Health Care Law Outline

Notes:  Mergers and acquisitions are prominent in the HC industry. o Caused by forces of competition brought on by employers’, insurers’ and tgovt’s demands for holding down costs of tx o Government’s role – payor and regulator (antitrust enforcer) o Employers decide what kind of coverage their employees have  FTC enforces the Sherman Antitrust Act and the Clayton Act: o requiring any company that wants to merge to announce it to them so they can decide on it first.  Types of Care: o Acute care = short term care – surgery… o Chronic care = long term – nursing home o Tertiary – care that occurs at a teaching hospital  Many times in smaller areas, you can only go to one hospital to get the care under their health care plan. o Health Plans and employers are primary purchasers of hospital services. o I do not purchase hospital services. I can’t afford it. I have insurance to do that  Consumers and patients have the least control – can’t choose your primary care provider or hospital that you go to. Why Health Care Is So Expensive and What We Can Do To Fix It The Health Care Financing and Delivery System History:  Health care in the 1850s o Physicians:  Less equipment  Less training and education  Fee-for-service  Less competition – less financial/economic hierarchy b/w them and their patients  House calls o Health Care Organizations (1850s)  Hospitals (not-for-profit)  Each religion had their own hospital, hospitals = charitable institutions  Nursing homes – didn’t exist  Mental hospitals were built in the 1920s-1940s o Payors = patients  No insurance companies o Suppliers = apothecaries make the medication. o 1930s – unions were able to bargain with companies to ensure that health care was available; employers offered health care, HMOs  Health Care in the 1920s o Enter health insurance  Blue Cross = hospital insurance ?  Blue Shield = doctors  Government involved in licensing doctors and giving regulations o Suppliers: mass producers, regulations  Health Care Today! o Physicians –  Conflicted b/w providing all the services they think a patient needs v. what the insurance companies say they will reimburse for  Concerns of being sued in malpractice  Demanding education, certifications, competitive  Physicians feeling cost constraints  Specialists o Hospitals  Expensive! Why?  Technology - High-tech equipment – if the technology is there, it will be used.

 A state has no duty under the 14 th A to provide protective or medical services. DPC doesn’t mandate specific obligations  B/c the constitution does not require states to provide any emergency medical services at all, it cannot be held liable for providing services which happen to be less extensive than a particular citizen may desire  A constitutional duty can arise only when a state, by exercising a significant degree of custody or control over an indvl, places that person in a worse situation than he would have been had the government not acted at all. o Place person in danger, strip them of ability to defend themself, or cut off potential sources of private aid. o County did not exercise a degree of coercion, dominion or restraint over P sufficient to create such a relationship o County did not coerce P into its ambulance. Merely made it available to her and P entered voluntarily. o P’s physical condition not attributed to county, thus the county was not under an affirmative duty to provide services Notes:  Even if the alleged policy of the county to transport patients only to certain hospitals were proved, no constitutional right would be violated. Recent Supreme Court cases dealing w/ access to abortions support the conclusion that the state is under no constitutional duty to provide substantive services for those w/in its borders.  The Constitution imposes no obligation on the state to pay any of the medical expenses of indigents.  The “No Duty” Rule o A physician is under no obligation to engage in practice or to accept professional employment, but when medical services of a physician are accepted by another person, the relation of physician and patient is created. o Relationship may result from an express or an implied K and the rights and liabilities are governed by K law  Hospital’s Duty o Manlove was reluctant to find a duty to tx, but paved the way for cts to make more definitive findings of H liability o Many states impose a requirement of open emergency rooms by statute or regulation  Reliance: o Manlove’s reliance theory is limited to just emergency care b/c a refusal might result in the worsening of a condition o Where reliance is detrimental, must the patient have to demonstrate actual reliance, rather than reliance being assumed. Manlove required actual reliance, not psychological expectation that ER will always be open to them.  Physicians “On Call” o Some courts have held that physicians on call have already established a physician patient relationship, whether or not they have actually spoken with the patient, and cannot refuse care o Similar analysis for HMO physicians: HMO subscriber is a third-party beneficiary of an HMO’s contracts with its physicians; contract was breached when physician refused treatment)  The Quasi-Public Status of Hospitals: o Docs or Hs owe duties to public at large simply by virtue of their having chosen to become licensed HC providers o In common law, certain occupations could not turn away customers w/o good reason (innkeepers, public transporation, public utilities). Reasons: importance of the service, the monopoly status, gov’t support o Physicians rarely have a local monopoly – usually there are several in the town. o Most courts reject this view, others have accepted it.  Paying v. Indigent Patients o For indigent patients, public service theory doesn’t help, b/c no common law duty to serve people for free. Only the reliance theory helps, but restricted to severe emergencies (where patient would be worse off for securing service)  Patchwork of laws: o For physicians, no common law duty to treat, even in emergencies o For hospitals:  A common law duty to treat emergency patients regardless of pmt, but only in severe emergencies  Common law and regulatory duties to treat all patients who can pay; but  No enforceable duty to treat nonemergency or mild emergency patients who cannot pay o Set the stage for enactment of a new federal statute: the EMTALA EMTALA  Enacted due to concern that hospitals were dumping patients onto public hospitals, due to patient’s inability to pay  When a patient comes to the ER, and a request is made for an evaluation, H must provide an appropriate medical screening exam. If the appropriate medical screening exam discloses that the patient is either in active labor or in an emergency med condition, then the H has to either stabilize patient or if it thinks patient would be better off at another H, it can transfer  To transfer, the doc must show that the risks of transfer outweigh the benefits that could be provided at the other hospital.  Physician must personally arrange the transfer.

 A strict rule of deference to a doc’s medical jmt would completely eviscerate 504’s function of preventing discrimination against the disabled in the healthcare contexts.  P must be given an opportunity to prove that the reason given by the doc that made him unqualified encompassed unjustified consideration of the handicap itself. Note:  This case sets forth the proper evidentiary approach to be taken in § 504 cases.  The P must first make out a prima facie case that he was otherwise qualified for surgery, and only then does the burden shift to the D to show that the P’s handicap made him unqualified. Then in order to prevail, the P must prove either that the reason given by the D is a pretext or that the reason encompasses unjustified consideration of the handicap itself. Roberts v. Galen P was severely injured and taken to H in Kentucky, where she stayed for 6 weeks. While still in an unstable condition, H transferred her to a facility in Indiana. Her condition deteriorated and she incurred substantial medical expenses. P applied for Medicaid and was denied b/c did not meet Indiana’s residency requirements. P alleged violations of EMTALA. Ct granted SJ to H on the ground that P failed to show that the hospital had an improper motive in it’s’ decision that P was stable and should for transferred.  Must a P show that the H’s inappropriate stabilization resulted from an improper motive (such as one involving indigency, race, or sex), in order to state a claim of an EMTALA violation? NO!  EMTALA contains no express or implied “improper motive” requirement for proof of violation Baber v. Hospital P shows up at H drunk and behaving erratically. P previously diagnosed w/ schizophrenia. P had convulsion in the waiting room in H, falls and hits her head. Dr. sutured her cut and monitored her for symptoms of head injury. Dr. thought P’s behavior was due to psychiatric condition and drunkenness. Dr. consulted w/ P’s psychiatrist, and both determined she would be better off at psychiatric H. At the other H, she had a seizure, she was transferred back, they did a CT scan, and discovered serious head injury and she died.  P cannot sue under EMTALA b/c EMTALA does not create a private cause of action against physicians  P argued: H did not provide an appropriate medical screen exam. If they had, the doc would have determined she was in an emergency medical condition → violated EMTALA requirement to first stabilize before transfer  Doesn’t matter if screening was negligent (for EMTALA purposes) but only whether the H provides the same screening for patients in similar situations.  Whether screening was appropriate is not based on a national standard but on the H’s own screening process.  A claim of negligence should be brought in state court for malpractice  The requirement that a H must stabilize a patient before transfer, only applies if the screening exam discloses that the patient is in an emergency medical condition. No obligation for H to transfer patient in a stable condition (b/c the H did not know) Note:  No national standard under EMTALA – just within the particular H’s capabilities  Criticism: Disincentive for hospitals to provide an appropriate medical screening exam due to holding that “if they never know she is in an emergency” then no obligation to transfer in a stable condition  Hospitals have had to shoulder the burden of health care for illegal immigrants (deportation case)  NY State Law – anybody who shows up at an hospital’s emergency room cannot be denied care based on their ability to pay. o Before admission, the H cannot even ask about a patient’s ability to pay. o In cities w/ a population of one million or more (NYC), general Hs must provide emergency medical care and tx to all persons in need of such tx – if not then guilty of a misdemeanor. o There is a specific obligation on physicians in NYC to provide tx to anyone who shows up – subject to criminal prosecution – imprisonment and a fine. o Also, EMT workers are required to report if a H refused to accept a patient. o Exception – no available beds and that it would jeopardize the care of already admitted patients. Walker v. Pierce, 1977 P = black woman on Medicaid, pregnant and having her fourth child. P claimed doctor violated her constitutional right to privacy, DP of law and EP under the law due to racial discrimination, by subjecting P to involuntary sterilization. P went to dr, who told her his

Payton v. Weaver, 1982 P suffers from chronic end stage renal disease and requires constant care (every 3 days) to stay alive. Doc treated P for 3 yrs. Dr W sent a letter to P, stating he would no longer permit her to be treated at BMA H b/c of her uncooperative behavior, refusal to adhere to med advice, and use of drugs and alcohol. P went to Herrick H and was refused. P filed a petition for mandate to compel Dr Weaver and BMA to treat her. It was granted upon the condition that P meet certain conditions, which she failed to meet so Dr W once again notified her that he would no longer treat her and gave her a list of other providers in the area. Legal ob to continue providing P w/ tx?  A doc who abandons a patient must do so only after due notice, and an ample opportunity afforded to secure the presence of other medical care. Doc gave sufficient notice to P and discharged all obligations in that regard.  Health and Safety Code §1317, requiring Hs to provide emergency care, does not apply to P’s need for continuing treatment  Even though a private hospital owes no duty to the public to accept any patient, H is questionably private since it receives public funding under the Hill-Burton Act. It contains a unique and scarce medical service needed to preserve life, thus public and should not be permitted to w/hold its services arbitrarily or w/out reasonable cause.  Collective responsibility for all providers of scare resources to share the burden on difficult patients. However, this argument was not presented at trial – collective responsibility is not absolute or independent of patient’s own responsibility Moses v. Providence Patient brought in by wife. Diagnosed w/ psychosis, threatening his wife, suicidal. Discharged- 10 days later patient killed wife. Executor of wife’s estate sued hospital and physician. Issue: Did H satisfied EMTALA obligation when they admitted patient and performed tests? No. Did P have standing? Yes. Did patient have an emergency medical condition? Maybe- question of fact for jury  Civil enforcement provision of EMTALA: “any individual who suffers personal harm as a direct result of a hosptal’s EMTALA violations may sue – this includes P’s estate  EMTALA requires more than simply admitting a patient w/ an EMC. H must stabilize them – so that no material deteroration of the condition is likely to result from or occur during the patient’s relase from the H  Whether the patient did not have an emergency medical condition is a question of fact that should have been left for the jury  Definition EMC does not exclude mental health conditions  To trigger EMTALA obligations, the H had to have actual knowledge of an emc, if they wrongly diagnose – EMTAlA doesn’t apply. P argues that they were negligent in failing to recognize emc = negligence, state malpractice law  EMTALA does not provide for a private cause of action against an individual physician, only hospitals. Notes:  EMC = emergency medical condition  EMC: a medical condition that manifests acute symptoms of sufficient serverity, such that the absence of immediate medical attention could reasonably be expected to result in placing the health of the indv in serious jeopardy.  EMTALA only applies to hospitals that accept Medicaid and Medicare. Virtually all hospitals accept these  The H argued that CMS regulation released them from liability: o CMS reg: if a H has screened an indv and found them to have an emc and admits him into inpatient in good faith in order to stabilize the emc the H has satisfied its responsibilities – not consistent w/ goal of EMTALA Quality of Care: why errors occur and who should be held responsible: Hosptial Liability Medical Mistakes  If you make a wrong diagnosis → chose the wrong treatment.  Physicians are encouraged to be error-free (an unattainable standard) → deny evidence of error → don’t learn from errors →  Iatrogenic Injury: Injury caused by treatment o A substantial number of patients suffer treatment-caused injuries while in the hospital o Most iatrogenic injuries are due to errors → potentially preventable  Slip v. Mistake o Slip = unintended error due to being preoccupied w/ something else (fatigue, illness, stress) o Mistake – Rule based error occurred during problem solving when a wrong rule is chosen (b/c misinterpretation of the situation → application of the wrong rule OR misapplication of a rule that is frequently used that seems to fit adequately. Lack of knowledge, misinterpretation of the problem

 Holding Out – Ostensible Agent Theory o One who represents that another is his servant or agent → causes a 3 rd person justifiably to rely upon the care or skill of such apparent agent → subject to liability to the 3 rd person for harm caused by the lack of care or skill of the one appearing to be an agent if he were such o Doc doesn’t have to affirmatively misrepresent his status. A holding out may arise when the H acts or omits to act in some way which leads the patient to a reasonable belief he is being treated by the H by one of its employees o Occurs when medical staff are “held out” as employees of the hospital  Three theories of negligence: o Diagnostic negligence o Vicarious liability (hospital) o Nurse negligent for failure to inform hospital …  Limitations on Hospital liability: o Charitable immunity o Holding doctors as independent contractors o Captain of the ship doctrine – surgeon is in charge of the operating room and everybody in there, nurse not liable o Soverign Liability Hospital Vicarious Liability:  Hospital Control: o The corporate practice of medicine doctrine – illegal for corporations to subject physicians to the control of lay management b/c this would constitute the unlicensed practice of medicine o How does respondeat superior liability (premised on the principal’s control of an agent’s actions) coexist w/ this prohibition of corporate control of physicians?  Captian of the Ship Doctrine o Hospital defense against vicarious liability o To hold physicians responsible for subordinate doctors and nurses o Occurs when a hospital employee’s negligent acts are directed or superivised by a physician who is not an agent of the hospital. Courts usually find that the H and the physician in charge share the employee and thus share liability  Three concepts of vicarious liability: o Actual agency (includes simple employment) o Ostensible agency – holding out o Nondelegable duty (enterprise liability)  Holds Hs automatically liable for all acts of negligence w/in their walls, regardless of the specifics of actual or apparent agency. Rational = nondelegable duty – hospital may not avoid responsibility by delegating the function to an independent contractor. So far this duty has only been applied in cases of ER care  Direct Institutional Liability ( Darling). o Falls b/w vicarious liability for some physicians and enterprise liability for all physicians. Hospitals are held liable even for acts of indepdent physicians, but only if the hospital management breached a duty of care owed directly to patients with respect to selecting or supervising the physician Darling v. Charleston Community Memorial Hospital, 1966 (failure to supervise = direct liability) P broke his leg and went to ER at the defendant H, where Dr. Alexander, on emergency call that day, treated him. Dr put a cast on – maybe too tight → lost circulation → toes were visible and blue. P’s leg amputated . May the H be held liable for the negligence of its staff?  A H may be liable for the negligence of its staff.  The notion that a H only provides facilities and does not purport to act thorugh its staff docs and nurses, doesn’t reflect reality  Modern Hs do much more then provide facilities. They employ a large staff of docs, nurses, admins, and collect fees for services performed at the H  A person availing himself of a H reasonably expects the H to treat him, not that its nurses will act on their own responsibility  No legitimate basis for not holding a H vicariously responsible for the torts of its staff exists.  H failed to review Dr. A’s work or require consultation. Jury could reasonably find that H’s failure to do so was negligent

HMO Direct Liability:  HMOs have been held to the same type of direct corporate liability as in Darling (Boyd focuses on vicarious)  Direct liability (hospitals): o Duty of care in the selection of physicians  HMOs also have this duty – engage in hospital-like credentialing process o Duty of care in the contemporaneous supervision of physicians  Do HMOs assume such a duty thru their utilization review function?  When insurance companies choose to intervene in tx decisions they assume a duty of care in doing so Financial Incentives:  An HMO’s use of financial incentives to encourage docs to economize = potential basis for direct liability against HMOs  HMOs should pay docs in a way that encourages them to economize in their own clinical decision-making to avoid liability Breach of Contract:  B/c HMOs, unlike hospitals, sell medical services, they undertake an implied warranty of quality – nonnegligent care  HMOs should be automatically liable for any negligent care delivered under their auspices, regardless of whether they fall under the theories of liability devised for hospitals Exclusive Enterprise Liability:  Not sufficient integration to justify imposition of enterprise liability: o The health care delivery system is not an “integrated delivery system” structure. o Most networks are only loosely formed contractual affiliations in which the parties (hospitals, doctors, and insurers) agree on a nonexclusive basis to market their services collectively Boyd v. Albert Einstein Medical Center, 1988 HMO (D) operated a HC provider system wherein members would be referred to primary care physicians approved by the HMO, who in turn could refer them to specialists. Certain Hs were also members of HMO. P underwent a breast biopsy by HMO doc – perforated chest wall- died. HMO argued that its participating docs were independent contractors.  A HMO may be liable for the malpractice of its doctors under an ostensible agent theory of liability  Participating doctors are the ostensible agents of the HMO: o A HMO generally covenants w/ its members to provide quality health care. o It screens its participating docs and limits the choice of its members as to with whom they may consult o Participating docs must comply w/ various regulations. o HMO advertised that it would provide HC services and that docs were competent and had been evaluated o P paid his doctor’s fee to the HMO, not to the physician of his choice o P could not see a specialist w/o the primary care physician’s referral  Because the P had no choice in which doctor he woud see, he looked to the institution (HMO) for care, not solely to the docs  P submitted himself to the care of the participating docs in response  The theory of ostensible agency as applied to Hs is applicable to HMOs since patients look now to institutions for care  HMO held out evidence that could have created a reasonable belief in the P that the doctor was its agent Note:  HMO’s Arg:The theory of ostensible agency has been applied only to relationships b/w hospitals and independent contractor physicians → the theory is not appropriate to this situation – court disagrees  Court hints at negligent credentialing (HMO advertised that all their doctors were competent and that they were evaluated prior to being selected), but not the main theory  Ostensible agency is different than actual agency o Ostensible agency – Look at it from patient’s point of view.  Patient reasaonbly believes that the doctor is the agent of the institution (HMO).  There must be a holding out by the HMO o Actual agency – clear cut – if they are the agent for the institution, then the institution is liable  If a physician was a participant of several HMOs it would undercut the agency argument Wickline v. State (1986) P treated under CA’s Medicaid Program (Medi-Cal), sued the state, but not her physician, for negligently causing premature discharge from the H, resulting in eventual amputation of leg. To cut costs, Medi-Cal uses a prospective utilization review process. HC providers must get the permission of Medi-Cal first before they are allowed to render medical care. Medi-cal authorized only 4 days of extended hospital stay. The doctors thought she needed longer to recover, however they did not contest the issue and discharged her.

