Indiana Law Review


Survey of Recent Developments in
Health Care Law

Hall, Render, Killian, Heath & Lyman, P.C.'

Introduction

Healthcare in Indiana, as in the rest of the United States, is governed by an

evolving and changing body of law, both state and federal, covering a vast

number of topics. Although not an exhaustive review, this Survey summarizes
recent developments in various areas of health law including: fraud and abuse,

quality, tax, reimbursement, and labor and employment.

I. General Health Law

In 2008, there were several interesting cases impacting health care providers.

Two notable cases include Poliner v. Texas Health System^ and United States ex
rel Bates and Patrick v. Kyphon, Inc? involving peer review and a qui tarn
complaint, respectively. These cases are summarized below.

A. Peer Review

The 2007 Survey ofRecent Developments in Health Law in the Indiana Law
Review reported on the decisions from a district court in Texas in the Poliner v.

Texas Health System^ case, and described the dramatic impact these decisions

had on the landscape of peer review."^ However, following publication of the

2007 Survey, the defendants appealed to the Fifth Circuit.^ The court issued a
decision reversing the district court on July 23, 2008.^

Poliner is based upon a lawsuit with numerous claims brought by Lawrence

Poliner, M.D. and his professional corporation against Texas Health Systems and
several physicians, alleging that the defendants ''improperly and maliciously used

the peer-review process to summarily suspend [his] privileges, thereby causing

damage to his interventional cardiology practice."^ In September 2003, the
United States District Court for the Northern District of Texas, Dallas Division,

"granted in part and denied in part [djefendants' motion for summary judgment

* The following Hall, Render, Killian, Heath & Lyman attorneys contributed to the research
and drafting of this Survey: Kimberly S. Adams, Calvin R. Chambers, Thomas M. Donahoe, Mark
E. Douglas, Natalie L. Dressel (clerk), Robin E. Ebert, Kimberly A. Emil, Mary C. Gaughan,
Michael R. Greer, Clifton E. Johnson, and Jennifer P. Viegas.

1. 537 F.3d 368 (5th Cir. 2008), cert, denied, 129 S. Ct. 1002 (2009).

2. No. 05-CV-6568CJS(f) (W.D.N.Y., filed Oct. 25, 2005).

3. 537 F.3d 368 (5th Cir. 2008), cert, denied, 129 S. Ct. 1002 (2009).

4. Ice Miller LLP, Survey ofRecent Developments in Health Law, 40 IND. L. REV. 93 1 , 946-

51 (2007).

5. Poliner, 537 F.3d at 375.

6. Mat 384.
7. Poliner v. Tex. Health Sys., No. Civ. A.3:00-CV-1007-P, 2006 WL 770425, at *1 (N.D.

Tex. 2006), rev'd, 537 F.3d 368 (5th Cir. 2008), cert, denied, 129 S. Ct. 1002 (2009).



1004 INDIANA LAW REVIEW [Vol. 42: 1003

on all of [p]laintiffs' claims."^ The claims not dismissed on summary judgment
were submitted to a jury, who found that defendants' actions were not immune
from civil liability under the federal Health Care Quality Improvement Act

(HCQIA) or state peer review statutes, and in favor of plaintiffs on all of their
other claims.^ "Thejury awarded compensatory and exemplary damages against

[d]efendants in the total amount of $366,21 1,159.30."^^

Following an unsuccessful mediation, plaintiffs moved to have thejudgment
entered, and the defendants moved to renew their motion for judgment
notwithstanding the verdict, arguing that the defendants were entitled to

immunity under the HCQIA or state peer review statutes. ^^ The court found that
sufficient evidence existed in support of the jury's decision that the defendants

were not entitled to immunity under HCQLA or state law.^^ The court, in a
separate order, addressed the defendants' motion for a new trial and remittitur,
but ultimately denied the motion for a new trial. ^^ Although the motion was
denied, the court did reduce the verdict to approximately $22.5 million, because

it found the jury's verdict to be excessive.
^"^

The United States Court of Appeals for the Fifth Circuit later reversed the
lower court's decision on based on the defendants being entitled to immunity

under the HCQIA. ^^ The court held, "Because [d]efendants are immune under
the HCQIA, we have no occasion to consider [d]efendants' other substantial
arguments that we must reserve and render judgment based on state law
immunity and because Poliner failed to prove the substantive elements of his

claims."^^

In arriving at the decision that the defendants were immune under the
HCQIA, the court examined the factors set out in HCQIA^^ and concluded that
the professional review actions taken by the defendants were done "in the

reasonable belief that the action was in the furtherance of quality health care,"

that defendants made "a reasonable effort to obtain" the facts, that defendants
satisfied the notice and hearing requirements, and that the peer review action

taken by defendants was taken "in the reasonable belief that the action was
warranted by the facts known after such reasonable effort to obtain facts."^^ The
court elaborated on the application of these elements, stating that (1) the HCQIA

8. Id.

9. M at*2.
10. Id.

11. Id.

12. /J. at*5.

13. See Poliner v. Tex. Health Sys., 239 F.R.D. 468 (N.D. Tex. 2006), rev'd, 537 F.3d 368

(5th Cir. 2008), cert, denied, 129 S. Ct. 1002 (2009).

14. Mat 478.
15. Poliner v. Tex. Health Sys., 537 F.3d 368, 385 (5th Cir. 2008), cert, denied, 129 S. Ct.

1002 (2009).

16. Id. at 385 (footnote omitted).

17. Id. at 376-77 (citing 42 U.S.C. § 1 1 12(a) (2006)).

18. See id. at 378-85.



2009] HEALTH CARE LAW 1005

was "intended to create an objective standard of performance, rather than a

subjective good faith standard," ^^ (2) HCQIA does not require that the peer
review action result in an actual improvement in the quality of care,^^ (3) the

"good or bad faith of the reviewers is irrelevant,"^ ^ (4) an ultimate decisionmaker

is not required to investigate the matter independently but is only required to

make a "reasonable effort to obtain the facts,"^^ and (5) "HCQL\ immunity is not
coextensive with compliance with an individual hospital's bylaws."^^ Poliner

appealed, but on March 23, 2009, the United States Supreme Court denied the
certiorari.

^"^

The most recent Poliner decision provides some reassurance for health care
providers in that immunity under the HCQL\ can be extended to those who
perform professional review actions which conform to the applicable standards

and serve as a shield from damages. The decision applies the presumption found
in § 111 12(a) of title 42^^ that "a professional review action shall be presumed

to have met the [applicable standards] . . . unless the presumption is rebutted by

a preponderance of the evidence."^^

B. Medtronic-Kyphon Settlement

One of the most interesting False Claims Act^^ cases impacting healthcare
providers in 2008 is the Medtronic settlement.^^ The settlement demonstrates the
risks associated with a healthcare provider's reliance on reimbursement advice

from a medical device manufacturer.^^

On October 25, 2005, former Kyphon employees Charles Bates, HI and Craig
Patrick filed a qui tarn complaint against Kyphon, Inc.^^ alleging violations of the

False Claims Act.^^ Bates and Patrick later amended the complaint to include

19. Id. at 376.

20. Id. at 378.

21. Id. (quoting Brader v. Allegheny Gen. Hosp., 167 F.3d 832, 840 (3d Cir. 1999)).

22. Id. at 380 (internal quotes omitted).

23. Id.

24. Poliner v. Tex. Health Sys., 129 S. Ct. 1002 (2009) (mem.).

25. See Poliner, 537 F.3d at 377.

26. 42 U.S.C. § 1 1 1 12(a) (2006).

27. 31 U.S.C. §3729(2006).

28. Subsequent to the filing of the qui tarn action, Kyphon was acquired by Medtronic in

2007.

29. Dep't of Justice, Medtronic Spine, Formerly Kyphon, Inc., to Pay U.S. § 75

Million to Resolve Allegations of Defrauding Medicare (2008), available at http://www.

usdoj.gov/opa/pr/2008/May/08-civ-455.html.

30. United States ex rel. Bates & Patrick v. Kyphon, No. 05-CV-6568CJS(f) (W.D.N.Y., filed
Oct. 25, 2005). Subsequent to the filing of the qui tam action, Kyphon was acquired by Medtronic

in 2007.

31. Id.



1006 INDIANA LAW REVIEW [Vol. 42: 1003

claims against Sisters of Charity Hospital. ^^ Bates was a former Kyphon sales
representative while Patrick was a former Kyphon reimbursement manager.^^
According to the qui tarn complaint, Kyphon illegally marketed its kyphoplasty
procedure by encouraging physicians to perform the procedure and to claim

reimbursement unnecessarily treating the procedure as an inpatient service.^"^

The lawsuit described kyphoplasty as a minimally-invasive surgery used to
treat vertebral compression fractures most commonly caused by osteoporosis in
the elderly population.^^ The kyphoplasty restores the size and strength of the
fractured, collapsed vertebra. According to the complaint, the procedure

involves the insertion of an inflatable balloon into the vertebra in order to restore

partially vertical height and to create a cavity in which to inject a viscous bone

cement.^^ The cement in turn strengthens the broken vertebra, secures the
vertebra in its original height and position, and supports the surrounding bone to

prevent further collapse.^^ This procedure is usually performed by orthopedic

surgeons and interventional radiologists under general anesthesia or conscious

sedation.^^ Kyphoplasty can generally be done on an outpatient basis and

inpatient stays are only expected in rare cases where the patient is frail or other

medical issues require further monitoring following the procedure.^^

Despite the minimal invasiveness ofthe procedure, the complaint alleged that

approximately eighty-ninety percent of the 150,000 kyphoplasty procedures

performed from 1999 to 2005 were unnecessarily performed as inpatient, rather

than outpatient, procedures as a result of Kyphon' s misleading marketing

practices.
"^^

On May 20, 2008, Medtronic Spine, LLC (Medtronic) announced a $75
million settlement of the qui tarn lawsuit.'*^ In addition to paying the $75 million

fme, Medtronic also agreed, as part of the settlement, to enter into a corporate

integrity agreement (Agreement) with the United States Department of Human
Services, Office of Inspector General."^^ The Agreement contained measures to
ensure compliance with Medicare regulations and policies in the future."^^ As a
result of the settlement, the qui tarn relators received a total of $14.9 million as

their statutory share of the proceeds."^"^ The Medtronic-Kyphon settlement ranks

32. First Amended Complaint at 1 , United States ex rel. Bates & Patrick v. Kyphon, Inc. and
Sisters of Charity Hospital, No. 05-CV-6568CJS(f) (W.D.N.Y., filed Jan. 5, 2006).

33. MM 14-17.
34. Id.f4.

35. Id. n 54-59.
36. Mffl 64-65.

37. Id. n ^5-66.
38. Id.f2\.

39. Id. f6S.

40. /J. 15.

41. See Dep'T OF JUSTICE, supra note 29.

42. Id.

43. Id.

44. Id.



2009] HEALTH CARE LAW 1007

as the fifty-eighth largest False Claims Act settlement to date."^^

n. Fraud & Abuse

A. Starkly

On August 19, 2008, the Centers for Medicare & Medicaid Services (CMS)
issued the final Hospital Inpatient Prospective Payment Systems rule for fiscal

year 2009 (Final Rule) which, in part, finalized several new Stark regulations."^^
1. Changes to Physician ''Stand in the Shoes'' Regulations.—In the Stark

Phase ni final regulations effective December 4, 2007, CMS implemented a
"stand in the shoes" rule under which referring physicians were treated as

standing in the shoes of their physician organization for purposes of applying the

direct and indirect compensation exceptions."^^ As a result, many compensation
arrangements between entities providing designated health services (DHS) and
physician groups that previously were indirect compensation arrangements or did

not meet the definition ofan indirect compensation arrangement under Stark (and

thus may not have been subject to Stark at all), were treated as direct
compensation arrangements between the DHS entities and the groups' referring
physicians."^^ Therefore, these arrangements were required to be restructured in

order to satisfy all of the elements of a direct compensation exception."^^

In an attempt to simplify the application of the stand in the shoes regulations

in the Final Rule, CMS finalized revisions to the physician "stand in the shoes"
provisions that deem a physician who has an ownership or investment interest in
a physician organization to "stand in the shoes" of that physician organization.^^

Physicians with only a "titular" ownership interest—physicians that do not have
the "ability or right to receive the financial benefits of ownership or investment,

. . . [such as] the distribution of profits, dividends, proceeds of sale, or similar

returns on investment"—and non-owner physician employees or independent
contractors would not be deemed to "stand in the shoes" of their physician
organizations.^^ Further, CMS clarified that the physician "stand in the shoes"
provisions do not apply to arrangements that satisfy the academic medical centers

exception.^^

Nonetheless, in the preamble to the Final Rule, CMS noted that the revised
regulations p^rm/r non-owner physicians and titular owners to stand in the shoes

45. Top 100 False Claims Act Cases, http://www.taf.org/toplOOfca.htm (last visited July 5,

2009).

46. Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral

Rules, 73 Fed. Reg. 48,434, 48,688-48,754 (Aug. 19, 2008) (to be codified at C.F.R. pt. 411).

47. Id. at 48,695 (citing 42 C.F.R. § 41 1.357(p) (2008)).

48. Id.

49. Id.

50. Id. at 48,753 (to be codified at 42 C.F.R. § 41 1.354(c)(l)(ii)).

51. Id. (to be codified at 42 C.F.R. § 41 1.354(c)(3)(ii)(C)).

52. Id. at 48,698.



1008 INDIANA LAW REVIEW [Vol. 42: 1003

of their physician organizations.^^ Per CMS, the purpose of this "permissive"
regulation is to allow parties the flexibility to structure compensation

arrangements in a manner that satisfies a direct compensation arrangement (as
opposed to an indirect compensation arrangement exception or no exception at

all) in order to comply with Stark.^"^ CMS indicated that it believes that "[t]his
approach is consistent with [its] longstanding view that parties are entitled to use

any available exception of which they satisfy all of the applicable

requirements."^^

CMS noted that as a result of the Phase IE "stand in the shoes" rule, many
arrangements between DHS entities and physician organizations had to be
restructured or initially structured by December 4, 2007, to meet an exception for
direct compensation arrangements.^^ Accordingly, in the Final Rule, CMS
clarified that "such arrangements do not need to be restructured" again to comply

with the revised stand in the shoes regulations until the expiration of the original

term or renewal term of the agreement.^^ Additionally, the parties can elect to

continue having the non-owner physicians stand in the shoes of their physician

organization, as was required under Stark HI, in order to avoid restructuring an

arrangement.^^

2. New Limitations Placed on Services Performedfor Hospitals and Other
DHSEntities (including " UnderArrangements "j-—The Stark law prohibits both
a physician from making referrals for DHS to an entity with which the physician
(or an immediate family member) has a financial relationship and prohibits the

entity from billing Medicare for the DHS, unless an exception applies.^^ Under
the Phase I definition of "entity," an "entity" includes only the person or entity

that bills Medicare for the DHS—not the person or entity that performs the DHS
where such person or entity—is not also the person or entity billing for it.^^

In this version of the Final Rule, CMS amended the definition of "entity" to
clarify that a person or entity is considered to be "furnishing" DHS if it "[i]s the
person or entity that has performed' the DHS (notwithstanding that such entity
did not actually bill the services),^^ Note that where an "under arrangements"

service provider "performs" a service that is billed by another entity, both the

"under arrangements" service provider and the billing entity are DHS entities
with respect to that service.^^ CMS does not define "perform" specifically, but
it appears that the "hands-on" medical or clinical work would fall under this

53. Id. at 48,690.

54. /J. at 48,695.

55. Id.

56. Id.

57. Id.

58. Id.

59. 42 U.S.C. § 1395nn(a)(l) (2006).

60. 42 C.F.R. §411.351(2008).

6 1

.

Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral

Rules, 73 Fed. Reg. at 48,751 (to be codified at 42 C.F.R. § 41 1.351) (emphasis added)).

62. Id. at 48,721.



2009] HEALTH CARE LAW 1009

umbrella.

Thus, where an "under arrangements" service provider (e.g., ajoint venture,

physician group practice, or other physician organization) ''performs" the

services and, pursuant to a contractual arrangement, a hospital bills for those

services, the services are DHS and the "under arrangements" service provider
would be a DHS entity with respect to those services.^^ If the referral to the
"under arrangements" service provider is made by a physician owner or investor
in such provider, an ownership exception must be met to protect the referral.

