Rev. Proc. 2016-44 Greatly Expands Rev. Proc. 97-13 Safe Harbor for Management Contracts, Opening the Door for Long-Term Management Contracts (Repost)

On August 22, 2016, the IRS released new safe harbors from private business use of tax-exempt bond-financed facilities for management contracts that substantially change the prior safe harbors under Rev. Proc. 97-13. The new revenue procedure, Rev. Proc. 2016-44, provides more flexibility and appears to be more favorable than Rev. Proc 97-13.

The new safe harbors take effect immediately for management contracts entered into, or materially modified, on or after August 22, 2016. However, during an initial transition period running until February 18, 2017, issuers and borrowers may apply either the prior safe harbors or the new safe harbors to management contracts entered into, or materially modified, before February 18, 2017. In addition, issuers and borrowers may elect to apply the new safe harbors to management contracts entered into before August 22, 2016.

A full-length summary of Rev Proc 2016-44 authored by Alexios Hadji is available on Squire Patton Bogg’s Public Finance Tax Blog.

CMS Finalizes 2017 Medicare Payment Rates: What Hospitals Need To Know

On August 2, 2016, CMS released its final rule to update the fiscal year (FY) 2017 Medicare payment rates under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital Prospective Payment System (Final Rule). By law, CMS is required to update payment rates for IPPS hospitals annually, and to account for changes in the costs of goods and services used by these hospitals in treating Medicare patients, as well as other factors (Market Baskets). For 2017, inpatient hospital payment rates will increase by 0.95% for those hospitals that successfully participate in the Hospital Inpatient Quality Reporting Program (IQR) and are meaningful electronic health record users (EHR).

While the Final Rule consists of more than 2,000 pages, the following is a summary of a few of the key points for hospitals to consider for FY 2017.

The Final Rule “permanently” removes the controversial -0.2% payment cut related to the “two-midnight” payment policy established in 2014, representing approximately US$220 million in payments, and makes various changes to quality initiatives. CMS also finalized an increase of about 0.8% for inpatient payment rates to offset the estimated costs of the two-midnight rule and its financial impact over the past three years. However, the Final Rule has garnered some negative feedback for nearly doubling the reduction in payments related to documentation and coding overpayments, from -0.8% to -1.5%, in an attempt to recoup US$11 billion by 2017 as required by the American Taxpayer Relief Act.

Under the Final Rule, hospitals choosing not to submit quality data will be subject to losing one quarter of the Market Basket update (2.7%), and hospitals that are not meaningful users of EHR can potentially lose three-fourths of the Market Basket update.

Starting in calendar year 2017, CMS will require hospitals to select and submit four quarters of data on eight of 15 electronic clinical quality measures (eCQM) as part of the IQR program, such as breast and cervical cancer screening statistics. CMS will begin to validate eCQM data reported during calendar year 2018, which will affect payment in FY 2020.

Additionally, CMS delayed the implementation of the Notice of Observation Treatment and Implication for Care Eligibility (NOTICE) Act such that it will not take effect until late October of 2016 at the earliest. As part of the NOTICE Act, CMS developed the Medicare Outpatient Observation Notice (MOON) requirement for hospitals to provide written notice to Medicare patients receiving observation services as an outpatient for more than 24 hours, no later than 36 hours after observation services are initiated. Hospitals must give patients a verbal explanation of the MOON and obtain a signature to acknowledge receipt and understanding of the notice.

The Final Rule also revises and rebases the Long-Term Care Hospital (LTCH) Prospective Payment System’s (PPS) market basket to 2.8%, along with a 0.3% cut for productivity and an additional 0.75% cut as mandated by the Affordable Care Act. CMS is also continuing to implement the two different types of LTCH PPS payment rates depending on whether the patient meets certain clinical criteria. Due to these changes, CMS estimates that LTCH PPS payments will decrease by 7.1%, or US$363 million, compared to FY 2016 payment levels. This overall impact includes a 0.7% net increase in payments for cases paid a standard LTCH PPS rate, and a 23% drop in payments for LTCH site-neutral cases.

CMS projects that total Medicare spending on inpatient hospital services, including capital, will increase by about US$746 million in FY 2017. Under the Final Rule, CMS will distribute almost US$6 billion in uncompensated care payments in FY 2017, reflecting a decrease of approximately US$400 million from the FY 2016 amount. CMS distributes a prospectively determined payment amount to Medicare disproportionate share hospitals based on their relative share of uncompensated care nationally.

The Final Rule was officially published in the Federal Register on August 22, 2016. The final rule will affect discharges occurring on or after October 1, 2016.

HHS and Cuba’s Ministry of Public Health Sign a Historic MOU

Last month, the U.S. Department of Health and Human Services (HHS) entered into a historic Memorandum of Understanding (MOU) with Cuba’s Ministry of Public Health.