 Pre-1929: insurance coverage nonexistent. Expenses for care where not large relative to typical income. Patients paid out of pocket. Physicians did not charge or earn large amounts  1929-1940: Blue Cross plans were organized by hospital associations. Patients were given free choice of provider (not limited to contracted docs or hospitals), w/ low out of pocket cost. Providers received retroactive fee-for-services pmt (not an advanced salary, capitation…) Helped strengthen providers as private entrepreneurs  1940s – 50s: Workplace insurance – health insurance could be prepaid w/ pre-tax dollars, reducing the cost of private coverage by savings on tax otherwise due. Federal grants to hospitals. Beginning of price increases.  1960s: government subsidized care for those omitted by private coverage (poor and aged). Medicare and Medicaid. Hospitals expanded; prices rose; usage of services increased. Private hospitals. All plans retrospectively reimbursed provider-set charges or costs. Generous fee-for-service reimbursement encouraged even more services.  1970s: cost containment. Health prices were frozen, then regulated by federal price controls. Prospective reimbursements.  1980s: –Prospective Pmts – Hs were paid fixed amounts per case w/ rates set in advance. A H earns no more for spending more and is able to keep the balance by spending less. Managed care – not the open ended coverage of whatever services docs and patients choose. Drop in the percentage of people w/ coverage (due to drop in private health insurance coverage – due to rise in HC costs →making insurance premiums too high to continue to attract new purchasers. Paying for Health Care Four basic modes of paying for HC :  Out of pocket o Since HC is a basic human need, then people who are unable to afford HC must have a pmt mechanism available that is not reliant on out of pocket payments → heath insurance! o Insurance created a new problem – since people no longer had to pay out of pocket for HC, they used more HC. And if HC providers could charge insurers rather than patients, they could raise their prices → costs rose  Individual private insurance o Private health insurance can be purchased individually or in groups. o Most is obtained on a group basis as a fring benefit of employment b/c of tax advantages  Employment based group private insurance o Hospital-centered private insurance plans  1930s = depression. Hs needed to bring in patients, so offered plans for patients to use their particular H  American Hospital Association established Blue Cross hospital insurance plans o Blue Cross – allowed free choice of hospitals. Blue Shield came along later to cover physician services o US health care was initiated by health care providers seeking a steady source of income (generous reimbursements). o Gov’t doesn’t treat the health insurance fringe benefit as taxable income to the employee.  B/c each dollar of employer-sponsored health insurance results in a reduction in taxes collected, the federal gov’t is in essence subsidizing employer-sponsored health insurance (subsidy = 200 billion/year) o Commercial insurance companies began to compete w/ the Blues. To do this they used “experience rating” o Experience Rating : Premiums are set according to the experience of each group in using health care services. Higher risk of illness → higher premiums. Attracted customers by offering very low premiums for low risk people. o Community Rating  Blue Cross used to set its premiums by the principle of community rating.  For a given HI policy, all subscribers in a community pay the same premium no matter the risk  Blue Cross had to abandon community rating to survive competition w/ the commercial insurance companies’ → left older and sicker groups less able to afford health insurance . o Group insurance spreads medical costs across a pool of subscribers such that the relatively healthy subsidize the relatively sick, so it serves a redistributive as well as a payment function  Government Financing: o Enactment of Medicare and Medicaid = 1965 o Medicare Part A = hospital insurance for the elderly - financed thru Social Security taxes o Medi Part B = insurance for doc services – financed thru federal taxes and monthly premiums from beneficiaries o Medicaid – funded from federal and state taxes.

o Costs continued to rise → cutbacks in Medicaid → pushed low-income people out and uncovered services under Medicare left the elderly unable to pay for rx and long term care. At the same time, rising costs of private insurance was placing coverage out of reach of more and more employers The Unraveling of Employer-Based Insurance  Adverse Selection o If an insurer offered polices to anyone, with the annual premium set to cover the average person’s hc expences, healthy people would probably drop out b/c no reason to expect high medical bills, leaving the unhealthy as the consumer base (b/c they would find it attractive) o The insurer’s clientele would be tilted toward those w/ high medical costs and the actual costs per customer would be much higher than those of the average member of the population. So it would have to raise premiums to cover those higher costs → more healthy people would drop out → further rise in premiums  Solution: identify applicants w/ a high risk of needing expensive tx and rejecting them or charging them a higher premium.  Solution to screening = employer based insurance (which used to be affordable, but not so much anymore)  Advances in medical technology → doctors spend more → higher insurance costs → employers stop providing health coverage → people are uninsured (rob Peter of basic care to provide Paul w/ state of the art treatment) Consumer-Directed Approach to Health Care Reform – a return to out of pocket payments  We consume too much HC b/c insurers pay the bills; people should pay more of their medical expenses out of pocket  The way to reduce public reliance on insurance, republicans believe, is to remove the tax advantages that favor health insurance over out of pocket spending (instead of raising taxes of HI, Bush cut taxes on out of pocket insurance)  System of tax-advantaged health savings accounts where individuals can shelter part of their income from taxes by depositing it in such an account, then withdrawing the money to pay medical bills  Disadvantages to consumer – driven health care: o The health care savings account is just another tax break for the wealthy. Lower income Americans would only get a marginal tax rate and lack the ability to put the maximum allowed amt into these savings accounts. o These accounts undermine employer-based HC, b/c they encourage adverse selection: health savings accounts are attractive to healthier people who would opt out of company plans, leaving only unhealthy people o The consumer plan is not proposing to force people to pay a large share of extreme medical expenses (chemo), out of pocket. The consumer plan can’t promote savings on the treatments that account for most of what we spend on HC (major expenses, not doc visits and checkups) Uninsured Patients  Some states and counties reimburse private hospitals for their costs of treating indigent patients in emergencies, but standards to prove indigency are stringent. Where public compensation is unavailable, private hospitals are forced to fund uncompensated care by “cost-shifting”  Cost Shifting o Hospitals charge paying patients more. o Insurers are insisting that this padding be removed from the H bills they pay → forces Hs to inflate charges only for their paying customers that are covered by small insurers or who pay out of pocket (including uninsured patients) Preexisting Conditions: Experience rating is one way insurers adjust for subscriber’s health risk. Variety of techniques called “medical underwriting”. Insurer may not accept the subscriber/group at all, exclude coverage for high-cost conditions, or exclude from coverage any preexisting conditions (to encourage people to buy insurance while they are still healthy) Small Group Market Reforms:  The problems for high-cost subscribers are more servere for individual policies and small groups b/c each policy covers only one or a few people → purchasing decisions are driven more by the individuals’ health characteristics than by group averages. → small employers often have a harder time finding insurance or face higher premiums  HIPPA limits the length of time group insurers can exclude preexisting conditions, requires open enrollment (accepting all applicants) and automatic renewal for groups Severing Employment and Insurance:  Primary difficulty created by an employment-based insurance system is that insurance ceases or changes when a worker loses or switches jobs

 Portability: HIPPA allows people to switch to a new employer policy when they change jobs, w/o undergoing a new waiting period as long as they don’t drop coverage for more than 2 months  HIPPA also requires insurers to “convert” group coverage to individual coverage for people who leave the group  COBRA – congress required group insurers to give departing employees the option to “continue” their group coverage (rather than convert to individual coverage) at essentially the same price, only to be paid by the employee, not employer. Continuation lasts for 18-36 months.  Even though there are protections, problems still exist w/ emp- based insurance (people are stuck w/ the insurance that their emp selects, if you buy your own you don’t get the tax breaks; can still fall b/w the cracks when you switch jobs)  Solutions: get rid of employer-based insurance. Instead, employers could give employees a fixed budget the employees can use to shop for insurance anywhere they want (defined contribution). Or, have a tax credit rather than a deduction to anyone who purchases health insurance, whether or not insurance comes as a job benefit Private Insurance → Universal System  By maintaining private health insurance system aimed at limiting gov’t regulation, we get even more complex gov’t regulation to compensate for the inadequacies of that very system, than if you just switched to a universal system  In a universal system, everyone is in one group. No regulatory need to resolve issues of continuity and eligibility. Patient Cost-Sharing:  Market-oriented reformers would restrict the scope of health insurance in order to encourage patients to pay more out of pocket. Reason- that it would increase patient’s sensitivity to costs, which would force docs to become more price competitive Four Different Proposals in Congress:  Universal payor – gov’t pays for everyone (single payor system) – why? Moral obligation o The gov’t provides protection against fire and crime and health care should be included in the rights we gain as accepting gov’t supervision. o Less expensive – when illegal immigrants cannot receive care unless they go to the ER, that is more expensive than providing preventive care. o Does everybody have to have the same coverage? Answer depends on the reason that one argues for a single payor system. If it is b/c it is a moral obligation then everyone should get the same coverage. If you believe that everyone should have personal responsibility – then there could be tiers (if you can afford a better plan, you can buy that)  Medical savings account o Problem – not realistic for poor/ middle class people - if you don’t have money to save, then you don’t benefit o Reasons for medical savings account – people would use less health care if they had to pay out of pocket (moral hazard – if you don’t pay much of a co-pay then you are largely indifferent to the amount you spend on HC). Counter argument – when people cut back on health care they don’t make wise choices.  Individual and employer mandates- baucas proposes this o Should everybody be compelled to buy insurance? It would be good for the insurance companies – 46 million new customers. Since a lot of people w/o insurance are young and healthy – had to get HI – it would make insurance more affordable for everyone – sick people wouldn’t be the majority and drive up the cost for everyone.  More payor (insurance companies) regulation. Requiring community rating instead of experience rating. No discrimination b/c of pre-existing conditions. Government Health Programs: Introduction to Medicare The American Health Care System: Medicare  Who is eligible to be a Medicare Beneficiary: o 65 years or older and have to have worked for 10 years, or your spouse has to o People under 65 w/ End Stage Renal Disease (ESRD) or Lou Garrig’s Disease w/ a short waiting period o People under 65 who are permanently disabled o If your eligible for social security then you are eligible for Medicare  What does Medicare cover? short term medical services (for acute illnesses) o Medicare does not cover:  Long-term care

 Routine foot, hearing, vision, dental care  Medicare has no preexisting conditions limitation  Medicare’s hospital-financing scheme is grounded upon social insurance. Employees make mandatory contributions to dedicated trust funds during their working years, w/ the promise of receiving benefits after they retire  Medicare used to pay hospitals on a fee for service basis. o As costs increased, Congress reduced the discretion hospitals and docs had to establish their own prices: o (1) prospective payment system for hospitals – Medicare fixed prices in advance on cost-per-case basis o (2) Medicare must pay physicians according to a uniform fee schedule for some 7,000 medical procedures  Medicare Reform: Gov’t failed to anticapte how costly Medicare’s would be: o Generous payment methods o Increased demand for medical services o The expanded life expectancy of the elderly o Aging of baby boomers o Three solutoins:  Raise taxes  Reduce Medicare benefits  Ask elderly to pay more on some income related basis Four Separate Medicare Plans:  Part A: Hospital insurance (automatic enrollment) o Hospital insurance (in-patient, temporary nursing home care, temporary rehabilitation) for acute illness o Pays for all reasonable expenses, minus a deductable amt for the first 60 days. After 60 days, a higher copay/day o Does not cover long term care (only 0 – 100 days). o How do hospitals charge?  DRG: Diagnosis Related Group  Hs charge a specific amt for specific services  Incentive to perform more efficiently b/c paid same amt whether patient stays for 1 day or 10 days  Hospice care – have to die w/in the 6 months for Medicare to pay  Home care – cheaper in the patient’s home than it is in the hospital  Part B: Supplemental medical insurance (voluntary enrollment): o Physicians services, diagnostic and lab services, medical equipment, outpatient hospital services o This is where docs abuse the medicare system o You must pay a premium every month. Everybody pays the same premium (traditional fee for service)  Medicare pays for 80% of approved amount.  P responsible for 20% of the doctor’s fee. (covered under Medigap)  Similar to traditional indemnity fee for service system.  If doc charges based on what they do, there is still incentive for docs to do more (Medicaid fraud) o Dual Eligibles – so poor that they are eligible for Medicare and Medicaid, state will pay for their Part B insurance o RBRVS: Resource Based Relative Value Scales  To reflect the doc’s payment with the amount of work that the doctor was actually performing.  Incentive: not to over- perform and to adjust the disparity in pay b/w general physicians and specialists.  Part C: Medicare Advantage – allows people to get full Medicare coverage; o Allows people to get full Medicare coverage o Additional benefits: dental care, eye glasses, gym memberships…. (stuff that healthier people chose) o Offers enrollees private insurance alternatives to traditional Medicare to stimulate managed care cost savings o Payments increased due to private insurers complaining that they were losing money o Insurance companies are making huge profit from the gov’t from insuring all these healthy people o As a result, the program cost rather than saved money by attracting a disproportionate number of healthier people (adverse selection) whom traditional Medicare could have covered for less than it paid the private health plans o Expensive b/c it uses private insurance → the administrative costs are more expensive

 Part D: Prescription drugs (voluntary enrollment) o The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 o Provides outpatient prescription drug coverage o Created b/c more and more conditions are being treated w/ Rx drugs. People were paying out of pocket – expensive o Private sector drug plans use cost management techniques – controls spending– forces competition o Adverse Selection:  A stand-alone prescription drug benefit could be especially prone to adverse selection, in which people who expect to have higher than average costs disproportionately enroll in the insurance plan (undermines purpose of insurance- to spread financial risks among a wide pool of people). Solution? Encourage as many people as possible to enroll  Premiums to beneficiaries are community rated o Donout Hole: only after you spend $5,100 (2250-5100 – no payment if b/w these) , does the gov’t pay for 95% of the drugs you need  The Gov’t is not able to use its enormous purchasing power to reduce costs like it does w/ Part A and B because it is prohibited from negotiating with the drug companies for the amount they are willing to spend. o Enrollment is voluntary – Medicare eligible individuals choose whether to pay a subsidized premium for coverage o Rx Plans are offered by competing private co, such as insurance companies, HMOs, pharmacy benefit managers o The premiums for private Part D plans are set by private insurers and vary from region to region o The gov’t subsidizes 75% of the Part D premium up to $2,250  Medigap Insurance: o Medicare pays for about half the average elderly person’s medical bill → o Most people obtain supplementary packages (Medigap) from private insurers or previous employers to cover the gap o This covers the other 20% that the patient has to pay. o But you still pay a monthly premium for Medigap Government Health Programs: Medicare Part D and Medicare Reimbursement and Solvency Issues Medicare Part D: Prescription Drugs  Medicare Part D uses three techniques to manage their enrollees’ use of Rx drugs: o prior authorization—not covering a drug until the prescriber documents that it is medically necessary; o step therapy—not covering a drug until certain other drug therapies are tried first; and o quantity limits—restricting the quantity of a covered drug dispensed over a certain period of time  (e.g., limiting the number of pills dispensed each time a prescription is filled).  Appeals Process: when a patient’s Medicare drug plan doesn’t cover a needed drug o All drug plans must include a process through for enrollee to challenge decisions made by the Part D plan o If you want a drug that isn’t covered, you have to get your doc to write to the prescription drug plan to explain why you need the actual drgu that the doc is prescibing o Standard (same as Medicare Advantage): the expedidted approach can only be used if requested by the doc and has to jeopardize the patient’s health  Critcisms of Part D: o No federal gov’t bargaining w/ the drug companies o If you don’t join immediately, it would cost more to join later. (encouraged to join to get healthier people)  Standard Plan: I don’t understand…. o $275 deductible o Pay 25% of cost (coinsurance) up to 2250 o Dounut Hole Open-Ended Reimbursement

Memorial Hospital/Adair County Health Center v. Bowen, 1987 DHHS denied H full pmt for pharmacy services rendered to Medicare patients by OK hospital (P). The H filed complaints challenging the decisions. Blue Cross audited the reimbursement claim by comparing the costs of each H with other institutions in the same area which were similar in size and scope of services and determined H’s to be substantially out of line. H’s pharmacy provided state-of- the art services whose cost was out of line with the peer group’s costs. Ct concluded that DHHS’s decisions were not irrational.  The amount paid to any provider of Medicare services shall be the reasonable cost of such services.  When such services are compared, they must comprise the same basic elements.  HHS denied H reimbursement of actual pharmacy costs that were in excess of the highest pharmacy costs in the peer groups, even though none of the comparison Hs used a pharmacist-supervised IV program (which accounted for P’s excessive costs)  H’s pharmacy costs must be compared w/ those incurred by peer groups offering comparable IV services Notes:  Medicare Act: amt paid to a provider are the reasonable costs of services; intended to meet the actual costs, however much they vary b/w institutions (unless an institution’s costs are substantially out of line with other’s in the same area which are similar in size, scope of services, and utilization).  Counter: subsidizing a H’s elevated aspirations for one of its services thru disproportionate reimbursements (at the disappointment of other Hs competing for the same limited funds) is not the intent of Medicare Act to cover reasonable costs  Fiscal intermediary = BC → PRRB (Medicare’s Provider Reimbursement Review Board) → District Court  This decision allows Hs to use the best technology… and they will get reimbursed. New standard of care will drive up the cost of health care services if H’s are allowed to pick more expensive methodologies. New technology spreads b/c hospitals must compete for doctors who bring in the patients (70% of medical services at hospitals are referred to them by doctors) Valley Hospital v. Kroll, 2003 (no balance billing) Husband in H for 11 months and died. H sent Medicare a bill for $214K for first 150 days in H (M paid $79K) and H wrote off the remaining $111K. H sent AARP (husband’s Medigap insurer) the bill for $502K for the time not covered by Medicare (AARP paid $230K – the amt Medicare would have paid if its coverage had not expired). Pmts left a balance of $260K (difference b/w what Medigap paid and the full amount of H’s charges). H sent the widow the bill for $260 and filed suit against her to recover.  Issue: May a state hospital “balance bill” patients who have exhausted their Medicare Part A benefits? NO  Medicare doesn’t pay a H’s standard charges; rather it reimburses hospitals using Diagnostic Related Group (DRG) method.  The H pays one flat fee for the entire hospitalization, depending upon the illness being treated.  Since DRG pmts represent the average cost for each illness, the H receives adequate compensation for all patients treated w/ the same DRG code (more efficient than fee for service – docs provide unnecessary care for more $)  NJ’s Medicare supplement law bars balance billing: Exposing elderly to liability for the amount that a H’s rates exceeds the Medicare-approved rate is at odds w/ the goal of Medigap insurance  H’s damages is limited to the reasonable value of services rendered by the H to decedent. The total paid to H by Medigap insurer is reasonable given that it corresponds to NJ’s regulatory scheme, which utilizes the DRG pmt methodology. Notes:  Medicare through the DRGs pay a set fee for the husband’s illness  Medicare through CMS has greater bargaining power than the hospital – if the hospital ever wants to accept a Medicare patient, the H must accept an agreement that they cannot balance bill (provider agreement)  Balance billing means charging or collecting from a Medicare beneficiary an amount in excess of the Medicare reimbursement rate for Medicare-covered services or supplies provided to a Medicare beneficiary  Prospective Payment Systems (PPS): o Open-ended cost-based reimbursement still exists, but public and private insurance are moving toward forms of PPS o Prospective payment systems (PPS) reverse the incentives created by retrospective reimbursement by setting a fixed rate in advance that does not vary as much according to the nature or extent of treatment given DRGs  Form of PPS.  Designed to give hospitals an incentive to provide efficient care.

