United States: Health Law Update – July 16, 2015

Welcome to this week's edition of the Health Law Update. In this issue:

• Tuomey Judgment Upheld in Novel Stark Law and False Claims Act Case
• CMS Releases CY 2016 OPPS Proposed Rule With Updates to Two-Midnight Rule and Other IPPS Proposals
• How an Insufficiently Detailed Provisional Patent Application Can Hurt You
• House Passes 21st Century Cures Act
• FDA Investigates Children's Cough and Cold Medication With Codeine Amid Safety Concerns
• BLOG EXCLUSIVE: Proposed 340B Rule Would Impose Penalties for Overcharging, Plus Other Changes
• Events Calendar

TUOMEY JUDGMENT UPHELD IN NOVEL STARK LAW AND FALSE CLAIMS ACT CASE

By Donna S. Clark and Darby C. Allen

The U.S. Court of Appeals for the Fourth Circuit recently upheld the judgment against Tuomey Healthcare System, Inc. (Tuomey), in a qui tam False Claims Act case predicated on Stark Law violations. The district court in the case had previously upheld a jury verdict finding that Tuomey, a community hospital in South Carolina, violated the Stark Law and False Claims Act by knowingly billing for services referred by 19 physicians with whom Tuomey had illegal part-time employment agreements. The detailed history of the case is available in our October 3, 2013, issue of Health Law Update.

The Fourth Circuit addressed a number of issues raised by Tuomey on appeal related to the complex procedural history of the case. The court rejected Tuomey's argument that it did not have the requisite intent to violate the False Claims Act because it reasonably relied on the advice of counsel in structuring the physician compensation arrangements. A fact the court found particularly compelling was that Tuomey had "shopped for legal opinions approving of the employment contracts" and ignored the negative opinion of an attorney with specialized knowledge of the Stark Law.

Tuomey's attacks against the district court's judgment amount of over $237 million were also wholly rejected by the Fourth Circuit. The decision has valuable guidance for False Claims Act defendants regarding the importance of presenting evidence about damage calculations at trial for the jury to consider. Additionally, the Fourth Circuit held that the treble damages award and civil penalty were not unconstitutional under the Fifth and Eighth Amendments to the U.S. Constitution.

A concurring opinion noted that the complexity of the regulatory environment that resulted in the judgment "will result in a likely death sentence for a community hospital in an already medically underserved area," underscoring the criticality of Stark Law compliance in physician-hospital relationships. Tuomey has stated that it will continue settlement discussions with the government, and has announced a potential collaboration with another South Carolina health system.

CMS RELEASES CY 2016 OPPS PROPOSED RULE WITH UPDATES TO TWO-MIDNIGHT RULE AND OTHER IPPS PROPOSALS

By Kathlynn Butler Polvino and Jennifer P. Whitton

On July 1, 2015, the Centers for Medicare and Medicaid Services (CMS) released the calendar year (CY) 2016 outpatient prospective payment system (OPPS)/ambulatory surgical center (ASC) payment system proposed rule that updates payment policies and rates for hospital outpatient departments and ASCs. The proposed rule also includes certain proposals relating to the hospital inpatient prospective payment system (IPPS), including changes to the two-midnight rule.

Comments on the proposed rule are due by August 31, 2015, and a final rule is expected in November 2015. If adopted, the changes will take effect January 1, 2016.

Highlights of the proposed rule are noted below.

Key Changes Impacting Inpatient Stays

"Case-by-Case" Exception to the Two-Midnight Rule

CMS proposes to revise its two-midnight policy regarding when hospital stays are appropriate for payment under Medicare Part A.

CMS established its two-midnight policy in the fiscal year (FY) 2014 IPPS final rule. The two-midnight rule provides that a hospital inpatient admission generally is considered reasonable and necessary if a physician or other qualified practitioner orders such admission based on the expectation that the beneficiary's length of stay will exceed two midnights or if the beneficiary requires an inpatient-only procedure. Hospital stays expected to span less than two midnights presumptively are considered outpatient cases and, therefore, not appropriate for Part A payment.