The MOU establishes coordination across a broad spectrum of public health issues, including:

  • Healthcare systems and public health management;
  • Quality management and patient safety systems in hospitals and outpatient settings;
  • Health information technology;
  • Communicable and non-communicable diseases;
  • International health regulations; and
  • Biomedical research and development, clinical trials, and medical product regulation.

The MOU also provides that “[f]or each area of mutual cooperation identified,” the U.S. and Cuba intend to “identify an appropriate entity to lead the practical implementation of activities.”  As the two countries continue to finalize arrangements to strengthen their collaboration in these and other scientific and health areas, we expect significant opportunities to arise for international healthcare partnerships between U.S. providers and Cuba.

The execution of the MOU also coincides with the U.S. Department of Transportation’s announcement last week selecting eight U.S. airlines to begin scheduled flights between Atlanta, Charlotte, Fort Lauderdale, Houston, Los Angeles, Miami, Newark, New York City, Orlando, and Tampa and Havana as early as this fall.

CMS Releases Proposed Rules Implementing Section 603

On July 6, CMS released its long-awaited proposed rules implementing Section 603 of the Bipartisan Balanced Budget Act of 2015 (Proposed Rules).  As we’ve discussed previously, Section 603 effectively reduces Medicare compensation paid to certain off-campus hospital outpatient departments (HOPDs) beginning January 2017 by eliminating eligibility for compensation under Medicare’s Hospital Outpatient Prospective Payment System (HOPPS).  Under Section 603, HOPDs that were billing Medicare under the HOPPS as of November 2, 2015 (Grandfathered HOPDs) are excepted, and may generally continue to bill under the HOPPS for service lines provided as of that date.

Contained within CMS’s proposed annual update of its HOPPS and ASC compensation payment systems, the Proposed Rules address many of the open issues concerning Section 603’s implementation.  Some of the key proposals are as follows:

Relocation of Grandfathered HOPDs – Relocating a Grandfathered HOPD will result in the loss of excepted status for the Grandfathered HOPD, precluding it from continuing to bill under the HOPPS after the relocation.  CMS is soliciting comments for certain narrow exceptions (such as relocation due to natural disaster).

Expansion of Services at a Grandfathered HOPD – A Grandfathered HOPD will continue to be reimbursed under the HOPPS only for those service lines it provided as of Nov. 2, 2015.  Any service lines introduced thereafter will be reimbursed under another payment system.  To implement this, CMS has proposed a table establishing “clinical families.”  If the Grandfathered HOPD provided any services within a particular clinical family as of November 2, 2015, any services it provides within that clinical family will still be reimbursed under the HOPPS.  However, if the Grandfathered HOPD initiates services in a new clinical family, those new services are reimbursed under another payment system.

Change of Ownership of a Grandfathered HOPD – In a sale/merger transaction, a Grandfathered HOPD will retain its excepted status only if (i) ownership in the main hospital location is also transferred to the new owner and (ii) the new owner accepts the hospital’s existing Medicare provider agreement.  A sale of just the Grandfathered HOPD would result in the loss of the HOPD’s excepted status.

Payment for Non-Excepted Items and Services – For HOPDs that are not grandfathered,  and services that do not fall under the grandfathering exception (such as new services introduced at a Grandfathered HOPD), CMS has declared the Medicare Physician Fee Schedule (MPFS) to be the appropriate payment system for such items and services.  However, CMS has acknowledged that it currently has no system to allow hospitals to bill directly under the MPFS.  Therefore, for 2017, CMS has proposed two options for hospitals to bill for such services.  First, the performing physician or practitioner may bill for the service under the MPFS (this would likely require some sort of business arrangement between the physicians/practitioners and the hospital regarding assignment and transfer of funds).  Second, the hospital may enroll the HOPD separately under Medicare as a freestanding facility or supplier (such as a group practice or ASC), which would permit the HOPD to bill directly under the MPFS.  CMS is soliciting comments regarding development of a mechanism to permit hospitals to bill directly for 2018.

Dedicated Emergency Departments – All services provided at a dedicated ED, whether emergency or non-emergency, would continue to be eligible for payment under the OPPS.

The proposed rules do not address the issue concerning HOPDs under development as of November 2, 2015, although, as we discussed last month, Congress is currently considering a legislative response to this.

Because these are only proposed rules, the provisions may change based on comments received.  Given that these rules will affect every hospital system that currently operates an off-campus HOPD, they are likely to generate a significant volume of comments.  Parties interested in submitting comments to CMS  will have until September 6, 2016 to submit such comments.

Recent IRS Private Letter Ruling Provides Helpful Guidance on Management Contracts (Repost)

The National Office of the Internal Revenue Service (“IRS”) released Private Letter Ruling (“PLR”) 201622003 on May 27, 2016.  This recent PLR provides additional guidance on management contracts and private business use issues related to tax-exempt bonds.  A full-length commentary on PLR 201622003 authored by Michael Cullers is available on Squire Patton Boggs’ Public Finance Tax Blog.