 Every rate control system is composed of: o (1) a base rate, which is fixed o (2) an annual update for increasing costs o (3) adjustments to achieve equity and accuracy among different patients and providers.  The more economizing effort hospitals exert in response to the incentives of prospective payment, the more leeway Medicare has each year to tighten up the standardized rate.  Problem – physicians control most clinical decisions that drive hospital costs  DRG is multiplied by the Hospital’s specific rate (see below)  Adjustments to Hospital Rates:(Hospital’s Specific Rate) o Hospitals should bear the brunt of only the costs they control → DRG system had to add adjustments o A lot of time is spent litigating a H’s specific rate so that the H can get more money o Geographic variations in the cost of labor.  Medicare divides the country into different geographic wage areas →  A hospitals reimbursement for any case also depends on which wage index it has been placed into o Teaching hospitals are paid more b/c more expensive (more technology, more severe cases) o Hospitals which treat a disproportionate share of indigent patients are reimbursed more b/c more expensive o Hospitals which are the only facility in their respective community receive more o Hs are paid a separate, additional amt for extraordinarily expensive cases which deviate from average case in a DRG Resource-Based Relative Value Scale (RBRVS)  DRGs only cover hospital costs  For physician’s costs – RBRVS  Physicians are paid based on CPT codes  Modified form of fee-for-service reimbursement that employs a RBRVS  Supposed to achieve some degree of similarity in the amount that docs charge for various services by measuring the: o relative costs of each service according to the time, mental effort, and technical skill required o differences in the costs of malpractice premiums and speciality training. o distinguishes among short, medium, and long office visits Capitation Payment  Capitation: a payment method for health care services.  The doc or group of docs are paid a contracted rate for each member, regardless of the number or nature of services provided.  Financial Risk:(Two-tier system) o HMO pays capitation fees directly to primary care physicians. o Rather than the HMO plan paying for referral services separately, it shifts the financial risk to the primary care doc o Doc is paid $30/month for each patient no matter what. o If one patient needs specialty care, the primary care doc has to pay those charges out his capitation income o If the doc makes too many referrals to a speacilist, not as big of a bonus  Three-tier: (less risky) o The financial risk for diagnostic and specialist services is borne by the overall practice group organization and spread among all the participating primary care physicians in the practice group. Reduces the risk. o Practice groups provide financial incentives to primary care docs to limit the use of diagnostic and specialist services Medicaid  Medicaid Eligibility – Individuals must fit into one of four categories o (1) Children and their caretakers  If child 6 and under – must be 133% below the federal poverty level  If child 6-19 – must be 100% below the federal poverty level  Caretakers = mothers of children who meet the requirements o (2) Low income pregnant women

 Women should have Medicaid before pregnant b/c it increases the chance of a healthy baby o (3) Poor elderly  Medicare pays for Part B premiums.  Medicaid pays for Part D premiums.  Until recently it was easy for the elderly to divest of all their assets – to spend down – to be eligible for Medicaid so that the state would pay for their nursing home care. Congress has made it harder to impoverish oneself (must wait five years instead of three). Not eligible just b/c old, must also be poor. o (4) People with disabilities (who have already been certified as disabled b/c receiving Supplemental Social Security) o You must be extreeeeeemly poor AND fit into one of the categories o Must be a US Citizen and resident of the state where applying for Medicaid o Categories made b/c Medicaid is given to the “deserving poor” o Medicaid is disconnected to welfare status o Family Health Plans - Now states can decide to provide Medicaid to the whole family. Why?  Children are more likely to have healthcare if their parents also have health care.  Mandatory Benefit Package: o Inpatient and outpatient hospital services o Physician services o Lab and x-ray services o Family planning services o Pediatric services  Medicaid = 4 Separate Programs o Long-term care (for elderly and people w/ disabling and chronic health needs) o Medigap program for elderly (for elderly and disabled individuals who cannot afford Medicare cost sharing) o Children’s Health Program o Provider Support Program  Financial support system for health care providers who serve low-income people and people w/ disabilities.  Payments are made directly to health care providers (not patients).  Some providers are more dependent on Medicaid than others  Nursing homes, community health centers, disproportionate share hospitals (DSHs)  No private right of action under the Medicaid Act, but some civil rights statutes expressly authorize private enforcement  How is Medicaid paid for? o CMS (Centers for Medicare and Medicaid Services) administers Medicaid at the federal level o It is a state and federal partnership. Every state negotiates a different deal w/ the federal gov’t – must be approved o States may decide to cover more services than required under federal mandate. o Great variation from state to state in terms of administration, eligibility, benefits, delivery systems, and provider pmt o Federal pmts to states for Medicaid covered services are b/w 50%-80% (poorest states get the most money) o B/c Medicaid serves low income populations, many beneficiaries and services are exempt from cost sharing o Medicaid reimbursement is extremely low. No incentive for docs to participate (patients couldn’t get services) o Managed Care Delivery:  HMO type of utilization  Providers are paid by capitation – get a certain amt a month (fee for service is too expensive)  Capitation encourages providers to participate  Emphasizes prepaid or discounted services and utilization controls  Prior authorization requirements before providers can render services  Used to be fee for service.  Baucas Bill: going to expand Medicaid to cover more people and federal gov’t was going to pay for more of the cost. 4 states are going to have the federal gov’t pay for 100% of Medicaid (all the other states get 87%). Many states are unhappy b/c it threatens to undercut existing services under SCHIP. But it may be better for entire families to be covered than just the kids  Who uses the most services under Medicaid? o Healthy people (children) consume less of Medicaid expenditures. o Unhealthy (elderly and disabled) consume a lot.

o Many people w/ disabilities could be cared for in their home – better b/c they would be integrated w/in their community (wouldn’t be discriminated against – ADA). Westside Mothers v. Haveman (6 th Circuit, 2002) P’s (suing under civil rights statute) allege that MI failed to provide services required by Medicaid. Ps allege Ds (who work for MI Dept of Community Health) did not provide the early and periodic screening, diagnosis, and treatment services mandated by the Medicaid Act for individuals eligible under the plan – kids under 21 (b/c the Ds did not require the HMOs to provide the services)  Medicaid is not just a contract. It is federal law o It doesn’t matter that states chose whether or not to participate. Doesn’t matter that its in the “nature of a K” o Unlike normal Ks, federal grant programs are governed by statutory provisions expressing the jmt of Congress concerning public policy; the remedies are not limited to common law contract remedies  Ct said Medicaid program is not the supreme law of the land b/c only a contract – not a federal statute (but it is federal law) o Once a state decides to participate, there are mandatory federal standards o Supremcy Claus: state must give way to fed law when there is a conflict over a program in which fed funds are used  The suit is not barred by soverign immunity: o If a state official’s (D) actions violate the C or federal law, and P asks for equitable relief – not against the state o Ps allege an ongoing violation of federal law (Medicaid Act), and seek equitable relief, an injunction ordering the name state officials to henceforth comply w/ the law  Civil Rights Act of 1983 provides a private right of action against state officers if: o The statutory section was intended to benefit the putative P (it was, kids eligible for Medicaid) o It sets a binding obligation on a gov’t unit, rather than merely expressing a congressional preference  “Medicaid shall be furnished” to eligible children. “Treatment provisions must be provided” o The interests of the P asserted are not vague and amorphous o P’s have an action for noncompliance w/ the screening and treatment provisions of the Medicaid Act Notes:  The Medicaid Act set out a detailed list of services every state program must provide (if the state decides to partipate)  Michigan decided to accept federal money to provide Medicaid services.  Civil Rights Act 1983: coa against any person who under color of state law deprives an individual of any right, privileges, or immunities secured by the Constitution and laws of the US. Citizens have a private coa  Failure to provide services: EPSDTs; transportatoin (to provde actual access to HC); notification – if kids eligible for services  Poor children are more likely to be sick (biggest predictor of long term health). Very important that they receive EPSDT  When can a party sue a state officer to compel them to act in accordance w/ federal law w/o violating the 11 th A? o 11 th A – States have soverign immunity and cannot be sued unless they consent o Ex Parte Young tells you how – can only be an action for prospective injunctive relief. State cannot be required to pay money damages for the EPSDT services the Ps didn’t receive Frew v. Hawkins Ps = mothers of children eligible for EPSDT services in TX. Filed action under 42 USC 1983, seeking injunctive relief against TX health agencies officials for failure to satisfy the requirements of the federal Medicaid Act. State officials agreed to enter into a consent decree → 2 yrs later, Ps filed a motion to enforce the decree (officials had not complied) → Officials said the decree was unenforceable under the 11 th A – b/c the details of the decree are not listed in the Medicaid Act. Cannot require a state to do more than what is federally mandated. Ps argue that the enforcement is permitted under Young.  11 th A permits suits for prospective injunctive relief against state officials acting in violation of federal law.  The consent decree is a federal court order that springs from a federal dispute and furthers objectives of federal law. Doesn’t matter that the decree requires the state officials to do things that the Medicaid Act doesn’t specifically require – b/c the decree reflects a choice among various ways that a State could implement the statute: enforcement does not violate the 11 th A  The state officials have substantial discretion in implementation so it won’t deprive future officials of their designated pwrs  If the state establishes reason to modify the decree, the ct will make the necessary changes; if not - decree will be enforced Notes:  Ps claimed they were deprived of their civil rights to the right to EPSDT

o Parents were not informed that these services were available (which is a requirement under the Medicaid Act)  Managed Care – HMO has a financial incentive not to provide many services (as opposed to fee for service) and to not notify Medicaid beneficiaries of all the services they are entitled to. o Hard for patients who are not educated and lack transportation to access managed care physicians o There are so few docs who were willing to accept Medicaid b/c very low reimbursement, patients had hard time accessing care. Now, through capitation, more providers are willing to participate  Ex Parte Young allows the court to order prospective injunctive relief  Consent decrees – o both a contract (the parties agree to it and it should be binding) and o a judicial decree (if it springs from a federal dispute and it furthers the objectives of federal law, then enforceable) SCHIP SCHIP v. Medicaid  Medicaid: Poor + category  SCHIP – how it works o Block grant to states (bag of money); enacted in response to the welfare reform bill, which made a whole bunch of people ineligible for Medicaid. Attractive to states – give them a bunch of money to provide for more HC o States could expand access to HC to children in 2 ways.  Could expand the poverty levels that they were currently providing under Medicare – increase to 200%  Could create a separate program ,where people who were not eligible for Medicaid b/c made too much money could be eligible for SCHIP – still w/ income guidelines. o States didn’t want to use schip to expand (by increasing poverty level) b/c then everyone who then meets the FPL was entitled to care and could sue to enforce their rights! BUT under schip, you cannot sue in the same way – every state designs their own plan. If you increase FPL to expand Medicaid, then huge increase in the amount of people that would be entitled to Medicaid o SCHIP is more like traditional indemnity insurance. Less generous than Mediciad (which provides EPSDT)  Disabled Child: o Medicaid  Child w/ disabilities doesn’t have to be poor to get Medicaid  Offers more services – early intervention program (preventative services) – great for kids w/ disab.  Little cost sharing o SCHIP  More like contracting w/ a private insurance company  Doesn’t offer as many services  More cost sharing (co-pays and deductibles)  Pregnant Women: o Medicaid - Pregnant woman herself is eligible – once she delivers, she is no longer a patient (no post natal care) o SCHIP – Unborn Child Option  Allows a state to cover a pregnant woman in order to provide services to the unborn child.  Good for illegal immigrant women – fetus has no immigration status.  Dental Care o Untreated dental problems leads to serious health complications o Medicaid patients have a hard time getting access to dentists. o Dentists don’t participate in Medicaid b/c low reimbursement o SCHIP is a major source of dental coverage for low-income children o Under EPSDT (Medicaid) states must cover all medically necessary dental services for children Age requirements: covers the gap left behind by Medicaid (133% to the 100%) New Federal Funding Available to Cover Immigrant Children and Pregnant Women

 New option = “ICHIA”. It allows states to receive federal funds for providing Medicaid and CHIP coverage to lawfully residing immigrant children and pregnant women regardless of their date of entry  States have been and continue to be prohibited from using federal funding to cover undocumented immigrants under Medicaid or CHIP, except for emergency Medicaid services  States can use CHIPRA for pregos b/c they are technically providing health coverage to the fetus – in effect it extends coverage to the woman. Unborn children do not have an immigration status → states can use CHIP dollars to provide prenatal care for pregnant women regardless of their immigration status  States often pay for the costs of labor and delivery for immigrant pregnant women thru emergency Medicaid. Extending Medicaid or CHIP to them would help ensure the availability of appropriate prenatal care → reduce emergency Medicaid costs. Prenatal care results in improved birth outcomes and cost-savings for babies – key aims for babies likely to be born US citizens and eligible for Medicaid   Medicaid Benefits SCHIP Benefits                                                                   Participating states must entitle   Participating states must furnish "child     eligible children to a broad        health assistance," which is subject to    range of required classes of         certain basic design rules but is not a     "medical assistance". Required      legal entitlement in eligible children.     coverage for children is            States' coverage design flexibility is      federally defined and               subject to certain rules:                   nationally uniform in scope:                                                                                                                                    The EPSDT benefit encompasses      • Coverage must be "equivalent to," and    detailed statutory assessment       must have an "aggregate actuarial value      procedures, vision, dental and      that is at least actuarially equivalent"     hearing services, and all forms     to, a "benchmark benefit package" selected   of treatment that fall within       by the state.                                the federal definition of                                                       "medical assistance."                                                                                                                                           No distinctions are drawn            Required categories of "basic            between physical and mental         services" must be included in the            conditions.                          benchmark (inpatient and outpatient                                               hospital care, physician surgical and                                             medical services, laboratory and x-ray                                           services, "well baby and well child" care                                         (undefined) and age appropriate                                                  immunizations.                                                                    States have the option of covering                                          prescription drugs, mental health                                                services, vision services, hearing                                                services, and other services recognized as                                       "child health assistance."                                                                                                 The concept of medical necessity    There is no federal definition of medical     is subject to federal rules.        necessity, tests of reasonableness, or       States must use a "preventive"      non-discrimination in coverage provisions.   standard of medical necessity       HIPAA prohibitions against preexisting       in accordance with the benefit      condition exclusions apply to insurance      and federal standards of            products however.                         

  reasonableness and prohibitions                                                 against discrimination on the                                                   basis of condition or illness.                                                                                                                                Cost-sharing is prohibited for      Cost-sharing is permitted subject to certain  all categorically needy             limits but is prohibited for well baby and  children.                           well child care including immunizations.                                                                                   Children are legally entitled to    Benefits are not a federal legal              a defined group of benefits.        entitlement. States are not obligated to   States remain directly              furnish defined benefits beyond the          obligated to cover all benefits     benchmark.                                   that exceed limits of MCO                                                       contracts.                                                                    Regulation of Insurance Companies and HMO’s Question: whether and how various forms of health care financing and delivery should be regulated by state insurance laws Jordan v. Group Health Association, 1939 Group Health (D), in return for monthly pmts by its members, contracted w/ independent docs and Hs for the provision of medical services to members. D did not regulate or control the docs, or determine what services were available to members. Docs paid salary and received the same compensation no matter the services provided. D assumes no liability if unable to procure any service or if doc failed to perform a service properly. D’s only obligation is to use its best efforts to procure the needed services from another source. P alleged that D was an insurance co w/in the meaning of the DC Code, and had failed to comply with the requirements of the Code.  A co that does not bear the risk of loss by its members, but merely agrees to make “best efforts” to minimize such losses, is not an insurer. It lacked a critical attribute of insurers, and is therefore not subject to the insurance statutes.  The primary purpose of D was to reduce the cost of medical services to its members by purchasing them in quantity, not to assume the risk of loss in exchange for payment.  D’s purpose was to provide services for minor ills, not for catastophic illnesses.  D did not have to accumulate a vast amt of capital to await the needs of a distant emergency for protection against solvency (as required under the statute for insurance companies), b/c that would divert funds from its primary purpose Notes:  Jordan shows the fundamental nature of health insurance (to bear risk). This is an alternative approach to delivery  No longer good law due to modern HMO enabling statutes. These statutes: o Impose insurance regulations on HMOs, o Recognizing them as serving the combined functions of insurer and service provider, o Imposing lower capital reserve requirements upon such orgs  State HMO enabling acts resolved the legal issue presented in Jordan. o But now the same issue is being faced by provider groups that accept capitation or other forms of at-risk payment.  In Jordan, the HC provider was assuming the risk. D is merely arranging for the availability of services. No shifting of a risk  Insurance companies guard against certain risks: o Risk of getting sick o Risk of not being able to afford to pay a health care provider for necessary service Health Maintenance Organizations:  HMO Act of 1973: Congress decided that HMOs were a good alternative to classic indemnity insurance o Intended to encourage the development of HMOs → gave federal loans and grants to HMOs o All employers of 25 or more had to offer at least one federally qualified HMO plan (this provision expired in 1995) o Federal qualification for financial assistance: pissed off employers b/c cost them more money  minimum benefits,  financial standards – capital requirement,  quality assurance systems,  not to impose preexisting condition limitations

 grievance procedures,  community rating reqs – everybody in community is rated together as opposed to experience rating o 1988 Amendment permitted federally qualified HMOs to adjsut the community rate prospectively based on the group’s anticipated utilization of health care o Consequence of HMO Act of 1973:  More people signed up for HMOs b/c cheaper  Initially employers like them b/c cheaper, but now HMOs shadow insurance premiums so costs increased  HMOs o What HMOs do sounds like classic indemnity insurance (but there are differences) o HMOs both pay for and provide HC services (unlike classic indemnity insurance) o HMOs deliver HC in exchange for predetermined monthly payments o HMOs retain any leftover money so they have an incentive to keep people well o 3 main components of managed care:  Restriction of providers  Utilization review  Cost-containment financial incentives o Capitation Payments : the most important difference b/w HMOs and traditional insurance = how providers are paid.  Certain amt of money per patient – paid the same amount.  The money per head is split up into different pots called withholds:  withholds for hospital referrals, specialist referrals, reserve (in case patient gets extremely sick)  Doc might hesitate to make a referral to a specialist if they may lose out on their bonus at the end.  Money left in these pools at year end is returned to the primary care physicians as a bonus.  Huge financial incentive to skimp on care. o HMOs attract the younger and healthier: why?  Restrictions on choice of provider are unattractive to patients with chronic illnesses who may also have established provider relationships → leads to adverse selection o Danger of HMOs providing inferior care is acute when:  If HMO is a for profit,  When the doc’s compensation is based on a percentage of profit rather than a fixed salary,  When HMO enrollees have no alternative means of obtaining medical care, and  When the HMO population is exclusively poor or aged. Four basic HMO model types  Staff model o Participating docs are employees of the HMO and are paid a salary. o Primary care physician is a gate keeper  makes the referrals and  makes the decision about whether you need to go to the hospital  Group model o HMO contracts w/ an independent physician group practice o HMO pays the physician group a monthly fixed amount (capitation) for each HMO enrollee o Similar to Group Health. Contract w/ a lot of individuals or groups.  Independent practice association (IPA) o 50% of HMO members are enrolled in this type o HMO contracts either directly with:  individual physicians in independent practice, or  with one or more associations of physicians in independent practice, and/or  with one or more multi-specialty group practices o Where an association represents a physician, the association is non-profit. o IPAs are formed to facilitate contracting w/ either one or more competing managed care plans o Fee for service reimbursement accompanied by a risk-sharing arrangement (percentage of physician fees is withheld from pmts otherwise due and is returned only if budgeting utilization goals are met) o Expansion of the group model. o Docs must control how many referrals they make and how many people they send to the hospital.  Network Model Classic indemnity insurance:  Insurance company has a contract w/ a doc.  The doc charges patient whatever they want and the insurance co reimburses the doc 80%  The patient pays for the 20% remaining (wasn’t a huge deal for the patient to pay back in the day)  Pays for services but doesn’t provide it –stays out of the p-p relationship

 HMOs challenged this model Notes: States have statutes that authorize and regulate the establishment and operation of HMOs. In some states, entitites that assume financial risk for the provision of HC services may be engaged in the business of insurance: requiring licensure as either an insurance co or an HMO (docs who accept capitation pmts assume financial risk) Recision:  When a person develops an expensive disease – insurance companies will go back and look at that person’s application and find reasons to rescind the contract (mistakes, person lies on application, but mostly mistakes)  Rescission – K law. o If there is a mistake or fraud (intentional misrepresentation of a material fact) in K, then the K can be rescinded o Misrepresentation of a material fact – you should have disclosed to us that you had a dermatological condition, otherwise we wouldn’t have insured you…  Insurance companies are looking for an excuse to rescind the contracts. They are stretching to deny coverage – based on immaterial facts (didn’t disclose that you had acne and then you get breast cancer and they make a connection…) no meeting of the minds  People pay their premiums expecting that the insurance company will pay for their medical expenses in case of serious illness  Contra Proferentum – any ambiguous language must be construed against the drafter (the insurance company). The questions on the application were complicated, hard to understand. ERISA and its’ Impact on Health Care Reform (a) Except as provided in subsection (b) of this section, the provisions of ERISA shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan… (b) (2)(A) Except as provided in subparagraph (B), nothing in ERISA shall be construed to exempt or relieve any person from any law of any state which regulates insurance…(B) Neither an employee benefit plan nor any trust established under such a plan shall be deemed to be an insurance company or to be engaged in the business of insurance for purposes of any law of any State purporting to regulate insurance companies  Provides procedural protections but no substantive regulation.  An employer can have whatever kind of EBP they want or none and the employee is out of luck  § 502 (Aetna v. Davilla) You can sue to enforce the K or to enjoin them from denying your benefit. o 2 remedies: Equitable relief (enjoin the practice) or to receive the money that you were eligible to receive  §510 (McGann) Antidiscrimination  §514 ERISA preempts any and all state laws that relate to an employee benefit plan (relate to clause).  State law is saved from ERISA if it is a state law that regulates insurance (savings clause).  However an EBP shall not be deemed an insurance company or insurance for purposes of state regulation (deemer). Retail Industry Leaders Association v. Fielder, 2007 MD statute, required employers w/ 10,000 + MD employees to spend at least 8% of their total payrolls on employees’ health insurance costs or pay a tax to MD. The Act was meant to cover just Wal-Mart, who brought suit arguing statute is preempted by ERISA, b/c it requires employers to restructure their EBPs and conflicts w/ ERISA’s goal of uniformity  ERISA regulates the plan that the employer chooses to establish (doesn’t mandate that employers have any specific plan)  How does ERISA regulate EBPs: sets uniform standards (rules for reporting, disclosure, and fiduciary responsibility).  Employers are left free to modify, adopt, or terminate welfare plans.  Aims of preemption –(1) to minimize the administrative and financial burden of complying w/ conflicting directives among States (2) to reduce the tailoring of plans and employer conduct to the peculiarities of the law of each jurisdiction  States can regulate o healthcare providers and insurance companies.