^"^

CMS delayed the effective date of the amendment to the definition of
"entity" until October 1, 2009, in order to afford parties adequate time to

restructure arrangements.^^

3. Percentage-Based Compensation Arrangements Prohibited for Office
Space and Equipment Lease Arrangements Only.—In the Final Rule, CMS
revised the rental of office space,^^ rental of equipment,^^ fair market value

compensation arrangement exceptions'^ (all ofthese are "direct" exceptions), and

the indirect compensation arrangement exception'^ to prohibit the use of

compensation formulae based on "[a] percentage of the revenue raised, earned,

billed, collected, or otherwise attributable to the services performed or business

generated" in leased space or by the use of leased equipment.^^

In the Final Rule, CMS clarified that it does not consider these changes in the
Final Rule to prohibit the imposition or levy of a percentage of expenses (e.g.,

property taxes or utilities) by a third party or a lessor from charging a lessee a pro

rata share of expenses incurred that are attributable to that portion of the medical

office building or other space or equipment that is leased by a lessee.^^ Although

CMS only finalized the percentage-based compensation formulae prohibition
with respect to space and equipment leases (the prohibition was not extended to
arrangements for non-professional services such as management or billing
services), CMS intends to continue monitoring percentage-based compensation
arrangements between DHS entities and physicians and may further restrict such
arrangements as appropriate.^^

CMS noted that the Final Rule's restrictions on the use of percentage-based
compensation formulae for determining rental charges for the lease of space and

equipment "may require the restructuring or termination of arrangements for the
rental of space and equipment."^^ Therefore, CMS has delayed the effective date

63. Id.

64. Id.

65. Id.

66. Id. at 48,752 (to be codified at 42 C.F.R. § 41 1.357(a)).

67. Id. (to be codified at 42 C.F.R. § 41 1.357(b)).

68. Id. (to be codified at 42 C.F.R. § 41 1.357(1)).

69. Id. (to be codified at 42 C.F.R. § 41 1.357(p)).

70. Id. (to be codified at 42 C.F.R. § 41 1.357(a)).

71. Id. at 48,711.

72. /J. at 48,710.

73. Mat 48,713.



1010 INDIANA LAW REVIEW [Vol. 42: 1003

of these regulations until October 1, 2009/"^

4. Restrictions on Unit-of-Service (Per-Click) Payments in Space and
Equipment Lease Arrangements.—CMS revised the lease exceptions for office
space and equipment, the fair market value exception, and the exception for

indirect compensation arrangements to provide that Unit of Service (per-click)

rental charges are not allowed "to the extent that such charges reflect services

provided to patients referred [by the lessor to the lessee]."^^ The rulemaking
clearly articulates,

The prohibition on per-click payments for space or equipment used in
the treatment of a patient referred to the lessee by a physician applies

regardless of whether the physician is the lessor or whether the lessor is

an entity in which the referring physician has an ownership or

investment interest. The prohibition also applies where the lessor is a
DHS Entity that refers patients to a physician lessee or a physician
organization lessee.^^

CMS delayed the effective date of these amendments until October 1, 2009,
in order to afford parties adequate time to restructure arrangements.^^

5. Expansion ofObstetrical Malpractice Insurance SubsidyArrangements.—
In the Final Rule, CMS revised this exception by separating it into two
subsections. First, section 411.357(r)(l) retains the provisions of the current

exception.^^ New section 411.357(r)(2) allows hospitals, federally qualified
health centers, and rural health clinics to provide an obstetrical malpractice

insurance subsidy to a physician who regularly "engages in obstetrical practice
as a routine part of his or her medical practice" that is: (1) "located in a rural

area, primary care HPSA, rural area, or an area with a demonstrated need ... as
determined by the Secretary in an advisory opinion"; or (2) is comprised of

patients "[a]t least [seventy-five] percent of the physician's obstetrical patients

reside in a medically underserved area or are part of a medically underserved

population."^^

6. Ownership orInvestment Interest in Retirement Plans.—CMS revised the
definition ofownership or investment interest out ofconcern that physicians may
be using retirement plans as a vehicle "to purchase or invest in other entities . .

. to which they refer patients for DHS."^^

7. Outer Limits on the Period of Disallowance.—In the Final Rule, CMS
provided that the "period of disallowance" begins when the "financial
relationship fails to satisfy the requirements of an applicable exception."^ ^ A

74. Id.

75. Id. at 48,752 (to be codified at 42 C.F.R. § 41 1.357(b)).

76. Mat 48,7 14.
77. Id.

78. Id. at 48,753 (to be codified at 42 C.F.R. § 41 1.357(r)(l)).

79. Id. (to be codified at 42 C.F.R. § 41 1.357(r)(2)(B)).

80. Id. at 48,737.

81. Id. at 48,700.



2009] HEALTH CARE LAW 101

1

period of disallowance is the time in which a physician cannot refer DHS to an
entity and an entity cannot bill Medicare because the financial relationship

between the referring physician and the entity fails to meet all of the

requirements of a Stark exception.^^ When noncompliance is not due to a
compensation matter, the period of disallowance ends when "the financial
relationship satisfies all of the requirements of the applicable exception."^^ In

cases where the noncompliance is tied to compensation, the period of

disallowance ends no later than the date on which all "excess compensation is

returned to the party that paid it," or the date on which all "additional required

compensation is paid to the party to which it is owed."^"^

8. Alternative Method for Compliance and New Guidance on Missing
Signatures.—The Final Rule also created a new paragraph to section 41 1.353,
which provides that "payment may be made to an entity that submits a claim or
bill for [DHS] if the financial relationship between the entity and the referring
physician "fully complied with an applicable exception [under section 41 1 .357],

except with respect to the signature requirement," and provided that the

necessary signatures are obtained within ninety days ofthe commencement ofthe
financial relationship if the failure to comply with the signature requirement was
"inadvertent," or within thirty days if the failure to comply was "not

inadvertent."^^

In order to take advantage of the alternative method for compliance in section

411 .353(g), the financial relationship at issue must satisfy all of the requirements

of the applicable exception at the commencement of the financial relationship.^^
An entity may use this alternative method of compliance only once every three
years with respect to the same referring physician.

^^

9. Claimants Bear Burden ofProoffor Claims Denied Based on Prohibited

Referrals.—CMS finalized its proposal to clarify existing Medicare regulations
to provide that,

in any appeal of a denial of payment for [DHS] that was made on the
basis that the DHS was furnished pursuant to a prohibited referral [under
Stark], the burden is on the [DHS] entity submitting the claim for
payment to establish that the service was not furnished pursuant to a
prohibited referral [under Stark].

^^

In the Final Rule, CMS noted that this new regulation—section
41 1.353(c)(2)—clarifies that "in any case in which a claim is denied for failure
to comply with [Stark], the ultimate burden of proof (that is, the burden of

persuasion) is on the claimant to demonstrate compliance and not on [CMS or its

82. See id.

83. Id.

84. Id.

85. Id. at 48,751 (to be codified at 42 C.F.R. § 41 1.353(g)).

86. Id. (to be codified at 42 C.F.R. § 41 1.353(g)(l)(i)).

87. Id. (to be codified at 42 C.F.R. § 41 1.353(g) (2)).

88. Id. at 48,738 (to be codified at 42 C.F.R. § 41 1.353(c)(2)).



1012 INDIANA LAW REVIEW [Vol. 42: 1003

contractors] to demonstrate noncompliance."^^ In the preamble, CMS clarified
that the burden of proof rules relate only to the administrative appeals of

Medicare claims denials under the appeals process.^^ Appeals of civil monetary

penalties, exclusions or other remedies imposed based on a determination that a

DHS entity or a physician knowingly violated the Stark Law involve other appeal
processes that are not subject to this rule.^^

10. Disclosure ofFinancial Relationships Report.—In the Final Rule, CMS
also provided an update on the status of the ^'Disclosure of Financial

Relationships Report" (DFRR).^^ The DFRR arose out of the Stark Law and its
implementing regulations.^^ In September 2007, CMS intended to send a
mandatory DFRR to 500 specialty and general hospitals for the purpose of
collecting information to be used analyzing the investment, ownership, and

compensation relationships with regard to the hospitals and its physicians.^"^ The
mandatory disclosure process would have followed the previous year' s voluntary

disclosure process, distributed to hospitals pursuant to the Deficit Reduction Act

of 2006 (DRA).^^ However, prior to distribution of the mandatory DFRR, CMS
was required to obtain approval from the Office of Management and Budget
(OMB) and had been in discussions with OMB since late last year.^^

In the Final Rule, CMS indicated that it will proceed with its proposal to
send the DFRR to 500 hospitals (both general acute care hospitals and specialty
hospitals).

^^

However, based on further review and comments [that CMS] may
receive in response to the revised [Paperwork Reduction Act (PRA)]

package that will be published separately in the Federal Register [at

some later date], [CMS] may decide to decrease (but not increase) the
number of hospitals [to which it will] send the DFRR.^^

Importantly, CMS did not adopt a regular reporting or disclosure process at
this time, and thus, the DFRR will be used, for the time being, as a "one-time
collection effort."^^ CMS did, however, adopt its proposal that "the DFRR be
completed, certified by the appropriate officer of the hospital, and received by

[CMS] within [sixty] days of the date that appears on the cover letter or email

89. /J. at 48,739.

90. Id.

91. Id.; see also 42 C.F.R. § 411.353(c) (2008).

92. S'^^iV/. at 48,740-41.

93. U at 48,740.
94. Mat 48,740-41.
95. Deficit Reduction Act of 2005, Pub. L. No. 109-171, 120 Stat. 4 (2006) (codified as

amended in scattered titles and sections of U.S.C.).

96. Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral

Rules, 73 Fed. Reg. at 48,745.

97. Mat 48,743.
98. Id.

99. M. at 48,744.



2009] HEALTH CARE LAW 1013

transmission of the DFRR."^^^ This is an increase from the original forty-five

day required response time.

Failure to respond to the DFRR could result in a civil monetary penalty. ^^^

However, prior to imposing such a penalty of up to $10,000 for each day beyond

the timeframe established for a response, CMS agreed to issue a letter to any
hospital that does not return the completed DFRR.^^^ The letter will inquire as
to why the hospital did not timely return the completed DFRR.^^^ "In addition,
a hospital may, upon a demonstration of good cause, receive an extension of time

to submit the requested information."
^^"^

B. OIG Actions

L Advisory Opinion 08-01.—On January 28, 2008, the U.S. Department of
Health and Human Services, Office of Inspector General (OIG) issued Advisory
Opinion 08-01.^^^ This was the first advisory opinion addressing the application

of the anti-kickback statute to bulk replacement patient assistance programs

(PAPs). Based on the specific facts of the arrangement, the OIG determined that
while the arrangement raised a potential compliance risk as a possible

inducement, it would still be approved due to the presence of several

safeguards.
^^^

PAPs "have long provided important safety net assistance to patients of
limited means who do not have insurance coverage for drugs, typically serving
patients with chronic illnesses and high drug costs." '^^ The arrangement involved
a non-profit, tax-exempt corporation (Partnership) that served "as a liaison

between the pharmaceutical industry and free clinics and FQHCs [federally
qualified health centers] to improve access to free pharmaceutical products for

low-income persons" by participating in "various bulk replacement [PAPs]

sponsored by pharmaceutical companies that provide in-kind donations in the

form of free drugs."^^^

The Partnership sought to create an arrangement to make it easier for
pharmaceutical companies to offer their bulk replacement PAPs to free clinics
and FQHCs. ^^^ First, the Partnership limited utilization of the PAP drugs to
uninsured patients with income below 200 percent of the federal poverty limit

100. /J. at 48,741.

101. Id.

102. Id.

103. Id.

104. Id.

105. OIG Advisory Opinion No. 08-01 (Jan. 28, 2008), available at http://www.oig.hhs.

gov/fraud/docs/ advisoryopinions/2008/AdvOpn08-0 1 C.pdf

106. Id. at 2, 12.

107. OIG Special Advisory Bulletin on Patient Assistance Programs, 70 Fed. Reg. 70,623,

70,623-24 (Nov. 22, 2005).

108. OIG Advisory Opinion No. 08-01, supra note 104, at 2.

109. Id.



1014 INDIANA LAW REVIEW [Vol. 42: 1003

(including Medicare beneficiaries who are not enrolled in Part D).^ ^^ Second, the
Partnership imposed uniform PAP operating standards on participating
companies, which included: (1) maintaining separate, auditable records for all

PAP drugs; (2) maintaining systems for separating PAP inventory from other
purchased products; (3) implementing a computerized dispensing system that will

generate electronic reports for monitoring compliance with the Partnership

requirements; and (4) agreeing to submit to annual on-site compliance audits.**^

Additionally, the arrangement prohibited the free clinics and FQHCs from
"selling any donated PAP drugs and from transferring any PAP drugs to any third
party other than the qualifying patients."^ '^ Finally, the arrangement required the

Partnership to submit a monthly summary report to the pharmaceutical company
sponsor of each participating PAP, "providing detailed information about the
PAP drugs dispensed to eligible patients during the previous month."^*^

The OIG concluded that the arrangement could potentially violate both the
anti-kickback statute and the prohibition on inducements to Medicare

beneficiaries contained in the civil monetary penalties, but nevertheless, OIG
approved the arrangement due to several safeguards. ^^"^ Specifically, OIG
identified the following safeguards: (1) the inventory segregation of the free

drugs to be provided protected against free clinics and FQHCs from receiving
any remuneration such as excess stock that could be diverted to other uses;^^^ (2)
the arrangement was documented in detail and was auditable, which assured
transparency;

^^^
(3) the PAP sponsors did not control the selection of the free

clinics or the FQHCs which prevented PAP sponsors from "cherry-picking"
certain FQHCs to receive donated drugs; ^^^ (4) the physicians who prescribed
drugs for FQHC patients did "not receive any compensation that [would] take[]
into account in any manner the physicians' prescribing patterns for PAP
sponsors' products, and the FQHCs [did] not track any physician's prescribing
patterns ofPAP drugs'';^ ^^ and (5) in its liaison capacity, the Partnership insulated
the FQHCs from PAP sponsors.^^^

2. Advisory Opinions 07-21, 07-22, 08-09, & 08-21: The Gainsharing
Exception.—In 2008, OIG issued four separate Advisory Opinions addressing
several proposed arrangements involving gainsharing agreements.

a. Advisory opinions 07-21 & 07-22.—On December 29, 2007, the U.S.
Department of Health and Human Services issued Advisory Opinions 07-21^^^

110. /J. at 2-3.

111. /^. at 3-4.

112. Mat 3.
113. Id.

114. /J. at 12.

115. Mat 10.
116. Id.

117. /J. at 10-11.

118. /J. at 10.

119. Id. at 11.

1 20. OIG Advisory Opinion No. 07-2 1 (Dec. 28, 2007), available at http://www.oig.hhs.gov/



2009] HEALTH CARE LAW 1015

and 07-22,^^^ in which the OIG restated its position regarding gainsharing
arrangements with respect to surgeons and anesthesiologists.^^^ In both

arrangements, the hospitals engaged a third-party program administrator

(Administrator) to collect and analyze data related to the proposed cost saving

practices, and to manage the arrangement/^^ Both Administrators identified a

number of specific cost-saving opportunities such as: (1) use as needed items;

(2) product substitution; and (3) product standardization.
^^"^

The OIG noted its overall concerns related to gainsharing arrangements,
included: (1) "stinting on patient care"; (2) "cherry picking" healthy patients; (3)
payments in exchange for referrals; and (4) unfair competition.

^^^

The OIG determined that both arrangements contained a variety of
safeguards so as to protect against inappropriate reductions in services, including:

(1) "the specific cost-saving actions and resulting savings were clearly and

separately identified"; (2) the hospitals provided "credible medical support for

the position that implementation of the recommendations did not adversely affect

patient care"; (3) the Administrator used "objective historical data and clinical

measures"; and (4) the product standardization ensures "that individual

physicians still had available the same selection ofdevices and supplies under the

[a]rrangement as before." ^^^ Thus, the OIG concluded that neither arrangement
violated the civil monetary penalties statute.

^^^

In addition, the OIG analyzed these arrangements under the anti-kickback
statute. In that analysis, the OIG determined that the personal services safe
harbor would not afford protection to the arrangements because the aggregate

compensation was not set forth in advance. ^^^ Nevertheless, the OIG determined
that it would not impose sanctions because: ( 1 ) the circumstances and safeguards

reduced the likelihood that the arrangements would attract or increase referrals;

(2) each group was the sole participant of their respective arrangement and each

group was composed of their respective specialty; and (3) the activities required

fraud/docs/advisoryopinions/2007/AdvOpn07-2 1 A.pdf.

121. OIG Advisory Opinion No. 07-22 (Dec. 28, 2007), av^Z/aW^af http://www.oig.hhs.gov/

fraud/docs/advisoryopinions/2007/AdvOpn07-22A.pdf.