The proposed rule does not change the two-midnight policy for hospital stays that are expected to cross two midnights or longer. For stays expected to last less than two midnights, CMS acknowledged stakeholder concerns that the two-midnight rule removes physician judgment from the decision to admit a patient for inpatient hospital services. Although CMS will continue to adhere to the two-midnight benchmark, the proposed rule would allow Part A payment on a "case-by-case basis" under the existing "rare and unusual" exceptions policy for inpatient admissions that do not satisfy the two-midnight benchmark provided that documentation in the beneficiary's medical record supports the admitting physician's determination that the patient requires inpatient hospital care despite an expected length of stay that is less than two midnights. CMS further reiterated that inpatient admissions for minor surgical procedures or other treatments expected to require hospitalization for only a few hours would be considered "rare and unusual." According to CMS, these rare and unusual cases will be a priority for medical review organizations.

CMS considers the following factors to be relevant in determining whether a patient stay that is expected to be less than two midnights is nonetheless appropriate for Part A payment:

• The severity of the signs and symptoms the patient exhibits;
• The medical predictability of something adverse happening to the patient; and
• The need for diagnostic studies that are appropriately outpatient services (the performance of which ordinarily would not require the patient to remain in the hospital for 24 hours).

QIO Review of Inpatient Stays

CMS also announced that by October 1, 2015, Quality Improvement Organizations (QIOs) will take over first-line medical reviews of short inpatient stays from Medicare Administrative Contractors in order to foster a more collaborative approach to education and enforcement. The QIOs are expected to better educate hospitals and physicians about claims denied under the two-midnight rule. This change will take effect regardless of whether the other proposed changes to the two-midnight rule are finalized. Hospitals that are found to consistently have high denial rates will be referred to the appropriate recovery audit contractor for further payment audits.

Key Changes Impacting OPPS/ASC Payments

The proposed rule also includes payment rate adjustments, new requirements for computed tomography (CT) payment, and changes in quality measurement and reporting for the OPPS. In addition, CMS adopted policy changes consistent with its stated goal to make OPPS payments for all services paid under the OPPS more consistent with those of a prospective payment system and less like a fee-for-service payment system.

Restructuring and Consolidation of APCs

In the CY 2014 OPPS/ASC final rule, CMS finalized a comprehensive payment policy that packages payment for adjunctive and secondary items, services, and procedures, and beginning in CY 2015, establishes 25 comprehensive ambulatory payment classifications (C-APCs). This results in a single prospective payment for each of the primary comprehensive services based on the costs of all reported services at the claim level. For CY 2016, CMS proposed nine new C-APCs to be paid under the existing C-APC payment policy: ENT procedures, intraocular procedures, gynecology procedures,

laparoscopy (2), musculoskeletal procedures, urological procedures and related services, ancillary outpatient services when a patient expires, and comprehensive observation services.

CMS also proposes to restructure existing APCs in nine clinical families:

• Diagnostic tests and related services
• Endoscopy procedures
• Gastrointestinal procedures
• Imaging services
• Incision and drainage and excision/biopsy procedures
• Orthopedic procedures
• Skin-related procedures
• Urology and related procedures
• Vascular procedures

Expansion of Ancillary Services Packaging

In the CY 2015 OPPS/ASC final rule, CMS conditionally packaged payment for ancillary services assigned to APCs with a geometric mean cost of less than or equal to $100. In the proposed rule, CMS reiterated that conditional packaging may be appropriate for more costly ancillary services given the context in which the service is performed. Thus, for CY 2016, CMS proposes to expand the set of conditionally packaged ancillary services to include services in three APCs – Level 4 Minor Procedures, Level 3 Pathology, and Level 4 Pathology – each of which has a geometric mean cost of more than $100. However, to avoid packaging certain high-cost pathology services with lower-cost and non-primary services such as low-cost imaging services, the Level 3 and Level 4 pathology services will be packaged only when they are billed with a surgical service.