o indirect economic incentives that affect but do not bind the choices of employer of their ERISA plans.  States cannot regulate an employee benefit plan’s structure or administration  MD’s statutes directly regulates Walmart’s employee benefit plan → preempted by ERISA o The Act is not a revenue statute of general application. It was intended just for WM o If permitted to stand, these laws would force WM to tailor its healthcare benefit plans to each specific state Dissent: the Act is not preempted by ERISA. The assessment is not an exorbitant fee that leaves a large employer with no choice but to alter its ERISA plan offerings. Walmart burdens the state’s medicaid program Notes:  Travelers = A state could indirectly regulate an employee benefit plan. o NY law required Hs to add a surcharge to the fees they demanded from most insurance companies, exept BC o Effect was to make BC really cheap and more attractive option for ERISA covered plans o The statute only indirectly regulated ERISA plans o Narrow distinction b/w this case and Retail Industry. In Travelers, the state law regulated healthcare providers  This is not a state law that regulates insurance. It is a payroll tax. It is not an insurance law. The statute is preempted American Medical Security v. Bartlett, 1997 MD tried to mandate that EBPs offer at least 28-state mandated health benefits. MD regulates health insurance by requiring that health insurance policies afford at least 28 specified benefits . Insurance companies wanted to avoid the requirements so they self- insure, then they buy stop-loss insurance. Three MD employers (P) sponsoring self-funded employee health insurance plans subject to ERISA with stop-loss insurance and whose EBPs contained less than the 28 health benefits required by ERISA sought to bypass state mandates and sought a declaration that some regulations were invalid  ERISA preempts state law and assures that federal regulation will be exclusive  A preempted law is saved from preemption if it regulates insurance, but state insurance regulation may not directly or indirectly regulate self-funded ERISA plans  A state regulation “relates” to an EBP when: o it has a “connection with or reference to such a plan” o A law “relates to” an EBP if it affects the structure and administration of the EBP. o The state regulations at issue do “relate” to ERISA plans.  Although the regulations are drafted to focus directly on inusrance companies issuing stop-loss insurance, MD is violationg the ERISA deemer clause: A state cannot deem an EBP to be an insurance company in order to regulate it so that their law will be saved. Plans that are self-funded or self-insured may not themselves be regulated as insurance companies  These efforts impermissibly intrude on the relationship b/w an ERISA plan and its partiicpants and beneficiaries  Only Congres can address the problem of employers attempting to circumvent state regulation. Md cannot be concerned w/ the benefits that ERISA plans choose to provide to their particpants Notes:  In determining whether MD’s law constitutes a law that regulates insurance , o Not enough that it operate only on insurance companies or policies. o It must regulate the business of insurance. o The object of its regulation must:  (1) transfer or spread a policyholder’s risk- D meets this requirement  (2) be an integral part of the policy relationship b/w the insurer (stop loss insurer) and the insured (the employer) – the effect of the regulation reaches the relationship b/w ERISA plans and their participants who are not parties to the insurance K (D doesn’t meet this element) - and  (3) be limited to entities within the insurance industry – same as 2  Self Insurance: o Some employers want to provide their employees w/ healith insurance w/o having to pay for a group insurance plan o One way to do this is to self-insure. o Employers establish a fund that it uses to pay the medical expenses of its workers. o This is a cost effective alternative to traditional insurance, but very risky – could bankrupt a company  Stopp- loss insurance: o Provides coverage to self-funded plans above a certain level of risk absorbed by the plan. o Stop loss health insurance helps guard against risk.

o It pays your employees' medical bills after you have paid a certain predetermined amount. o Once you have paid the specified amount the insurance pays for the rest of the individual's medical expenses, up to the policy's coverage limits. o Financial risk if an employee gets really sick and it doesn’t have stopp-loss insurance. o Company is shifting the risk to the insurance company o MD is saying that this stop loss insurance co is the same as an insurance co – and can therefore be regulated McGann v. H & H Music Co. 1991 P discovered that he had AIDS and submitted claims for reimbursement under his employer’s, H & H Music Co (D) group medical plan. A short time later benefits payable for AIDS-related claims were limited to a lifetime maximum of $5,000 (previously one million). P sued D under ERISA provisions prohibiting discharge or discrimination against a plan participant for exercising any rights to which he was entitled under a benefit plan. P failed to establish D’s specific intent to retaliate against P for filing AIDS-related claims or to interfere with any right to which he may have become entitled.  Congress did not intend that ERISA circumscribe employer’s control over the content of BPs they offered to their employees.  ERISA does not broadly prevent an employer from discriminating in the creation, alteration, or termination of EBPs  The “right” is not any conceivable right to which an employee may become entitled, but rather a “promised benefit”  P’s allegations showed no promised benefit b/c: o D’s plan expressly provided that it “may terminate or amend the Plan at any time or terminate any benefit under the Plan at any time”. P could not show that he had become entitled to any benefits since the Plan never promised that any benefit would be permanent  An employer can reserve the right to amend a medical plan. §510 of ERISA: unlawful for any person to …discriminate against a (EBP) participant or beneficiary for exercising any right to which he is entitled under the provisions of the employee benefit plan or for the purpose of interfering w/ the attainment of any right to wich such participant may become entitled under the plan Health Insurance Coverage: Rationing and Discrimination Alexander v. Choate, 1985 TN Medicaid decided to cut costs → reduced the number of inpatient hospital days per fiscal year that TN Medicaid would pay Hs on behalf of a Medicaid recipient from 20 to 14. Class action was brough on behalf of TN Medicaid recipients claiming that the proposed limitation on inpatient coverage would have a discriminatory effect on the handicapped in violatation of §504 of Rehabilitation Act §504 of the Rehabilitation Act: No otherwise qualified handicapped individual shall, solely by reason of his handicap, be excluded from the participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.  Proof of discriminatory intent is not required to establish a violation of §504. Some disparate impacts are actionable  Discrimination agaisnt handicapped is usually the product, not of invidious animus, but rather of thoughtlessness – neglect  504 doesn’t reach all action that disparately affects the handicapped: o You cannot require each recipient of federal funds to evaluate the effect on the handicapped, and then to consider alternatives for achieving the same objectives w/ less severe disadvantage to the handicapped (huge burden)  Which disparate impacts are actionable under 504? o An otherwise qualified handicapped must be provided w/ meaningful access to the benefit offered. o To assure meaningful access, reasonable accommodations in the grantee’s program or benefit may have to be made. o The 14-day limitation will not deny/exclude P meaningful access to TN Medicaid services o Both handicapped and the non-handicapped are subject to the same durational limit o Benefit provided is termed “adequate health care.” Medicaid does not guarantee that each recipient will receive that level of care precisely tailored to their particular needs. o Rehabilitation Act assures evenhanded treatment, not equal results. State Medicaid programs are not required to review each specific illness to determine which is most deserving of a cure through gov’t subsidies  TN does not need to redefine its Medicaid program to eliminate durational limitations on inpatient coverage, even if doing so the State could achieve its immediate fiscal objectives in a way less harmful to the handicapped. ERISA Cont’d

Pilot Life v. Dedeaux, 1987 P injured himself in an employment related accident. Employer had a long term disability EBP by purchasing a group insurance policy from D, Pilot Life. D terminated P’s benefits after 2 yrs. D sued under three counts: (1) Tortious Breach of K (2) Breach of fiduciary duties and (3) fraud in the inducement - MS law of bad faith (an insurance carrier which refuses to pay a claim when there is no reasonable basis to deny it is acting in bad faith). P sought punitive damages and did not assert any of the causes of action available under ERISA. D argues that ERISA preempted P’s common law claims for failure to pay for benefits  ERSIA: if a state law (1) relates to employee benefit plan, it is preempted. (2) the savings clause excepts from the preemption clause laws that regulate insurance.  Preemption Clause: the “Relate To” Clause o P’s common law causes of action “relate to” en EBP and are thus preempted o Relate to =  broad, commonsense meaning.  Has a connection w/ or reference to such a plan.  Does not have to be specifically designed to affect employee benefit plans  Savings Clause: Laws that Regulate Insurance: the MS law of bad faith does not regulate insurance – not “saved” o P argues that the MS law of bad faith, is a law that “regulates insurance” and is thus saved from preemption o To regulate insurance: a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry. The root of the law here are in tort and contract law. Any breach of K (not just breach of an insurance K), may lead to liability for punitive damages under MS law.  ERISA’s civil enforcement scheme is exclusive. There is no language that provides for punitive damages o A plan participant or beneficiary may bring a civil action to recover benefits due under the plan, to enforce the participant’s rights under the plan, or to clarify rights to future benefits (§502) NYS Conference of BC/BS Plans v. Travelers Insurance (narrow ly interpretats “relate to” – indirect economic effect ok) NY Stat: requires Hs to collect surcharges for patients covered by an insurer except for BC/BS plan. Purpose: to increase the costs of obtaining insurance thru any source other than BC so customers will switch to BC and ensure its’ survival. Ct found that although the surcharges do not directly increase a plan’s costs or affect the level of benefits to be offered, the surcharges have a significant effect on the commercial insurers and indirectly lead to an increase in plan costs. The effect on choices by ERISA plans trigger preemption.  Do the surcharges “relate to” ERISA since they impose a significant economic burden on EBPs that are regulated by ERISA and HMOs whose membership fees are paid by ERISA plans (does it impact ERISA plan structure and administration)?  A law “relates to” an EBP if it has a connection with or reference to such a plan.  Does the law reference ERISA plans? NO o Surcharges are imposed upon patients and HMO’s, regardless of whether it is secured by ERISA or something else  Does the law have a “connection with” the ERISA plans? NO o State laws that clearly “relate to” EBP all mandate employee benefit structures or administration. o The surcharges have an indirect economic effect on choices made by insurance buyers, including ERISA plans o An indirect economic influence does not bind plan administrators to any particular choice – not a regulation  Commercial Insurers may still offer more attractive packages than the Blues  It simply bears on cost – affects a plan’s shopping decisions – but plans always shop for the best deal.  Metropolitan Life: the NY surcharges do not impose the kind of substantive coverage requirement binding plan administrators that was at issue in that case. If the surcharge became too high, leaving consumers w/ no real choice, it might be treated as imposing a substantive mandate – but no showing of that here.  A state can regulate health care cost control (example = DRGs, state health systems agencies funded by the federal gov’t) Notes:  The state sets the rates for DRGs and then they imposed surcharges beyond the DRG rates.  Blue Cross was community rated – the state wanted Blue Cross to be cheaper and thus more attractive  “Relate to” has limits. Congress did not intend that anything that had any kind of connection w/ ERISA should be preempted  The law is not effecting the structure of an EBP, but just making it possibly more expensive.  Even if it has an indirect affect on the cost on an EBP – doesn’t necessarily mean that it “relates to” an EBP. Pegram v. Herdrich, 2000 (mixed eligibility decisions made by HMO thru its docs are not fiduciary decisions under ERISA) Pegram (D), the HMO treating doc, examined P but failed to immediately order an ultrasound. When D did order it, P had to go to a distant facility owned by the HMO. B/c of the delay, P injured. P alleged that provision of medical services under the terms of the

HMO, rewarding docs for limiting medical care, entailed an inherent or anticipatory breach of an ERISA fiduciary duty, b/c the terms create an incentive to make decisions in the doc’s self-interest, rather than the plan paricipant’s exclusive interests.  Are tx decisions made by HMOs, acting through its doc employees, fiduciary acts within the meaning of the ERISA? NO  Mixed tx and eligibility decisions (to delay medical tx by sending patient to a HMO owned facility) w/ adverse consequences, made by HMO through its docs, are not fiduciary decisions under ERISA. P did not state an ERISA claim.  Threshold question to determine breach of ERISA duty: o Whether a person employed to provide services under a plan was acting as a fiduciary (performing a fiduciary function), not merely whether that person adversely affected a plan beneficiary’s interest o The HMO is not an ERISA plan and the employers decision to adopt the contents of a plan are not fiduciary acts  Two kinds of fiduciary acts: (1) pure eligibility decisions – the plan’s coverage of a particular condition or procedure (2) treatment decisions – choices about how to go about diagnosing and treating a patient’s condition, given their symptoms. o The doctors make mixed treatment and eligibility decisions: Congress did not intend HMOs to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians. o A mixed eligibility decision is not fiduciary in nature.  The defense of the HMO would be that its doc did not act out of financial interest but for good medical reasons – and would use standards of reasonable and customary medical practice → every claim of fiduciary breach by an HMO doc making a mixed decision would boil down to a malpractice claim. ERISA was not enacted to federalize malpractice litigation. If it was, then it would preempt state law, since the new ERISA coa would cover the subject of a state law malpractice claim Notes:  No HMO organization could survive without some incentive connecting physician reward with treatment rationing.  The check on this financial influence is the obligation to provide covered services w/ a reasonable degree of skill and jmt  Fiduciary – patient relies on doctor to recommend the best medical procedure to benefit the patient.  The HMO Act authorized HMOs to use these types of cost savings techniques (cost effective tx decisions)  Mixed decision = medical and coverage decision Rush Prudential HMO v. Moran (state law not preempted – law regulates insurance b/c it regulates HMOs, which = insurance) D, HMO that provides medical services for EBP covered ERISA, denied P's request to have surgery by an unaffiliated specialist after the HMO doc recommended it. P made a written demand for an independent medical review of her claim, which D failed to provide. P sued in state ct to compel compliance w/ the state HMO Act (provides a right to independent medical review of certain denials of benefits and in the event that the reviewing doc determines the covered service to be medically necessary, the HMO shall provide the service). The ct ordered the review , which found the tx necessary. While the suit was pending, P had the surgery and amended her complaint to seek reimbursement. D removed the case to federal ct, b/c amended complaint stated a claim for ERISA benefits.  The IL law “relates to” an EBP. The state law bears indirectly but substantially on all insured benefit plans by requiring them to submit to an extra layer of review for certain benefit denials if they purchase medical coverage from any HMO  The IL law “regulates insurance” under the savings clause: McCarran-Ferguson Act Factors: o Spreading a policyholder’s risk.  HMOs bear and manage risk (required to to get fed benefits)  Under the Federal HMO Act, for HMOs to get federal benefits → required to bear and manage risk  HMOs have taken over much business formerly performed by traditional indemnity insurers  Almost universally regulated as insurers under state law o The law is an integral part of the policy relationship b/w the insurer and the insured.  The independent eview req regulates an integral part of the policy relationship b/w the insurer and insured.  It translates the relationship under the HMO agmt into concrete terms of specific obligation o The law is aimed at a practice limited to entities w/in the insurance industry.  The law regulates application of HMO Ks and provides for review of claims denials; once it has established that HMO Ks are, in fact, Ks for insurance (and not merely for medical care), it is clear that the law does not apply to entities outside the insurance industry o The IL HMO Act is a law “directed toward” the insurance industry and an insurance regulation. Notes:  Because HMOs are risk-bearing organizations subject to state insurance regulation and almost universally regulated as insurers under state law, "the Illinois HMO Act is a law 'directed toward' the insurance industry and an 'insurance regulation'" and is, thus, saved from preemption under ERISA's saving clause.  Mandatory independent review is analogous to an arbitration o HMO argues that congress provides 6 remedies under ERISA and arbitration would provide a remedy not included o Court said this is really just like getting a second medical opinion

 It relates to EBP b/c it interferes w/ structure and administration of the plan  When she went ahead and had the surgery – retrospective review – said it wasn’t medically necessarily and won’t pay for it.  Savings Clause: o HMO argues that this is not a state law that regulates insurance b/c we are not an insurance company. We are an HMO and as an HMO we not only pay for health care we provide it as well. o Court says that just b/c it provides care doesn’t mean that it doesn’t also have an insurance function.  Rush said that even though the law regulates insurance, it should still be preempted based on congressional intent…  Broad interpretation of - does a state law “regulate insurance”  WE DON’T NEED TO KNOW ANYTHING ABOUT THE M-F ACT Kentucky Association of Health Plans v. Miller (any willing provider statutes are not preempted by ERISA – MF gone!) Ps= HMOs of Kentucky. These HMOs create exclusive provider networks. The providers agree to render HC services to HMO subscribers at discounted rates and in return receive a higher patient volume than those who lack access to the networks. KY Law: a health insurer shall not discriminate against any provider located w/in the coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer. The AWP statutes impair HMO’s ability to limit the number of providers w/ access to their networks → can’t assure a high patient volume → discounted rates (frustrates their efforts at cost and quality control). P sued Kentucky’s Dept of Insurance asserting that ERISA preempts the AWP laws.  Ps argue that the law does not regulate insurance (should not be saved from preemption) b/c: o The law is not specifically directed toward the insurance co (b/c it also regulates doctors)  But the law does not impose any prohibitions or requiremetns on doctors  Regulations directed toward certain entities usually disable other entities from doing, w/ the regulated entities, what the regulation forbids  The law regulates insurance by imposing conditions on the right to engage in the business of insurance o whether or not an HMO contracts w/ providers constitutes the “business of insurance” is besides the point  McCarran-Ferguson Act is over: The MF act is not a requirement. The M-F factors are only considerations to be weighed.  NEW RULE: For a state law to be deemed a law which regulates insurance, it must satisfy two requirements: o (1) the state law must be specifically directed toward entities engaged in insurance o (2) the state law must substantially affect the risk pooling arrangement b/w the insurer and the insured. Notes:  Why do HMOs want to limit their networks? o HMOs refer to docs in their own network b/c they can pay them less (in return for a higher volume of patients) o Having less physicians costs less b/c quality control will not cost as much for 10 docs compared to 100 docs. o The HMO has more leverage with fewer docs than a lot (b/c HMO will be more in control of how many patients the doc has – gives them more patients)  Doctors want to be included so they can get access to patients  Does the law “relate to” an EBP? o Yes – it affects the structure and administration of the EBP  Is it saved? o HMO’s say that it should not be saved b/c it doesn’t deal specifically w/ insurance co – it also deals w/ providers o Court says that the fact that it also affects people outside the insurance industry doesn’t mean that it doesn’t regulate insurance if other requirements are met o A state law can be a law that regulates insurance companies as well as HMOs o Doesn’t matter that the law affected self-insured plans…  How does it affect risk pooling arrangement? o It increases the number of providers available – beneficiaries pay higher prem o Paying higher premiums = shifting the financial risk more to the consumers Aetna Health Inc. v. Davila , SCOTUS (2004) Daila and Calad sued their HMOs for failures to exercise ordinary care in their coverage decisions, in violation of a duty imposed by the TX Health Care Act. Davila’s doc recommended a Rx which HMO refused to cover. Davilla took another Rx → hospitalization. Calad’s doc recommended an extended H stay, HMO denied coverage → complications. P’s brought case in state court under the TX Act. D, HMOs removed the case to Federal Ct, arguing that P’s state claims are preempted by ERISA.  Did HMOs violate legal duties that arise independently of ERISA or the terms of the employee benefit plans under Act? No

 If an individual brings suit complaining of a denial of coverage for medical care, where the individual is entitled to such coverage only b/c of the terms of an ERISA-regulated employee benefit plan, and if an individual, at some point in time, could have brought the claim under ERISA, then the individual’s coa is completely preempted by ERISA  Any state law cause of action that duplicates, supplements, or supplants the remedies provided by ERISA conflicts with the clear Congressional intent to make the ERISA remedy exclusive → state law would be preempted.  Ps complain only about denials of coverage promised under the terms of ERISA-regulated plans. Upon the denial of benefits, Ps could have paid for the tx themselves, and then sought reimbursement thru ERISA  P’s arg for violation of Texas Act fails – No violation of a legal duty independent of ERISA o Interpretation of the terms of P’s benefit plan forms an essential part of their state law claim → o State law liability would exist here only b/c of D’s administration of ERISA-regulated benefit plan → o D’s liability under the Texas Act derives entirely from the obligations established by the EBP → o Ps bring suit only to rectify a wrongful denial of benefits promised under ERISA-regulated plans → o They do not attempt to remedy any violation of a legal duty independent of ERISA  Can’t recover under TX Act and no recovery under ERISA. Concurrence : ERISA should be reconsidered by Congress b/c thru ERISA, virtually all state law remedies are preempted but very few federal substitutes are provided. Consideration of the availability of damages is in order Note: A state law that tries to impose a separate remedy is not acceptable. Under TX state law you would get damages. See 502 What is Medically Appropriate Care and Who Decides? Mount Sinai Hospital v. Zorek, 1966 (doc decides what tx to use. Question is whether hospitaliztion is required for that tx) P was obese and suffered related medical complications. Doc had her hospitalized and put her on the “Duncan Regime” a rigid starvation diet. P lost weight w/ no adverse affects. Administrator of BC plan refused to reimburse. D argued: (1) that under the BC plan, a H service shall not be provided for a H stay which is primarily for custodial, convalescent or sanitarium type of care or for a rest cure. (2) H confinement was not necessary for proper tx of P’s obese condition (under the plan, H services are available when it is necessary for proper treatment )  Who decides what is proper under the provision in the plan making H services available when “necessary and proper”? o Only the treating physician can determine what the appropriate treatment should be for any given condition.  When the doc decides on a tx for which hospitalization is necessary, cannot judge whether the tx was necessary.  The question is whether hospitalization was necesssary for the particular tx the doctor chose? o The Duncan Regime is dangerous and calls for careful supervision. Hospitalization was necessary o Just b/c Ms. Z did not have adverse affects doesn’t mean that she couldn’t have  When multiple courses of tx are available, if the treating doc chooses that tx for which hospitalization is required, and rejects those treatments which can be adequately administered in a rest home or sanitarium, absent a specific contractual exclusion, there is full coverage for the hospital stay.  Only limit = must be a respectable minority of physicians who would chose that treatment Notes:  Insurance contracts – questions of contract interpretation  Insurance cannot second guess the physician on what treatment should be used  Retrospective utilization review  Advantages of deferring to the judgment of treating physician : o You get the full benefit of the doctor’s expertise. o No worry that a payor is engaging in the practice of medicine – payor just pays – no interference w/ medical jmt o Counter argument – physician could over treat the patient Bechtold v. Physicians Health Plan of Northern Indiana, 1994 P diagnosed w/ breast cancer. Her doc recommended chemo and an autologous bone marrow transplant (ABMT). D informed P that the tx was not a covered service under the plan. P appealed the denial of benefits and received a hearing before a committee who recommended that D change its policy and authorize pmt for the procedures. D did not agree and refused to pay. P alleged ERISA violation b/c D plan was operating under a conflict of interest. Plan: “Plan reserves the right to change, from time to time, the procedures considered to be experimental or unproven… Autologous Bone Marrow Transplant: insufficient data exists to establish definite conclusions regarding the efficacy of the transplant for solid tumors (breast cancer).”