122. See OIG Advisory Opinion No. 07-21 , supra note 1 19, at 1 1 ; OIG Advisory Opinion No.

07-22, supra note 120, at 11.

123. OIG Advisory Opinion No. 07-21, supra note 119, at 2-3; OIG Advisory Opinion No.

07-22, supra note 120, at 2-3.

124. OIG Advisory Opinion No. 07-21, supra note 1 19, at 4-5; OIG Advisory Opinion No.

07-22, supra note 120, at 4.

125. OIG Advisory Opinion No. 07-21 , supra note 1 19, at 8; OIG Advisory Opinion No. 07-

22, supra note 120, at 7-8.

1 26. OIG Advisory Opinion No. 07-2 1 , supra note 1 1 9, at 1 0- 1 1 ; OIG Advisory Opinion No.

07-22, supra note 120, at 9-10.

127. OIG Advisory Opinion No. 07-21, supra note 1 19, at 15; OIG Advisory Opinion No. 07-

22, supra note 120, at 14.

128. OIG Advisory Opinion No. 07-21 , supra note 1 19, at 13; OIG Advisory Opinion No. 07-

22, supra note 120, at 12.



1016 INDIANA LAW REVIEW [Vol. 42: 1003

of the groups under the arrangements carried some increased Uability risks for
physicians, for which compensation was reasonable. ^^^ Thus, the arrangements
posed a low risk of fraud or abuse under the anti-kickback statute.

b. Advisory opinion 08-09.—On July 31, 2008, the U.S. Department of
Health and Human Services, OIG issued Advisory Opinion 08-09, in which the
OIG again^^° discussed its position regarding gainsharing.^^^ This time, however,
OIG discussed its position with respect to an arrangement under which "a
medical center . . . agreed to share with groups of orthopedic surgeons and a

group of neurosurgeons a percentage of the medical center's cost savings arising

from the surgeons' implementation of a number of cost reduction measures in
certain surgical procedures."^^^ Specifically, the medical center would pay the
surgeon groups fifty percent of the medical center's first-year cost savings

directly attributable to specific changes in each of the surgeon groups' operating

room practices for spine fusion surgery. ^^^ While the medical center withheld
payment under the arrangement until it received a favorable opinion from the

OIG, the OIG explicitly stated that such nonpayment does not insulate parties
from liability.

^^"^

The medical center engaged an Administrator to collect and analyze
historical data related to the cost-saving practices as well as to manage the
arrangement. ^^^ The Administrator had thirty-six specific recommendations
which can be grouped into two categories: ( 1 ) "use as needed biological" and (2)
"product standardization."^^^

The OIG noted that these types of arrangements that share cost savings
"could serve legitimate business and medical purposes" if properly structured by

increasing "efficiency and reduc[ing] waste, thereby potentially increasing a

hospital's profitability."*^^ However, the OIG reiterated its longstanding
concerns related to gainsharing arrangements as aforementioned.*^^

129. OIG Advisory Opinion No. 01-21, supra note 1 19, at 13-14; OIG Advisory Opinion No.

07-22, supra note 120, at 13-14.

130. See also OIG Advisory Opinion No. 08-21 (Nov. 25, 2008), available at

http://www.oig.hhs.gov/ fraud/docs/advisoryopinions/2008/AdvOpn08-2 1 . 2.pdf. The OIG utilizing

similar analysis reiterates its positions regarding gainsharing in the context of cardiac

catheterization procedures. Id. at 12. Consistent with its prior gainsharing advisory opinions, the

OIG found that the arrangement implicated both the civil monetary penalties statute and the anti-

kickback statute. Id. at 16. However, the OIG concluded that it would not impose sanctions due

to the presence of certain program safeguards. Id.

131. Mat3n.4.

132. Id. at I.

133. Id. Sits.

1 34. OIG Advisory Opinion No. 08-09 (July 3 1 , 2008), available at http://www.oig.hhs.gov/

fraud/docs/advisoryopinions/2008/AdvOpn08-09B.pdf.

135. Id. at 3.

136. Id. at 4.

137. Mat 7.
138. Id. at n.



2009] HEALTH CARE LAW 1017

The OIG ultimately concluded that the arrangement provided sufficient
safeguards such as (1) the transparency ofthe identifiable cost-saving actions, (2)

credible support that patient care was unaffected, and (3) the medical center and
surgeons provided written disclosures of the arrangement to patients, which

precluded the OIG from seeking sanctions. '^^

Additionally, the OIG analyzed the arrangement under the anti-kickback
statute and determined that the personal services safe harbor would not protect

the arrangement because the compensation was not set forth in advance/"^^

However, the OIG consistently concluded that sanctions would not be imposed
because of several safeguards including (1) the low likelihood that referrals

would increase as a result of the arrangement, (2) the low likelihood that the

arrangement would influence other physicians who refer patients to the surgeon
groups, and (3) the increased liability risks for the surgeons.

^"^^ The OIG
continued to emphasize the transparency ofthis gainsharing arrangement, but still

cautioned against similar arrangements, including multi-year arrangements or

those based on generalized, less specific cost savings formulae.
'"^^

m. Tax

In 2007 and 2008, there were several tax developments that directly impacted

the health care industry. These developments include the introduction of the new
Form 990 by the Internal Revenue Service, final regulations relating to the
requirements for tax exemption status under 501(c)(3) of the Internal Revenue

Code, and an Interim Report on the Hospital Compliance Project. Below is a
brief summary and analysis each of these recent tax developments.

A. Final Form 990

Since the summer of 2007, the world of tax exempt organizations, including
tax exempt hospitals, has been intently focused on the changes associated with

the redesign of the Form 990, Return ofOrganizations Exemptfrom Income Tax,
by the Internal Revenue Service (IRS). After the closing of comment periods to
drafts of the Form 990 and related instructions, the final version of the
redesigned Form 990 (New Form 990) was released on December 20, 2007,^"^^

and instructions to the New Form 990 were released on August 19, 2008
(Instructions).

^"^"^

The New Form 990 represents one of the most significant changes in the tax
exempt sector during the last thirty years. "The focus of the redesign . . . was on

139. /J. at 9-11.

140. Id. at 12.

141. Id. at 12-13.

142. Id. at 12.

143. I.R.S. News Release IR-2007-204 (Dec. 20, 2007).

144. I.R.S. News Release IR-2008-98 (Aug. 19, 2008); see also I.R.S., Chronological History:

Redesign of the 2008 Form 990 and Corresponding Instructions (June 18, 2009), available at

http://www.irs.gov/charities/charitable/article/0„id=185892,00.html.



1018 INDIANA LAW REVIEW [Vol. 42: 1003

increasing reporting related to governance, executive compensation, related

organizations, fundraising practices, and hospitals' amount of community
benefit," according to Lois Lemer, IRS Exempt Organizations Division
Director/"^^ The subject matter that is addressed in the New Form 990 was
developed based on a perceived need to aid the tax compliance interests of the

IRS as well as the transparency and accountability needs of the states, the general

public, and local communities served by tax exempt organizations.^'*^ The New
Form 990 becomes applicable for tax years beginning in 2008 (i.e., returns filed
in 2009). The effective date for the filing of certain information on Schedule H
(Hospitals) and Schedule K (Bonds) has been delayed for one year.^"*^ Only the
portions of these Schedules that provide certain identifying information must be

completed for the 2008 tax year.^'*^

The implementation of the New Form 990 represents an increased
compliance burden for most tax-exempt organizations, especially tax exempt

hospitals. The New Form 990 will require the disclosure of a significant amount
of new information, which will be available publically.^'*^ The New Form 990
consists of a core form (Core Form) and sixteen schedules (each referred to as

a Schedule) that cover various topics. ^^^ Every organization that files the New
Form 990 will complete the Core Form.^^^ Completion of the Schedules will be
dependent upon the type of activities that the organization conducts. ^^^ While

much has changed with the New Form 990, three areas should be of particular
interest to tax exempt hospitals: governance, compensation, and hospital

activities, including community benefit and charity care activities that must be
reported on Schedule H.^^^

With respect to governance, a section of the Core Form is primarily devoted
to questions about the governance of the organization that will likely influence

the behavior of most tax-exempt organizations.*^^ The questions require only a
"yes" or "no" answer, but in effect, these questions encourage organizations to

revisit their structural and policy choices and modify their conduct. *^^ The

1 45

.

Christopher Quay & Fred Stokeld, IRS ' s Lemer Details Draft of Redesigned Form 990,
57 Exempt Org. Tax Rev. 9 (2007).

146. IRS Frequently Asked Questions, Why Did the IRS Redesign the Form? (Jan. 7, 2007),
«v«//a^/^«rhttp://www.irs.gov/charities/article/0„id=176670,00.html.

147. See TY 2008 Form 990—Forms and Instructions, Instructions for Schedule H and
Instructions for Schedule K (Jan. 5, 2009), available ^r http://www.irs.gov/charities/article/0„id=
185561,00.html.

148. Id.

149. See 26 U.S.C. § 6104(d)(1) (2006).

150. I.R.S. News Release IR-2007-204 (Dec. 20, 2007).

151. Id.

152. Id.

153. See id.

154. See Instructions for Form 990, at 15-19, available at http://www.irs.gov/pub/irs-

pdf/990.pdf.

155. See generally id.



2009] HEALTH CARE LAW 1019

policies addressed include a conflict of interest policy, a whistleblower policy,

and a document retention policy. ^^^ This portion of the form also inquires as to
whether the organization's process for approving compensation arrangements

satisfies the requirements for the rebuttable presumption of reasonableness.'^^

Significant with respect to the conflict of interest policy is the detail sought

on conflicts enforcement practices, whether discovered before or after the

transaction has occurred. This includes a description of the types of persons

covered by the policy, the level at which the conflicts determination is made and
at which actual conflicts are reviewed, as well as any restrictions imposed upon

a person determined to have a conflict with respect to a particular transaction.'^^

While the IRS believes that the listed policies and procedures generally improve

tax compliance, it noted that many of the policies or procedures are not legally
required. '^^ If an organization does not already have the right policies or

procedures in place with respect to these items (or similar ones discussed

elsewhere on the New Form 990), then it may be prudent to adopt such policies.
An organization also must disclose how it makes certain information about

itself—including its Form 1023, Form 990, governing documents, and various
other information—available to the public. '^^ Once again, the IRS is signaling
that such information should be readily accessible and is inviting organizations

to take action voluntarily rather than have the IRS compel them to do so.
Compensation is addressed in two areas of the New Form 990—in Part Vn

of the Core Form and in Schedule J, Compensation. In Part Vn, organizations
must report compensation for (1) current officers, directors, trustees, and key

employees; (2) the five highest paid employees earning over $100,000; (3)
former officers, key employees, and the five highest paid employees (going back

five years) earning over $100,000; and (4) former directors or trustees who
received more than $10,000 of reportable compensation.'^' A separate table
demands compensation information for the highest-paid independent
contractors.'^^

In Schedule J, compensation information must be supplied for ( 1 ) any person

listed in Part Vn who receives reportable compensation greater than $150,000
from the organization and any related organizations; (2) any former officer, key

employee, or highest compensated employee receiving reportable compensation

of $100,000 or more; (3) any former director or trustee receiving reportable

compensation greater than $10,000; and (4) any individual who receives
compensation from any source, other than the organization, for services rendered

156. See id; see also 2008 Form 990: Return of Organization Exempt from Income Tax,

0MB No. 1545-0047, at 6, //. 13-14, available at http://www.irs.gov/pub/irs-pdf/f990.pdf
[hereinafter 2008 Form 990] (providing disclosures on Part VI of the return).

157. 2008 Form 990, supra note 155, at 6, /. 15.

158. Id. at 6,/. 12.

159. Instructions for Form 990, supra note 153, at 15.

160. 2008 Form 990, supra note 155, at 6, /. 19.

161. /6?. at 7, /. la (listing the disclosures required under Part II).

162. Id. at 8, § B, /. 1-2.



1020 INDIANA LAW REVIEW [Vol. 42: 1003

to the organization. ^^^ Schedule J also requires disclosures regarding specific

types of compensation, some of which (e.g., first class travel or health club dues)
the IRS has identified as occasionally problematic. ^^"^ An organization must
provide details about the process for setting the compensation of the chief

executive officer and, in some cases, other officers. ^^^ Finally, Schedule J
requires information about deferred compensation and nontaxable fringe

benefits.^^^

Schedule J, in combination with Part Vn of the Core Form, will require
disclosure of a great deal of information not previously collected by the IRS.

There is no transition relief concerning this Schedule, so organizations should

already have systems in place to identify the various highly compensated

individuals and to track and record the benefits they provide to them.

Schedule H, Hospitals, should be of great interest to tax exempt hospitals

even though the substantive questions on this schedule are optional for the 2008

tax year,^^^ because it represents an entirely new compliance component for tax
exempt hospitals. Schedule H must be completed by a filing organization that
operates one or more hospitals. *^^ The Instructions provide that the term
"hospital" is limited to state-licensed hospitals.

^^^ In the New Form 990,
Schedule H is divided into the following six parts: Part I—Charity Care and
Certain Other Community Benefits at Cost; Part 11—Community Building
Activities; Part III—Bad Debt, Medicare & Collection Practices; Part
rv—Management Companies and Joint Ventures; Part V—Facility Information;
and Part VI—Supplemental Information. ^^^

Part I of Schedule H requests information regarding charity care and certain
other community benefits provided by the organization. ^^^ Part I raises numerous
questions regarding the charitable care that the organization provides. *^^ The
Schedule utilizes the community benefit reporting model advanced by Catholic
Healthcare Association. Part I of Schedule H requires each line item of charity
care/community benefit to include information regarding the number of the
organization's charitable activities or programs related to that benefit, persons

1 63. See 2008 Form 990, Schedule J: Compensation Information, available at http://www.irs.

gov/pub/irs-pd^f990sj .pdf

.

164. See id.

165. Id.

166. Id.

167. See 2008 Form 990: Instructions for Schedule H, at 1 , available at http://www.irs.gov/

pub/irs-pdf/i990sh.pdf. Only one part of the form that identifies hospital facilities will need to be

completed when organizations file their returns in 2009. Id. (noting that only Part V must be
completed).

168. See id.

169. /J. at 1.

170. Mat 2-7.
171. See id. at 2.

172. See 2008 Form 990, Schedule H: Hospitals, available at http://www.irs.gov/pub/irs-

pdf/f990sh.pdf [hereinafter 2008 Form 1990, Schedule H].



2009] HEALTH CARE LAW 102

1

served, total community benefit expense, direct offsetting revenue, net

community benefit expense, and the percent of total expenses represented by
such benefit. ^^^ The IRS has decided with the New Form 990 that Medicare
shortfalls and bad debt should not be included in the calculation of community

benefit—although such matters still may be reported in another area of the
form.^^"^ According to the instructions to Part I, a hospital is required to use the

"most accurate costing methodology" in reporting various costs on Schedule H.
^^^

Part II of Schedule H, allows an organization to describe its community

building activities. ^^^ Examples ofsuch activities include physical improvements

and housing, economic development, community support, and environmental

improvements. ^^^ Part HI allows an organization to provide information about its

bad debt and Medicare shortfalls. ^^^ The schedule also seeks information
regarding collection practices. *^^ Part FV of Schedule H requires that an
organization identify and describe all management companies and joint ventures
(regardless of their tax structure as partnerships or corporations) which it owns
together with any of its officers, directors, trustees, key employees, or

physicians. ^^^ In Part V of Schedule H, the IRS requests general information
regarding the different facilities at which the organization provides medical or

hospital care, including the activities and programs conducted at each such

facility.
^^^ This is the only Part of this Schedule that organizations will be

required to complete for 2008.'^^ Part VI of Schedule H seeks certain
supplemental information regarding the organization, such as how the
organization assesses the health care needs of the communities it serves and how
the organization informs and educates patients about their eligibility for

assistance under federal, state, or local government programs or under the

organization's charity care policy. ^^^ Part VI also seeks any other information
important to describing how the organization's hospital facilities further its

1 QA

exempt purposes.

Schedule H demands more information from hospitals than ever before, and
it is probable that reform advocates, members of Congress, and others will point
to such information to support proposed changes to the tax-exempt healthcare

sector. Overall, the New Form 990 presents a much more logical and systematic
approach to the information reporting for tax exempt organizations. However,

173. See 2008 Form 990, Schedule H, supra note 171, at 1.

174. 2008 Form 990: Instructions for Schedule H, supra note 166, at 2.

175. Id. at 3.

176. Id.

Ml. See id. at 3-4.