Packaging of Clinical Diagnostic Laboratory Tests

Under CMS's current policy, certain clinical diagnostic tests are packaged in the OPPS payment system as "integral, ancillary, supportive, dependent, or adjunctive" to the primary service or services provided in the hospital outpatient setting on the same date of service as the laboratory test. Under the proposed rule, CMS plans to expand this policy and consider laboratory tests provided during the same outpatient stay (rather than specifically provided on the same date of service as the primary service) as "integral, ancillary, supportive, dependent, or adjunctive" to a primary service or services, except when a laboratory test is ordered for a different purpose and by a different practitioner than the practitioner who ordered the other OPPS service(s).

HOW AN INSUFFICIENTLY DETAILED PROVISIONAL PATENT APPLICATION CAN HURT YOU

A well-intentioned decision to reduce expenses can result in a poorly written provisional patent application that actually destroys an institution's future patent rights in an important technology.

By Aaron B. Rabinowitz

In today's world, there are a few things most people can agree on: Sean Connery was the best James Bond, ice cream is the perfect dessert for any season – and patent applications are expensive! Because even a run-of-the-mill patent application may, depending on the invention's complexity, cost several thousand dollars, life science entities may elect to file an informal "provisional" patent application, which can cost less than a few hundred dollars and is not examined by the United States Patent and Trademark Office (USPTO). And although the decision to file a provisional patent application may hold a certain appeal, a provisional patent application that is insufficiently detailed can have significant and irreversible negative effects, especially for life sciences entities that protect any part of their market position with their intellectual property.

There can be good reasons for pursuing a provisional patent application. For example, filers receive an official filing receipt from the USPTO and maintain the option to file a "full" patent application within 12 months of the provisional filing. This provides the filer with a year's "grace period" for gauging the market's interest in their technology. Another reason, and one that is especially applicable to medical and biotechnology institutions with researchers who frequently publish and attend conferences, is to establish a filing date prior to the disclosure of the technology in a scientific journal or academic conference. This is especially critical because most countries and the U.S. do not grant patent protection for inventions that are disclosed prior to a filed patent application.

A provisional patent application, however, can provide the foregoing safeguards only when the application is sufficiently detailed.

An insufficiently detailed provisional patent application may destroy the ability to patent an invention.

Although provisional applications include some description of the invention, an insufficiently detailed provisional application may not satisfy the applicable portions of the Patent Act. A provisional application that does not satisfy the Patent Act does not establish a filing date, which in turn means that if the researcher publicly discloses the invention after filing a faulty provisional application, the researcher (and the institution) will have lost the ability to secure patent protection in a number of countries.

An insufficiently detailed provisional patent application may weaken the ability to patent an invention.

Even if a poorly drafted provisional patent application doesn't destroy the ability to secure later patents, it can still adversely impact the strength of those later patents. More specifically, if an earlier provisional application insufficiently describes the technology, a full patent application that is related to that provisional application will be vulnerable to prior art references that a more detailed provisional application would have avoided. For example:

This scenario often arises in the medical and biotechnology fields, where researchers are constantly publishing their own work and seeking to improve upon the work of others.

An insufficiently detailed provisional patent application can provide competitors with an opportunity to secure crucial patent protection.

A provisional patent application that fails to adequately describe the subject matter technology can leave the filer of the provisional application vulnerable to patent applications filed by competitors during the filer's pendency period. For example:

There are other ways in which a poorly drafted provisional application can create problems, but the foregoing scenarios – receiving a narrower-than-desired patent or even losing the ability to secure any patent protection at all – underscore the harm that an insufficiently detailed provisional patent application can inflict.

HOUSE PASSES 21ST CENTURY CURES ACT

By Lance L. Shea and Nita Garg

On July 10, 2014, the U.S. House of Representatives overwhelmingly passed legislation intended to speed the approval of drugs and medical devices and increase funding for medical research. The central aim of H.R. 6, the "21st Century Cures Act" (Cures bill), is to accelerate the drug development process by reducing or removing regulatory obstacles. Specifically, the Cures bill seeks to:

• Modernize the Food and Drug Administration (FDA) drug and medical device approval process;
• Place greater regulatory attention on personalized medicine and rare diseases; and
• Provide for significant funding increases for the FDA and National Institutes of Health (NIH).