 Congress never intended ERISA to dictate the content of welfare benefit plans: the discretion of which lies w/ plan admin  A claim for benefits under an ERISA-governed plan is a matter of contract interpretation  The clear and unambiguous language of the policy dictated that D properly denied coverage for the tx.  Higher standard of review applies for ERISA-governed plans when there is a conflict of interest  P alleged that the higher cost of the experimental tx was a factor in D’s decision not to cover. Insufficient data existed, however, to establish the efficacy of the procedure. Notes:  The decision to not cover experimental procedures saves the insurance company money and protects the patients  When benefits are denied by an ERISA plan administrator, they have to be reviewed de novo – o the ct looks at the decision of the ERISA plan administrator. o This is a higher standard than the normal abuse of discretion standard. o Higher standard b/c there is a conflict of interest- the ERISA people are conflicted and their decisions might be crap.  How do you think insurers rewrote their contracts after this case? To give themselves the sole discretion to interpret each and every provision of the contract. Rush Prudential HMO v. Moran, 2002 HMO (D) provides medical services for EBPs covered by ERISA. D denied P's request to have surgery by an unaffiliated specialist. IL HMO Act, provides that "Each HMO shall provide a review by a physician who is unaffiliated with the HMO in the event of a dispute b/w the primary care physician and the HMO, regarding the medical necessity of a covered service proposed by a primary care physician. In the event that the reviewing physician determines the covered service to be medically necessary, the HMO shall provide" the service.” P made a written demand for an independent medical review of her claim. Rush refused her demand, P sued in state court to compel compliance with the Act. Rush claimed that ERISA preempts the state Act b/c the Act requires a review mechanism that is inconsistent w/ ERISA’s process for challenging benefit denials.  The Act does resemble an arbitration provision – which could be preempted – b/c the independent reviewer considers disputes about the meaning of the HMO contract and receives “evidence”. But the Act does not give the independent reviewer the power to construe contract terms; rather they are confined to review a single term: “medical necessity”  The review process does not resemble contract interpretation or evidentiary litigation  The reference to an independent reviewer is similar to the submission to a second opinion, which many health insurers are required by law to provide before denying coverage.  Act = mandate for second-opinion practice in order to ensure sound medical jmts.  Holding: the act is not an arbitration provision that supplants judicial enforcement under ERISA and is not preempted. Notes: Insurance Coverage Disputes  It is not sufficient for patients that are denied coverage to eventually have their day in court. They need a prompt and fair review process on the spot. Most states now require this for all health insurers (Rush Prudential) at least on questions of medical appropriateness. Similar provisions are imposed on self-insured employers under the authority of ERISA  ERISA preemption: o ERISA preempts insurance K disputes (Pilot Life). After this case, most have shifted to fed cts – w/ no possibility of personal injury or punitive damages. ERISA allows for recovery of only the monetary value of the tx at issue  “Iron Clad” Insurance Contract: o Insurers have rewritten contracts to make their decisions more enforceable. They declare that questions of interpretation are to be determined in the discretion of the insurer, whose decision is binding.  Conflicts of Interest: o ERISA requires a higher scrutiny when insurers are under a conflict of interest (that insurers have already collected their premium and each medical pmt comes out of their bottom line) o HMOs sometimes shift the insurance risk to treating physicians by contracting w/ them on a capitated basis. This gives the duty of making coverage denials to the doc, b/c it is the doc who bears most of the cost. Minimizes the potential for coverage disputes, since a patient is less likely to be presented conflicting opinions b/w her doctor and her insurer if the doctor simply declines to order the treatment  Legality of Prior Authorization: Utilization Review o UR is now done on a prospective basis, prior to treatment, than as a part of ordinary insurance claims review

o Prospective UR → many decisions to deny coverage result in denial of treatment as well→ tort and K liability o B/c coverage denials affect tx decisions, UR might be characterized as an illegal interference w/ medical jmt o Process: nonmedical personnel to review coverage requests w/ screening criteria that flag certain requests for review by a nurse. The nurse decides whether the case should be reviewed by a doc. Usually requests are not denied w/o physician review; but the doc may work in a different state, and not trained in the particular specialty involved, unless the insurer decides to refer the request for independent review o Courts usually uphold the process when challenged b/c utilization reviewers do not purport to make medical tx decisions, only payment decisions o UR regs now exist in most states. They require:  Insurers and third-party UR firms to maintain proper licensure and expertise of personnel (including M.D.’s licensed in the state) to give a prompt response to requests and to disclose the screening criteria o Cost-savings from UR are not much. UR reduces hospitalization expenses, but savings overall are muted by the administrative expense of running these programs. (so many insurers cut back on the amount of UR they do) Health Care Reform: Competing Visions and Current Proposals Chaoulli v. Quebec, 2005, Supreme Court of Cananda Demand for HC is increasing → gov’t creates waiting lists. Many people die while waiting. P claims that delays resulting from waiting lists violates his rights under the Quebec Charter and the Canadian Charter (specifically his right to life). Ps contest the validity of the prohibition on private insurance for HC services that are available in the public system. Issue: whether residents of Quebec who are willing to spend money to get access to HC that is not accessible in the public sector b/c of waiting lists may be validly prevented from doing so by the state. NO  Right to life: many people die as a result of long waits for tx in the public system when they could have gained prompt access to care in the private sector  The prohibition is not necessary to guarantee the integrity of the public plan (aim of legislation)  In a number of Eurpean countries – people who want to obtain health care in the private sector in addition to the services covered by the mandatory social insurance are free to do so – none of them affects the integrity of the public system  Wide range of measures that are less drastic that could ensure the aim of the legislation  The Quebec Health Insurance Act and Hospital Insurance Act (prohibiting private medical insurance in the face of long wait times) violates the Quebec Charter’s right to life. Concurrence: The Acts remove the ability to contract for private health care insurance and in effect create a virtual monopoly for the public health system. On the evidence of significant delays in service, this monopoly harms the right to security of person . Delays in medical treatment could have physical and psychological consequences. Gov’t argument: if people can purchase private health insurance, they will seek tx from private docs and Hs, which will divert resources from the public health system into private health facilities – reducing the quality of public care . There is no real connection b/w prohibition of health insurance and the goal of quality public system Dissent : gov’t views the prohibition against private insurance as essential to preventing the current single-tier health system from changing into a two-tier system. Fear that it will lead to a US type health care system. Increase in private funding leads to a decrease in gov’t funding. Private insurers will take all the healthy, leaving the public system w/ all the sick. REFORM ARTICLES:

 Employers believe the govt would underpay docs and Hs →leading medical providers to charge private employers and health insurers higher rates. The effect would be to increase costs and send healthier employees to find cheaper rates elsewhere.  Employers are concerned about changes the bill would make to ERISA, the federal law that allows multistate employers to circumvent state insurance regulations. The House bill would allow state law to govern legal disputes over health coverage.  The bill: o Would prohibit insurers from denying people coverage based on age or health condition and would eliminate lifetime limits on how much HC a person could receive. It would go into effect by 2013 and would include a requirement that all individuals purchase insurance. It would allow people up to age 27 to stay on their parents’ insurance plan.  Republicans say: o It will raise the cost of Americans’ health insurance premiums; o it will kill jobs with tax hikes and new mandates; o and it will cut seniors’ Medicare benefits,”  The bill would exempt 86 percent of small businesses from a requirement to provide insurance (those that make below $500,000 in payroll). But a penalty will be phased in later for employers w/ payrolls b/w 500,000 and 1 mill – taxed  Immediately extend COBRA payments for laid-off workers until the national insurance exchange is set up Health insurance reform will lower premiums for small businesses in four important ways.  Creates a health insurance exchange.   o Create a health insurance exchange that pools small businesses and their employees with millions of other Americans to increase purchasing pwr and competition in the insurance market. o Increased purchasing power and competition, in turn, make premiums more affordable.   o The exchange will also reduce administrative costs for small businesses and their employees by enabling them to easily and simply compare the prices, benefits, and quality of health plans.  Provides a small business tax credit.   o On top of the potential savings created by the health insurance exchange, an estimated 3.6 million small businesses nationwide could qualify for a tax credit to make coverage for their employees even more affordable  Ends the “hidden tax” on small businesses that provide health insurance.   o Premiums are high, in part, because of a “hidden insurance tax” of more than $1,000 added onto every family policy that covers the cost of care for those without insurance. Health insurance reform will benefit small businesses that already provide health care by expanding health care coverage to all Americans and removing this hidden tax.   Prevents arbitrary premium hikes.   o Currently, small businesses’ premiums skyrocket if just one-two workers fall ill and accumulate high medical costs.  o Health insurance reform will prevent insurance discrimination based on health status, meaning that small businesses will no longer be unfairly penalized if a worker falls ill. o Health insurance reform will crack down on excessive insurance overhead by limiting the amount insurance companies can spend on administrative costs.  o Reform will also require transparency among insurance companies so small business owners can see exactly how insurance companies spend their premium money and make informed decisions when choosing a health plan. Universal single payor –saves money, satisfies moral obligation, gov’t providing necessary service, preventative. Cons – drives up taxes, could be rationing of care (death panels). Medical savings accounts: roll over to the next year. Moral hazard – make more careful choices. Con – not realistic for poor HOUSE PLAN

Financing:  Expand Medicaid to 150% of the FPL o Single person who makes $24,000 will be eligible for Medicaid. o If you broaden coverage you bring in more younger and healthier people which will lower the cost. o It is cheaper to include more people under Medicaid than subsidizing insurance premiums of near poor individuals – b/c Medicaid reimbursement is lower. (Providers (docs and hospitals) are probably not happy about this)  Individual mandate that you have to buy insurance and if you don’t then you pay a tax penalty. o Advantage: The more people that are insured, the cheaper the premiums  it increases the pool – if you use a community rating system  Employer mandate: more people will be covered. o Employers w/ 50 or more people are subject to the mandate. o Rather than starting over (as the Clinton’s did), both the Senate and the House want to build on the existing system. o Employers are pissed. They would have to spend more out of their pocket to fund employer’s insurance – which will raise the cost to consumers for their goods – they will buy less – economy will be at a stand-still. o SHOP option – employers with less than 50 employees will have access to cheaper insurance.  Taxes: o Under the House bill – will tax individuals who earn more than $500,000 or couples who earn more than a million  Contributing to the overall cost of healthcare for everybody else o Senate bill – proposes to tax employers and insurers who have generous plans o Encourages employers and insurance companies to offer less generous plans o B/c upper income people can pay for insurance w/ pretax dollars = subsidy for the wealthy – bill will stop all of that. o Affects Unions (teachers, nurses, factory works) – they get generous health plans (bargained for it for lower wages). o Senate is more business oriented. House is more democratic – pro union.  More regulation of payors: no discrimination based on preexisting conditions. Required community rating  What is the affect on State treasuries? By expanding Medicaid, it is going to cost the states more money. The state has an unemployement rate greater than 12% they will get a subsidy from the federal gov’t State Oversight of Health Care Facilities Must be (1) organized to achieve a charitable purpose and (2) operated to meet a charitable purpose Statewide Health Coordination Council v. General Hospitals of Humana, Inc., 1983 Fed govt, in an effort to control rising H patient costs, and finding that competition among Hs actuallhy increased H charges, required each state to pass a plan dividing the state into health service areas and limiting the distribution of Hs. Desiring to build a new H in Arkansas, D applied for a certificate of need, the procedure by which the state health agency was empowererd to make exceptions to the plan’s limits on the maximum number of H beds allocated to an area. The CON was granted.  Issue: was the state agency authorized to grant D a CON (to build a 150 bed H) that is inconsistent w/ a federally mandated plan (since D’s project would exceed the maximum number of beds per area allowed)? YES  State officials may not disregard at will a federally mandated Plan for the distribution of hospitals  The P is not inflexible, and permits the maximum bed limits in an area to be exceeded to meet exceptional conditions.  No such conditions were found here. D argued that the federal and state efforts to control H proliferation = mere guidelines

Dissent: This case involves overregulation. A less narrow construction of these statutes and regulations would allow the state agency to depart from strict compliance if they felt necessary . Competition will drive costs down Notes:  How do too many hospitals increase the prices to consumers? o Fixed H costs are so high that an empty bed costs half as much to maintain as an occupied bed. Hs compete not for patients but for docs. Hs compete to provide the most expensive equipment and unnecessarily offer the same costly facilities as one another. H charges will w/o question be paid by insurers  Exceptions to the maximum bed limit allowed for exceptional conditions: none of which are present in this case o Unusually high proportion of population over 65 o Seasonal population fluctuations o Rural areas where a majority of the residents would otherwise be more than 30 minutes from another hospital o Urban areas having a large number of beds compensated by fewer beds in the same metropolitan area o Areas having referral hospitals attracting nonresident patients  Certificate of Need Regulation o Establish entry controls. Regulatory approach to containing HC costs. Replaces competition w/ state planning o CON laws have had almost no impact on hospital costs o CON laws constrain only what hospitals spend, not what they charge – incomplete o Price control is essential since restricting entry creates monopoly power o Slow the increase in the number of beds, but the funds saved are just moved to new services and equipment Queen of Angels Hospital v. Younger, 1977 Queen (H), founded by a Catholic Church, operated an outpatient clinic w/in the H. Queen leased the H, except for the outpatient clinic and convent house, intending to use a portion of the lease proceeds to establish additional medical clinics in the area (offering free medical care to the needy). Queen filed a declaratory relief action against the AG to determine the validity of the lease.  May a corp incorporated as a charitable org for tax purpose cease to perform the charitable purpose for which it was created?  An org incorporated for charitable purposes is impressed w/ a trust by virtue of the express declaration of the corp’s purposes  Queen, in its articles of incorporation and in a stmt to the Tax Board has stated that it is in the business of running a hospital  An outpatien clinic is not functionally equivalent to a hospital (even though serving the poor is a worthy purpose)  The question is not whether Queen can divert some of its assets to purposes other than the operation of a H, but whether it can abandon the H business altogether, thereby ceasing to perform the charitable function for which it was expressly created  Queen may not do this and retain control over its assets (cannot divert charitable trust assets) Notes:  Rules governing the use of assets of a nonprofit charitable organization: a nonprofit corp cannot legally divert its assets to any purpose other than charitable purposes. The AG is empowered to oversee charities as the representative of the public  Queen represented to the public (IRS) that it was a hospital. Funds were solicited from the public for the hospital.  Queen’s Argument: the corp has multiple purposes; that the purpose to “furnish medical and surgical treatment” stated in the articles of incorporation, are broad enough to authorize the operation of a clinic. “Acts of Christian charity,” also stated in its article of incorp, encompass all forms of medical care to the needy.  The corporation is bound by its articles of incorporation. NOTES: Charitable Trust Law; Public and Religious Hospitals; For-Profit Conversions  Ultra Vires (charitable purpose) o If the articles of incorporation were worded differently, the court may have been such a stickler about modifying the corporate purpose, as long as the new purpose still pursues the same general charitable aims o Queen was bound by its charitable purpose for which it was created, but not required to run a H if it would be financially ruinous (cy press)  Public and Religious Hospitals: o Public hospitals, those owned by the gov’t and chartered by statute, are subject to similar limitations on their powers, depending on how their corporate purposes are stated in the statutes  Cy Pres: the ultra vires doctrine does not require a nonprofit board to continue running a money-losing H until it goes bankrupt. The board may transfer ownership entirely to a new corp. Trust doctrine (cy pres) determines what alternative use to make of the proceeds from the sale. There is more flexibility – but must have a charitable purpose of the same general type if the original purpose is no longer possible

Charitable Tax Exemption Eastern Kentucky Welfare Rights Organization v. Simon (1974) (community benefit) The IRS had long held that Hs could only qualify as tax-exempt charitable orgs under IRS Code §501(c)(3) if they provided services to those unable to pay. IRS issued Revenue Ruling 69-545, defining charitable in terms of “community benefit” and stating that the provision of HC benefited the entire community, even if those unable to pay for H services received no direct benefit. Under the new definition, a nonprofit H could qualify as chartiable by keeping its ER open to all, regardless of ability to pay, and by admitting any person able to pay, either directly or through insurance. Free or below cost services to those unable to pay is no longer essential. P sued to declare RR 69-545 invalid b/c the institutions enjoying tax exempt status as charitable orgs routinely deny H services to poor  Is the term “charitable” for tax purposes, properly limited to those orgs that provide no-cost or low-cost services to the poor?  The term “charitable” can be defined more broadly than mere relief to the poor  A narrow definition fails to recognize the changing status of health care in our modern society o Hs are no longer exclusive to the poor. Today they are the primary community health facility for both rich and poor. o Medicare/Medicaid and insurance has reduced the number of poor people requiring free or below cost H services. o Counties provide non – ER care for those unable to pay  To qualify as a tax exempt charitable organization, the H must still provide services to indigents o H’s required to have ERs (regardless of ability to pay)– often the only means of access the poor have to medical care o Hs are required to accept Medicare and Medicaid – covers indigent population Note: Hospitals do not have to provide free or below cost services to those unable to pay to qualify as a charitable organization and thus exemption from federal income tax Utah County v. Intermountain Health Care, Inc. (1985) D operated two NP Hs. Hs funded almost exclusively through insurance, Medicare and Medicaid, patients; very little income came from gifts. D’s policy: to charge patients for H services whenever possible. Income exceeded expenses, free services amounted to less than 1% of revenues. Employees of Hs = volunteers, but Hs used the services of many paid contractors. H was denied tax-exemption  Under the Utah constitution, property used exclusively for charitable purposes are exempt. o Essential to this definition is the element of gift to the community. o A gift to the community is identified either by a substantial imbalance in the exchange b/w the charity and the recipient of its services or in the lessening of a gov’t burden through the charity’s operation  To determine if the org is a chartiable institution, must consider these factors: o Whether the entity provides services w/o expectation of material reward o The extent to which it is supported by donations – H received few donations o The extent to which recipients are expected to pay for services – H actually turned people away from ER o Whether income exceeds expenses o Restrictions upon beneficiaries o Whether financial benefits are available to those involved  Hospital argues that : ability to pay is not a criterion for care → it provides a community benefit o doesn’t mean the H has a charitable purpose –for profits do the same thing o Ds confuse the element of gift to the community with the concept of community benefit, which for-profit Hs alo provide. Meeting a public need does not automatically give you a property tax exemption o They must prove the element of gift to the community (in the olden days, Hs did provide a gift to the community b/c served the poor, which the gov’t would otherwise have to provide- but now the H is open to everybody)  No difference b/w this non-profit and other for-profit hospitals o Their charges were no lower than comparable hospitals o The vast majority of their services are paid for o They accumulate capital just like profit-seeking hospitals o They expend their revenues in excess of operational expenses (on updated equipment, competitive salaries…)  The Ds are using subsidies from Utah County taxpayers that are given to certain entities as a substantial competitive edge Notes:  Ds have not demonstrated that their property is being used exclusively for charitable purposes under the Utah Constitution  How could the H have won? Need more than an open door policy. Have to do more than forgive the debts of people who don’t pay. Need to advertise that they provide free care if you can’t afford it – that is a gift to the community  Kentucy case – you don’t actually have to provide free care (minority view); Utah case- you do need to provide free care