178. Mat 4.
179. Id. at 5 (discussing Section C of Part III).
180. /J. at 5-6.

181. See id. at 6.

182. Mat 1,6.
183. Id. at 6-1.

184. Id. at 7 (discussing line 7).



1022 INDIANA LAW REVIEW [Vol. 42: 1003

the volume of new information that must be produced by tax exempt
organizations will undoubtedly be burdensome. Most significantly, tax exempt
hospitals will need to evaluate their policies and operations to ensure that they

can provide information on the New Form 990 that represents them in a favorable
light.

B. Interaction Between Tax Exempt Status and Rules Regarding
Excess Benefit Transactions

On March 28, 2008, the IRS released final regulations that clarify the
substantive requirements for tax exemption under section 501(c)(3) of the

Internal Revenue Code of 1986, as amended (Code), explain the relationship
between those requirements and the imposition of excise taxes under Code
section 4958, better known as the Intermediate Sanctions Law, and provide
several examples ofthe interaction between Code sections 501(c)(3) and 4958.^^^

For background purposes, the Intermediate Sanctions Law imposes excise
taxes on ^'excess benefit transactions."^^^ An excess benefit transaction occurs
when a tax exempt organization provides a benefit to a ''disqualified person" that
exceeds the fair market value of the consideration received for such benefit.

^^^

A disqualified person is "any person who was, at any time during the [five-year]
period ending on the date of such transaction, in a position to exercise substantial

influence over the affairs of the [tax exempt] organization," any close family

member of such individual, and any entity in which any such individual owns
more than a thirty-five percent interest. ^^^

The IRS had previously issued proposed regulations addressing this topic on
September 9, 2005.^^^ The release of these regulations finalize the IRS's
application of certain factors when determining whether an exempt 501(c)(3)
organization that has engaged in an excess benefit transaction should also lose

its exempt status. ^^^ Specifically, the IRS will consider the following facts and

circumstances:

(A) the size and scope of the [exempt] organization's regular and

ongoing activities that further exempt purposes before and after the

excess benefit transaction or transactions occurred;

(B) the size and scope of the excess benefit transaction or transactions

(collectively, if more than one) in relation to the size and scope of the
[exempt] organization's regular and ongoing activities that further

exempt purposes;

185. See Treas. Reg. §§ 1.501(c)(3)-l, 53.4958-2 (as amended by T.D. 9390, 2008-18 1.R.B.

855).

186. See 26 U.S.C. § 4958(c) (2006).

187. Id. § 4958(c)(1).

188. Id. § 4958(f)(1).

189. See T.D. 9390, 2008-18 I.R.B. 855 (2008).

190. Id.



2009] HEALTH CARE LAW 1023

(C) whether the [exempt] organization has been involved in multiple

excess benefit transactions with one or more person;

(D) whether the [exempt] organization has implemented safeguards that

are reasonably calculated to prevent excess benefit transactions; and

(E) whether the excess benefit transaction has been corrected ... or the

[exempt] organization has made good faith efforts to seek correction
from the disqualified person(s) who benefited from the excess benefit
transaction.

^^^

All of the foregoing factors will be "considered in combination with each other,"

and the IRS "may assign greater or less weight to some factors than to others." '^^

The finalization of these regulations should serve to re-emphasize the
importance to tax exempt organizations ofhaving appropriate safeguards against

excess benefit transactions and private inurement. Such safeguards should

include an effective Intermediate Sanctions Policy to identify and prevent or

correct the occurrence of excess benefit transactions.

C IRS Interim Report on Hospital Compliance Project
On July 19, 2007, the IRS released an Interim Report on Tax Exempt

Hospitals and Community Benefit Projects (IRS Interim Report) that summarized
the responses from tax exempt hospitals to a questionnaire distributed by the IRS

in May 2006.^^^ That questionnaire was sent to over 500 tax exempt hospitals
across the country, and it requested information regarding hospitals' activities,

governance, expenditures, and executive compensation practices. ^^"^ The IRS
Interim Report presents data gathered from the responses of 487 hospitals and

focuses on how those hospitals provide and report benefits to the community
pursuant to the community benefit standard.

^^^

The IRS Interim Report made three basic findings: (1) nearly all hospitals
reported providing various types ofcommunity benefit; (2) no uniform definition
ofuncompensated/charity care emerged from various hospital responses; and (3)
"there appear to be significant differences in the way other components of
community benefit are reported."^^^ In conjunction with the IRS Interim Report,
the IRS's hospital project team recommended developing a separate Form 990
schedule for hospitals as a vehicle for addressing the lack of definitional and

191. Treas. Reg. § 1.501(c)(3)(ii) (as amended by T.D. 9390, 2008-18 I.R.B. 855).

192. Id. § 1.503(c)(3)- l(f)(2)(iii).

193. For a copy of the IRS Interim Report, see I.R.S., Hospital Compliance Project:

Interim Report (Summary of Reported Data) (2008), available «r http://www.irs.gov/pub/irs-

tege/eo_interim_hospital_report_072007.pdf.

194. See generally id.

195. Id. all.

196. I.R.S. News Release IR-2007-132 (July 19, 2007).



1024 INDIANA LAW REVIEW [Vol. 42: 1003

reporting uniformity. '^^ The IRS responded with the new Schedule H, Hospitals,
as part of the New Form 990, which was clearly influenced by the preliminary
results of the IRS Interim Report.

The IRS issued a final report on the community benefit compliance check in
early 2009.'^^ The final report is outside the scope of this Survey, but it includes
a more in-depth analysis of the responses, including information regarding
executive compensation practices, and it provides information based on varying

demographics, such as rural and urban communities and hospitals.
^^^

IV. Reimbursement & Payment Issues

A. New Provider Reimbursement Review Board Instructions

On August 8, 2008, the Provider Reimbursement Review Board (Board)
provided guidance following the much anticipated changes to the Medicare
appeals process by issuing new rules, also referred to as instructions, to comply
with new Centers for Medicare and Medicaid (CMS) regulations.^^^ The
instructions outline new requirements under the regulations published by CMS
in the Federal Register on May 23, 2008.^^' The new instructions supersede the
prior rules and are applicable to all appeals pending as of, or filed on or after,

August 21, 2008.^^^ The Board instructions present additional issues providers
must consider when preserving their appeal right before the Board. A brief
summary and discussion of the changes to the appeal filing and pre-hearing
process affected under the new instructions are discussed below.

1. Appeal Filing Changes.—Under the new rules the Board has issued
several changes that appear minor in nature but can significantly impact whether

the Board will grant jurisdiction to an appeal or whether the Board will consider

a document to be timely received. One of the most significant changes was made
to the actual Board filing process with respect to date and time of receipt. In

order to be deemed timely filed, the previous rules allowed an appeal or
document to be accepted by the Board based on the day ofmailing. Under the

new instructions, the filing deadline is now the date of receipt.^^^ This change

197. Id.

198. For a copy of the final report, see I.R.S. IRS EXEMPTORGANIZATIONS (TE/GE) Hospital

Compliance Project: Final Report (2009), available at http://www.irs.gov/pub/irs-

tege/frepthospproj .pdf

.

199. See generally id.

200. Provider Reimbursement Review Bd., Ctrs. for Medicare & Medicaid Servs.,
Provider Reimbursement Review Board Rules (2008), available at http://www.cms.hhs.gov/

PRRBReview/Downloads/PRRBRules2008.pdf.

201

.

See Provider Reimbursement Determinations and Appeals, 73 Fed. Reg. 30, 1 90 (May 23,

2008) (to be codified at 42 C.F.R. pts. 405, 413, 417). CMS published this Final Rule which
outlines the changes to the Provider Reimbursement Review Board appeal process. Id.

202. Provider Reimbursement Review Bd., supra note 200, at 1

.

203

.

See Provider Reimbursement Determinations and Appeals, 73 Fed. Reg. at 30, 1 92 (to be



2009] HEALTH CARE LAW 1025

is significant as it now places a stricter timeline on filing appeals and other time-
sensitive documents to the Board. The effects of the changes are as follows. If
an over-night carrier is used for delivery, the date of receipt will be the date as

recorded by the carrier.^^"^ If the U.S. Postal Service is used for delivery, the date

of receipt is the date the Board's receiving entity enters the filing as

"received."'^'

The new rules also place additional limitations on providers with respect to
adding new appeal issues to active appeals already timely filed. Under the
previous rules, providers had significant leeway to add new appeals issues at any
time prior to the Board hearing. The new instructions change this filing deadline
dramatically. Now, if a provider wishes to add a new appeal issue, they must do
so within sixty days of the initial 180-day filing deadline.^^^ This change now
gives providers a maximum of 240 days to add new issues to individual appeals.
The Board's rationale for this change was based on the growing backlog of cases
and concern that providers were intentionally leaving appeals open longer with

the hope of capturing new appeal issues to add to the original filing.^^^ The new
instructions significantly limit the addition of issues and now require providers
to carefully consider the entirety of potential issues that arise from a final

determination as part of their filing strategy.

Other appeal filing considerations relate to certain certifications that must be

provided to the Board. In the Board instructions, the Board provides several

templates that define specific information and specific statements that must be

certified to the Board for either an individual provider or group appeal.^^^ The
new instructions require that the designated representative sign a certification to
the Board that the issue requested for appeal is not currently under appeal and

that there is no common issue related provider (CIRP) issue.^^^ Under the CIRP
rule, if two or more providers have a common appeal issue—are commonly
owned or controlled and have the minimum $50,000 amount in controversy
requirement—the providers must file their appeal as a CIRP group.^^^ While the

codified at 42 C.F.R. § 405. 1801(a), (d)); see also Provider REIMBURSEMENT Review Bd., supra

note 200, at 2.

204. Provider Reimbursement Determinations and Appeals, 73 Fed. Reg. at 30,192.

205. Id.

206. Id. For each fiscal year, providers must submit a cost report to a Medicare Administrative

Contractor (formerly referred to as a fiscal intermediary) who is responsible for auditing all costs

submitted for payment to CMS. Id. at 30,191. After the audit is completed each provider is given

a notice of program reimbursement (NPR) by their respective MAC which, among other things,
outlines any adjustments to payments—often citing overpayments made to the provider. See id.
If, after reviewing the NPR and adjustments, the provider wishes to appeal the issue, they have 1 80
days from the receipt of the NPR from which to initiate the appeal or they generally lose their
appeal rights for the cost report year. See id. at 30,191, 30,203.

207. /J. at 30,192.

208. See PROVIDER REIMBURSEMENT REVIEW Bd., supra note 200, at 45-62.

209. Id. at 58.

210. Id. at 9. Under the Board instructions, in order to initiate an individual appeal, a provider



1026 INDIANA LAW REVIEW [Vol. 42: 1003

CIRP rule has not changed in its scope under the new instructions, the Medicare
Administrative Contractors (MAC) (formerly fiscal intermediaries) have noted
they intend to deny jurisdiction for an appeal to the Board if the CIRP rule is not
followed.

Finally, the Board instructions now require a more comprehensive
description of the issue under appeal along with supporting documentation.^^

^

The Board will no longer accept a general statement of an issue when requesting
a hearing. Providers, in their initial hearing request, must provide the following

information: (1) proof that all jurisdictional requirements have been met; (2) a

thorough explanation of the issue under appeal; (3) the rationale for the appeal

and underlying assertion as to why the provider believes the Medicare payment
is incorrect—including supporting documentation or the provider' s notation of
the lack of necessary documentation required to accept the final payment
determination; (4) an explanation as to how the determination should be
determined differently; and (5) for items properly self-disallowed, a full

descriptions of the nature of the controversy, the amount of reimbursement
sought, and for cost reporting periods ending on or after December 31, 2008,
proof that the self-disallowed item was filed under protest in the provider's cost
report.^^^

2. Pre-hearing Considerations.—Under the new instructions, the Board has
introduced a significant change with the addition of the Joint Scheduling Order

(JSO) which has implications for the appeals pre-hearing procedure.^ ^^ In the
past, the Board established all preliminary and final position paper due dates in
addition to overseeing the pre-hearing process between the provider and MAC
based on standard timeframes and the appeal filing date.^^"^ The Board is now
offering two options for providers with respect to the pre-hearing process: (1)
the Board will establish a standard timeline for document filing or (2) the parties
may now jointly establish the pre-hearing deadlines in a proposed JSO.^^^ The
Board believes the JSO option will promote parties to work together to resolve
issues more quickly, allow for stipulations, and promote judicial economy.

The JSO now allows parties to negotiate a detailed pre-hearing timeline
setting out agreed upon dates for such important items as the filing of position

must have at least $10,000 in controversy. Id. at 5. For a group appeal, the amount in controversy

must be $50,000. Id. at 8.

211. Provider Reimbursement Review Bd., supra note 200, at 4.

212. Id. at 6, 46-63. A provider may self-disallow an item for payment on their cost report
when they believe an item should be reimbursed but also are concerned that by requesting the

payment from CMS, they would be in violation of a regulation or other legal authority. Id. at 6.

If the provider maintains there should be a payment, however, they must file the cost report to CMS
under protest. Id.\ see also 42 C.F.R. § 405.1835(a)(l)(ii) (2006) (outlining the filing of a cost

report under protest).

213. Provider Reimbursement Review Bd., supra note 200, at 17-20; see also 42 C.F.R.

§405.1853(2006).

214. Provider Reimbursement Bd., supra note 200, at 17.

215. Id.



2009] HEALTH CARE LAW 1027

papers and the exchange of information.^ ^^ Under the JSO, the Board will still
maintain authority over setting the final position paper due dates and scheduling

the date of the hearing.^^^ As part of the JSO request, the parties must identify
all issues they agree to, conditionally agree to, and any issues that remain in

dispute.^^^ Providers must also provide the Board with expected discovery

requests and a timeline for the exchange of information.^ ^^ When approved, the
JSO becomes the timeline that the Board will follow with respect to the pre-
hearing procedure. If a provider or MAC fails to follow the negotiated JSO, they
jeopardize their appeal rights before the Board.

B. Recovery Audit Contractors

The Recovery Audit Contractor (RAC) Program was instituted by CMS
under authorization from the Medicare Modernization Act of 2003^^° and was

made permanent under the Tax Relief and Health Care Act of 2006.^^^ Recovery
Audit Contractors are independent organizations that contract with the federal

government to audit improper over- and under-payments made to providers
through the Medicare program.^^^ Congress implemented the RAC Program as
a means to support CMS in its efforts to prevent improper payments and
safeguard against increased costs.^^^ Li 2007, 0MB estimated that, of the 1.2
billion claims processed by CMS for that year, improper payments accounted for
Medicare costs of $10.8 billion.^^'* The program was initiated under a three-year
demonstration project beginning in 2005 that was first piloted in California, New
York, and Florida and was eventually implemented in Arizona, Massachusetts,
and South Carolina.^^^ An overview of the RAC Demonstration Project and
implications for the final RAC Program is discussed below.

7. RAC Demonstration Project, 2005-2008.—The RAC Demonstration
Project began in 2005 and ended on March 27, 2008.^^^ The Program was
specifically designed to identify and correct past improper CMS payments and
provide information to CMS regarding claims error rates that could be used to

216. Id. at 17-20.

217. Mat 20.
218. Mat 19-20.
219. Id. at 19.

220. Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No.

108-173, § 306, 117 Stat. 2066, 2256-57.

221. Tax Relief and Health Care Act of 2006 § 302, 42 U.S.C. § 1395ddd (2006).

222. See id.

223. See id. § 1395ddd(a).

224. Ctrs. for Medicare aisfd Medicaid, The Medicare Recovery Audit Contractor

(RAC) Program: An Evaluation of the 3-Year Demonstration 1 (2008), available at
http://www.cms.hhs.gov/RAC/Downloads/RAC%20Evaluation%20Report.pdf [hereinafter RAC
Program].

225. Id.

226. Id. at 6.



1028 INDIANA LAW REVIEW [Vol. 42: 1003

prevent future improper payments.^^^ Through a competitive bidding process,
three contractors were invited to participate in the RAC Demonstration Project
and were divided among the piloted states.^^^ The RACs were paid by what has
proven to be a controversial method of payment. While most agencies working
with CMS are paid through appropriated funds, RACs were paid based on a
contingency fee.^^^ That is, they were paid a percentage based on the number of
improper claims the RACs identified and collected.

