The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

The Supreme Court announced earlier this week that it would rule on challenges to the Patient Protection and Affordable Care Act (PPACA), President Obama’s healthcare reform law. After four Federal Courts of Appeal had reached conflicting conclusions on the constitutionality of all or parts of the law, many experts had expected the Court to hear the case this fall.  Others had believed the Court would hold off on hearing the case until after the 2012 election, due to concerns fboth of influencing the election and of “ripeness” of the case.

At the heart of the legal battle is the "individual mandate", which requires all Americans to buy health insurance by 2014 or pay a penalty.  The Court could uphold all of PPACA,  strike down just the individual insurance mandate or other provisions,  invalidate the entire law or even put off a ruling on the mandate until it is fully ripe (ie after the individual mandate has taken effect in 2014).

A group of 26 states had joined to argue that Congress exceeded its powers and that all of the law should be struck down. The states also challenged the expansion of Medicaid on the grounds Congress unconstitutionally forced the expansion on the states by threatening to withhold funds. The Obama administration has argued that Congress could adopt the insurance purchase requirement under its powers in the Constitution to regulate interstate commerce.

Oral arguments should take place in March, and the ruling is expected by June 2012.  We will continue to track progress of the case and discuss its impact on various healthcare sectors.

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We have discussed in prior posts the unique regulatory enforcement climate that providers and investors currently find themselves.   It is critical that anyone contemplating investment in a healthcare business not only understand the regulatory risks and pressures of that industry but carefully review the target company’s compliance protocols for dealing with those challenges in a proactive way.   And the Patient Protection and Affordable Care Act (aka PPACA, ACA or healthcare reform) makes having an appropriately structured compliance plan even more essential than ever.

Under PPACA, certain healthcare providers, as a condition to participation in Medicare, must have in place a compliance plan that meets the requirements to be laid out by the Secretary of HHS. The PPACA lists several detailed requirements for the compliance plans of skilled nursing facilities (SNFs), likely due to the industry’s historical scrutiny and highly publicized investigations from the SNF industry in the past few years. SNFs must implement these compliance plans pursuant to the requirements of Section 6102 of the PPACA within 36 months following passage of the PPACA, and regulations must be issued by the Secretary of HHS for SNFs with additional guidelines no later than two years following passage of the PPACA on March 23, 2010. 

The Secretary of HHS is also mandated with determining which additional provider types must have compliance plans in place and what those plans must entail. HHS has informally indicated that it would likely roll out the compliance plan requirements on an industry-by-industry basis.  Although HHS has been laden down with rule-making obligations resulting from PPACA in the past 18 months,  the agency has indicated that the requirements for most industries will closely follow the key components of the DHHS Office of Inspector General model compliance plan published for healthcare providers in 1997, which has subsequently been updated.   These core elements for a compliance program are as follows:

 i.            Compliance standards and procedures must be adopted and followed.

 ii.           Specific individuals with authority and sufficient resources must be assigned to oversee compliance.

iii.          The organization must exercise due care to ensure that the above authority is not delegated to an individual with a propensity to engage in PPACA criminal, civil and administrative violations.

iv.          The organization must take steps to educate its employees and agents of the compliance program.

v.           The organization must take reasonable steps to achieve compliance with its standards.

vi.          The standards and procedures must be consistently enforced.

vii.         If an offense is detected, the organization must respond appropriately and prevent similar offenses.

viii.        The organization must periodically reassess the compliance programs and make changes necessary to reflect changes within the organization.

When reviewing a company’s compliance plan, it is essential that the provider and investor not only ensure that there is a plan in place but also that the plan is well-tailored for that company’s key risk management needs.  To be truly effective the plan must be specific to that company’s industry and risks, with associated useful training and response tools such that the plan can really be the guide for a full compliance program.   Both providers and investors should ask, how is the plan truly used and made a part of daily operations?  Understanding a company’s compliance culture can help everyone assess the risks it may be taking with investment in the company and what challenges, if any, may be on the horizon for the company.  

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This week, the 6th Circuit Court of Appeals upheld the constitutionality of the individual mandate portion of the healthcare reform law, the ACA (also known as PPACA).  In this first decision from a Federal Court of Appeals on the matter, a Republican appointee joined a Democratic appointee Wednesday for a 2 to 1 decision upholding the law.  The decision affirms the ruling of a federal circuit judge in Michigan.  