The vote margin of 344–77 in the House shows the strong bipartisan support that the Cures bill has been receiving.

A prior version of the Cures bill would have revised the current approval process in a way that many critics, including the FDA, believed would present risk to patient safety, and would have provided brand-name drugs additional market time without competition from generic versions. The legislation that was passed, however, incorporated less extensive modifications to the drug approval process.

A key section of the Cures bill would revise the FDA's "breakthrough therapy designation," a program that allows the FDA to accelerate review of drugs that, based on early clinical evidence, present a significant improvement over current treatments for serious or life-threatening diseases or conditions. The Cures bill would authorize the FDA to grant market approval to a drug with breakthrough therapy designation based on early-stage safety and effectiveness test results; however, the drug's manufacturer would be required to conduct clinical trials establishing safety and effectiveness shortly after marketing the drug. Additionally, medical device makers would be able to apply for breakthrough therapy designation for devices that either treat diseases or conditions for which there are no alternative treatments, or considerably improve upon currently approved therapies.

The Cures bill also would instruct the FDA to study how readily available data, such as information from provider practices or disease registries, could be used to approve new drug indications. Further, it would direct the FDA to consider suggestions regarding methods that could measure a treatment's effectiveness without having to wait to determine whether a patient's health was improved, such as use of biomarkers. Additionally, the Cures bill would alter the current method of approval for medical devices by authorizing the use of evidence such as peer-reviewed journal articles and patient medical histories.

With regard to funding, the Cures bill would provide for $8.75 billion over the next five years to the NIH, as well as $550 million in additional funds for the FDA. Funding would come from both the sale of crude oil from the Strategic Petroleum Reserve and a reduction in the amount of Medicaid reimbursement states receive for the purchase of certain durable medical equipment to equal the Medicare reimbursement rate.

Various groups praise the legislation for, among other things, fostering medical research, speeding marketing approval for new products, increasing transparency of the approval process, and focusing efforts on personalized medicine. Critics argue that the legislation would reduce efficacy and safety testing for antibiotics and high-risk medical devices, increase risk from drug-resistant bacteria by encouraging use of antibiotics (and new antibiotics rather than older ones), and increase healthcare costs by adding exclusivity for orphan drugs, among other effects.

The White House has issued a statement of administrative policy (SAP) on the legislation. The SAP mentions various benefits of the Cures bill, such as encouraging biomarker development to improve studies of new therapies, increasing access to and "interoperability" of electronic health records, and advancing personalized medicine. Yet, the SAP mentions various challenges, such as funding levels and mechanisms, the effect on drug costs of extending marketing exclusivity for drugs intended to treat rare diseases, and the "undermin[ing of] regulatory standards by allowing unproven uses of therapies to be marketed to health care payors as though such uses had been proven safe and effective."

These and many other issues likely will be taken up as the Senate considers parallel legislation this fall. The original sponsors of the Cures bill, Chairman Fred Upton (R-MI) and Rep. Diana DeGette (D-CO), hope to have legislation to the President before the end of this year.

The full text of the legislation and other materials are available from the House Energy and Commerce Committee website. For additional background, see our postings in the Health Law Update blog.

FDA INVESTIGATES CHILDREN'S COUGH AND COLD MEDICATION WITH CODEINE AMID SAFETY CONCERNS

By Lee H. Rosebush and Dena S. Kessler

In the wake of the European Medicines Agency's (EMA) recently announced warning against giving codeine to children under 12 years old, the FDA announced its own safety investigation of the drug for use in children. The FDA's renewed interest in pediatric codeine use comes two years after the agency issued a black box warning, its strongest warning of potential harmful side effects, on codeine pain management for children following surgery to remove the tonsils and/or adenoids.