Results of the RAC Demonstration paint an interesting picture of what will
likely occur once the RAC Program is implemented nationally in 2010.^^^ Upon
completion of the demonstration on March 27, 2008, the RAC auditors had
identified over $1.03 billion in improper payments—ninety-six percent ($992.7
million) were recovered overpayments made to providers while only four percent
($37.8 million) were repaid to providers for underpayment.^^ ^ With respect to
hospital claims, critical areas that were examined included medical necessity and

documentation related to proper coding.^^^ Of the hospital overpayment claims
reviewed, forty-one percent of all improper claims were due to a medically

unnecessary setting, thirty-six percent were due to incorrectly coded claims, and

eight percent were due to insufficient documentation.^^^

After the RAC Demonstration project was completed, CMS implemented
new guidelines that will become effective with the final program.^^"^ Key changes
include: ( 1 ) RACs can only review claims going back to October 1 , 2007; (2) all
RACs must have a medical director; (3) RACs must have all issues they intend
to examine approved by CMS and then must comply with the standards set forth
by CMS; (4) RACs must post the issues on their website for providers to review;
(5) RACs will only be able to request medical records based on a provider's NPI
number for inpatient hospitals the RACs can only obtain ten percent of average
monthly Medicare claims (maximum of 200 records) every forty-five days; and
(6) RACs cannot review any claim or issue now under investigation or previously
reviewed by the OIG.^^^

2. The Implications of the Permanent RAC Program.—After the RAC

227. Id.dXn.

228. Id. During the RAC Demonstration, Connolly was the RAC for New York and
Massachusetts, HealthDatalnsights was the RAC for Florida and South Carolina and PRG-Schultz
was the RAC for California and Arizona. Id.

229. Id.

230. The national implementation is contemplated by the Medicare Modernization Act of

2003. See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No.

108-173, § 306, 117 Stat. 2066, 2256-57.

23 1

.

RAC Program, supra note 227, at 2.
232. Id. at 56, app. E.

233. Id. at 18-19.

234. See id. at 25, tbl. 10.

235. Id.\ see also Ctrs. for Medicare and Medicaid, RAC Medical Record Request
Limits (2009), available at http://www.cms.hhs.gov/RAC/Downloads/RAC%20Medical%20

Record%20Request% 20Limits.pdf.



2009] HEALTH CARE LAW 1029

Program was halted due to a bidding dispute in November 2008, CMS announced
on February 6, 2009, that the final RAC contractors were named.^^^ Under the
permanent RAC Program the country has been divided into four regions. ^^^ The
following RACs will be paid and are as follows: (1) in Region A, Diversified
Collection Services will be the RAC and will be paid a contingency fee of
12.45%; (2) in Region B, CGI Technologies and Solutions will be the RAC and
will be paid a fee of 12.50%; (3) in Region C, Connolly Consulting Associates

will be the RAC and will be paid a fee of 9.00%; and (4) in Region D
HealthDatalnsights will be the RAC and will be paid 9.49%.^^^ The permanent
RAC Program began in March 2009 in some areas of the country and will be
nationally ramped up through 2010.

Hospitals and providers throughout the country are in various stages oftrying

to become RAC-ready . Hospitals have been encouraged to develop a centralized,
multi-disciplinary group of healthcare providers and staff who can quickly
respond to a RAC inquiry.^^^ Although providers in demonstration states have
provided insight into how to prepare for a RAC data request, the demonstration
project made it clear that providers should understand their rights and obligations
and how to properly and quickly respond to a RAC inquiry.^"^^ To begin,
providers should know that RACs audit payment claims by one of two methods:
(1) by mining claims data provided by to them by CMS and/or (2) by reviewing
a sampling of patient charts delivered by the providers to the RAC upon request.
If a provider receives a records request, hospitals have forty-five days to

respond.^"^' Hospitals can request an extension, but must do so before day forty-

five.^"^^ Providers who fail to respond in a timely manner will have their claims
denied. RACs have sixty days to review records and within the sixty day period
must notify providers of the final determination by letter.

Preserving appeal rights as the result of the RAC audit is another important

236. See Andrea Kraynak, RAC Protest Resolved: CMS to Continue RAC Program
Implementation, HealthLeadersMedia.COM, Feb. 9, 2009, n.p., http://www.healthleadersmedia.

com/content/227913/topicAVS_HLM2_FIN/RAC-Protest-Resolved-CMS-to-Continue-RAC-

Program-Implementation.html.

237. For a map of these jurisdictions, see Ctrs. for Medicare and Medicaid Servs., Proposed

2008 RAC Jurisdictions, http://www.cms.hhs.gov/RAC/Downloads/Four%20RAC%
20Jurisdictions.pdf (last visited July 6, 2009).

238. FedBizOpps.Gov, Recovery Audit Contractor (RAC), https://www.fbo.gov/index?s=

Opportunity&mode=form&id=5c8c7d4b00249ba579d4d77d64bd0aea&tab=core&_cview=l&c

ck=l&au=&ck= (last visited July 6, 2009).

239. See, e.g.. Bill Phillips et al., 10 Critical Actions to Minimize RAC Recoupment,
HealthLeadersMedia.COM, Feb. 23, 2009, n.p., http://www.healthleadersmedia.com/content/

228655/topic/WS_HLM2_FIN/10-Critical-Actions-to-Minimize-RAC-Recoupment.html.

240. See RAC PROGRAM, supra note 227, at 29.
241

.

Ctrs. for Medicare and Medicaid Servs., Frequently Asked Questions, "How Long Does

a Provider Have to Submit Medical Records When Requested by a Recovery Audit Contractor

(RAC)?," http://questions.cms.hhs.gov/ (search for question number 7725).

242. Id.



1030 INDIANA LAW REVIEW [Vol. 42: 1003

consideration. If hospitals are engaged in a RAC review, it is crucial to follow
an established timehne to help navigate the required procedural obligations. An
abbreviated version of the appeals process with important times is outlined

below.

Pre-Appeal : Providers should notify the RAC as soon as it has verified there
is a dispute with the RAC's determination of an overpayment issue;
Level 1 Review : Appeal to the FI/MAC for redetermination, Provider must
file within 120 days of receiving the initial RAC determination letter
requesting repayment; the MAC/FI has sixty days to issue determination
after the request is made;

Level 2 Review : Provider has 1 80 days from the FI/MAC redetermination
to file an appeal with a Qualified Independent Contractor (QIC); the QIC has
sixty days to issue a determination after the request is made;

Level 3 Review : If denied by the QIC, the provider must file an appeal
within sixty days to an Administrative Law Judge (ALJ). The ALJ has
ninety days to issue a ruling;

Level 4 Review : If denied by the ALJ, the provider must appeal within sixty
days to the Medicare Appeals Council for review. The Appeals Council has
ninety days to issue a determination;

Level 5 Review : If denied by the Appeals Council, then the provider must
move within sixty days for judicial review in a United States District
Court.'"^

V. Quality

Two extremely important developments which relate to quality ofhealth care
include the new Red Flag Regulations as well as a final rule regarding the
recognition of new Hospital Acquired Conditions. These developments require
providers to be more diligent in the way they deliver care.

A. Red Flag Regulations

On December 4, 2003, President Bush signed the Fair and Accurate Credit
Transactions Act (FACTA). ^"^"^ FACTA was originally enacted to provide greater
protection against consumer identity theft and directed six federal agencies to

develop methods of detecting consumer identity theft.^"^^ These six agencies

243. See Ctrs. for Medicare and Medicaid Servs., Original Medicare (Parts A and B Fee-For-
Service) Appeals Process, http://www.cms.hhs.gov/OrgMedFFSAppeals/Downloads/

AppealsprocessflowchartAB.pdf (last visited July 6, 2009).

244. See Fair and Accurate Credit Transactions Act of 2003, Pub. L. No. 108-159, 117 Stat.

1952, 2012.

245. See 15 U.S.C. § 1681m(e)(l)(A) & (2)(A) (2006). The six agencies Congress directed
to develop guidelines were: ( 1 ) the Office of the Comptroller of the Currency, Treasury; (2) the

Board ofGovernors of the Federal Reserve System; (3) the Federal Deposit Insurance Corporation;

(4) the Office of Thrift Supervision, Treasury; (5) the National Credit Union Administration; and

(6) the Federal Trade Commission. Id. § 1681m(2)(l) (listing the first three under the general



2009] HEALTH CARE LAW 103

1

jointly promulgated final regulations that were initially to become effective
November 1, 2008, but were later delayed and are presently effective as of May
1, 2009 (Red Flag Rules).^"^^ The Red Flag Rules impose obligations on many
health care providers to establish programs and greater oversight to prevent

consumer identify theft.

The Red Flag Rules require "each financial institution or creditor to develop
and implement a written Identity Theft Prevention Program (Program) to detect,

prevent, and mitigate identity theft in connection with the opening of certain

accounts or certain existing accounts.
"^"^^ The Rules define Red Flags as "a

pattern, practice, or specific activity that indicates the possible existence of

identify theft," which the aforementioned program should protect against.^"^^

They also provide guidelines "to assist financial institutions and creditors in the
formulation and maintenance of [such] a Program that satisfies the requirements

of the [rules].
"^"^^ Key definitions of the Red Flag Rules bring some health care

entities within the rules' purview. The Rules define "creditor" as "any [entity]
who regularly extends, renews, or continues credits; any [entity] who regularly
arranges for the extension, renewal, or continuation of credit; or any assignee of

an original creditor who participates in the decision to extend, renew, or continue
credit."^^^ "Credit" is defined as "the right granted by a creditor to a debtor to

defer payment of debt or to incur debts and defer its payment or to purchase

property or services and defer payment therefore."^^^ Finally, "covered account"

is defined as:

(i) An account that a financial institution or creditor offers or maintains,
primarily for personal, family, or household purposes, that involves or

is designed to permit multiple payments or transactions, such as a credit

card account, mortgage loan, automobile loan, margin account, cell

phone account, utility account, checking account, or savings account;

and

(ii) Any other account that the financial institution or creditor offers or
maintains for which there is a reasonably foreseeable risk to customers

or to the safety and soundness ofthe financial institution or creditor from

identity theft, including financial, operational, compliance, reputation,

or litigation risks.^^^

heading of "Federal banking agencies").

246. Fed. Trade CoMM'N, FTC Enforcement Poucy: Identity Theft Red Flags Rule,

1 6 CFR 681.2 (2008), available at http://www.ftc.gov/os/2008/ 1 0/08 1 022idtheftredflagsmle.pdf.
247. Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit

Transactions Act of 2003, 72 Fed. Reg. 63,718, 63,718 (Nov. 9, 2007).

248. 16 C.F.R.§ 681.1(b)(9) (2009).

249. /J. pt. 681,app. A.

250. Id. § 681.1(b)(5) (citing 15 U.S.C. § 1681a(r)(5) (2006)).

251. Id. § 681.1(b)(4) (citing 15 U.S.C. § 1681a(r)(5) (2006)).

252. Id. § 681.1(b)(3).



1032 INDIANA LAW REVIEW [Vol. 42: 1003

In context, the definition of covered account implies a continuing

relationship where a consumer receives a service or product that is billed

retroactively. The widespread practice among health care institutions to bill for
services after those services have been provided and the maintenance of accounts

that allow for patients to defer and make multiple payments for these services
will likely allow the FTC to characterize health care institutions who maintain
these practices as "creditors" who extend "credit" under the Red Flag Rules.
Moreover, the FTC may characterize patient accounts as "covered accounts," as
patient accounts are generally accounts maintained for personal and/or family

purposes (e.g., health care needs) that are designed to allow multiple payments.

Such characterizations will likely trigger the application of the Red Flag Rules
to these health care institutions. Moreover, while there has been some
speculation as to whether the FTC has jurisdiction over non-profit entities,
including nonprofit hospitals, the FTC has taken the position that it will enforce
the Red Flag Rules against nonprofit entities.^^^

Health care entities that determine they are covered by the Rules, finding

they (1) are creditors and (2) have covered accounts, must follow the Red Flag
Rules by implementing a Program. Each entity must tailor its Program to protect

against the risk ofidentity theft based on its own operations and circumstances.
^^"^

For example, health care institutions covered by the rules would likely develop

a Program to address medical identity theft. ^^^ However, each Program

must contain reasonable policies and procedures to:

(i) Identify relevant Red Flags for covered accounts that the . . .
[c]reditor officer or maintains, and incorporate those Red Flags into its
Program;

(ii) Detect Red Flags that have been incorporated into the Program of

.

. . the [c]reditor;

(iii) Respond appropriately to any Red Flags that are detected ... to
prevent and mitigate identity theft; and

(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to customers

and to the safety and soundness of the . . . creditor from identity theft.^^^

Health care entities implementing an initial Program, addressing all of the

253. Fed. Trade Comm'n, New "Red Flag" Requirements for Financial Institutions and
Creditors Will Help Fight Identity Theft (June 2008), available Air http://www.ftc.gov/bcp/edu/pubs/

business/alerts/alt050.shtm.

254. 16 C.F.R. § 681.1(d)(1) (2009).

255. Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit

Transactions Act of 2003, 72 Fed. Reg. 63718, 63727 (Nov. 1, 2007).

256. 16 C.F.R. § 681.1(d)(2) (2009).



2009] HEALTH CARE LAW 1033

elements listed above, must receive the approval of the entities' "board of

directors or an appropriate committee"; therefore, the Program and the board of

directors, committee or "a designated employee at the level of senior

management [i.e. compliance officer, risk manager or general counsel]" should
be involved "in the oversight, development, implementation and administration

of the Program."^^^ The entities must also train appropriate staff to implement
the Program and ensure adequate oversight of its arrangements with service

providers.^^^

The Red Flag Rules Program and oversight requirements will place
additional obligations on many health care providers to develop additional
policies and procedures to monitor patient accounts for identity theft. Moreover,

the rules require more activity, involvement and accountability from governing

boards of health care providers in regards to identify theft. Finally, health care

providers must monitor their relationships with third parties that provide services

to the health care providers and with whom these providers exchange patient
account information. Many health care providers may already have in place
certain provisions of agreements with third party services providers to protect

certain patient information to comply with security and privacy obligations under

the Health Insurance Portability and Accountability Act (HDPAA) and regulations
that have been promulgated thereto. However, health care providers will have

to impose additional oversight mechanisms and impositions on these third party

service providers to protect against identity theft as required by the rules.

B. Hospital Acquired Conditions

On August 19, 2008, the Centers for Medicare & Medicaid Services (CMS)
issued a final rule regarding additional recognized Hospital Acquired Conditions

(HACs) and reportable quality measures.^^^ The effective date of the final rule
is October 1, 2008.^^^ The final rule implements the HAC payment adjustment
provision for all recognized HACs and imposes new reporting requirements for
Inpatient Prospective Payment System (IPPS) hospitals who wish to receive the
full 2010 payment update.

As part of its continued efforts to promote patient safety and health care
quality, as well as support its value-based purchaser model, CMS developed
strategies to combat expensive and preventable inpatient complications. In 2005,

Congress, in its attempt to reduce the incidence of HACs, authorized CMS to
adjust the IPPS to encourage hospitals to prevent medical errors. Legislation

required CMS to identify at least two adverse HACs that were: (1) high cost,
high volume, or both; (2) assigned to a higher paying diagnosis related group

(DRG) when present as a secondary diagnosis; and (3) could reasonably have

257. M§§681.1(e)(lH2).

258. M§§681.1(e)(3)-(4).

259. Prospective Payment Systems for Inpatient Hospital Services, 73 Fed. Reg. 48,754 (Aug.

19, 2008) (to be codified at 42 C.F.R. pt. 412)

260. 42 C.F.R. § 412.22(e)(vi) (2008).



1034 INDIANA LAW REVIEW [Vol. 42: 1003

been prevented through the application of evidence-based guidelines.
^^'

CMS ultimately selected the following HACs for hospitals to report on
beginning on October 1, 2007: (1) foreign object retained after surgery; (2)
surgical site infection after coronary artery bypass graft surgery; (3) air

embolism; (4) blood incompatibility; (5) catheter-associated urinary tract

infection; (6) pressure ulcer (stages IQ and IV); (7) vascular catheter-associated

infection; and (8) bums, electric shock, and certain types of falls and traumatic

injuries.
^^^

1. NewlyReleasedHACs and the PaymentAdjustment Provision.—Although
the proposed rule for the FY 2009 rulemaking period sought comments on
numerous HAC candidates, CMS ultimately chose to add two HACs, expand the
HAC relating to surgical site infection, and clarify two recognized HACs. Under
the final rule, manifestations of poor glycemic control and deep vein thrombosis

and pulmonary embolism following total hip or knee replacement were

recognized as an HACs.^^^ Additionally, the final rule expanded the surgical site

infection HAC to include those following certain orthopedic procedures and
bariatric surgery for obesity.^^"^ Finally, the final rule refined diagnosis codes to

include the payment provision in both the foreign object retention HAC and
pressure ulcer HAC.^^^

The final rule also provided that as of October 1 , 2008, any HAC adopted by
CMS would only be paid at the higher DRG rate as a secondary diagnosis if it
was present on admission.^^^ This is often referred to by CMS as the HAC
payment adjustment provision. This payment adjustment provision allows

Medicare to deny payment at the higher DRG rate when a HAC, not present on
admission, is later claimed as a secondary diagnosis within the higher paying

DRG. As part of this provision, hospitals would be required to report whether
the secondary diagnoses were present on admission when submitting their claims.

