The 2006 Health Law And Policy Forum: Current Legal Issues - Part I

Saturday, April 1, 2006 - 01:00
Richard L. Shackelford
James W. Boswell III
Laura E. Loeb

Editor: How large is King & Spalding's healthcare practice group?

Shackelford: We have about 67 lawyers who practice regularly in the field of health law and many others that have substantial involvement with healthcare matters. Our firm has the third largest membership in the American Health Lawyers Association, the leading health lawyers' industry association.

Editor: Rick, you have been involved in numerous complex commercial litigation matters for healthcare clients, please describe today's enforcement climate in the healthcare industry. First, tell us about the impact of the Deficit Reduction Act of 2005 (DRA).

Shackelford: DRA provides for increased funding for efforts to investigate Medicare fraud cases and significantly increases the focus on Medicaid fraud. DRA also provides financial incentives for states to pass false claims statutes with provisions that are at least as effective as the federal False Claims Act (FCA) and with penalties that are at least as high. This includes provisions that reward and facilitate qui tam (whistleblower) actions.

DRA requires that providers who receive payments of $5 million or more under state Medicaid programs must establish written policies that educate their employees about false claims, including about protections afforded to whistleblowers under state as well as federal law, including their right to share in a recovery.

The DRA establishes a Medicaid Integrity Program, which requires the Secretary of Health and Human Services to enter into contracts pursuant to which outside vendors will review the actions of entities receiving Medicaid payments for potential fraud and abuse; audit claims under cost reports, consulting contracts and risk contracts; and identify overpayments. Funding of the Medicaid Integrity Program will ramp up to $75 million by fiscal year 2009.

The Medicaid Integrity Program requires HHS to increase by 100 the number of employees whose duties consist solely of assisting in combating Medicaid provider fraud and abuse. It provides the Office of the Inspector General (OIG) with an additional $25 million in each fiscal year through 2010 for Medicaid fraud and abuse activities. It also expands the data match program (Medi-Medi Program) to ensure that Medicaid payments are included, with the total funding ramping up to $60 million by fiscal year 2010. The Medi-Medi Program combats fraud or abuse by using computer algorithms to look for payment anomalies to identify suspect or otherwise implausible payments.

Editor: Why should healthcare companies pay closer attention to the Stark statute?

Shackelford: Stark covers most healthcare facilities, including inpatient and outpatient hospital services. Responding to the potential conflict of interest that may result from a financial relationship between referring physicians and hospitals, the Stark law places significant restrictions on these financial arrangements. The enforcement of Stark is on the rise.

Portions of Stark are quite technical, and thus many hospitals with good intentions may not be complying with all of its terms. An inappropriately documented relationship with a physician can easily slip through the cracks. In the last year or two we have seen more settlements in connection with Stark. One of the cases involved numerous relationships between Erlanger Medical Center and physicians (of the sort many large healthcare institutions have) including recruiting agreements, medical director contracts, joint venture agreements and leases. The outcome in Erlanger is a dramatic warning that both hospitals and physicians need to make sure that all these agreements comply with Stark.

The government's case in Erlanger could have resulted in greater damages. Although the case settled for $40 million, the government had, according to a news report, $120 million in claims against Erlanger, which gives you some idea of potential penalties that may be imposed in connection with Stark enforcement actions. Stark enforcement actions are currently pending in Georgia and in other southeastern states.

Many plaintiffs' counsel are starting to use Stark as the underpinning of a whistleblower action under the FCA. This is a wakeup call for hospitals to audit all of their financial relationships with physicians to assure compliance. Counsel should direct the audit and any corrective action.

Editor: Are you seeing an overall increase in whistleblower claims under the FCA brought against healthcare organizations?

Shackelford: Yes, according to GAO, between 1997 and 2005 there were a total of 2,490 FCA whistleblower cases of which almost half were against healthcare organizations - and I do not see this trend changing any time soon.

Editor: Are manufacturer consulting fees being targeted by enforcers?

Shackelford: In the medical device and pharmaceutical industry, some companies have a long tradition of compensating physicians who are familiar with their products as consultants. This can be done for appropriate reasons. But, the government has begun scrutinizing these arrangements to see whether they are in fact kickbacks.

Editor: Tell us about recent litigation activity?

Shackelford: Everyone in healthcare has been watching the trial in San Diego of Tenet's Alvarado Hospital Medical Center in which the jury was, as of March 9, in its 39th day of deliberations. The government's position is that so-called relocation payments to physicians were a sham to reward referrals to the medical center. This high-stakes criminal trial is being closely watched by healthcare organizations because many hospital systems engage in physician recruiting.