We have discussed in prior posts that the 6th Circuit case is one of several similar challenges pending in Federal Courts of Appeal around the country.   In mid-June, the 11^th Circuit Court of Appeals heard arguments in the government’s appeal of Circuit Court Judge Vinson’s earlier ruling that the individual mandate is unconstitutional and that, given the lack of a severability clause, the entire law is therefore unconstitutional.  And the 4^th Circuit heard arguments in mid-May in cases brought by the Commonwealth of Virginia and Liberty University challenging the individual mandate and PPACA generally.  The nation continues to await these additional Circuit rulings, with the expectation that some or all of these cases will be consolidated by the US Supreme Court for expeditious hearing this fall.

Available here are prior posts discussing these PPACA challenges, legislative efforts to repeal portions of the law and the Physician Hospitals of America (PHA) and Texas Spine and Joint Hospital (TSJH) court challenge to Section 6001 regarding limitations on physician-owned hospitals.

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Healthcare providers are often the first to feel the effects of Medicaid funding shortfalls.  Economic turmoil, federal law and political pressures leave states few options but to slash the rates they pay to providers or take other actions regarding program eligibility discussed in Part I of our Medicaid Budget Crisis series.  A recent Kaiser Family Foundation study found that 39 states cut or froze provider rates in 2010 and 37 states have either planned or implemented rate restrictions in 2011.   Yet, because Medicaid covers approximately 68 million beneficiaries nationwide, many providers continue to rely to varying degrees on Medicaid reimbursement.  As John Iglehart's piece in the New England Journal of Medicine describes, in 2010 the program spent approximately $406 billion on acute and long term care, representing one sixth of the United State’s overall healthcare spending.  Assuming that the requirements of the healthcare reform law, The Affordable Care Act (aka PPACA) continue to take effect as scheduled, these numbers are expected to continue to grow, some estimate by over 16 million people. The challenge, particularly for healthcare investors, is determining which providers can benefit from Medicaid programs despite state budget cuts.  In a continuation of our series on the Medicaid budget crunch and its affect on healthcare investing, this post will consider some of the healthcare providers that are well positioned to flourish (or at least emerge relatively unscatched) as states and the federal government assess strategies for Medicaid budgets. 

The first type of business that are more likely than others to emerge as winners, or perhaps more accurately at least not be cast as losers, from the Medicaid budget crunch are those that do not rely heavily on state legislatures for their reimbursements.    A few provider types that fall in this category are as follows.

• Dialysis Providers: The best example of this is dialysis providers who receive the majority of their payments from the federal government’s Medicare program. 

• Preventive Care/Disruptive Healthcare Initiatives:   We have discussed in the past certain healthcare thought-leaders' perspectives on the value of disruptive healthcare initiatives, a philosophical shift in the macro system of orienting care and incentivizing clinical outcomes.  As providers focusing on preventive healthcare and those geared toward different stages in the healthcare continuum flourish, those that are typically self pay or commericial-reimbursed rather than  government-reimbursed could be "winners" in the Medicaid budget crunch.

• Primary Care Providers: As a result of PPACA, primary care providers are another group that should enjoy some insulation from state budget issues.  Assuming that PPACA is not repealed or rendered unconstitutional, the legislation calls for a temporary, federally funded two-year increase for payments to primary care physicians starting in 2013.  The increase would pay primary care physicians 100% of the rate that Medicare pays primary care physicians, rather than the historically lower Medicaid rates that each state sets.   At least in the short term, this enhancement should insulate primary care physicians from the volatility in state budgets and, at least for providers in some states, give primary care physicians a significantly enhanced reimbursement rate for each patient that they treat.   
  • Unfortunately, the extent to which this enhanced reimbursement will benefit primary care physicians depends on the state in which a physician practices. While state Medicaid programs have historically reimbursed primary care physicians at lower rates than Medicare, the degree of difference varies dramatically between states.  In 2008, states like New York and California reimbursed primary care physicians at less than half the rate of Medicare.  Therefore primary care physicians in these states stand to gain significantly from the PPACA’s rate enhancement.  On the other hand, states like Alaska, Wyoming and Idaho had Medicaid reimbursement rates that exceeded the Medicare reimbursement rate. Thus, at best primary care physicians in these states will likely see their rates remain the same or possibly even decline as state Medicaid directors reduce their reimbursement rates to bring them into line with Medicare.
  • Finally, primary care physicians must consider whether or not a two year rate enhancement is enough to entice them to open their clinics to Medicaid patients.  In 2008 only 42% of primary care physicians nationally were accepting new Medicaid patients. This compared with 61% of primary care physician accepting Medicare patients and 83% accepting privately insured patients.  For further detail on historical rates and primary care government program activity, see these publications by Stephen Zuckerman and Dennis Smith.