The payment adjustment provision clearly targets reimbursement by linking
payment for health care services to quality of care. Medical record

documentation will be invaluable in establishing whether or not a particular

condition was present on admission.
2. Expanding Reporting ofHospital Quality Data,—In the final rule, CMS

expanded the list of reportable quality measures under the Reporting Hospital

Quality Data for Annual Payment Update Program.^^^ Previously, this program
required hospitals to report thirty quality measures on inpatient claims in order

261. Deficit Reduction Act of 2005, S. 1932, 109th Cong. § 5001(c) (2006) (enacted).

262. Medicare Program; Changes to Hospital Inpatient Prospective Payment System and Fiscal

Year 2008 Rates, 72 Fed. Reg. 47,130 (Aug. 22, 2007) (to be codified at 42 C.F.R. pt. 41 1).

263. /J. at 47,215.

264. /J. at 47,244, 47,261.

265. /rf. at 48,168.

266. Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and

Fiscal Year 2009 Rates, 73 Fed. Reg. 48,433, 48,444 (Aug. 19, 2008) (to be codified at 42 C.F.R.

pt.411).

267. Mat 48,617.



2009] HEALTH CARE LAW 1035

to qualify for a full update to their Medicare payment rates. However, in the

final rule, CMS added thirteen new reportable measures to this list and retired a
pneumonia measure, bringing the total number of reportable quality measures to
forty-two. The thirteen new reportable quality measures include: Surgical Care
Improvement Project (SCIP) Measure, Readmission Measure, Nursing Sensitive

Measure, Agency for Healthcare Research and Quality (AHRQ) Quality
Indicators, and Cardiac Surgery Measure.^^^

According to the final rule, CMS will reduce the Medicare payment update
amount by two percent for any hospital that fails to successfully report quality

measures.^^^ In doing so, CMS has once again directed its enforcement at the
bottom line. Hospitals who fail to fully comply with this emphasis on quality,
efficiency, and transparency will see their reimbursement decline.

HACs are of great concern to both the public and health care providers. The
occurrence of these conditions not only decreases the quality of care but also

costs federal health care programs billions of dollars each year. Since paying for

HACs is inconsistent with Medicare payment reforms, CMS is increasing
financial consequences to encourage providers to reduce their occurrence.

VI. Changes to Hospital Conditions of Participation

A. Hospital Conditions ofParticipation Interpretive Guidelines

On April 11, 2008, the CMS issued a Survey & Certification transmittal
(S&C)^^^ to state survey agencies regarding the revised Medicare Conditions of

Participation Interpretive Guidelines (Guidelines) for hospitals. The Guidelines
serve as the basis for determining hospital compliance, and the S&C provides an
advance copy of amendments to, and an accompanying explanation of. Appendix

A of the State Operations Manual.^^^

The new Guidelines correspond to the amended Hospital Conditions of
Participation (CoPs) published on November 27, 2006. The Guidelines also
reflect changes in the regulations from the 2008 Outpatient Prospective Payment

System (OPPS), which became effective January 1, 2008. The Guidelines
incorporate previously issued CMS guidance into the SOM for Hospitals.

The revised Guidelines reflect CMS' interpretations of the CoPs which
address the following areas: history and physicals (H&Ps), post anesthesia

evaluations, verbal orders, security of medications, infection control and

268. Id at 48,609.

269. Id. at 48,768.

270. Dep't OFHealth&Human Servs., Hospitals—Restraint/Seclusion Interpretive
Guidelines & Updated State Operations Manual (SOM) Appenddc A (2008), available at
http://www.cms.hhs.gov/SurveyCertificationGenInfo/downloads/SCLetter08- 1 8.pdf [hereinafter

Guidelines].

27 1

.

Dep't of Health & Human Servs., State Operations Manual (2004), available at
http://www.cms.hhs.gov/Manuals/IOM/itemdetail.asp?filterType=none&filterByDID=-

99&sortByDID= 1 &sortOrder=ascending&itemID=CMS 1 20 1 984&intNumPerPage= 10.



1036 INDIANA LAW REVIEW [Vol. 42: 1003

communicable diseases, and patient rights. Most noteworthy are CMS'
interpretations and examples of restraints and seclusion, training requirements,

and death reporting. Also included are many Guidelines on Medicare discharge
appeal rights, informed consent, and medication and pharmacy, including

medication management and disclosure requirements for physician-owned
hospitals. The Guidelines were immediately upon the publication date.

7. Restraint and/or Seclusion—Sections 482.13(e)-(g).—The restraint and
seclusion section of the Guidelines is quite expansive and provides numerous

examples of what CMS deems a restraint or seclusion.^^^ CMS also provides
information about what constitutes a minimal assessment prior to the initiation

of a restraint or seclusion of the patient.^^^ CMS states that "[t]he decision to use
a restraint or seclusion is not driven by diagnosis, but by a comprehensive

individual patient assessment."^^"^ The Guidelines also provide information
regarding the hospital's inappropriate use of weapons, the use of drugs or

medications which may or may not be a part of the patient's standard medical
treatment, and the type of devices or methods used by practitioners that are not

considered restraints.
^^^

The Guidelines address significant details regarding the scope of training,
who must be trained, and the qualifications of the trainers prior to use of the
restraint or seclusion.^^^ There is considerable discussion regarding the method

and manner of face to face evaluations of the patient.^^^ All of these
requirements must be on file and set forth in the hospital's policies and

procedures. The Guidelines dictate that states are free to set requirements by
statute or regulation that are more restrictive than the federal regulations so long
as they do not conflict with federal requirements. CMS has also included
numerous resources for clinicians to provide further guidance.

2. History and Physical Examinations—Section 482.24(c)(2).—On
November 27, 2006, CMS issued a revised rule requiring that H&Ps be
completed no more than thirty days before, or twenty-four hours after, admission
for each patient, or prior to a surgery or procedure requiring anesthesia.^^^

Additionally, an H&P or an update to an H&P, is required prior to surgery and
for procedures requiring anesthesia services, regardless of whether care is being

provided on an inpatient or outpatient basis.
^^^

The new CoPs expand the permissible professional categories of individuals
who may perform an H&P.^^^ The new rule allows physicians, oral maxillofacial

272. Guidelines, supra note 276, at 83.

273. /J. at 85.

274. Mat 83.
275. Id. at 86.

276. Mat 110.
277. M. at 113.

278. Medicare and Medicaid Programs; Hospital Conditions of Participation, 71 Fed. Reg.

68,671, 68,673 (Nov. 27, 2006) (to be codified at 42 C.F.R. pt. 482).

279. M. at 68,674.

280. Guidelines, supra note 276, at 148.



2009] HEALTH CARE LAW 1037

surgeons, or "other qualified licensed individuals] in accordance with State law

and hospital policy" to perform H&Ps.^^* The Guidelines interpret such "other
qualified practitioners" as including nurse practitioners and physician

assistants.

The revised CoPs mandate that an H&P performed prior to admission (within
at least thirty days before admission) must be updated within twenty-four hours

of admission or prior to surgery, whichever comes first.^^^ The Guidelines
explain that this update must be completed and documented by a licensed
practitioner credentialed and privileged by the hospital's medical staff. ^^"^ If the
practitioner performing the update finds no change in the patient's condition
since the last H&P was completed, then the practitioner may indicate in the
patient's medical record that the H&P was reviewed, the patient was examined,
and may enter "no change" in the patient's medical record.^^^ However, if the
practitioner finds that an H&P performed prior to admission was incomplete,
then the practitioner must conduct and document a new H&P in the medical
record within twenty-four hours after admission or registration.^^^ This must be

done prior to the performance of a surgery or procedure requiring anesthesia.^^^

3. Authentication of Verbal Orders—Section 482.24(c)(1).—The CoPs
emphasize that hospitals should use verbal orders sparingly, if at all. The
Guidelines reiterate that verbal orders must not be a common practice as they
increase the risk ofmiscommunication, which could contribute to error, resulting

in an adverse patient event.^^^ Hospitals are expected to develop appropriate

policies and procedures that govern the use of verbal orders and minimize their

use.^^^ If there is no state law that designates a specific timeframe for the
authentication of verbal orders, such orders must be authenticated within forty-

eight hours.^^^

All orders, including verbal ones, must be dated, timed, and promptly

authenticated by the ordering practitioner.^^' Verbal orders must be immediately
documented in the patient's medical record and signed by the individual
receiving the order.^^^ CMS expects the nationally accepted "read-back"
verification practice to be used for every verbal order.^^^ Verbal orders may only
be accepted by persons authorized to do so by hospital policy and procedure.

281. Id.

282. Id. Sit 149.

283. W. at 150.

284. Id.

285. /J. at 151.

286. Id.

287. Id.

288. Id. at 166.

289. Id.

290. Mat 181.
291. Mat 179.
292. Id. at 116.

293. Id. at 179.



1038 INDIANA LAW REVIEW [Vol. 42: 1003

which must be consistent with federal and state law.^^"^ The receiver of any
verbal order must date, time, and sign the verbal order according to hospital

policy.^^^ CMS expects that if verbal orders are received, then the hospital's
policy must include a **read-back and verification process [es]."^^^ Where the
ordering practitioner cannot authenticate his or her verbal order, another

practitioner who is responsible for the patient' s care may authenticate that verbal
order.^^^

4. Securing Medications—Section 482.25(b)(2)(i).—Previously, the CoPs
required that all drugs and biologicals be kept in a locked storage area.^^^

Further, all drugs categorized as Schedule H, IQ, IV, or V were required to be
locked in a secure storage area available only to authorized personnel.^^^ The
CoPs now require that all drugs and biologicals be kept in a secure area.^^^ CMS
defines a "secure area" as one that prevents "unmonitored access by unauthorized

individuals.
"^^^ Labor and delivery suites in critical care units staffed twenty-

four hours a day are considered secure areas so long as entries and exits are

limited to appropriate staff, patients, and visitors.^^^

Operating room suites are considered secure only when the areas are staffed
and care is being actively provided.^^^ The Guidelines go on to state that
materials must not be stored in areas that are readily accessible to unauthorized

personnel.
^^'^

It is also important to note that although the storage of non-

controlled drugs and biologicals is a bit more flexible, controlled substances must

be kept in locked storage.^^^ In the event a patient care area is not staffed,

hospitals must be sure that both controlled and non-controlled substances are

locked up at all times.^^^ If a hospital uses mobile nursing medication carts,

anesthesia carts, epidural carts, or any other type of medication cart that contains

controlled substances, all drugs must be locked to prevent unmonitored access.
^^^

When a patient is self-administering his or her medications, hospitals are
expected to address this aspect in their policies and procedures to ensure that the

medications are secure at the patient's bedside.^^^

5. Completion of Post-Anesthesia Evaluation—Section 482.52(b)(3).—

294. Id.

295. Id. at 176.

296. Mat 179.
297. Id.

298. 42 C.F.R. § 482.25(b)(2)(i) (2008).

299. Id. § 482.25(b)(2)(ii).

300. Guidelines, supra note 276, at 207.

301. Id.

302. Id.

303. /J. at 208.

304. Id. at 201.

305. Id.

306. Id.

307. Mat 208.
308. Id.



2009] HEALTH CARE LAW 1039

Under the previous CoPs, only individuals who administered anesthesia could
perform post-anesthesia evaluations.^^^ The revised CoPs now state that post-
anesthesia evaluations and documentations may be done by any individual
qualified to administer anesthesia.^ ^^ This revision of the rules grants hospitals

and staff much greater flexibility when completing post-anesthesia evaluations.
It should also be noted that the new CoPs require post-anesthesia evaluations and
documentations be completed within forty-eight hours of surgery.^^^

The Guidelines provide greater clarification on the new CoPs regarding post-
anesthesia evaluations. CMS requires such an evaluation to be performed any
time general, regional, or monitored anesthesia is administered to a patient.^

^^

The Guidelines also provide clarification as to the definition of a "practitioner
qualified to administer anesthesia," including in its definition a qualified

anesthesiologist, a doctor of medicine or osteopathy, a dentist, and a certified

registered nurse anesthetist.^ ^"^ Anesthesiologist's assistants may also complete
the post-anesthesia evaluation and documentation so long as the anesthesiologist

who is supervising the assistant is immediately available.^ ^'^ The Guidelines do
not require a post-anesthesia evaluation and documentation to be performed on

patients who receive conscious sedation.^ '^

B, Revisions to the Hospital Interpretive Guidelines for Infection Control

On November 21, 2007, CMS issued a S&C^^^ to state survey agencies
regarding revisions to the Hospital Interpretive Guidelines for Infection Control

(Revisions). The Revisions were published in an effort to address the changing
infectious disease threats, as well as new mechanisms to confront these threats,
that have emerged in recent years.^^^

The Revisions require hospitals "to develop, implement, and maintain an
active, hospital-wide program for the prevention, control, and investigation of

infections and communicable diseases."^^^ The program must "be conducted in
accordance with nationally recognized infection control practices or guidelines,

as well as applicable regulations of other federal or state agencies.
"^^^

Furthermore, the program must contain a surveillance component to identify

309. 42 C.F.R. § 482.52(b)(3) (2008).

310. Guidelines, supra note 276, at 32 1

.

311. Id.

312. /J. at 322.

313. Id.

314. Id.

315. Id.

316. Dep't of Health & Human Servs., Revisions to the Hospital Interpretive
Guidelines for Infection Control (2007), available at http://www.cms.hhs.gov/Survey/

CertificationGenInfo/downloads/SCLetter08-04.pdf [hereinafter Revisions] .

317. /J. atl.

318. /J. at 3.

319. Id.



1040 INDIANA LAW REVIEW [Vol. 42: 1003

infectious risks or communicable disease problems at any particular location
within the hospital.^^^ The Revisions delineate the obligations of the hospital-
appointed infection control officer and the protocols with which he or she must

comply.^^^ The Revisions also discuss the responsibilities of the ChiefExecutive
Officer, Medical Staff, and Director of Nursing Services with regard to infection

control.^^^

C. Enforcement ofRequirementsfor Certain Hospital and Critical Access
Hospital (CAH) Disclosures to Patients

On December 14, 2007, CMS issued a S&C^^^ to state survey agencies
regarding the enforcement of disclosure requirements for certain hospitals and

critical access hospitals (CAHs). This memorandum discusses patient disclosure
obligations for physician-owned hospitals and CAHs.^^"^ Under the final rule
governing the hospital inpatient prospective payment system, all physician-
owned hospitals and CAHs must provide written notice to a patient at the
beginning of stay or visit that the hospital or CAH is physician-owned.^^^ The
purpose of this rule is to enable patients to make an informed decision about his
or her care. The notice must be made in a manner reasonably understood by all
patients.

^^^

The final rule amends 42 C.F.R. section 489.12 to enable CMS "to deny a
provider agreement to a hospital or CAH applicant that does not have procedures
in place to notify patients of physician ownership in the hospital."^^^

Furthermore, CMS may terminate a provider agreement that does not comply
with the new disclosure requirements.^^^ "Enforcement of the mandatory
disclosure requirements is linked to the Patients' Rights CoP for hospitals and the
compliance with Federal, State and local laws and regulations CoP for CAHs."^^^
Compliance with the disclosure requirements will be assessed when the hospital
is surveyed for compliance.

^^^

320. Mat 4.
321. /(i. at 7-13.

322. Id.at\3.

323. Dep't of Health & Human Servs., Enforcement of Requirements for Certain
Hospitals and CriticalAccess Hospitals (CAH) Disclosures to Patients (2007), available

at http://www.cms.hhs.gov/SurveyCertificationGenInfo/downloads/SCLetter08-07 .pdf [hereinafter

Requirements].

324. Id. all.

325. Id.

326. Id.

327. Mat 2.
328. Id.

329. Id.

330. Id. at 3.



2009] HEALTH CARE LAW 1041

vn. Changes to Hospice Conditions of Participation

On June 5, 2008, CMS issued a final rule revising the Hospice CoPs, which
all hospices are required to meet to participate in the Medicare and Medicaid

programs.^^^ Effective December 2, 2008, the final rule addresses the comments
received by CMS on the proposed rule published in 2005.^^^ The revised CoPs
are a flexible framework for continuous quality improvement in hospice care and
reflect current standards of practice. Further, the CoPs focus on a patient-
centered, outcome-oriented, and transparent process that promotes quality patient

care while allowing for flexibility in meeting quality standards.^^^ The final rule
marks CMS' first overhaul of regulations governing the hospice industry since
1983.^^"^ These CoPs address patient rights and quality of care, as well as the
relationship between hospices and the nursing facilities to whose patients they
provide services.