 NP put their revenues back into the hospital – back into the mission. St. David’s Health Care System v. United States, 2003 (forming partnerships, who has control?) St. David’s (P) operated as a charitable H → financial difficulties → formed a partnership w/ HCA, a for-profit co that operates 180 Hs nationwide. The partnership hired Galen, a subsidiary of HCA to manage the partnership. IRS audited the partnership and determined that P was not a charitable org. P argues that it is a charitable H, and thus tax exempt under 501(c)(3). Gov’t argues that P is not tax exempt b/c it formed a partnership w/ a for-profit company and gave control of its operations to the for profit entity.  Issue is not whether the partnership provides some or a lot of charitable services b/c i t must operate exclusively in furtherance of exempt purposes → to determine this must determine whether P has ceded control to the for profit  ORGANIZATIONAL TEST: to determine whether P qualifies for tax exempt status (P passes this test) o P must show that it was “organized and operated exclusively” for a charitable purpose. o P’s founding docs must: (1) limit its purpose to one or more exempt purposes and (2) do not expressly empower P to engage more than “an insubstantial part of its activities” in conduct that fails to further its charitable goals  OPERATIONAL TEST : P must engage primarily (exclusively) in activities which accomplish its exempt purpose. o (1) P must show: that it engages primarily in activities which accomplish its exempt purpose  To meet this element, must determine whether the NP ceded control to the FP  P argues that it only has to meet the community benefit standard – control is not the issue  CBS: provides ER to all; hires AWP; run by independent board of trustees from the community; uses all excess revenues to improve facilities, provide ed servicse, conduct med research, gives free/below cost care; accepts Medicare/Medicaid. Don’t have to satisfy all factors to be eligible.  But even though P might pass the CBS test; the issue is not whether the partnership provides some or lot of charitable services. It must operate exclusively in furtherance of exempt purposes  If more than an insubstantial amt of activities furthers non-charitable interests, not exclusive o (2) that its net earnings do not inure to the benefit of private shareholders or individuals o (3) that it does not expend a substantial part of its resources attempting to influence legislation o (4) that it serves a valid purpose and confers a public benefit  Standard for determining whether an org furthers non-charitable interests = Control o Examine structure and management of the org: who controls the organization o If private individuals or FP entities have control, then the org furthers the profit-seeking motivations of private individuals or entities → the partnership’s activities are not exclusively in furtherance of charitable purposes o P entered partnership out of necessity. HCA just wanted to expand. P has little bargaining strength over activities  Revenue Ruling 98-15 determines how a NP can establish that it has retained control over the partnership activities o (1) The founding documents of the partnership expressly state that it has a charitable purpose which will take priority over all other concerns (2) the agreement gives the NP org a majority vote in the partnership’s board of directors and (3) the partnership is managed by an independent company (not affiliated w/ the for-profit entity) Notes:  Partnership Documents: Gov’t argues that there is reasonable doubt that the docs provide P with control. o Although P can veto board actions, it cannot initiate action w/out the support of HCA (board) o Galen is a for-profit subsidiary of HCA – w/ incentive to prioritize the non-charitable interests of its parent org o Docs requirement that Galen abide by the CBS standard is only effective if P can enforce it. o Threatening dissolution: HCA won’t take the threat serious b/c if P dissolves the relationship, they will cease to exist  K with Galen was extremely long  Even split b/w NP and FP on the board – what is the problem with an even split? o It gives both equal control – you want NP to be able to control  Revenue Ruling 98-15: if there is a joint venture b/w a NP and a FP, the issue is who is in control. o If NP is not in control, can they still achieve their charitable purpose? o 2 situations: in both the NP engage in the venture to keep afloat – they are struggling financially. o In both cases, they form with a FP limited liability corporation (LLC). o Both intend to use the proceeds of the LLC to run the charitable org. o But the purpose in the two are different:  Situation one (maintans their tax exempt status)  Purpose: operate H in a manner in a way that furthers the charitable purpose.  Unrelated management company  3 people for the governing board is chosen by the NP and 2 chosen by the FP (more pwr to NP)

 NP is still in charge – consistent w/ the documents that say the new org will still be organized to achieve its charitable purpose (situation 2 doesn’t have that language)  Situation 2: (does not maintain its tax exempt status b/c NP ceded control to the partnership)  Purpose: doesn’t say that it must further the charitable purpose  Management by a subsidiary (related to the corp);  3 for the board chosen by NP and 3 by FP (not as much control).  More oriented to a FP mode of operation. The CEO has previously worked for the FP  Intermediate Sanctions : o Hard to revoke a hospital’s tax exempt status, so sometimes IRS imposes intermediate sanctions on those insiders/ disqualified persons who are taking advantage of a NP organization. o IRC 4958 – 25% tax on the prohibited transaction. o The action must be rescinded. If it is not rescinded = 200% tax. o The org manager of the NP has to pay an additional 10% tax if they knew about it and knew it was illegal. NOTES: The Basis for Health Care Tax Exemption  Benefit = o Exemption from federal income tax and from state and local property taxes; o Eligibility to receive tax-deductible gifts (but hospitals no longer rely substantially on donations)  Utah County is the minority view? (or is Kentucky the minority view)?  Now, free emergency services are not even necessary if an ER isn’t needed in the community or the H is a specialized kind  Not tax exempt: o Non-hospital facilities: Clinics and nursing homes are usually denied exemption – low volume of free care. o Physcian groups usually are not exempt as well – docs would personally benefit too much if their professional orgs were exempt (exceptions: large and prestigious physician groups)  Unrelated Business Income: o Income from activities not connected w/ the H’s exempt function. o If it is a substantial portion of the H’s total operations, entire H may not be exempt. o Ex: H’s pharmacy sales to outpatients are taxable  Class Action Suits: Causes of action against nonprofits: o Third-party breach of K w/ taxing authorities, o Breach of charitable trust, o Violation of state law consumer protection and fair debt collection practices  HMO exemption: HMO must offer: o Open enrollment and community rating, o Discounted fees for low income people, and support for research and education. o Limited to staff model HMOs, which retain physicians full-time and own their own hospitals Hospitals and Physicians Working Together and Separately: Joint Ventures Hospital-Physician Joint Ventures: Example: NP H establishes a for-profit stock corporation to be jointly owned in equal shares by the H and physicians on its medical staff. The new corp would serve as the general partner in four limited partnerships (4 outpaitent departments) in which the medical staff would operate. All the profits would go to the limited liability partnerships.The outpatient departments would represent 4 % of the H’s gross revenues.  Hospitals that form joint ventures w/ medical staff physicians to establish a new health care provider or resource for the community further their exempt purpose (but paying doctors to steer patients to one particular hospital merely to improve its efficiency is not in furtherance of a charitable purpose)  Why did the H do this? It wanted to keep its docs happy so that they docs don’t refer their patients to other hospitals (side note - now docs form their own hospitals and not even going thru the H).  Problem w/ the transaction → jeopardize H’s tax exempt status b/c (1) they allow inurement of part of a charitable org’s net earnings to the benefit of private individuals (2) they confer more than incidental benefits on private interests.  Private inurement: 98-15??? o A charitable org must not allow net earnings inure to the benefit of any private shareholder or individual o Private inurement is usually an insider/disqualified person. o The functional equivalent of a dividend that a stockholder would get.

o Prohibition on private inurement is to prevent anyone in a position to do so from siphoning off any of a charity’s income or assets for personal use o Inurement applies to people who have an opportunity to control or substantial influence its activities (including docs)  Private Benefit: Necessary for people to do their work o It is okay for people to benefit (receive reasonable compensation for the services they provide). o In order to be exempt, org must establish that it is not organized for the benefit of private interests o Applies to anybody – not just insiders subject to more strict inurement proscription o Any private benefit arising from a particular activity must be “incidental” to the overall public benefit achieved o Fairmarket value = checkpoint o Examples: a H that does not open its medical staff to all docs in the community; below-market office space rental; excess compensation for administrative services o Impermissible for Hs to secure or devise incentives to attract new phsicians (unless in an underserved area)  Physician Recruitment Problem: Revenue Ruling 97-21 o Attracting a physician to a community that had no available medical services furthers the charitable purpose of promoting the health of the community. o Residents of an isolated rural community had to travel a considerable distance to obtain care. Faced with the total lack of local services, the community formed an organization to raise funds and build a medical office building to attract a doctor to the locality. (No hospitals or existing medical practices were involved.) o The ruling states that certain facts are particularly relevant:  (1) the demonstrated need for a physician to avert a real and substantial threat to the community;  (2) evidence that the lack of a suitable office had impeded efforts to attract a physician;  (3) the arrangements were completely at arm's-length; and  (4) no relationship between any person connected with the organization and the recruited physician. o The ruling states that, under all the circumstances, the arrangement used to induce the doctor to locate a practice in the area “bear[s] a reasonable relationship to promotion and protection of the health of the community” and any private benefit to the physician is incidental to the public purpose achieved. It concludes that the activity furthers a charitable purpose and the organization qualifies for exemption as an organization described in § 501(c)(3) .  Must ask: o What the H gets in return for the benefit conferred on the physician-investors. o How does the transaction further the H’s exempt purposes. o Usually the reason for these ventures is:  to retain and reward medical staff;  to attract their admissions and referrals;  to preempt the physicians from investing in or creating a competing provider o The specific venture will be taxable, but sometimes the H’s entire exemption may be revoked retroactive to the initiation of the venture. o Clarify the main issue. Usually the issue is NOT whether the venture itself is exempt, since usually it is not. Rather it is whether the nonprofit’s participation in a for-profit venture jeopardizes the nonprofit’s exemption.  Integrated Delivery Systems (IDS) o IDS = systems that contain not only Hs but also nursing homes, home health agencies, physician groups, and HMO. o IRS has approved exempt status for the network parent that controlled the system as a whole, and not necessarily for its component members. o Requirements for networks: free emergency care and 49% limit on physician governance. o The network must be hospital-run, in order to promote health and meet the free emergency service requirements Bartron v. Codington County, 1942 (Corporate Practice of Medicine Doctrine) Bartron Clinic, a for profit corp contracted w/ the county to provide medical services as well as medicine to indigent residents of the county. It operated a H and clinic and employ licensed docs to carry on the business of the corp. Its shares of stock were held by the employees of the corp (including docs). All of the professional services were performed by the docs, employed at fixed salaries by the corp, and all charges were made to the corp. BUT the corp did not hold a license to practice medicine. Ct found that it is unlawful for a corp to practice medicine and to operate a pharmacy or sell medicine w/o a license as required by statute

 Issue: whether contracts b/w the County and the Bartron Clinic (a for-profit corporation) for the corp to furnish medical and surgical services and medicines to the county indigent, are illegal and unenforceable. YES  Like lawyers, physicians, should be devoted to the client, not to the corporation for which they work.  Undue emphasis on mere money making: o B/c of a stockholder’s rights in a corporation for profit it gave the right of participation in control of its policies and its earnings to lay persons. o The object of the company would be to make money. Its trade commodity = professional services of its employees. o Constant pressure would be exerted by the investor to promote a high volume of sales of that commodity to get a greater return on the investment.  Against public policy: To allow a profession to be organized in this way would wipe out the characteristics that distinguish the business practices of the professions from those of the market place (ethical, trustworthy, and unselfish professionalism).  It is unlawful and contrary to public policy for a corporation to practice medicine or surgery and to operate a pharmacy or sell medicine w/o a license as required by statute. Notes:  Corporate practice of medicine doctrine: o Only licensed docs can practice medicine. o Corporations cannot practice medicine. They do not have a licenseThe K is void against public policy.  Justification for the doctrine: o Corporations would interfere w/ relationship b/w doc and patient. o Preserve public health by excluding from practice persons w/ inadequate ability, morality and training o Don’t want to commercialize the medical profession  Note: AMA is opposed to the corporate practice of medicine doctrine.  Corporations = group of docs have incorporated to operate their own clinic; laymen form a corp and hire docs (for profit) Berlin v. Sarah Bush Lincoln Health Center, 1997 (corp practice of medicine doctrine is not applicable to hospitals) D is a NP corp licensed to operate a H. P, doc, and D entered into a written agmt for P to practice medicine for the H for five yrs. The agmt barred P from providing health services w/in fify miles of the D for two yrs after the end of the agmt. P did just that and D sought an injunction. Ct determined that the D, by hiring P to practice medicine violated the corporate practice of medicine doctrine and thus found the entire employment agmt unenforceable. Issue: whether licensed Hs are prohibited from employing physicians.  Corporate Practice of Medicine Doctrine: o prohibits corps from providing professional medical services, o It is forbidden to practice medicine w/o a license. A corp cannot be licensed b/c only an individual can. o Employment of physicians by corps is illegal b/c the acts of the doc are attributable to the corporate employer. o Policy arguments: dangers of lay control over professional judgment, the division of the doc’s loyalty b/w his patient and his profitmaking employer, commercialization of the profession  Exceptions to the corporate practice of medicine doctrine, allowing Hs to employ physicians o A H corp which employs a doc is not practicing medicine, but is merely making medical treatment available o Public policy arguments don’t apply to physicians employed by charitable institutions or in modern day Hs  (1) no concern for lay control over professional jmt b/c a separate professional medical staff is responsible for quality of services (2) Hospitals have an independent duty to provide for the patient’s health/welfare o Hs are not only authorized by law to provide medical tx to patients, but are mandated to – would not make sense for the leg to intend a H to accomplish what is is licensed to do w/o having docs as employees (or independent contractors) Note:  A licensed H has the authority to practice medicine by means of its staff of licensed docs and is an exception to the corporate practice of medicine doctrine.  Hospitalists – docs employed full time in the H.  The legislature made an exception – professional corporations of docs are permitted.

Hospitals, Medical Staff Privileges, and Managed Care Credentialing:  Why have staff privileges? o H’s need constraints over who is on their medical staff b/c H’s may be held liable for the negligence of doctors. o Bylaws govern credentialing and quality assurance.  JCAHO – every H has to have medical staff bylaws Medical Staff Structure St. John’s Medical Staff v. St. John Medical Center, 1976 (Bylaws are a contract b/w the H and the staff) St. John’s Hospital Medical Staff = association of docs whose members have staff privileges at the H. The medical staff bylaws provide that bylaws can be amended after notice given at any regular meeting of the staff and requires 2/3 majority. The H wanted to amend something in the bylaws, medical staff didn’t agree, H did it anyway and then said staff was bound by it.  The medical staff bylaws constitute a contract.  Contract law governs the contruction and interpretation of corporate bylaws.  The medical staff and the H are bound by them until they are amended in accordance w/ the procedure set out in the K.  The H breached the K with the medical staff. Mahan v. Avera St. Lukes, 2001 OSS built a day surgery center that directly competed w/ ASL. ASL’s Board closed their medical staff to docs requesting privileges for spine surgery and orthopedic surgery privileges (precluded any new docs from applying for privileges to use their H for those procedures. OSS challenged the Board’s decision to close the staff. Ct said ASL breached the Staff Bylaws by closing the staff w/o first consulting the staff (staff bylaws trump the decision making ability of the board as to all decisions relating in any way to, or incidentally affecting medical presonnel issues.  The board delegates to the medical staff the authority to evaluate staff and applicants for staff privileges; to make recommendations to the board concerning these matters – all subject to the final approval of the board.  The medical staff bylaws of a H do not trump the Board’s ability to make administrative decisions  This is not a case concerning issues delegated to the expertise of medical staff concerning appointments and privileges  It was an administrative decision by H’s Board to close its staff for certain procedures to ensure H’s economic survival  Allowing the medical staff to pass upon valid business decisions by the Board as to any issue that incidentally affects the medical staff would render the Board ineffectual.  Hs have a duty of responsibility w/ regards to hiring competent physicians. To impose this duty and leave H boards powerless to make any decisions regarding medical staff would lead to illogical results  The board does more than just give its seal of approval. The delegation of authority to the staff is to obtain input from the staff on area of its expertise  This case does not deal with matters within the staff’s power to control. It is a business decision in which the board does not have to consult with the medical staff in order to make. No breach of K Notes:  The physician group is building a mini hospital and are going to perform all the expensive surgeries and now H is going to run out of money. H is non profit and needs these high end surgeries to continue to provide their charitable mission  2 sets of bylaws: o Corporate and staff (corporate bylaws trump staff bylaws). o Board gets to make economic and quality of care decisions.  How do courts reconcile St. Johns and Mahon? o St. J – medical staff bylaws constitute a K and cannot be amended or ignored unilaterally by the hospital board. o Mahon – hospitals are free to enter unilaterally into exclusive contracts or stop admitting new members to a portion or all of the medical staff

o Courts distinguish b/w administrative decisions reserved to the H board versus medical decisions made by the medical staff. When the reasons for action are economic, the board can act unilaterally.  Courts distinguish b/w the possession of clinical privileges and the right to exercise those privileges, o Reason - that medical staff bylawys protect only the former, not the latter. o H picks a certain set of docs to staff a portion of the H. o The result is that not only new docs but existing docs lose the ability to practice in those areas of the H. o Courts uphold this b/c the non- contracting docs still retain their status as members of the medical staff and are entitled to practice in other areas of the H. Medical Staff Disputes:  Access to a H is essential for most docs to carry on a practice.  Hospitals are coming under increasing legal and economic pressure to monitor who joins the medical staff Greisman v. Newcomb Hospital, 1963 P obtained a degree of doctor of osteopathy and is licensed to practice medicine. P tried to apply for admission to the staff of H (only H in the area). H refused to permit the P to apply, not b/c they questioned his personal or professional qualifications but b/c P’s app went against their bylaws. H bylaws: an applicant for membership on the staff must be a graduate of a medical school approved by the AMA.. The AMA rejects schools of osteopathy. D argues that it is a private H and may exclude docs from its staff  P suffered economic harm b/c he was not permitted to admit his patients to the H or to serve them professionally once they were admitted, or to use the ER services of the H; that his patients suffered restriction in their choice of physicians or hospital facilities b/c of the P’s inability to attend them professionally at the H.  H is not private: It is tax exempt b/c of its nonprofit (non-private) status o Even if H was private, CL has regulated private businesses that exist for the common good (railroads, inn keepers). o Private property devoted to a “public use” is subject to public regulation o Hs purpose is to furnish facilities to the members of the medical profession in aid of their service to the public  Patients: It is not enough that the patient could go the H under the care of another doc b/c their personal physician will have no opportunity to participate in his tx. Any other H is too far away to require patients to travel to.  Validity of bylaw: The decision that a doctor of osteopathy, though fully licensed, is automatically, and w/o individual evaluation, considered unfit for staff membership at the only available H in the area where he resides and practices is arbitrary. P’s app must be evaluated on its own merits  The H’s standards were not in furtherance of the common good. Their pwrs are in trust, and must be dealt w/ as such Notes:  Different types of docs: osteopath (OD); allopath (MD) (dominate medicine); chiropractic (DC); homeopathy.  This case was not decided on constitutional DP or EP grounds, but on a CL fairness theory, based on the quasi-public nature of private hospitals. Only public hospitals have been subject to regulation under the constitutional DP clause Nanavati v. Burdette Tomlin Memorial Hospital, 1987 P, Doc, asked the board if he could read EKG machines more often – b/c it is good pay. Another doc had been doing it all by himself before P showed up. Board denied request. P started to criticize the board and committed violation of H bylaw provision that requires staff doctor to work cooperatively with others. P’s privileges were revoked.  A H may terminate a doc for disrupting the harmonious work relationship w/ other staff.  H does not have to wait for a disruptive doc to harm a patient before terminating his privileges  More is required than general complaints of a physician’s inability to cooperate w/ others.  If a H is to care for its patients, the staff must work together.  A bylaw providing that the inability of a doc to work w/ other docs or nurses is grounds for terminating privileges = lawful  Such termination should take place only upon the presentation of concrete evidence of specific instances of misbehavior likely to adversely affect health care delivery.  Examples: unjustified altercations w/ other docs or nurses, violations of H routines or rules; breaches of professional standards Notes:  Test (1): courts should sustain a H’s standard for granting staff privileges if that standard is rationally related to the delivery of HC. A decision is related if it advances the interests of the public (patients); the H, or those who are essential to the H’s