Other potential winners in the Medicaid budget crunch are those businesses who can provide better care with fewer resources and the vendors who will provide the tools to help healthcare providers reach these cost and quality improvement goals.

• Managed Care Organizations:  A number of states are trying to overcome their Medicaid budget issues by pushing more of their Medicaid beneficiaries into privately run managed care plans.  In 2010 13 states and in 2011 20 states expanded their Medicaid managed care programs.  These plans at least purport to save states money and encourage more efficient care because they allow states to pay an insurance company a set fee for each Medicaid patient that a health insurer covers.  A recent USA Today article highlights the business opportunities that the recent state expansion of managed care, combined with the PPACA’s expansion of Medicaid, offers large healthcare payers like Aetna and UnitedHealthcare.  While many industry participants disfavor MCOs because of the manner in which they control costs, at least one state, Florida, is giving hospitals and doctors groups the chance to set up their own managed care networks and compete directly with traditional MCOs.  In theory at least, under this plan, providers will be able to take advantage of some of the business opportunities that MCOs see in the expansion of Medicaid managed care. 

·        Health IT:  Health information technology is another area that has received significant government investment over the past two years.  The American Recovery and Reinvestment Act of 2009 (ARRA) included approximately $27 billion worth of incentives for Medicaid and Medicare providers who “meaningfully” use electronic health records.  The incentives are substantial. Clinicians with at least 30% of their patients (20% for pediatricians) on Medicaid can qualify for up to $63,750 in grants. 

Ultimately, who wins and who loses as a result of a particular state's Medicaid budget crunch largely depends on the state in which a provider practices.  Not every state is experiencing the same level of budget problems and not every state is exacting deep rate cuts to Medicaid providers.  For example, states like Oregon and South Carolina, with large Medicaid budget shortfalls, are resorting to large provider rate cuts, while states like Virginia may be able to avert any rate cut for the upcoming fiscal year other than for outpatient hospital care.  Healthcare providers and investors would be wise to consider the particular circumstances of their states and the providers’ reliance on Medicaid reimbursement when assessing the likely impact of the Medicaid budget crunch on their businesses.

*** The authors would like to thank Tim Hoppe, McGuireWoods LLP summer associate, for his significant contribution to this post. ***

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Last week a three-judge panel of the 11th Circuit heard arguments in the 26-state lawsuit challenging the healthcare reform law, The Patient Protection and Affordable Care Act (aka PPACA or The Affordable Care Act or even the ACA to add yet another moniker). The United States had appealed the decision by Judge Vinson of the U.S. District Court for the Northern Division of Florida, which we have discussed in prior posts.  Judge Vinson had ruled that the individual insurance mandate portion of PPACA is unconstitutional and that because the provisions requiring the individual mandate could not be severed from the rest of the law, the entire law was void.  The issues of interest in the appeal are not only the constitutionality of the individual mandate requirement and PPACA at large, but also whether the District Court correctly held that the federal government can force states to expand their Medicaid programs as a precondition for continuing to receive matching federal funds for their Medicaid programs.  McGuireWoods attorneys Shayna Bowen and Amita Sanghvi have published a more detailed description of the June 8^th oral arguments accessible here.

The 11^th Circuit case is one of several cases pending before Federal courts regarding the constitutionality of all or part of PPACA.  The 4^th Circuit heard arguments in mid-May in cases brought by the Commonwealth of Virginia and Liberty University challenging the individual mandate and PPACA generally.  With a surprising three-judge panel comprised of all Democratic appointees, many experts expect the 4^th Circuit to uphold the constitutionally of PPACA in its entirety and the U.S. Supreme Court to then consolidate the 11^th and 4^th Circuit cases for unusually expeditious hearing this fall.

It is also important to note that in the 5^th Circuit, on May 27^th Physician Hospitals of America (PHA) and Texas Spine & Joint Hospital (TSJH) filed an appeal of the ruling by Judge Schneider in the Eastern District of Texas upholding the constitutionality of Section 6001 of PPACA.  We have discussed in several prior posts the key elements of the PHA and TSJH arguments in the 5^th Circuit case, in which a team of McGuireWoods attorneys lead by Scott Oostdyk and Victor Moldovan are representing PHA and TSJH.   If the Supreme Court voids all of PPACA upon hearing one or both of the more global PPACA cases now  pending in the 11^th and 4^th Circuits, the PHA-TSJH case will become moot.