^^^

While many hospice patients are already active in their own treatment plans,
this regulation is the first to set out a detailed list of patient rights. Specifically,

the rule says that patients who choose hospice, or palliative care, over curative
treatment are entitled to such things as participation in the development of his or

her plan of care, the right to effective pain management, and the right to choose

his or her attending physician.
^^^

In addition to the patient rights' section, the CoPs created measures for the
quality of care of hospice patients. For example, the CoPs require hospices to
implement "an effective, ongoing, hospice-wide data-driven quality assessment

and performance improvement [(QAPI)] program."^^^ The CoPs allow hospices
to develop their own QAPI program to cater to their own goals and needs instead
ofmandating a particular mechanism to implement this program.^^^ Furthermore,
the CoPs require a comprehensive assessment to take place. ^^^

Additionally, the CoPs create other quality measures, such as a requirement
that patient needs be initially assessed within 48 hours of electing the hospice

benefit.^^^ The rule also requires that a comprehensive assessment occur within
five days of electing the hospice and that updated assessments be conducted at

least every fifteen days thereafter.^"^^ Further, the CoPs create a requirement that

331. Medicare and Medicaid Programs: Hospice Conditions of Participation, 73 Fed. Reg.

32,087 (June 5, 2008) (to be codified at 42 C.F.R. pt. 418).

332. Id. at 32,088.

333. Id.

334. Id.

335. Id.

336. See 42 C.F.R. § 418.52 (2008).

337. Id. § 418.58.

338. Medicare and Medicaid Programs: Hospice Conditions of Participation, 73 Fed. Reg. at

32,118.

339. 42 C.F.R. § 418.54(c) (2008).

340. Id. § 418.54(a).

341. Id. §418. 54(d).



1042 INDIANA LAW REVIEW [Vol. 42: 1003

each patient receive a full drug profile that examines issues ranging from the

effectiveness of current drug therapies to potential drug interactions to drug side

effects.^"^^ A treatment team will consult with a qualified individual, such as a
pharmacist, to ensure that drugs meet the needs of every hospice patient.^"^^

Moreover, the CoPs recommend the use of a patient-centered interdisciplinary
approach that recognizes the contributions of various skilled professionals and

other support personnel and their interaction with each other to meet the patients'

needs.
^"^"^

The CoPs also establish certain requirements for relationships among
hospices. For instance, the CoPs allow a hospice to contract with another
Medicare-certified hospice for nursing, medical, social services, and counseling

services under extraordinary or other non-routine circumstances, including travel

of a patient outside of the hospice's service area.^"^^ Moreover, the new CoPs
remove a previous provision which required an inpatient facility only providing

respite care to have a registered nurse on duty twenty-four hours a day.^"^^

Instead, the patients' needs, acuity, and plan of care will drive the nursing and

staffing requirements.

Finally, CMS created requirements for hospices with respect to their
relationships with nursing facilities. Because a hospice's access to nursing

facility patients is directly dependent on the nursing facility's operator, CMS
created several additional requirements in an effort to reduce the potential for

fraud and abuse. The CoPs require that a written agreement must be in place
between a nursing facility and hospice if the hospice provides services in the

facility.^"^^ Furthermore, the CoP lists the minimum requirements for such
agreements.

Instead of ensuring quality through a problem-oriented, after-the-fact

corrective approach ofquality assurance, the CoPs suggest a shift towards a more
quality-conscious, preemptive approach to hospice care. This approach will

require hospice administrators to review current operating policies and

procedures and create agreements with nursing facilities to ensure compliance.

342. Id. §418.54(c)(b).

343. Medicare and Medicaid Programs: Hospice Conditions of Participation, 73 Fed. Reg. at

32,095.

344. /t/. at 32,088.

345. Id. at 32,123; see also 42 C.F.R. § 418.64 (2008).

346. Medicare and Medicaid Programs: Hospice Conditions of Participation, 73 Fed. Reg. at

32,134.

347. Id. at 32,216; see also 42 C.F.R. § 418.112 (2008).

348. Medicare and Medicaid Programs: Hospice Conditions of Participation, 73 Fed. Reg. at

32,216.



2009] HEALTH CARE LAW 1043

vm. Antitrust

A. Clinical Integration

In September of 2007, the FTC issued an advisory opinion informing the
Greater Rochester Independent Practice Association, Inc. (GRIPA) that it would
not challenge the organization' s proposed operation as a non-exclusive physician

networkjoint venture. The FTC found that the proposed program would involve
substantial integration among its physician participants that had the potential to
produce significant efficiencies in the provision of medical services, and that the

joint contracting with payors on behalf of the GRIPA's physicians was
subordinate and reasonably necessary.^"^^

GRIPA is the fourth in a series of advisory opinions issued by the FTC
focusing on clinical integration since clinical integration' s first description in the

FTC's 1996 Statements ofAntitrust Enforcement Policy in Health Care?^^ In
each subsequent opinion, the FTC continues to refine its guidance on the types
ofprograms it considers sufficiently integrated to stave off an antitrust challenge.

In GRIPA, the FTC found that joint contracting was ancillary to the
efficiency enhancing purpose of the program.^^^ In reviewing the program, the

FTC noted certain key program provisions. Although one of the goals of the
program was to increase physician reimbursement, it did so not through market
power, but rather through improved quality and more cost-effective utilization.
Also, the FTC noted with approval the investment of both time and money that
the physicians would be required to undertake in the clinical integration program,

including: collaborative development of practice guidelines, coordinated

delivery of medical care, and sharing of treatment information through a clinical

information system.^^^ At the end of the day, the FTC concluded that the
proposed program was unlikely to have anticompetitive effects or allow GRIPA
to exercise market power.

^^^

Clinical integration continues to be on the FTC's radar screen and will
continue to raise antitrust issues. It is becoming clear that multi-specialty

programs with strong clinical management, robust outcomes measurement, and

significant physician interdependence can generate sufficient efficiencies to

overcome the risk of antitrust challenge. Look for the FTC to continue to refine
its guidance on clinical integration in the foreseeable future.^^"^

349. Fed. Trade Comm'n, Greater Rochester Indep. Practice Ass'n, Inc., Advisory

Opinion 1 (Sept. 17, 2007), available at http://www.ftc.gov/bc/adops/gripa.pdf [hereinafter

GRIPA].

350. U.S. Dep't of Justice & Fed. Trade Comm'n, Statements of Antitrust
Enforcement Policy in Health Care (1996), available at http://www.usdoj.gov/atr/public/

guidelines/1791 .htm.

351. GRIPA, supra note 355, at 1.

352. Id.

353. Id.

354. See Fed. TradeComm'nTriStateHealthPartners, Inc., AdvisoryOpinion 1 (Apr.



1044 INDIANA LAW REVIEW [Vol. 42: 1003

B. Cascade Health Solutions v. PeaceHealth

In Cascade Health Solutions v. PeaceHealth^^^ the Ninth Circuit found that

the exclusionary conduct element of a claim, arising under section 2 of the

Sherman Act, against a defendant with monopoly power, over one or more of the
bundled products, cannot be satisfied by reference to bundled discounts unless
the discounts result in prices that are below an appropriate measure of the
defendant's costs.

^^^

PeaceHealth and McKenzie-Williamette Hospital (Cascade)^^^ were the only

two hospital care providers in Lane County, Oregon. PeaceHealth operated three
hospitals with a total of 464 beds, offering primary, secondary, and tertiary care.
Cascade operated one hospital with 114 beds, which provided only primary and
secondary care.^^^ In what Cascade alleged as unlawful monopolization,

attempted monopolization, conspiracy to monopolize, tying, exclusive dealing,

and violations of state law, PeaceHealth offered insurers discounts of thirty-five

to forty percent on tertiary services if the insurers made PeaceHealth their sole
preferred provider for all services—primary, secondary, and tertiary.^^^ In
essence, PeaceHealth bundled its services, including its tertiary services, which

Cascade did not provide to offer bigger discounts across the board in order to

obtain an exclusive contract. Because Cascade did not provide tertiary services,

it could not match the aggregate savings payors enjoyed under an exclusive

contract with PeaceHealth. Thus, the issue became whether the bundled discount
amounted to predatory conduct because Cascade was effectively foreclosed from
at least one key payor contract.

Consumers are faced with bundled discounts on a daily basis.^^^ Sometimes
bundled discounts are good for consumers because they offer products at lower
prices. But sometimes bundled discounts can lead to anti-competitive

behavior—offering lower prices to monopolize the market leading to higher

13, 2009), available a/ http://www.ftc.gov/os/closings/staff/090413tristateaoletter.pdf.

355. 515 F.3d 883 (9th Cir. 2008).

356. Id. at 903; cf. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209,
222, 224 (1993) (requiring that a plaintiff prove that defendant's price was below cost and that

defendant had a reasonable probability ofrecouping its investment in below cost prices); LePage's,

Inc. V. 3M, 324 F.3d 141, 154 (3d Cir. 2003) (en banc) (foregoing cost analysis with respect to

defendants with monopoly power, and concluding that all bundled discounts offered by a

monopolist are anticompetitive with respect to sellers that do not offer an equally diverse product

line), cert, denied, 542 U.S. 953 (2004).

357. As a result of a merger with Triad Hospital, Inc., McKenzie's name changed to Cascade

Health Solutions. Cascade, 515 F.3d at 891.

358. Id. "Primary and secondary acute care hospital services are common medical services like

setting a broken bone and performing a tonsillectomy .... '[T]ertiary care' . . . includes more

complex services like invasive cardiovascular surgery and intensive neonatal care." Id.

359. Mat 892.
360. See id. at 894.



2009] HEALTH CARE LAW 1045

prices in the future.^^' In Cascade the Ninth Circuit tried to determine when
bundled discounts are "good" and when they are "bad."

The Ninth Circuit adopted a discount allocation standard that allocates the
full amount of the discounts given by the defendant on the bundle to the
competitive product or products.^^^ In other words, the court reallocated the

discount amount offered by PeaceHealth for tertiary services to PeaceHealth's
primary and secondary services as if payors paid full charges on tertiary services

and discounted amount on primary and secondary services. The court concluded
that if the resulting price of the competitive product, or products, is below the

defendant's incremental cost to produce them, the trier of fact may find that the
bundled discount is exclusionary for the purpose of section 2.^^^ This standard

allows a defendant to offer bundled discounts unless the discounts would exclude

an equally efficient producer of the product. The Ninth Circuit championed that
the discount attribution standard provides clear guidance for sellers that engage

in bundled discounting, because a seller can easily ascertain its own price and
costs of production and calculate whether its discounting practices run afoul of

the standard.^^"^

In adopting the discount allocation standard, the Ninth Circuit rejected the

standard set forth in LePage 's Inc. v. 3M, thereby creating a split among the
circuits over the appropriate legal standard for evaluating bundled discounting

practices. ^^^ Because the LePage 's standard could insulate a less efficient rival
from legitimate competition at the expense of consumer welfare, a discount

reallocation methodology should be favored. However, in the health care

industry and other industries where seller list prices have little relevance to

negotiated rates, a methodology that reallocates the incremental discount offered

for the bundled products or services should be adopted.

IX. Labor & Employment

A. Indiana Case Law Update: Enforceability ofPhysician Noncompetes

On March 11, 2008, the Indiana Supreme Court ruled on its first physician
covenant not to compete case in nearly twenty-five years.^^^ The decision will
likely impact the enforceability of many existing noncompetition agreements.

From 1996 through 2005, Dr. Kenneth Krueger, a podiatrist, worked with

361. As noted in Cascade, "it is possible, at least in theory, for a firm to use a bundled

discount to exclude an equally or more efficient competitor and thereby reduce consumer welfare

in the long run." Id. at 896 (citing RICHARD A. POSNER, ANTITRUST LAW 236 (2d ed. 2001)).
362. /J. at 906.

363. Id.

364. Id. at 907.

365. /^. at 903.

366. Cent. Ind. Podiatry, P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008). Prior to Central

Indiana Podiatry, the last physician noncompete case the court ruled on was Raymundo v.

Hammond Clinic Ass'n, 449 N.E.2d 276 (Ind. 1983).



1046 INDIANA LAW REVIEW [Vol. 42: 1003

Central Indiana Podiatry, P.C. (CIP), which maintains offices in counties

throughout central Indiana.^^^ Krueger had worked at CIP offices in Clinton,
Marion, Howard, Tippecanoe, and Hamilton counties. ^^^ But, in the last two

years of his employment he only split his time at offices in Marion, Tippecanoe,

and Howard counties.^^^ CIP and Krueger had an employment agreement
including a noncompete that prohibited Krueger from practicing podiatry for two

years in an area defined as fourteen listed central Indiana counties where CIP
maintained offices and all counties adjacent thereto, essentially the middle half

of the state of Indiana.^^° On July 25, 2005, CIP terminated Krueger and in
September 2005, Krueger entered into an agreement with Meridian Health

Group, P.C. (Meridian) and began practicing podiatry in Hamilton County,

Indiana, about ten minutes away from the Indianapolis office at which he had
been working with CIP.^^^ Krueger provided Meridian with a copy of the CIP
patient list and created a letter to be mailed to patients which stated his new
employment was within ten minutes of his previous office.^^^

When CIP learned of the letter, it sought injunctive relief against Krueger
and damages from Krueger and Meridian on the basis that Krueger' s employment

violated the geographic restriction of the noncompete.^^^ The trial court found
that the geographic restriction was unenforceable and denied CIP's request for
injunctive relief.^^"^ The court of appeals disagreed and reversed the trial court.^^^
The Indiana Supreme Court addressed the issue and ultimately ruled the covenant
was only enforceable in Marion, Tippecanoe, and Howard counties, affirming the
trial court's decision that it was unenforceable elsewhere, particularly as to
Hamilton County where Krueger was competing.^^^

The court began its opinion by reconsidering whether physicians should be
able to enter into noncompetition agreements at all, given the nature of the

physician-patient relationship.^^^ The court first addressed this argument in 1983
in Raymundo v. Hammond Clinic Ass 'n,^^^ holding that physician noncompetes
were not void because of such concems.^^^ This conclusion is consistent with the

vast majority of other U.S. jurisdictions allowing noncompetes with reasonable

367. Cent. Ind. Podiatry, 882 N.E.2ci at 725-26.

368. Id. at 726.

369. Id.

370. Id. at 125-26.

371. Id. at 126.

372. Id.

373. Id.

374. Id.

375. Id. (citing Cent. Ind. Podiatry, P.C. v. Krueger, 859 N.E.2d 686, 689 (Ind. Ct. App.

2007), trans, granted, 882 N.E.2d 723 (Ind. 2008)).

376. Id. at 131.

377. Id. at 727-28.

378. 449 N.E.2d 276 (Ind. 1983).

379. Cent. Ind. Podiatry, 882 N.E.2d at 728 (citing Raymundo, 449 N.E.2d at 280-81).



2009] HEALTH CARE LAW 1047

restrictions.^^° The court observed that noncompetes with physicians are

different from noncompetes in other business settings where typically only the

employer and employee are impacted by enforcement of the noncompete.
^^^

Patients are impacted more by physician noncompetes than the average business

consumer.^^^ Patients often seek out particular physicians, and noncompetes may
impair patient choice and confidence.^^^ The court determined that those

concerns require physician noncompetes to be given "particularly careful

scrutiny," even beyond the disfavor with which all noncompetes are viewed.
^^"^

But, the court upheld its earlier ruling that physician noncompetes are not void

due to those public policy concerns, noting that any contrary decision is better

left to the state legislature.^^^

The court then examined the reasonableness of Krueger's noncompete
covenant.^^^ In order for a noncompete to be enforceable, it must be

reasonable.^^^ An employer seeking to enforce a noncompete "must first show
that it has a legitimate interest to be protected by the agreement."^^^ Then, the

employer also must show the noncompete is reasonable in its scope "as to time,
activity and geographic area restricted."^^^ The court found that CIP
demonstrated a legitimate interest in preserving patient relationships developed

with CIP resources.^^^ However, it found the geographic scope of the

noncompete to be unreasonable because Krueger had not actually used CIP

resources to develop patient relationships outside of the areas served by the

particular locations at which he had worked in the last two years of his

employment.^^^ The Court refused to enforce the noncompete outside areas in
which Krueger himself developed patient relationships, even though the CIP had
other offices throughout the area covered by the noncompete.