operations, (docs and nurses) - Docs need staff privileges to serve their patients, and that the public interest requires that Hs treat docs fairly in making decisions about those privileges  Test (2): the test for judicial review of the individual decision to deny staff privileges, is whether it is supported by “sufficient reliable evidence, even though of a hearsay nature, to justify the result.” Relaxed standard. Court picks this standard o Courts should allow hospitals, as long as they proceed fairly, to run their own business Membership in Managed Care Networks Potvin v. Metropolitan Life Insurance Co. (2000) MetLife entered into an agmt w/ P, doc, to include him as one of the participants on two if its preferred provider lists. The agmt provided for termination by either party at any time, w/ or w/out cause, by giving 30 days notice. D notified P that they were terminating his preferred provider status w/o cause (it was b/c he had too many malpractice suits). D did not respond to P’s request for a hearing, P sued under the CL right to fair procedure. P alleges that he should have been given an opp to be heard before his removal.  Termination’s effects on P: Devastated his practice, reducing it to a small fraction of his former patients; Required to reveal termination to other insurers, which then removed him from their PP lists, Suffered rejection by physician groups who are dependent upon credentialing by MetLife and by current MetLife PP physicians, who ceased referring patients to him.  Is the “without cause” termination clause enforceable under the commonl law right to fair procedure doctrine? NO  Common law right to fair procedure: o Protects against arbitrary decisions by private organizations. When the right to fair procedure applies, the desion- making must be both substantively and procedurally fair o Membership in an association, with its associated privileges, once attained, cannot be arbitrarily withdrawn. o P argues : when an insurance company with fiduciary obligations to its insureds maintains a list of preferred provider physicians to render medical services to the insureds, a significant public interest is affected – and thus the insurer must comply with the common law right to fair procedure upon removal of a doc from a preferred provider list  Rule: the insurer who wants to remove the doc from the pp list must comply with the common law right to fair procedure only when the insurer possesses power so substantial that the removal significantly impairs the ability of an ordinary, competent doc to practice medicine in a particular geographic area, thereby affecting an important, substantial economic interest (not just b/c insurer’s decision affects a public interest)  Impairing a doc’s practice of medicine : If participation in managed care arrangements is a practical necessity for docs generally and if only a few health care entities have a virtual monopoly on managed care, removing individual docs from preferred provider networks controlled by these entities could impair doc’s practice of medicine Dissent: the “without cause” termination provision should be enforced b/c there is no showing that D’s decision was made in bad faith or based upon some other factor that would render the decision contrary to public policy. It is not against public policy for a business enterprise to seek to minimize its costs. Physicians are not entitled to a certain minimum income. Doctors are not a protected class Harper v. Healthsource New Hampshire, Inc. (1996) P is a participating doc w/ D (HMO) as a surgeon and a primary care provider. D renewed him as a primary care physician but not as a surgeon. Yrs later, P thought D was manipulating his patient’s medical records and notified D of his concern and D responded by terminating P b/c he had not satisfied its recredentialing critieria. P appealed to D’s committee and asked them to produce docs they relied on in terminating him and they would not, and affirmed the decision to terminate him w/out cause.  P argues: the “termination w/out cause” provision in the agmt, or the termination in this case, is void as against public policy  An agreement is against public policy if it is injurious to the interests of the public, contravenes some established interest of society, is against good morals, interferes w/ the public welfare or safety  Every K imposes upon each party a duty of good faith and fair dealing - D has an ob to act in gf in employment termination  The public has a substantial interest in the relationship b/w HMOs and their preferred provider physicians (choice of doc)  The termination of P’s relationship w/ D affects more than just his own interest  RULE: public interest demand that a HMO’s decision to terminate its relationship with a particular physician provider must comport with the covenant of good faith and fair dealing and may not be made for a reason that is contrary to public policy  If a doc is terminated w/o cause and believes the decision was made in bad faith or contrary to public policy, the doc is entitled to review the decision.  This is not just a wrongful termination of employment claim (which the trial court treated it as – it was dismissed)  D was not a state actor. Even if the state has an ongoing relationship with D on various matters, it doesn’t matter. P must prove that the two were intertwined w/ regard to the challenged action (the termination decision itself). No DP protection

 Remanded to consider whether D acted against public policy in violation of the good faith and fair dealing doctrine of K law Janda v. Madera Community Hospital (1998) (preexisting duty rule – if bylaws offer more than required = consideration) Orthopedic surgeon, P, who was born in India, sued H, alleging that H’s decision to limit its orthopedic dept to an exclusive group of physicians (only white) constituted racial discrimination under breach of P’s employment contract by violating the bylaws and intentional interference w/ economic relations. Hospital Bylaws: no aspect of medical staff membership or particular clinical privileges shall be denied on the basis of race…unrelated to the ability to fulfill patient care and required medical staff obligations.  Preexisting Duty Rule: the promise to perform an act which the promisor is already bound to perform cannot constitute consideration to support an enforceable contract.  D’s argue that the enactment of bylaws pursuant to CA statute is a preexisting duty and cannot constitute consideration. o But here, the bylaws went way beyond what they were obligated to do under CA law. o Similar performance of an already existing legal duty is consideration if it differs from whats required by that duty o If the offer includes a condition that the physician be bound by certain bylaws and the physician accepts the offer, those bylaws become part of the K, as there is mutual assent to be bound by the bylaws. An express employment K!  D’s argue that docs also have a preexisting legal duty under CA statute to abide by the bylaws adopted by the medical staff. o This does not require physicians to comply with the bylaws adopted by the governing body of the hospital. o Phsyicians only have a legal duty to comply with the rules adopted by the medical staff (their medical peers) o P’s agmt to perform in accordance with the H’s bylaws requires constitutes valid consideration.  Bylaws created an implied in fact contract: P and the H had a mutual understanding that any adverse employment action affecting his medical privileges would comply with the terms of the bylaws (non-discrimination provision)  Intentional Interference with Prospective Economic Advantage: o Requires P to allege: (1) an economic relationship b/w P and some third party, with the probability of future economic benefit to the P (2) D’s knowledge of that relationship (3) intentional acts on the part of D to disrupt the relationship (4) actual disruption of the relationship (5) economic harm to P proximately caused by the acts of the D o P must establish an actual economic relationship or a protected expectancy w/ a third person – not merely a hope of future transactions – P must do amend complaint to do this Notes:  The hospital bylaws created an enforceable contract b/c there was consideration  P must identify future patients: H had an expanded case load and P could say that he would treat a certain % of those patients  Public Health Law § 206-a: Discrimination in hospital staff appointments and privileges prohibited: designed to protect against docs who practiced in a non-traditional manner (had Ks with HMOs). Health Care Antitrust  Antitrust laws are designed to protect against undue restraint of trade and to increase competition o the more competition, the more lower the prices, and the more goods available o Goal is to promote competition by prohibiting undue restraints on trade. Every single contract is a restraint on trade. If the Gap has a K for denim, then that denim isn’t available to others – only unreasonable restraint of trade o Quality of care is not a defense to an antitrust offense – it is only about competition. (be skeptical though b/c sometimes it masks economic reasons for excluding certain people)  Sherman Antitrust Act § 1 (Ps always have the burden of proof) o Rule of reason –  Detailed analyses of the anticompetitive effects of a particular practice that is challenged.  It takes a long time to develop this analysis – b/c you have to use expert economic analysis  Only defenses permitted are about the effect of competition.  The focus is on the effect of particular conduct on competition  Doesn’t ask “is this reasonable conduct” but asks whether the D’s conduct imposes an unreasonable restraint on trade  Have to look at market share (product market) (geographical)  Geography serves as a limit

 Have to be clear what the product is b/c if it is for a certain product, consumers may be willing to go further away (out of the geographic market). If you need specialty care – may go further away  Market pwer – if w/in that geographic and product market, co can raise prices with no competition  Barriers to entering the HC market: (1) if you need a lot of capital to start the company (2) to start a H you need a certificate of need (3) zoning requirements (4) licensing restrictions (these are all gov’t barriers)  Conspiracy – it takes at least 2 to commit conspiracy. Have to determine if there are two separate entities  The focus is on the conduct. P doesn’t have to show actual harm – only potential for harm o Quick look o Per Se Violation of antitrust laws (short cut approach)  Case by case approach under the rule of reason is not necessary for certain categories of business practices that almost always have anticompetitive effects without the offsetting pro-competitive effects.  If the purpose of restraint can only be achieved by suppressing competition it is a naked restraint of trade  Naked Restraint – actually agrees to restrain trade  Ancillary Restraint – stems from an otherwise legitimate agreement  Agmts to fix prices; division of markets; exclusive dealing; group boycotts; tying arrangements  Advantages:  (1) rules are clear cut  (2) deterrent effect (people know what they cannot do so less likely to do it)  § 2 of the Sherman Act: o Monopolization – it is not wrong to have a monopoly, but the question is whether the seller is using its monopoly position to create or sustain a monopoly.  Clayton Act: o Prohibits mergers and acquisitions where the effect would be to substantially lessen competition or tends to create a monopoly (FTC v. Tenent Health Care)  Heart Scott Rodino Act: requires an entity planning a merger to notify FTC in advance so the FTC can render an opinion  Who can bring an action for antitrust? o Dept of Justice – In charge of criminal and civil enforcement of antitrust laws. Can seek treble damages o FTC – federal trade commission – complementary civil enforcement authority. It can enforce the antitrust acts only by seeking injunctive relief o Private Plaintiffs can bring civil actions. Can get treble damages if they prevail. Weiss v. York Hospital, 1984 (fed ct) P is an osteopath (DO) and was denied staff privileges at York H. York is controlled by MDs. P contends that his app was turned down solely b/c of his status as an osteopath; the scheme to exclude DOs was motivated by a desire to restrict the ability of DOs to compete w/ MDs, thereby increasing the profits of MDs. Only two providers in the area: York holds 80% of the market share. York’s bylaws permit admission of DOs (after threatened w/ legal action). P’s denial was based on evidence of personality defects (which would exaserbate problems of him being an osteopath). Ds violated Sherman Act § 1; enjoined from denying P a review of his app  Sherman Act §1 elements: (1) a K, combination, or conspiracy (2) restraint of trade; and (3) an effect on interstate commerce  (1) Proof on An Agreement: is there a sufficient number of conspirators? o P must prove that two or more distinct entities agreed to take action against the P. o The medical staff is not one entity – the individual docs are in competition with one another and w/ the area  Action by the medical staff satisfies the (1) K, combination, conspiracy requirement  Must look at the economic incentives of the parties. o The H cannot conspire with its medical staff  The medical staff made staff privilege decisions on behalf of the H. With regard to those decisions, the medical staff operated as an officer of a corporation would in relation to the corp.  The staff as an entity had no interest in competition with the hospital  (2) Proof of Restraint of Trade: o Rule of per se illegality: D’s actions constitute a boycott (a concerted refusal to deal) which = per se illegal o Concerted Refusal to Deal:  Ds discriminated against DOs by applying unfair, unequal, and unreasonable procedures in reviewing their applications, causing DOs to refrain from applying there.

 Class Ex: business at one level of production use the threat of a boycott to induce business at another level not to deal with competitors of the first biz.  MDs controlled York’s admission decisions – thus controlling exclusion of their competitors at York (no coercion by MDs was necessary to induce York to exclude their competitors, the DOs)  Absent a legit explanation (DOs less qualified), per se rule applies  The Learned Professional Exception: o There is an exception to the per se rule of illegality for learned professions where the restriction of trade is justified on public services or ethical norm grounds – in that case the conduct will be subject to the rule of reason o Ds offered no “public service or ethical norm” rational for their discriminatory tx of DOs – per se rule governs Note:  Group boycott = per se restraint of trade. (medical staff conspiring to exclude one group of people in competition with them in order to increase their own profits = restraint of trade)  Exclusion hurts the patients b/c lessens choice  Other courts have found that Hospitals can actually conspire with its medical staff  Even though D hired another DO, the way they treated P is indicative of a group boycott (it discourages DOs from applying)  Learned profession – we are professional, not trades-people and the antitrust laws don’t apply to us Hassan v. Independent Practice Associates (Michigan, 1988) (injury must be to the overall market, not individuals) Ps = 2 allergist docs who own an allergy center. D = IPA (org of docs who provide care to subscribers of Health Plus HMO). D’s Board is made up of the public and docs. IPA only serves Health Plus patients, whose patient market share is 20% of the population in the area. IPA docs can still belong to other similar organizations. P performed an unjustified amount of lab tests and D took P off of their plan. Ps later applied to IPA after they established a new urgent care center and IPA denied its app w/out explanation  Issue: (1) was there a conspiracy – maybe (2) is there a per se violation - no (3) Is there a rule of reason violation? – no  Conspiracy: there is a question of fact as to whether there was a conspiracy to exclude P’s from IPA. Health Plus was created by docs who are members of IPA. IPA members have effective control of Health Plus’s Board of Directors  Per Se Violation: Ps are not entitled to a finding of per se illegality o This does not fall under a per se illegal boycott rule. Not all concerted refusals to deal are anticompetive o Ps must show:  the practice is not justified by plausible arguments that the practice is intended to enhance overall efficiency and make markets more competitive  D’s decision was to increase efficiency and cost containment objectives = pro-competitive  That D possesses market power and exclusive access to an essential element to effective competition  Market Pwr: 20% is not sufficient market power. No significant barriers to entry into this market.  IPA docs are free to affiliate with other providers  Rule of Reason:  No unreasonable restraint of trade b/c no significant anticompetitve effect has resulted from P’s expulsion  Test: whether competition in the overall market has been harmed (not whether individual competitors have been harmed)  No anticompetitive impact on the overall market. Injury must be to overall competition, not just individual competitors o IPA does not have significant market power o After Ps were excluded, it admitted two new allergists; public has just as many allergists to chose from o No evidence of an anticompetitive motive Note:  Wilk case: AMA discouraged cooperation b/w docs and chiropractors. AMA told docs not to refer to chiropractors b/c chiropractors are quacks. D insisted that they acted to protect the public health from chiropractors . Chiropractors sued. Court recognized that there was an anticompetitive problem. Court imposed a very strict standard and chiros still prevailed b/c no pro-competitive effects of AMA’s action  Koefoot : sometimes H had people who were not surgeons do post-operative follow-up on patients. But (American College of Surgeons) ACS said that the only people who could do these follow ups were other surgeons = boycott. Not per se illegal???  General rule: intent is relevant on the issue of an anticompetitive effect. If the Ds intended to restrain trade it shows that they thought it would have an anticompetitive effect. But still have to look to see whether there actually was that effect. California Dental Ass’n v. FTC, 1999

CDA is a voluntary NP association of local dental societies to which 20,000 dentists belong, including about ¾ of those in the state. Code of Ethics: Although any dentist may advertise, no dentist shall advertise or solicit patients in any form of communication in a manner that is false or misleading in any material respect. Certain disclosures dentists must make under state law when advertising. FTC alleged the CDA violated the FTC Act: CDA had unreasonably restricted advertising:price advertising (discounted fees) and advertising relating to the quality of dental services. FTC Act: prohibits unfair competition and deceptive acts or practices.  Issue: whether a “quick look” sufficed to justify a finding that CDA violated the antitrust laws. Did the CDA violate the Act?  The restrictions on advertising are designed to avoid false/deceptive advertising in a market w/ little info available to patient  Difficult for customers or potential competitors to get and verify information about the price and availability of services: o Why? Advertising for professional services is rare, not easy to compare service packages o Danger: to competition associated with misleading advertising.  Quality of professional services is hard to monitor by individual patients b/c of the knowledge required to do so and difficulty in determining whether an outcome is attributable to the quality of services or something else  Advertising restrictions protect patients from misleading or irrelevant advertising  Challenges to informed decisions for patients calls for more than a cursory treatment of the restrictions (Quick look insuff) Price-Fixing Law Arizona v. Maricopa County Medical Society, 1982 Maricopa Foundation (D) was a corp composed of docs engaging in private practice (70% of the county’s docs were members). The Pima Foundation (D) was a similar corp w/ 400 docs. Each org adopted a schedule of fees imposing a max amt that member doctors could charge. The docs were fully reimbursed by the insurance co for services. A patient under the plan was guaranteed complete coverage if treated by a foundation member. This practice was challenged by the state as price-fixing in violation of the Sherman Act.  Rule: Price fixing agreements are unlawful per se under the Sherman Act.  Price fixing = a conspiracy to effect raising, depressing, fixing, or stabilizing the price of a commodity in interstate or foreign commerce.  Purpose of prohibition= faith in competition as a market force and not on a policy of low selling prices  The rule is violated by a price restraint that provides the same economic rewards to all docs regardless of their skill, experience, training, or willingness to employ innovative and difficult procedures in individual cases.  The restraint discourages entry into the market and may deter experimentation and new developments by individual docs.  Does not fall under the exception for professionals; the price fixing was not premised on public service or ethical norms. The quality of the professional services that members provide are not enhanced by the price restraint. The claim that the price restraint will make it more affordable for customers is indistinguishable from any other provider of goods or services.  The docs are selling their services to certain customers at fixed prices and are affecting the prevailing market prices Notes:  Here, the docs in the foundation compete with one another for patients. The doctors combination in the form of the foundation does not permit them to sell any different product than medical services.  Foundation is not analogous to the docs forming a partnership in which it would compete as one in the market.  All the docs agreed to maximum prices to stave off from HMOs moving into the market. It doesn’t matter that it was a maximum v. minimum fix on price. Even though the prices can be fixed by someone, docs don’t have to do it. Ocean State Physicians Health Plan v. Blue Cross & Blue Shield of Rhode Island, 1989 Ocean State (HMO) provided more coverage and charged lower premiums. Many subscribers switched from BC to OS. To meet this challenge BC instituted 3 new polices: (1) BC created its own HMO (health mate), offering benefits and prices similar to OS. (2) Adverse Selection: BC instituted a policy by which rates were lowest for employers that offered only BC, and highest for employers that offered a competing HMO such as OS, but that declined to offer Health Mate. (3) Prudent Buyer: BC doesn’t pay a doc more for any service than that doc was accepting from any other insurance co, like OS, causing many docs to resign from OS to avoid a reduction in their BC fees.  Does BC’s conduct violate §2 of the Sherman Act: unlawful to monopolize any part of trade or commerce among the states.  McCarran-Ferguson Act: (Health Mate and Adverse Selection practices – are exempt from antitrust scrutiny)

o Exempts from the antitrust laws all conduct that is part of the business of insurance o Health Mate and the adverse selection policy qualify as the “business of insurance” (3 criteria)  HM = insurance co that spreads policyholder’s risk; AS – pricing policy that involves risk spreading  HM and AS directly involve the relationship b/w the insurer (BC) and the insured (policyholders).  HM and AS are limited to entities in the “insurance industry”  The Prudent Buyer Policy: does not violate §2 of the Sherman Act o Involves BC’s relationship w/ the docs, not with the subscribers o Monopolization requires (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth due to superior product, business jmt, historic accident o BC has a monopoly, but acquired its advantages legitimately; issue- did they maintain its position improperly? o § 2 does not prohibit vigorous competition, only “exclusionary” conduct (behavior that not only (1) impairs the opportunities of rivals, but also (2) either doesn’t further competition or does so in an unnecessarily restrictive way) o A policy of insisting on a supplier’s lowest price (assuming the price is not predatory or below the supplier’s incremental costs) is not exclusionary – it actually furthers competition (even if the company has monopoly power)  Kartell v. Blue Shield: a health insurer like BS is viewd as a purchaser of the doctor’s services. The insurer, like any other buyer of goods or services is lawfully entitled to bargain for the best price Note: Adverse Selection Policy of pricing: adverse selection = tendency for younger and healthier people to opt for HMOs like OS when available, leaving older and sicker people in the standard BC pool. Result – health care costs for standard BC would be higher in employer groups that offered an HMO option than in ones that didn’t. Federal Trade Commission v. Tenet Health Care Corp, 1999 Lucy Lee H and Regional H are the only two Hs in Poplar Bluff. Tent (D) owns Lucy Lee, a general acute care H that provides primary and secondary care services. Regional H is also a general acute care H providing primary and secondary services. D entered into an agmt to purchase Regional to operate it as a long-term care facility and consolidate inpatient services at Lucy Lee. The Hs filed a premerger certification w/ the FTC and FTC filed a complaint alleging that the H’s merger would create lessen competition for primary and secondary inpatient hospitalization services in the area in violation of the Clayton Act – holding: merger not in violation  To determine if there is an antitrust violation, must first determine the relevant market, which consists of 2 components: o Product market (the delivery of primary and secondary inpatient hospital care services) o Geographic market (includes potential suppliers who can offer consumers a suitable alternative to the D’s services)  Geographic Market Proposals: o FTC says the geographic market is a 50-mile radius from downtown Poplar Bluff. It is from this service area that the 2 Hs get most of their patients (90%). The FTC says the geographic market includes only 4 other Hs. FTC says the merged Hs will have a market share of 84% of this geographic market. o Tenent says the geographic market is a 65-mile radius from downtown Poplar and includes 20 Hosptials  FTC’s description of the relevant geographic market is too narrow o There are many alternatives in the surrounding towns for Poplar Bluff residents. 22% of Poplar already use hospitals outside the FTC’s proposed market for treatment that is already offered at Poplar hospitals o Hs already used by patients outside the service area, can act as a check on the H’ market share w/in the service area o Many patients are already close in proximity to other Hs in other towns  Nonprice competitive factors: o Quality - One reason that people already go outside of Poplar is the perceived difference in quality of care o Merged entity will enhance competition. A H that is larger and more efficient will provide better medical care and will be able to attract more highly qualified docs and specialists. Merged entity will enhance competition Health Care Fraud and Abuse: the potential for self-dealing and the anti-kickback law The Federal Anti-Kickback Statute is a federal criminal statute that generally prohibits the offering, payment, solicitation, or receipt of any remuneration in order to induce referrals to another person or entity for the furnishing , or arranging for the furnishing, of any item or service that may be paid for in whole or in part by Medicare , Medicaid or other federally-funded health care programs. The statute is structured broadly to reach any activity that could impact referrals. The purpose of the statute is to curtail the corrupting influence of financial incentives on medical decision making.