At the same time that the Federal government is defending legal challenges to PPACA through the courts, a variety of legislative challenges are pending as well, including repeal legislation introduced by U.S. Congressmen Sam Johnson (TX-3) and Doc Hastings (WA-4).

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As the Fourth Circuit Court of Appeals considers the constitutionality of the individual mandate of the Affordable Care Act (aka PPACA, or healthcare reform) and various GOP healthcare bills are deliberated, the healthcare plan spearheaded by Wisconsin Rep. Paul Ryan has  emerged as one platform for 2012 presidential hopefuls to stake out their positions on the U.S. healthcare system.

Ryan’s plan, part of the GOP budget proposal for 2012, would establish insurance exchanges for Americans age 55 and older and subsidize their purchase of a private insurance policy based on their income through vouchers. Republicans backing the plan say it would help cut the federal budget deficit by $5 trillion over the next 10 years.

Among other concerns, critics point out that the value of those vouchers would rise only as fast as overall consumer inflation, which has beeen outpaced by the rise in health costs for years, a result that would leave beneficiaries on the hook for rising health costs. Mindful of the political risks, most Republican presidential hopefuls treaded gingerly after Ryan and supporting House Republicans unveiled the plan.

A US News report describes the various positions on the Ryan plan publicly expressed by Republican hopefuls in the month since it was announced, ranging from former Minnesota Gov. Tim Pawlenty’s general approval of the ideals without approval of the Paul plan itself, to Indiana Gov. Mitch Daniels’s more clear support, to various others lingering on the fringes. 

Now that he is officially a candidate for the Republican presidential nomination, Newt Gingrich is beginning to more firmly define his positions on various on healthcare reform issues. Although, not surprisingly, he has been generally critical of Obama healthcare initiatives, on May 15^th Gingrich appeared on Meet the Press discussing his distaste for the Ryan bill as akin to Democrat efforts at imposing such a “radical change,” instead preferring “a system where people voluntarily migrate to better outcomes, better solutions, better options”. And while Gingrich has been generally critical of the Obama healthcare initiatives, he has endorsed the individual mandate to buy insurance that is one of the most well-known and controversial aspects of The Affordable Care Act. Not surprisingly, Gingrich’s comments have drawn criticism from many on the left, including a likely competitor for the GOP nomination, former Pennsylvania Sen. Rick Santorum who has defended the Ryan plan as not radical but a necessary and appropriate curb on the healthcare program effects on the federal budget deficit.  

We fully expect various presidential hopefuls to continue to define their healthcare positions in the coming months and will continue to discuss these developments.

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Yesterday, CMS released the much anticipated proposed regulations regarding the Shared Savings Program contemplated in Section 3022 of the healthcare reform law, PPACA.  The 429-page set of regulations is expected to provide greater clarity re CMS's implementation of HHS's authority to contract with Accountable Care Organizations (ACOs) under shared savings or other payment arrangements.  The proposed rule provides for a 60 day public comment period.  

 In conjunction with the CMS release, yesterday three other federal agencies issued related guidance.  First, the FTC and DOJ jointly issued a Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program.  The joint proposed statement seeks public comment until May 31st regarding the two agencies' guidance, including the new proposed antitrust "safety zone" that would be created.

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This past Thursday, March 3^rd, US District Court Judge Roger Vinson stayed implementation of his January 31^st ruling declaring the “individual mandate” of the Patient Protection and Affordable Care Act (PPACA) unconstitutional and the law as a whole therefore void. The stay came in response to the federal government's motion on February 17^th seeking clarification as to whether his ruling relieves the original parties to the case from obligations under PPACA while his ruling is on appeal.  In order for the stay to remain in effect during the appeal process, the federal government must, within seven days, file an appeal seeking an expedited appellate review with the Eleventh Circuit or the Supreme Court.

In his order, Judge Vinson pointed out that he thought his original ruling was as plain and unambiguous as it could be and chastised the government for being slow to respond to the January 31^st ruling and even then only filing a belated motion to clarify.   Despite the admonishment, after applying a four-factor test to determine whether to grant a stay pending appeal, Judge Vinson found the factors weighed in favor of granting the stay.

In his ruling, Judge Vinson urged that the public interest lies in a swift resolution of the issue, writing that “[t]he sooner this issue is finally decided by the Supreme Court, the better off the entire nation will be.”