With regard to large settlements involving the healthcare industry, Tenet settled a case involving its Redding, California hospital for over $50 million last year. Beth Israel Hospital settled for $72 million in December. Miami's South Beach Community Hospital (f/k/a South Shore Hospital and Medical Center) was recently excluded from all federal healthcare programs.

There have also been several large pharmaceutical settlements. Serono agreed to pay $704 million to settle. Warner Lambert agreed to a $430 million settlement, Schering Plough settled for $325 million, GlaxoSmithKline for $150 million and King Pharmaceutical for $124. These big numbers give a good idea of today's enforcement climate.

Editor: Jim, you have extensive experience representing healthcare clients. I understand that a class action brought against managed care organizations has already had significant repercussions. Tell us about it.

Boswell: In Re Managed Care (the Class Action) is a class-action lawsuit brought by physicians against most of the major managed care organizations in the country. A class has been certified as to a group of physicians who alleged that managed care organizations systematically underpaid claims using claims-checking software that can edit and reformulate claims submitted by physicians. Since 2003, physicians in the group entered into settlements with a majority of the defendants, which involved payments of over $380 million to the physicians and agreements by the defendants to change some of their claims processing practices. Litigation on behalf of subscribers, which would have involved over 100 million plaintiffs, failed because the circumstances varied too much in each case. No uniform practice could be proved, and therefore a class could not be certified.

Editor: What aspects of the Class Action are of particular concern?

Boswell: One of the most threatening parts of the litigation was the allegation of concerted action among more than one managed care organization, which ultimately led to the class being certified. The managed-care organizations use certain vendors of claims-checking and claims-editing software, and it was alleged that more than one managed care organization had agreed to advise the software vendor to structure the configuration of the software so that claims payments would be determined in a uniform way across the industry. This allegation of conspiracy had a lot to do with certification of the class.

The Class Action also includes claims for violating the Racketeer Influenced and Corrupt Organizations Act (RICO). The plaintiffs' alleged mail and wire fraud as the predicate acts needed for a RICO claim. This is a difficult claim to establish because the plaintiff must demonstrate that the defendants engaged in a pattern of racketeering activities through an enterprise; nevertheless, the court certified the class. RICO claims are serious - which may explain why so many of the defendants have settled.

Editor: What is the current status of the Class Action?

Boswell: There are only two major managed care organizations remaining as defendants. The settlements that most defendants have entered into involve significant payments to physicians for prior alleged underpayments and include requirements for the organizations to change their claims processing practices. The latter will have a far-reaching impact on how those organizations conduct business.

Editor: Laura, your healthcare practice includes counseling clients on complex coding and reimbursement issues. Do the settlements thus far create a guide for steps that might be taken by managed care organizations to insulate themselves from future litigation?

Loeb: Managed care organizations not directly involved in the settlements are adopting policies that conform to those required of the organizations that settled. For example, they no longer automatically "downcode" a procedure - such as by lowering the level of reimbursement for an office visit for which a physician has submitted a claim. In addition, the plans are recognizing modifiers that tell the plan when two procedures must be paid separately and not bundled together. They are also setting up external appeal mechanisms in the form of physician advisory boards to review plan decisions to deny coverage.

Another outgrowth of the settlements is that managed care organizations (whether or not included in the settlements) are placing greater emphasis on employee compliance training. Most claims are paid automatically, but where there is manual review, personnel will likely be further trained to assure that the policies required by the settlement are observed.

Boswell: I also expect to see changes industry-wide regarding the definition of medical necessity, which was another issue in these settlements. The allegation was that claims were being denied based on cost rather than lack of medical necessity. Several of the settlements require an independent review mechanism to review medical necessity determinations.

Editor: Where can readers find copies of the settlement documents?

Boswell: The documents related to the litigation, called In Re Managed Care , are available on the Federal Court Web site known as PACER, which is located at Readers should look under the United States District Court for the Southern District of Florida. Case No. OO-MD-1334. Also, the settlement documents themselves can be found at

Editor: What impact will these settlements have on the future operation of managed care companies?

Loeb: I believe we will see greater cooperation between physicians, physician associations and HMO plans. The litigation demonstrated that adequate communication might have prevented these cases from being filed. An open mechanism for the physicians' concerns to be heard and for the HMO plans to let their rationale be understood might have prevented the problems from escalating.

Editor's Note: These interviews capture some of the high points of the presentations by the interviewees on March 20 at the 2006 Health Law and Policy Forum organized and hosted by King & Spalding LLP. Part II of these interviews will appear in our May issue.