Supreme Court Approves Implied False Certification Theory but Imposes “Demanding” Materiality Limitation

In a decision that will impact every provider who supplies goods and services to the federal government, the Supreme Court today approved the implied false certification theory as a basis for liability under the False Claims Act (FCA). Specifically, in Universal Health Services v. Escobar, the Court ruled that the FCA is violated whenever a provider submits a claim for payment to the government yet misrepresents its compliance with material statutory, regulatory or contractual requirements—whether expressly or through omission. However, the Court emphasized that the misrepresentation must be “material” to the government’s payment decision in order to be actionable under the FCA. While it borrowed from a variety of sources, the Court was clear that “under any understanding of the concept, materiality looks to the effect on the likely or actual behavior” of the party receiving services.

 
The Court made clear that the materiality standard is a “demanding” one that prevents the government from imposing liability for all noncompliance; and the Court emphasized that the FCA is not “an all purpose antifraud statute” or a means for punishing “garden-variety breaches of contract and regulatory violations.” For a misrepresentation to be material, it must have “a natural tendency to influence, or be capable of influencing” the government’s payment decision. A plaintiff cannot prove materiality merely by showing that the government “would have the option to decline to pay if it knew of the defendant’s noncompliance.” Additionally, if the government chooses to “pay a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”

 
While the Court acknowledged that expressly designating a provision as a condition of payment is relevant to determining whether the provider “knowingly” submitted a false or fraudulent claim, the inquiry is not dispositive. For example, even if the government “failed to specify that guns it orders must actually shoot,” a provider of firearms could nonetheless face liability under the FCA if either (1) it has actual knowledge that the government “routinely rescinds contracts if the guns do not shoot” or (2) a “reasonable person would realize the imperative of a functioning firearm.” Similarly, the Court reasoned that simply labeling a regulatory requirement as a condition of payment does not necessarily give rise to FCA liability if violated, stating “[w]hat matters is not the label the Government attached to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

 
The Court’s analysis rejected UHS’s narrow interpretation (FCA liability attaches only if the regulation is expressly identified as a condition of payment) as well as the expansive view of the government and First Circuit (any violation is material if the defendant knows the government would be entitled to withhold payment). As the lower courts begin to apply the implied certification theory set forth in Escobar, it will be interesting to see the practical impact of the Court’s “demanding” materiality standard.

House Approves Site-Neutral Payment Relief for Some Hospitals but Bill Faces Uncertain Future in Senate

On June 7, the House passed H.R. 5273, the Helping Hospitals Improve Patient Care Act of 2016 which, in part, modifies the Medicare payment rules for certain hospital outpatient departments (HOPDs) which were adopted as part of the “site-neutral” payment provisions under Section 603 of the Bipartisan Budget Act of 2015 (Pub. L. No 114017). As we discussed in November, Section 603 will effectively reduce compensation for certain off-campus HOPDs beginning January 2017 by eliminating eligibility for compensation under Medicare’s Hospital Outpatient Prospective Payment System (HOPPS). As originally drafted, Section 603 provided a “grandfathering” exception for off-campus HOPDs that were already billing under the HOPPS as of November 2, 2015, retaining HOPPS eligibility for these HOPDs. However, Section 603 contained no exception for HOPDs that were under development as of that date, upsetting the financial projections of several hospitals.

H.R. 5273 would effectively extend the grandfathering exception to facilities under development as of November 2, 2015, allowing them to receive HOPPS reimbursement after January 1, 2017 so long as certain requirements are met. The bill also provides a broad exception for off-campus HOPDs operated by cancer hospitals. The costs associated with extending grandfathered status to certain HOPDs will be offset by other cuts in Medicare reimbursements.

Though the bill has passed the House, its future in the Senate is uncertain. Possible amendments to the bill and the limited time available to review and vote upon it may stand as barriers to passage.

The HOPD reimbursement changes implemented under Section 603 are critically important to a number of hospital systems, and we will continue to monitor and report on this legislation as it proceeds.

BREAKING: Deal Reached on New EU Medical Device and IVD Regulations

On May 25, 2016, the European Union (“EU”) Council and Parliament politically agreed on the provisions that will go into the final version of the long-awaited EU medical device and in vitro diagnostic (“IVD”) regulations.  The agreement seeks to fill the regulatory gaps uncovered as technology evolved faster than the current regulatory regime, which had not been updated since 2007.

The regulations will strengthen the rules for placing medical devices on the market, as well as tighten market surveillance and vigilance.  The regulations seem to take the step of establishing requirements for high-risk device expert reviews, and the regulations set forth specific duties for all economic operators, including manufacturers and distributors.

