9 Key Legal Developments Facing Hospitals

This article outlines many of the key legal developments impacting acute-care hospitals and hospitals in general. Specifically, this memorandum sets forth nine issues applicable to most hospitals. Finally, this memorandum recommends the need for aggressive internal compliance efforts to strengthen and support a hospital’s compliance with and defense to these legal issues.
1. Stark Act and Antikickback Statute enforcement. The government has greatly increased its enforcement efforts under both the Stark Act and the Anti-Kickback Statute. As a result, individual hospitals, including physician-owned hospitals, must ensure that each physician relationship meets an exception to the Stark Act and, when possible, a safe harbor to the Anti-Kickback Statute. For a primer on physician contracting intended to assist hospitals in various physician contracting issues, click here. This primer addresses the importance of regulatory compliance, review and audit of existing relationships and best practices for existing and future contracting efforts. Finally, it is strongly recommended that a hospital review its internal compliance mechanism and ensure that a compliance code and program is implemented and consistently adhered to.

2. Healthcare fraud, the False Claims Act and Recover Audit Contractor programs. In 2010, more than seven hundred False Claims Act issues were alleged by the federal government and private individuals. In the past two years, the government has recovered nearly $7 billion under the False Claims Act, with healthcare providers and pharmaceutical companies representing the source of over 75 percent of such recovery. Changes and amendments to the False Claims Act continue to expand its reach and increase its benefit to the government and private plaintiffs. The efforts under the False Claims Act and the recovery audit contractor program, intended to recover Medicare overpayments and demonstrate a hospital’s need for internal billing and coding audit processes. These processes increase the likelihood that a hospital can both protect itself and be proactive against any RAC overpayments,  False Claim allegations or other federal tools or programs designed to analyze hospital relationships and payments.

3. Accountable care organizations; physician relationships and physician integration. The Patient Protection and Affordable Care Act includes new incentives and initiatives impacting hospitals’ operations. One key incentive/initiative encourages the development of accountable care organizations. The purpose of ACOs is to assist provider coordination and cooperation in caring for Medicare beneficiaries. These concepts are also being used to assist providers in commercial insurance contracting efforts.  

A core impact of ACOs and the drive toward physician integration is the increase in hospital acquisition of physician practices. These acquisition efforts can have a very negative impact on hospitals that heavily rely on the efforts and productivity of independent physicians. In light of this environment, hospitals may need to consider acquiring physician practices to better support its operations and physician recruitment efforts.

The second core impact of ACOs relates to potential antitrust issues. For example, insurance companies generally desire strict limits on the manner in which hospitals and physicians can combine to sell services. In contrast, hospitals generally prefer a great deal of freedom to collaborate and sell products, including shared savings programs, to insurers. This can create opposing views of the applicable antitrust laws and lead to a disconnect in hospital-physician joint venture efforts and hospital-insurer contracting efforts.

4. Changes in reimbursement. Hospital reimbursement rates for inpatient services will decrease in fiscal year 2011 by approximately $440 million. CMS also intends to recoup payments made in previous years that were due to certain documentation and coding changes, leading to a nearly 3 percent cut by CMS. Reimbursement for outpatient services, however, is expected to increase by more than $3 billion in 2011.  

The ability of hospitals to significantly profit from out-of-network patients continues to decrease.  Payors are increasingly aggressive in connection with recoupment, collection of appropriate patient co-payments and increasing co-payment and deductible responsibilities.  Thus, it is difficult for hospitals to use out-of-network payments as a way to increase profits or improve negotiating position.

5. Value-based purchasing. While the concept of value-based purchasing has existed for some time, PPACA established a value-based purchasing program for all hospitals under the Medicare Inpatient Prospective Payment System beginning in fiscal year 2013. Hospitals that meet certain performance standards will receive incentive payments as a percentage added onto the base DRG payment per discharge each fiscal year. PPACA specifies that the Secretary of the Department of Health and Human Services must select performance standards on a number of quality measures, including at minimum acute myocardial infarction, heart failure, pneumonia, surgeries, and healthcare-associated infections. Each hospital’s performance under the program will be made available to the public, with an opportunity for hospitals to review and submit corrections before publication. PPACA takes the current Centers for Medicare and Medicaid Services rules on claims denials for care associated with certain hospital-acquired conditions a step further. Beginning with patients discharged in 2015, the health care reform mandates that hospitals in the top 25th percentile of rates of hospital-acquired conditions receive a one percent 1 percent reduction in the DRG payment that the hospital otherwise would have received for that patient. Hospitals will receive reports regarding their hospital-acquired conditions from HHS. Each hospital’s hospital-acquired condition information will also be made available to the public, with an opportunity for hospitals to review and submit corrections before publication.

6. Legal challenges to healthcare reform. To date, there have been a number of legal challenges to PPACA and its healthcare reform efforts. While certain challenges have succeeded and others failed in federal courts, it will be of great interest should the Supreme Court hear issues on PPACA and healthcare reform.  If the Supreme Court strikes down all or a portion of these reform measures, many of the new rules and regulations specific to physician-owned hospitals may substantially change. These rules and regulations, however, may not impact the acceleration of integration among health systems. This process and trend is likely to continue regardless of healthcare reform.

7. HIPAA AND privacy laws. Over the last few years, the government has reformed the healthcare privacy and security laws under HIPAA. In general, these amendments have increased the requirements and impact of HIPPA on hospitals which increases the cost incurred to address and manage various relationships and issues as they arise. The cost of complying with the new requirements, such as notifying patients of certain data breaches, is significant.

8. Co-management arrangements. We continue to see an increase in the number of co-management relationships between providers and physicians. These arrangements can be at the surgery center, physician-owned hospital, or general hospital level. Structurally, these arrangements generally include a fixed fee plus an incentive based on meeting certain objectives. Again, it is critical that each of the relationships under a co-management relationship meet an exception to the Stark Act and comply with the anti-kickback statute.

9. Tax-exempt concepts and statutes. The PPACA imposed additional reporting obligations and mandatory community benefit standards on tax-exempt hospitals. Under the Internal Revenue Code, as amended by PPACA, a hospital must comply with specific requirements to be treated as exempt under IRC 501(c)(3). These requirements include conducting a health needs assessment at least once every three years and adopting an implementation strategy to meet the community health needs identified in that assessment. In addition, each tax-exempt hospital must adopt a written financial assistance policy which includes certain criteria listed in PPACA. Each year, on Form 990, a tax-exempt hospital must report how it is addressing the needs identified in the community health needs assessment. The failure to meet any of the requirements imposed by PPACA in any year will result in an excise tax of $50,000.

A number of the new requirements apply to taxable years beginning after March 23, 2010 (i.e., the date of PPACA). The community health needs assessment, and the related requirements, are effective for taxable years beginning after March 23, 2012. Finally, the excise tax for failure to satisfy section 501(r)(3) is effective for failures occurring after the date of enactment. The IRS solicited public comments on these new requirements (Notice 2010 39) and it is expected that IRS guidance will be published in early 2011.  In the meantime, tax-exempt hospitals must use their best effort to comply with PPACA requirements, while being prepared to alter and modify its policies once the IRS guidance is issued. 

Tax exempt hospitals must also continue to assure compliance with (1) bond covenants as well as prohibitions on private inurement, and (2) assure that they are also effectively serving community benefits.

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