 A determination of guilt or liability under the statute is dependent upon a court finding that the accused individual or entity possessed a "knowing and willful" level of intent when engaging in the prohibited action.  Jurisdictions have interpreted the "knowing and willful" requirement of the statute differently.  The single purpose test articulated in [United States v. Greber] states that if a single purpose of the remuneration is to obtain or induce referrals, the statute is violated.  On the opposite end of the spectrum, [Hanlester Network v. Shalala] held that the intent element required both proof of knowledge of the law and the specific intent to violate it.  The holdings of most cases lie in between these two extremes.  Antikickback law makes it a crime to knowingly and willfully to offer,pay, solicit or receive any remuneration in exchange for referring for a health care service Hanlester Network v. Shalala, 1995 P and SKBL entered into an agmt that SKBL would provide lab mgmt services to all joint venture labs in which P had an ownership interest. Most of the tests that docs ordered from P’s labs were performed at SKBL facilities. P began selling limited partnership shares in joint venture labs to docs. Pmts to doc-partners was on the basis of shares held, not the number of referrals of lab services to joint venture labs. An agent of P told prospective limited partners that the number of shares they could purchase were contingent on the volume of business they referred to the labs. DHHS brought a claim that Ds had violated §1128B(b)(2) of the Social Security Act by offering and paying remuneration to physician-investors to induce them to refer laboratory tests to the three Hanlester laboratories. Claimed Ds violated §1128B(b)(1) of the Act by soliciting and receiving payments from SKBL in return for referrals of lab tests and proposed that all of the Ds be excluded from the Medicare and state health care programs.  Where docs receive limited partnership profit shares under a scheme to knowingly induce referrals to labs, the profit-sharing plan violates §1128B(B)(b)(2) of the SS Act.  Remuneration must have been knowingly and willfully paid or offered to induce referrals of program-related business. o Inducement = means an intent to exercise influence over the reason or jmt of another in an effor to cause the referral  P did not unlawfully induce referrals in the way it marketed the limited partnerships  P intended to allow docs to profit indirectly from referrals when they could not do so directly  A high rate of return for high volume of referrals is not enough to show a violation of 1128B(B)(b)(2).  The arrangement was not a per se violation of the act o Knowingly and willfully: knew that the act prohibits offering or paying remuneration to induce referrals and engaged in the conduct with the specific intent to disobey the law  But P’s agent made statements to potential investors that were clearly intended to induce referrals to joint venture labs. o Shares were to be sold based upon the volume of referrals to the lab o P is vicariously liable for the stmts made by its agent. Since liability emanates from the agent, the untrustworthiness of the joint venture ended when the agent left, so exclusion from Medicare or Medicaid programs is unnecessary .  §1128B(b)(1): no evidence that Ds intentionally solicited or received remuneration from SKBL in return for referrals. Notes: §1128B(B)(b)(2): whoever knowingly and willfully offers or pays any remuneration (including any kick back, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person purchase, lease, order or arrange for or

recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under Medicare or Medicaid shall be guilty of a felony  §1128B(B)(b)(1) prohibits solicitation or receipt of remuneration “in return for” the referral of program –related business and  (b)(2), proscribes offers or payments of remuneration “to induce” referrals of program-related busines.  Don’t need proof of an agreement to refer program-related business to violate either subsection of the anti-kickback statute. Focus is on the inducement factor  Remuneration = anything direct, indirect, overt or covert, in cash or in kind  Must be knowingly and willfully – don’t want it to be a strict liability crime United States v. McClatchey McClatchy recruited the Lahue brothers who ran the Blue Valley Medical Group – which provided care to patients in nursing homes. Lahue brothers came to Baptist and offered to sell them the medical group – baptist declined. McClatchy = Chief Operating Officer of Baptist. Still wanted them to have a relationship w/ baptist so he offered to pay each doc of Lahues 75K a year for being a director of gerontology at Baptist. Lahue started referring their nursing home patients to Baptist. (payment for referrals). The Lahues were not doing their work. Baptist merged w/ another corp and their lawyer (Thompson) reviewd Baptist’s contracts – questioned the contract b/c of the anti-kickback law. So he kept on redrafting but couldn’t satisfy the parties. D violated the Medicare Antikickback Act  sufficient evidence to show that McC knowingly and willfully offered remuneration in exchange for referrals  Willfullness = intentional – knowing it is against the law  McC’s conduct = a reasonable jury could infer that McC acted knowingly and wilfully o He knew the lahues had not performed substantial services under the K o Knew people were not interested in having the lahues perform these services, but did it anyways to get the referrals o He understood how important the doc’s patient referrals were to the hosptial’s financial health o His lawyer told him (McC offers the defense of relying on counsel – but court said you could only win if you gave full disclosure to your lawyer and McC didn’t do that) Note: A person who offers or pays remuneration to another person violates the Medicare Antikickback Act so long as one purpose of the offer or payment is to induce Medicare or Medicaid patient referrals; it is not necessary to show that this was the primary purpose. Social Security Act, § 1128B(b)(2)(A), as amended, 42 U.S.C.A. § 1320a-7b(b)(2)(A) . Health Care Fraud and Abuse: False Claims Act False Claims Act: Federal law which allows people who are not affiliated with the government to file actions against federal contractors claiming fraud against the government. The act of filing such actions is informally called " whistleblowing ." Persons filing under the Act stand to receive a portion (usually about 15-25 percent) of any recovered damages. The Act provides a legal tool to counteract fraudulent billings turned in to the Federal Government. Claims under the law have been filed by persons with insider knowledge of false claims involving health care US v. Krizek, 1994 (district ct) D = psychiatrist. His wife maintained his billing records. At issue are reimbursement forms submitted by the Ds to Pennsylvania Blue Shield (“PBS”) in connection with D’s tx of Medicare and Medicaid patients. A doc providing services to a Medicare/Medicaid recipient submits a claim for reimbursement to a Medicare carrier (PBS) on a form called the HCFA 1500, which requires the doc to provide a five-digit code identifying the services for which reimbursement is sought. D’s used the 90844 code (45-50 session) for most of their sessions. Gov’t contends that D’s made over 8,000 false reimbursement claims in violation of FCA Gov’t argues: Ds had used the 90844 code when they should have been billing for shorter, less-involved txs. Medical Necessity : the gov’t was unable to prove that D rendered services that were medically unknecessary

Improper Billing: Was D’s use of the 90844 (45-50 minute psychotherapy session) appropriate?  Gov’t claims that whenever D would see a patient, regardless of whether he simply checked a chart or spoke w/ a nurse, his wife or employee would on the vast majority of the time, submit a bill for CPT code – 45-50 minutes session.  Gov’t claims that the definition of 90844 code requires 45-50 minutes of face to face contact with the patient.  Bundling of services: this is okay (can charge for time spent on the case in general, not just face to face time) o billing for the total amount of time spent on a patient’s case and not just face-to-face contact. o Ds reasonably believed that they were allowed to request reimbursement for all related services – for the bundle o It is a common and proper practice among docs to “bundle” a variety of services o The CPT codes never use the term “face-to-face” in its code description – no FCA liability for bundling services Billing Irregularities:  Doc did not supervise billing practices – had no idea what was going on. His wife and employee were responsible  Wife and employee assumed that when D saw a patient it was for a 45-50 minute session unless specifically told otherwise  Serious lack of communication and no controlled billing system resulted in submission of 45-50 minute sessions when D could not have spent the requisite time providing services. (submitted claims totalling 21 hrs of services w/in one 24 hr day)  Bench-mark for excessive billing is the equivalent of 12 “90844” submissions in a single day -liable for bills in excess of that Scienter: D acted w/ reckless disregard as to the truth of falsity of the submissions – violated the FCA  Ds argue that they should not be held liable under the FCA b/c their submission of excess bills to Medicare/Medicaid was at most negligent and not “knowing” within the definition of the FCA statute  Under the FCA, the D must “knowingly” submit false claims.  “Knowingly” o actual knowledge of the information; o acts in deliberate ignorance fo the truth or falsity of the info; o acts in reckless disregard for the truth or falsity of the information. o No specific intent is required: Act does not apply to mere negligence but gross negligence is unnacceptable NOTES:  FCA = civil cause of action  It would clearly be a false claim if the services D provided were not medically necessary  How did the Ds get into this mess – he didn’t make any notes in his chart on what services he provided and for how long…  Burden of proof – gov’t must prove by a preponderance of the evidence that D violated the FCA  The doc acted in reckless disregard – should have supervised the billing that was submitted under his name to the gov’t  Was the CPT Code ambiguous enough that the D could have reasonably thought that he could bill for a 45-50 minute session for a single visit with a patient? YES – bundling of services is standard practice  FCA: any person who knowingly…causes false claims is liable  He knowingly submitted false claim, so now the issue is – how many claims?  Scienter = knowledge (mens rea for civil cases)  After this case, it is harder for people to claim ignorance of their billing practices.  Upcoding = doctor picks a higher code to bill at a higher rate US v. Krizek, 1997 (circuit court) DC found Ds liable for knowingly submitting false claims and entered jmt against Ds for $168,000. Case was referred to a Special MasterUpon who was to investigate the 8,000 challenged CPT codes and apply the 9 hr presumption to determine the number of false claims → damages. SM treated each of the 1,149 false code entries as a separate claim, even where several codes were entered on the same HCFA 1500. What is a claim?  Ds assert that the “claim” is the HCFA 1500 even when the form contains a number of CPT codes.  A “claim” under the FCA is a demand for money (one request)– focuses on the specific conduct of the D  Gov’t argues that b/c it uses the CPT code in processing the claims, the CPT code, and not the HCFA must be the claim.  The claim = the HCFA form. The CPT codes only explain how the D computed his request/ came to his total. Mens Rea: DC properly intepreted “reckless disregard” to be an extension of gross negligence  The FCA imposes liability on an individual who “knowingly presents” a false or fraudulent claim.  D’s argue that the DC impermissibly applied the FCA by permitting gross negligence to satisfy the Act’s scienter req  Question is whether “Reckless disregard” is properly equated w/ willful misconduct or with gross negligence. Answer = GN

 Reckless disregard = an extreme version of ordinary negligence: o The Act is intended to reach the “ostrich w/ his head in the sand” problem where gov’t contractors hide behind the fact that they were not personally aware that such overcharges may have occurred. (Legislative History) o “Reckless disregard for the truth or falsity of the information” – has the same meaning as gross negligence o The Act is intended to apply in situations that could be considered GN where the submitted claims to the Gov’t are prepared in such a sloppy or unsupervised fashion that resulted in overcharges to the Gov’t  The D’s conduct constituted reckless disregard (ex – they submitted claims of services performed totalling more than 24/day) Notes:  3 x the false claims = damages  $5-10,000 per claim  8,000 false claims x 3 (5-10K) = 81 million (that is how the gov’t calculated damages)  What could the gov’t have done when they found Ds were making false claims? (1) settled (2) could have brought criminal charge against D (under the Criminal False Claims Act). (3) civil FCA Fraud and Abuse: Anti-Kickback Law Safe Harbors and Stark Laws Odrich v. Trustees of Columbia University (NY) 2 docs were denied part-time appointments to D’s faculty b/c of P’s refusal to pay D’s 10% of their income generated by P’s private practice b/c such payment constitutes illegal fee-splitting. Ps first started off as full-time employees and were required to render professional services and the university paid the reasonable expenses of their practice = salary, rent, overhead, malpractice insurance. The Ps wanted to go to part-time employment in order to resume their private practice but still wanted to remain members of the faculty. Part time employment is needed by Ps in order to have staff privileges at the H associated w/ D’s medical school. Ct held that P’s payment of the “Dean’s Tax” (5% of their income would be used at the dean’s discretion) constituted illegal fee splitting in violation of Education Law § 6530(19) and § 6531 , where Ps are no longer employees of D’s university faculty practice corporation, and D is no longer providing Ps with salary, employee benefits, facilities, supplies, staff or malpractice insurance  10% of all their patient billing – whether it was done at their private practice or at the medical school  NY Education Law – governs docs in regard to professional conduct  No reason for the fee split – this is unlike a physician group that splits the fees; no shared responsibility  The parties could renegotiate and come up with a reasonable fee for the docs to be able to use Columbia’s medical facility – be like a space rental  NY Public Health Law §238-a (prohibits physician referrals) basically parallel to the federal stark law.  Public Health Law 2801-b – (Janda case) cannot w/hold privileges unless due to concerns patient care N.Y. Education Law §6509-a The license of a person may be revoked, suspended or annulled if that person has:  Directly or indirectly requested, receieved or participated in the division, transference, assignment, rebate, splitting or refunding of a fee for, or has  Directly requested, received or profited by menas of a credit or other valuable considreation as a commission, discount or gratuity  In connection w/ the furnishing of professional care, or service, or for the sale, rental, supplying or furnishing of laboratory services or supplies, medication, care or treatment  BUT, such pesons are not prohibited from practicing as partners, in groups or as professional corporation or as a university faculty practice corporation nor from pooling fees and moneys received for professional serivces furnished by them. They can also share, divide or apporition the fees received by them or by the partnership N.Y. Pub. Health L. §238-a : Prohibition of financial arrangements and referrals

 A practitione authorized to order clinical laboratory services and pharmacy services may not make a referral for such services to a health care provider authorized to provide such services where such practitioner or immediate family member of such pratitioner has a financial relationship with such health care provider.  Exceptions: o Practitioner’s services – provided personally by another practitioner in the same group as the referring practitionre o In-office ancillary services  Payments made for the rental or lease of office space does not constitute an illegal compensation arrangement if: o Written agreement, signed by the parties for the rental or lease of the space o Rental or lease is for at least a year o Payment is consistent w/ fair market value o The amount of the aggregate payments does not vary based on the volume or value of any referrals of business b/w the parties, and would be commercially reasonable even if no referrals were made b/w the parties Stark physician referral laws: 42 USC § 1395nn Limitation on certain physician referrals: Stark law , actually three separate provisions, governs physician self-referral for Medicare and Medicaid patients. Physician self- referral is the practice of a physician referring a patient to a medical facility in which he/she has a financial interest, be it ownership, investment, or a structured compensation arrangement. Critics of the practice allege an inherent conflict of interest , given the physician's position to benefit from the referral. They suggest that such arrangements may encourage over-utilization of services, in turn driving up health care costs.  Unlike the FCA w/ a scienter requirement and the Anti-kickback, which is criminal – the stark laws is strict liability  Prohibits referrals by docs (or an immediate family member of doc) w/ any entity w/ which there is a financial relationship  Immediate family – defined very broadly – family or origin, step families, in-laws…  Referrals for designated services increase health care costs – lead to unnessecary care – iotregenic injuries  Services includes: laboratory services, physical therapy, OT, radiology, radiation, durable medical equipment, home health services, outpatinet rx drugs, inpatient/outpatient services  If a physician (or an immediate family member of the physician) has a financial relationship w/ an entity, then the physician may not make a referral to the entity for the furnishing of designated health services for payment.  Financial relationship: an ownership or investment interest in the entity, a compensation arrangement b/w the doc and entity  Can not charge Medicare/Medicaid or anybody else (insurance or patient – no balance billing)  Rental Agreements: o If you are going to refer to an entity in which you have a financial interest (rentals/leases)– writing, lease must specify the premises to be used, can only lease amt of space necessary for the practice, fair market value, cannot take into account volume of referrals  Physician recruitment – doc cannot be required to refer patients to the hospital. The amt of renumeration cannot take into account the volume of referrals (See revenue ruling 97-21)  Exceptions: relationship is structured in a certain way that we can be confident that the doc won’t engage in over-referrals o Physician services: if services are provided personally by another physician in the same group practice as the referring physician (physicians can refer to themselves – come back and see me in two weeks). Doc can refer to another doc that is in the same group practice as they are in – the group practice has to bill under the same group number. o Doc can refer for in-office ancillary services that are furnished personally by the referring physician or personally by another physician in the same group practice as the referring physician (other than durable medical equipment).  I have problems w/ my chest, doc sends me to get an x-ray across the hall from another doc w/in the same group practice– that is okay o Pre-paid plans – includes HMOs or a Medicaid Plus Choice HMO. o Electronic prescribing o Investments – docs can invest if it is generally open to the public. If you own johnson and johnson stock, since it is open to the public, doc can make referrals there – his jmt won’t be distorted in this situation. You can refer to a H – but must be the whole hospital ,if the doc has an ownernship interest in a part of the hospital (the cardiac unit).

 Sanctions for violation of Stark La: $15,000. If there is a conspiracy - $100,000  Purpose of Stark law: is to prevent 3 abuses: (1) ordering unnecessary services, (2) increasing charges for needed services (3) influencing w/ financial considerations the decision of where best to refer a patient  Four soures of referral fee prohibitions: anti-kickback statute; stark bill; fee-spliting (state); referral fees or physician investmetns (state).  In contrast to prohibitions of referral incenvtives=prohibition of incentives to reduce Medicare or Medicaid services (FCA)  Stark Bill: o Applies to self-referral arrangements in which docs are rewarded for sending or keeping business in institutions they own, contract with, or are employed by. o An ownership interest in a medical facility where the doc practices means that they profit not only from their own service fees but also from the earnings of the facility →incentive to refer business to themselves → run more tests and perform more services o Civil, not criminal: imposes strict liability – intent to induce referrals is not an element Anti- kickback law: Safe Harbors: 1001.952  If you meet the requirements of the safe harbor you cannot be criminally prosecuted  2 kinds of investment safe harbors: o Large organizations: if a doc invests in Johnson and Johnson – he won’t be steering patients to J and J – his personal referrals will not make that much of a differnce o If an org has active and passive investigators; no more of 40% of the investment interest may be held by people in a position to make or influence the referrals  Space Rentals - H might rent space to a doc conveniently across the street from the H  Equipment rentals – H rents an expensive piece of machinery to a physician group o Space and equipment rentals must be an arms length transcation b/w lessee and lessor o Must be a one year minimum to fit within the safe harbor – to minimize the possibility of paying for referrals. A H might do a shorter deal to see how many referrals the doc makes before determining whether they want to continue leasing to doc o Contract must be in writing; Fair market value; Fully disclosed o Can’t be set up so that a doc is receiving money for referrals  Personal service and management: o Same requirements as space and equipment rentals  Sale of a physician practice – the period from the K to the completion can’t be more than one year. Selling practitioner cannot make referrals after a year –  Employee – it is okay for a doc to be a full time employee  Group purchasing organizations –  Can waive copayments and deductibles under certain circumstances  Office of Inspector general enforces the anti-kickback law News Article: 2 Drug Makers to Pay Millions to Settle Fraud Case  The drug company was helping the docs get reimbursement for drugs that they were getting at no cost (free samples). Docs were billing Medicare for the drugs –  Violates the anti- kickback law o the drug company were doing this knowingly and willfully with the goal of inducing the doctors to “referrals” that the federal gov’t would pay for o Docs were also getting lavish vacations…  Violates the False Claims Act: the claims that the docs sent to the gov’t were false.  Under the False Claims Act o Qui tam plaintiff = whistle blower/disgruntled employer can file a claim. If the gov’t is sucessful the P gets 15% - 25% percent of the total recovery. If the gov’t decides not to bring the action, the P can still go forward and would ger 25-30% o If people didn’t come forward and tell the gov’t about this wrong, the gov’t would never know about it.

o Damages: for each false claim – $5-10,000, plus treble damages o Civil statute.