The black box warning stemmed from a series of incidents where children suffered serious injuries or died after surgery that was followed by a codeine pain management regimen. The FDA's new investigation focuses on codeine in cough and cold medication administered to children, because of the risk of serious side effects, particularly for children with pre-existing breathing problems. This investigation targets both prescription and over-the-counter cold and cough medication with codeine.

Administering codeine to children is potentially problematic because of how it is metabolized. Codeine relieves pain as the liver converts it into morphine. Unfortunately, children who are "ultra-rapid metabolizers" turn too much codeine into morphine, up to 30 times more than an average metabolizer. These children can develop potentially life-threatening breathing problems from toxic levels of morphine. While codeine causes severe reactions in some children, others suffer from a lack of reaction. Up to one-third of children cannot fully metabolize codeine, leaving them without proper pain relief.

The American Academy of Pediatrics (AAP) first warned of codeine's potential for harm in 1997. The AAP's 1997 report found that cough medications with codeine were no more effective than the placebo in repressing a child's cough. According to a 2014 study tracing the prescribing patterns for codeine nationwide, "[b]ecause of the unreliable effect of the drug and its associated risk for death, national and international guidelines have recommended against codeine use in children for both of its common indications, analgesia and cough suppression."

The FDA's announcement stated it will consider the EMA's recommendations. The EMA recommended that codeine not be administered to any child under 12, and that children between 12 and 18 with a history of breathing problems likewise should not be given codeine.

The FDA also will hold a public advisory committee meeting to discuss the issue and consider the EMA's recommendations. Once the meeting is scheduled, the FDA will post the announcement in the Federal Register and on the Advisory Committee's web page.

The FDA urges healthcare providers, parents, and caregivers to report side effects involving codeine to the FDA's MedWatch Safety Information and Adverse Event Reporting Program:

• Complete and submit the report online: www.fda.gov/MedWatch/report.
• Call 1-800-332-1088 to request a reporting form, then complete and return it to the address on the pre-addressed form, or submit by fax to 1-800-FDA-0178.

BLOG EXCLUSIVE: PROPOSED 340B RULE WOULD IMPOSE PENALTIES FOR OVERCHARGING, PLUS OTHER CHARGES

By Lee H. Rosebush and Dena S. Kessler

A recently released proposed rule would impose civil monetary penalties on drug manufacturers that intentionally overcharge healthcare providers for medications purchased under the 340B Discount Drug Program. The proposed rule, if adopted, could open the door to significant financial penalties for manufacturers, even if it is the manufacturer's wholesaler or other business partner that overcharges the healthcare provider. The proposed rule would also (1) codify regulations concerning calculation of drug prices that can be charged under the program and (2) revise certain definitions of terms as they are used in the 340B program. Read more >>

EVENTS CALENDAR

September 11

Houston Partner Lynn Sessions will speak on "Data Breaches" at the Developments and Trends in Health Care Law Seminar sponsored by Cumberland Law School and the Health Law Section of the Alabama State Bar Association in Birmingham, AL.

September 15

Houston Partner Lynn Sessions will speak on "Cyber Liability" at the HUB International Limited Cyber Risk Seminar in El Paso, TX.

September 16

Houston Partner Lynn Sessions will speak on "Data Breaches" at the BB&T–J. Rolfe Davis Insurance Seminar in Orlando, FL.

October 5

Houston Partner Lynn Sessions will speak on "Incident Response Plans With a Focus on Governance Within an Organization" at the American Conference Institute's 17th Advanced Global Legal & Compliance Forum on Cyber Security & Data Privacy and Protection in Houston, TX.

October 13

Houston Partner Lynn Sessions will speak on "Privacy Data" at the Texas Health Law Conference in Austin, TX.

October 27

Washington, D.C., Partner Lee H. Rosebush will moderate a presentation on "Strategizing Compounding Pharmacy Management" at the AMCP Nexus 2015 Conference in Orlando, FL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.