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On Monday, a  federal judge sitting in Florida, Judge Robert Vinson,  declared unconstitutional the portion of the healthcare reform law (aka PPACA, or the Affordable Care Act)  requiring most Americans to buy health insurance by 2014 or face penalties.  Judge Vinson also declared unconstitutional the section of the act that withholds Medicare funds from states that refuse to participate.  This ruling is similar in part to the decision out of Virginia in mid December we'd previously discussed.   However, the Florida ruling is different in one key way - - - Judge Vinson ruled that, because the law contains no savings clause permitting certain provisions to be voided while retaining the remainder of the law, the unconstitutionality of those provisions voids the entire law.

Florida is one of 26 states that has challenged the law to date, while other states have indicated  that they are considering challenging as well.   In contrast to the decisions out of Florida and the Eastern District of Virginia,  federal judges in the Eastern District of Michigan and the Western District of Virginia and have ruled to uphold the "individual mandate" to carry health insurance.

On a related note, the Physician Hospitals of America (PHA) and Texas Spine & Joint Hospital (TSJH) lawsuit challenging Section 6001 regarding physician-owned hospitals may be impacted by the ruling in Florida.   PHA and TSJH have been awaiting an opinion in their case in the Eastern District of Texas from Judge Michael H. Schneider, and they have already filed a motion asking Judge Schneider to adopt the decision and invalidate the ban on physician-owned hospitals.

As the Senate debates whether to vote on the healthcare reform repeal and modification bills introduced over the past several days and other federal courts tackle similar healthcare reform challenges, developments on the healthcare reform front are occurring seemingly daily.  

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The new Republican-controlled House of Representatives has scheduled a bold and symbolic vote to repeal the healthcare reform law (PPACA) next Wednesday, January 12th.  The proposed repeal legislation is expected to be a brief document that simply revokes the law in full.

Because the Senate is still controlled by Democrats, the repeal legislation is expected to go no further than the House, but despite the uphill battle, Republicans are working hard to win over enough Senate Democrats to pass repeal legislation in the Senate as well.  On Monday, key Senate Democrats sent a letter to incoming House Speaker John Boehner vehemently opposing the repeal and warning that a full-scale repeal would take away a 50 percent discount on brand-name drugs for seniors who fall into a coverage gap known as the doughnut hole.  Adding additional concerns to the mix,  the non-partisan Congressional Budget Office reported today that repeal would result in adding $230 billion to the federal debt by 2021.

Although a full-scale repeal of the law seems unlikely now, Republicans are expected to be looking at every available opportunity to slow down or roll back the healthcare legislation.  Many in the new Congress will be sure to stage strong opposition to new rulemakings and appropriations that are necessary to implement the key components of PPACA in an effort to minimize or delay the practical impact of the law. 

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Earlier this week,  Judge Henry Hudson of the United States District Court for the Eastern District of Virginia became the first judge to strike down as unconstitutional the Minimum Essential Coverage Provision of the healthcare reform law, which requires uninsured individuals to carry certain levels of health insurance. ‬‪ In Commonwealth of Virginia v. Sebelius, the court ruled that the insurance mandate provision of Section 1501 was unconstitutional because people not buying health insurance were not taking any action that Congress could regulate as interstate economic activity.‬ 

Although there is no savings provision in PPACA  providing that invalidation of one part of a law does not eradicate the entire law, in this case Judge Hudson ruled that Section 1501 is unconstitutional but did not invalidate the entire healthcare reform law.  The government is nearly certain to appeal the decision, and industry followers believe the Commonwealth of Virginia will then ask the Fourth Circuit Court of Appeals to reconsider the judge's decision that only one part of the healthcare reform law is unconstitutional.  In the meantime, Judge Hudson's invalidation of Section 1501 without striking down PPACA in its entirety may provide additional grounds on which challengers to other portions of PPACA may rely, including in the Physician Hospitals of America and Texas Spine & Joint Hospital challenge of Section 6001 regarding physician-owned hospitals we've previously discussed.

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With the mid-term elections now behind us and the Republicans faring as successfully as generally predicted, all segments of the healthcare industry are looking closely at what the new Congressional power balance will mean for them. With several seats still in question as states finalize vote counts, the House membership will include at least 241 Republicans (largest since 1946) and at least 184 Democrats, while the Democrats will retain the majority with a slimmer margin.   This shift is the largest seat gain by either party since 1948.   Since then, the biggest change had been the 1994 Clinton-term Republican gain.   