^^^

As a result of finding the covenant unreasonable, the court then looked to
whether any of it could be saved by striking the unreasonable portions from the

agreement under what is known as the "blue-pencil" doctrine.^^^ Since the

380. Id. (citing Ferdinand S. Tinio, Annotation, Validity and Construction of Contractual

Restrictions on Right ofMedical Practitioner to Practice, Incident to Employment Agreement, 62

A.L.R. 3d 1014 §§ 6-25 (1975)).

381. Id. 21121.

382. Id.

383. Id.

384. Id. at 729.

385. /J. at 728.

386. /6?. at 728-31.

387. Id. at 729 (citing Raymundo v. Hammond Clinic Ass'n, 449 N.E.2d 276, 280 (Ind.

1983)).

388. Id. (citing Sharvelle v. Magnante, 836 N.E.2d 432, 436-37 (Ind. Ct. App. 2005)).

389. Id. (citing Sharvelle, 836 N.E.2d at 436).

390. Id.

391. /6?. at 730-31.

392. Id. at 730.

393. Id. (citing Dicen v. New Sesco, Inc., 839 N.E.2d 684, 687 (Ind. 2005)).



1048 INDIANA LAW REVIEW [Vol. 42: 1003

Agreement specifically listed particular counties by name, the court was able to
strike all of them, except for Marion, Tippecanoe, and Howard counties to create
a reasonable and enforceable restriction.^^"^ The court also found it necessary to
strike the language extending the noncompete to adjacent, or contiguous,

counties.^^^ The court reasoned that even though Krueger may have developed
patient relationships that crossed county lines, there was no evidence to suggest
that there was a substantial number of patients developed in all contiguous
counties or at their furthest reaches.^^^ As the non-compete used entire counties
as its measure ofthe restriction, the court deleted entire contiguous counties from

its scope, thereby permitting Krueger to compete in Hamilton county, a mere ten

minutes away from his former practice.^^^

B. Federal Statutory Changes

L FMLA Update.—The National Defense Authorization Act for Fiscal Year
2008 was signed on January 28, 2008.^^^ This Act includes amendments to the
Family and Medical Leave Act (FMLA),^^^ which provide additional leave

benefits to eligible relatives of military service members under two
circumstances, "Servicemember Family Leave" and "Qualifying Exigency.'"^^^

The first amendment to the FMLA provides an eligible employee a total of
twelve weeks of leave during a twelve month period because of any qualifying
exigency arising out of the fact that the spouse, son, daughter, or parent of the

employee is on active duty or has been notified of an impending call or order to

active duty."^^^ If foreseeable, an employee requesting leave due to a qualifying

exigency must provide reasonable notice."^^^ Under the second amendment, an
eligible employee who is the spouse, son, daughter, parent, or next of kin of a
covered servicemember is entitled to a total of twenty-six weeks of unpaid leave

to care for that servicemember."^^^ Covered servicemembers include those

undergoing medical treatment, recuperation, or therapy, are otherwise in

outpatient status, or are on the temporary disability retired list for a serious injury

394. /J. at 731.

395. Id.

396. /J. at 730-31.

397. Mat 731.
398. National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 1 1 0- 1 8 1 , 1 22 Stat.

3 (2008).

399. 29 U.S.C. §§ 2601-2654 (2006).

400. On February 11, 2008, the U.S. Department of Labor published additional proposed

regulations to significantly modify the FMLA. See 29 C.F.R. § 825 (2008). The final regulations

became effective January 16, 2009 and included substantive changes and clarifications to the

FMLA which are outside the timeframe of this article.
401. 29 U.S.C. §2611.

402. Id.

403. Id.



2009] HEALTH CARE LAW 1049

or illness.
"^^"^ This leave is available during a single twelve month period."^^^

Employers may require that eligible employees substitute paid leave for leave
taken pursuant to either of the amended FMLA provisions.'^^^

2. Genetic Information Nondiscrimination Act.—On May 21, 2008,
President Bush signed into law the Genetic Information Nondiscrimination Act
(GINA) of 2008."^^^ GINA bars health insurers and employers from
discriminating against individuals or individual's family members based on their
genetic information."^^^ Under GINA, genetic information is broadly defined as
an individual's genetic tests, the genetic tests of family members, or the

manifestation of a disease or disorder in the individual' s family members."^^^ The
expectation is that GINA will enable individuals to take advantage of genetic
testing, technology, research, and new therapies without fear of retaliation from
health insurers or employers.

As it relates to health insurers, GINA amends several federal laws, including
the Employee Retirement Income Security Act of 1974 (ERISA), the Public
Health Service Act, the Internal Revenue Code of 1986, the Social Security Act,
and the Health Insurance Portability and Accountability Act (HIPAA) to include
anti-discrimination provisions."^^^ GINA prohibits health insurers from adjusting
premium amounts or establishing distinct eligibility rules based on genetic
information. It also prohibits requesting or requiring genetic tests, or requesting,

requiring, or purchasing genetic information for underwriting or enrollment

purposes."^^ ^ These restrictions apply to insurers of group health plans, individual

market plans, government plans, and Medicare supplemental policies."^^^

As it relates to employment, GINA covers employers, employment agencies,
labor organizations, andjoint-labor management committees."^^^ GINA carves out
the actions employers may take with an applicant or employee's genetic
information, as well as how employers should maintain this sensitive
information. Unlawful employment actions under GINA include: (1) using
genetic information such as family history of a hereditary disease, to make hiring,
firing, or other employment decisions that affect the compensation, terms,
conditions, or privileges of employment;^^'^ (2) limiting, segregating, or

classifying employees because of genetic information in any way that would
deprive employees of employment opportunities or otherwise adversely affect

404. Id.

405. Id.

406. Id.

407. 42 U.S.C. § 2000ff (2006).

408. Id. § 2000ff-l(a).

409. Id. § 2000ff-4.

410. Id. § 2000ff-5.

411. Id.

412. Id.

413. Id. §§2000ff-lto-3.

414. Id. § 2000ff-l.



1050 INDIANA LAW REVIEW [Vol. 42: 1003

employment status;"^'^ (3) requesting, requiring or purchasing an employee's or
an employee's family member's genetic information, absent one ofthe prescribed

exceptions
;'^^^

or (4) except under certain conditions,"^ ^^ disclosing an applicant's

or an employee' s genetic information."^'^ Regarding employment discrimination,

GINA is effective November 21, 2009 and will be enforced by the Equal
Opportunity Commission (EEOC)."^'^ The EEOC proposed regulations on March
2, 2009 to carry out GINA's employment-related provisions."^^^ The final
regulations must be enacted by May 21, 2009.

3. ADA Amendments Act.—On September 25, 2008, the ADA Amendments
Act of 2008 (Act) was passed and became effective January 1, 2009."^^* Most
significantly, this Act amended the Americans with Disabilities Act of 1990
(ADA)."^^^ An individual is disabled under the ADA if the individual has "a
physical or mental impairment that substantially limits one or more major life
activities," has a record of such impairment, or is regarded as having such an

impairment."^^^ The Act was primarily aimed at reversing some significant U.S.
Supreme Court interpretations of the ADA within the last decade, specifically
regarding who is "disabled," and therefore, protected under the ADA."^^"^ Despite

415. Id.

416. Id. There are several exceptions to this prohibition, including where: (1) an employee

provides prior written authorization; (2) genetic services are offered by the employer; (3) the

information is inadvertently acquired; (4) the information is obtained for compliance with

certification requirements ofFamily and Medical Leave laws; (5) the information is used for genetic

monitoring of the biological effects of toxic substances in the workplace under limited conditions;

or (6) the information is required for an employer's forensic laboratory's DNA analysis for law
enforcement or human remains identification purposes. Id. Also, an employer's acquisition of

genetic information through the purchase of public materials such as newspapers or magazines is

not unlawful. Id.

417. /^. § 2000ff-5. Disclosing information is allowed under certain conditions. For example:

(1) to an employee upon written request; (2) to an occupational or other health researcher; (3) by

court order; (4) to a government official investigating compliance with GINA if the information is
relevant to the investigation; (5) in connection with an employee's compliance with FMLA
certification provisions; (6) or to a public health agency where the manifestation of a disease or

disorder concerns a contagious disease that presents an imminent hazard ofdeath or life-threatening

illness. Id.

418. Id. § 2000ff(2)(A)(i).

419. Id. § 2000ff-6.

420. Regulations Under the Genetic Information Nondiscrimination Act of2008, 74 Fed. Reg.

9056 (proposed Mar. 2, 2009) (to be codified at 29 C.F.R. pt. 1635).

421. ADAAmendmentsActof2008, Pub. L. No. 110-325, 122 Stat. 3553 (2008).

422. Americans with Disabilities Act of 1990, Pub. L. No. 101-336, 104 Stat. 327 (1990).

423. 42 U.S.C. § 12102 (2006).

424. Id. § 12101. The holding of the Supreme Court in Sutton v. United Air Lines, Inc., 527

U.S. 471 il999\supersededby statute, ADAAmQndmentsActof200S,Pub.L.No. 110-325, 122

Stat. 3553, and its companion cases narrowed the broad scope of protection intended to be afforded

by the ADA, thus eliminating from ADA protection many individuals whom Congress intended to



2009] HEALTH CARE LAW 105

1

the intended broad coverage of the ADA, Congress found that courts incorrectly
narrowed the definition of disability and scope of protection under the ADA."^^^

As a result, the Act made several changes. Highlights of the Act include: ( 1

)

construing disabiUty in favor ofbroad coverage;"^^^ (2) setting forth specific major

life activities and the types of bodily functions that are covered under the law;"^^^

(3) broadening protection afforded to individuals who are not actually disabled,
but are "regarded as" being disabled, by clarifying that individuals who are
"regarded as" having an impairment are protected under the Act regardless of

whether the impairment limits, or is perceived to limit, a major life activity ;'^^^ (4)
declaring that the amehorative effects ofmitigating measures, except for ordinary

eyeglasses and contact lenses, should not be considered in determining if

individuals are disabled;"^^^ (5) indicating that impairments which are episodic or

in remission are still covered under the ADA if, when active, the impairment
would substantially limit a major life activity ;'^^° (6) clarifying that reasonable

accommodation is not required for individuals who are only regarded as being
disabled;"^^^ and (7) stating that individuals cannot be regarded as disabled for

only having an impairment that is minor and lasts for six months or less, unless

impairments that are episodic or in remission."^^^

X. Indiana Legislative Update

A. House Enrolled Act 1001: State Assumption ofHCI Levy

Property tax reform was one of the primary issues of concern during the 2008
Indiana legislative session after many Indiana residents saw significant increases
in their property taxes months before the session began."^^^ To relieve local
property tax burdens, the Indiana State government elected to assume

responsibility for the hospital care for the indigent fund, which was traditionally

funded by a local hospital care for the indigent tax. The State also decided to
provide a certain level of funding to the Health & Hospital Corporation of

protect. The scope of the ADA was further narrowed by the Supreme Court in Toyota Motor
Manufacturing Kentucky, Inc. v. Williams, 534 U.S. 184 (2002), superseded by statute, ADA
Amendments Act of 208, Pub. L. No. 1 10-325, 122 Stat. 3553. As a result, lower courts incorrectly

found in individual cases that people with a range of substantially limiting impairments were not

disabled under the ADA.

425. 42U.S.C. § 12101.

426. Id. § 12102.

427. Id.

428. Id.

429. Id.

430. Id.

431. Id. § 12201.

432. Id. § 12102.

433. Larry DaBoer, The Impact ofProperty Tax Legislation on Indiana Households, 83 IND.

Bus. Rev., Spring 2008, at 1, 5.



1052 INDIANA LAW REVIEW [Vol. 42: 1003

Marion County, which had also historically been funded by local taxes. These

changes provided local tax relief while preserving funding for health care to the

indigent.

Since 1986, each county has levied a local tax on its residents to fund the

county hospital care for the indigent fund. Proceeds from the taxes and the fund

were used to reimburse certain qualified hospitals for uncompensated care they

provided to a county's indigent residents. House Bill 1001, which was
subsequently enacted in House Enrolled Act 1001 (HEA 1001), implemented
comprehensive property tax reform and provides that the state government is

responsible for adequate funding for the new state hospital care for the indigent
fund."^^^ The legislation effectively eliminates the local tax that had, since 1986,
funded indigent health care and shifts the burden of paying these costs to the

state. Further, HEA 1001 amends the Indiana Code to require the State of
Indiana to provide $40 million to fund the Health & Hospital Corporation of
Marion County, which operates Wishard Memorial Hospital and provides a

substantial amount of indigent care.'^^^ The changes set forth in HEA 1001 , while
alleviating local tax burdens, also preserve important funding streams to hospitals

so that they may continue to provide care to the indigent population of Indiana.

B. Senate Enrolled Act 42: Holding Medicaid Payors Accountable

The Indiana State Legislature took steps towards holding managed care
organizations participating in the Indiana Medicaid program (Program)

accountable for complying with their contracts with the Program. Senate Bill 42,

enacted as Senate Enrolled Act 42 (SEA 42), requires the Select Joint
Commission on Medicaid Oversight"^^^ (Commission) "to [d]etermine whether a
managed care organization that has contracted with the office to provide
Medicaid services has properly performed the terms of the managed care
organization's contract with the state.'"^^^ SEA 42 also requires certain managed
care organizations participating in the Program to: (1) be accredited by the

National Committee for Quality Assurance within certain timeframes and (2)
accept electronic claims for payment."^^^ Finally, SEA 42 repeals a provision
under which the Commission would have expired as of December 31, 2008.'^^^

This legislation increases the oversight duties of the Commission so that it may
scrutinize managed care organizations participating in the Program and ensure

434. H.B. 1001, 115thGen.Assem.,Reg.Sess.(Ind.2008)(amendinglND.CODE§ 12-16-7.5-

4.5 (2006 & Supp. 2008)).
435. Id.

436. The Commission had been created by the Indiana State Legislature before passage ofS.B.

42 to oversee general Medicaid matters involving claims, errors, reimbursement and other issues

involving the state Medicaid program. IND. CODE § 2-5-26-8 (2006 & Supp. 2008).
437. S.B. 42, 115th Gen. Assem., Reg. Sess. (Ind. 2008) (amending iND. CODE § 2-5-26-8

(2006 & Supp. 2008)).
438. Id.

439. Id.



2009] HEALTH CARE LAW 1053

that these organizations are complying with the terms of their contracts with the

Program, preventing future abuses of the Program, and increasing Program

efficiency.

C. Senate Enrolled Act 350: Community Mental Health Centers

The Indiana Legislature committed to establish and fund community health
centers in 2008 by enacting Senate Bill 350 into law.'^'^^ Community health
centers are federally funded "community-based and patient-directed

organizations that serve populations with limited access to health care . . .

[including] . . . low income populations, the uninsured, those with limited

English proficiency, migrant and seasonal farmworkers, individuals and families

experiencing homelessness, and those living in public housing.'"^"^' Community
health centers qualify for federal funding if they meet certain federal

requirements, but federal funding may not always provide a sufficient level of
resources to keep community health centers operational."^"^^ S.B. 350 helps to

resolve this problem.

Senate Enrolled Act 350 (SEA 350) requires a county (other than Marion
County) to transfer money within a specified time frame to the Division of
Mental Health and Addiction (Division) to satisfy the non-federal share of

medical assistance payments to community mental health centers for (1) certain
administrative services and (2) community mental health rehabilitation
services.

"^"^^
It also permits the Health & Hospital Corporation of Marion County

to make payments to the Division for the operation of a community mental health
center.'^'^'^ SEA 350 also requires the Division to ensure that the non-federal share
of funding received from a county is applied only for a county's designated

community mental health center and specifies the manner in which the Division
may distribute certain excess state funds."^"^^ Finally, it provides that the county
tax levy for community mental health services is allocated for operational
expenses of community mental health centers and that provisions of the bill are
applicable only to the extent that the congressional moratorium on the

implementation of certain rules by the U.S. Secretary of Health and Human
Services is not extended and other restricted rules are implemented."^"^^ The
enactment of SEA 350 shows the Indiana State Legislature's dedication to
indigent care by funding community health centers that offer significant health
care solutions to this population.

440. S.B. 350, 1 15th Gen. Assem., Reg. Sess. (Ind. 2008).

441. Health Resources and Services Administration, The Health Center Program: What Is a

Health Center?, http://bphc.hrsa.gov/about/ (last visited July 3, 2009).

442. 42 C.F.R. § 51c. 101 (2008).

443. S.B. 350, 1 15th Gen. Assem., Reg. Sess. (Ind. 2008).

444. Id.

445. Id.

446. Id.