Following the regulations’ entry into force, or official publication, the medical device regulations will have a three-year grace period (five years for IVDs) before they are fully applicable and enforced.  There will be interim enforcement periods for some requirements.  Medical device and IVD manufacturers should carefully read the final regulations when they are published to adequately build a plan to comply with the new regulations.

The EU Council’s Permanent Representative Committee will be invited to endorse the agreement mid-June 2016, after which the EU Parliament’s Committee on Environment, Public Health, and Food Safety (“ENVI”) will also be invited to endorse the agreement.  After the texts are fully revised and in their final form, the texts will be formally adopted by the EU Council and Parliament.

AHA Renews Objections to OIG Hospital Compliance Reviews

In a move that could affect all hospitals reimbursed by Medicare, the American Hospital Association (AHA) this week renewed strenuous objections to various aspects of ongoing hospital compliance reviews conducted by the Department of Health and Human Services (HHS) Office of Inspector General (OIG).

AHA’s most recent correspondence references the “numerous legal defects” it had previously identified in OIG’s hospital audits. These defects include claims that OIG audits (1) waste HHS resources and are unduly burdensome to hospitals, (2) use extrapolation in a manner that compounds OIG’s erroneous interpretations of Medicare rules and policies and (3) allow Medicare Administrative Contractors to collect overpayments in violation of the Medicare statute and agency rules. This blog post focuses on the AHA’s extrapolation-related objections, which form the bulk of its previous and recent correspondence concerning OIG hospital compliance reviews.

After the OIG Office of Audit Services determines that a submitted claim or claims were improperly high, it extrapolates the difference over all similarly situated claims to calculate the total amount overpaid by the government. According to the OIG, extrapolation allows it to police hospital overpayments without reviewing each claim, which it feels is both “economical and in the best interest of the provider and the Government.”

The AHA, however, is less enthusiastic about OIG’s usage of extrapolation and raises several objections. First, AHA argues that by refusing to pay for inpatient claims that were not supported with a “valid order signed by a physician,” OIG is improperly applying a post-October 2013 policy to pre-October 2013 claims. Second, AHA opines that OIG is attempting to recoup old overpayments despite its failure to overcome the no-fault presumption that attaches to claims paid under Part A more than 3 years ago. Third, the AHA takes issue with OIG’s attempt to recoup overpayments for inpatient admissions not “reasonable and necessary” (as required by the Social Security Act), arguing that hospitals are entitled to appellate review before overpayments are recouped on this basis. Finally, AHA disagrees with OIG’s failure to account for the Part B payments hospitals should have received even if they improperly received payment under Part A, arguing that these Part B payments should be offset when the Part A overpayments are recouped.

While OIG has responded to several concerns regarding extrapolation, AHA’s May 23rd letter makes clear that the matter is far from resolved, as the group indicates it remains “very troubled” by the practice. In fact, the AHA has asked to be present at a meeting between the OIG and Mount Sinai Hospital to discuss the audit process.   Hospitals facing OIG scrutiny should ensure that any recoupment efforts are conducted in a legally sound manner, since extrapolation can cost hospitals hundreds of thousands of dollars in improper recoupments.

Hospitals and CMS To Update Court About Two-Midnight Rule Challenge After Final Inpatient Rule Is Published in August

This is an update on the hospital lawsuit challenging CMS’s fiscal year 2014 “Two-Midnight” rule and the agency’s corresponding 0.2% reduction to inpatient prospective payment rates, in Shands Jacksonville Medical Center v. Burwell. As previously reported, the court ruled that CMS had violated mandatory notice and comment requirements regarding key information the agency had used to rationalize its 0.2% payment reduction. The court ordered CMS to disclose the missing information to the public and to reopen the issue for further comment, following which the court would evaluate if CMS’s actions were lawful. After publishing the missing information and receiving many comments, in April 2016, CMS proposed both to eliminate the 0.2% payment reduction and to make up for the reductions in fiscal years 2014-2016 with a one-time 0.6% increase to hospital inpatient rates in 2017.

The hospital plaintiffs and CMS were to have filed a status report with the court, by May 23, 2016, addressing the parties’ positions as to the impact of CMS’s proposal. Instead, however, the court has allowed the parties to delay filing their status report until two-weeks after the agency publishes its final rule governing hospital inpatient payments for fiscal year 2017. The parties explained that CMS’s final rule “could affect the nature of, or need for, any further proceedings . . . .” The final rule will be published in early August.

We will continue to monitor and to provide updates with any breaking developments in the Shands Jacksonville case. As it currently stands, the agency’s action in fiscal year 2014 (carried forward to fiscal years 2015 and 2016 ) is in serious jeopardy. Thus, as we have previously mentioned, hospitals should continue to take actions to preserve their appeal rights as to underpayments caused by the Two-Midnight rule and the 0.2% payment reduction.

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