High on the Republican agenda will be tackling the Obama-backed sweeping healthcare reform law passed this spring. Although a full scale repeal of the Patient Protection and Accountable Care Act (PPACA) is highly unlikely, Republicans will likely be looking at every available opportunity to slow down or roll back the healthcare legislation.  Many in the new Congress will be sure to stage strong opposition to new rulemakings and appropriations that are necessary to implement the key components of PPACA in an effort to minimize or delay the practical impact of the law. 

The healthcare sectors most immediately effected by PPACA are already reaching out to their seated and newly elected legislators to gain their ear on key issues. It has been well publicized, and we’ve discussed in prior blog posts, that the physician-owned hospital industry was a particular target in PPACA through Section 6001, which contained massive changes to the Stark law exception under which physician-owned hospitals have historically operated and been permitted to bill Medicare/Medicaid for referrals by their physician owners. Physician Hospitals of America (PHA) and its member hospitals will be working hard to educate newly elected legislators on the issues surrounding Section 6001 in an effort to obtain legislative relief through an amendment of Section 6001 or through the rulemaking process. These efforts of PHA are in addition to the ongoing litigation it has waged in conjunction with Texas Spine & Joint Hospital challenging the constitutionality of Section 6001. Even with the new shift in Congressional power, the industry will very likely continue to face powerful opposition, including from the American Hospital Association (AHA), which has the 5^th largest PAC in the country. The AHA and Federation of American Hospitals (FAH) together have spent $6,344,522 since 2007 on their advocacy efforts, a large component of which is tighter restrictions on physician ownership in hospitals.

Other sectors have also already started making moves to ensure their voice is heard. As the new Congressmen and Senators take office and Congressional leadership and committee leadership take shape, we will very likely see the divergent party healthcare agendas again at the forefront of Congressional activity and should soon see which sectors are most heavily impacted.

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With the authorization of Accountable Care Organizations (ACOs) in the healthcare reform law (PPACA), there has been a tremendous amount of industry attention on understanding ACOs and the opportunities and challenges they present. With ACOs as such a hot topic and the variety of forms these organizations can take, healthcare investors can examine not only opportunities in ACOs themselves but in healthcare related businesses that will service or be affiliated with ACOs.   Understanding the role and possibilities of ACOs is highly valuable in order to assess these opportunities.

PPACA directs the Secretary of Health & Human Services to establish a Shared Savings Program under both Parts A and B of Medicare to improve quality and efficiency of the healthcare delivery system no later than January 1, 2012.    ACOs may be created by ACO professionals in group practice arrangements, by networks of individual practices of ACO professionals, by partnerships or joint venture arrangements between hospitals and ACO professionals, by hospitals employing ACO professionals, by such other groups of providers of services and supplies as the Secretary determines is appropriate.

An approved ACO will be assigned Medicare beneficiaries, will participate in the Shared Savings Program and will be eligible to receive additional payments from Medicare when certain performance guidelines are met and cost-savings targets are achieved. The amount of the additional payment will be a percentage of the difference between the estimated per capita Medicare expenditures for patients assigned to the ACO and the cost-savings per capita Medicare expenditures threshold.

While ACOs are often heralded as the solution to the current ailing model of healthcare delivery for Medicare, including the need for enhanced quality, improved outcomes, better coordination of care, and greater cost-savings, there are many misconceptions about the Shared Savings Program and a seemingly unending list of questions about what form ACOs will take under the final regulations. CMS is tasked with fleshing out the details of how the organizations will work and be reimbursed. Right now, CMS has issued very little guidance on its vision of ACOs and the Shared Savings Program, but CMS has issued a brief Preliminary Questions & Answers piece on its website. A recent article by our McGuireWoods colleague Tom Stallings and Brent Rawlings addresses some of the common misconceptions about ACOs and the Shared Savings Program.  Additionally, our colleagues Scott Becker and Helen Suh discuss nine observations in their recent article about ACOs, including movements by commercial payors toward this model.

In future posts we will focus on the businesses that we envision will emerge or evolve to service these ACOs and those potential investment opportunities.  

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In prior posts I’ve discussed the significant impact of the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation) on the physician-owned hospital industry.  Section 6001 of the PPACA stymies growth of the industry by prohibiting expansion of existing physician-owned hospitals and bans any new physician-owned hospitals that are not Medicare-certified by December 31, 2010 (i.e. hospitals violating those limitations will not be permitted to bill Medicare/Medicaid for referrals made by their physician owners). Although a number of exceptions apply to the expansion prohibition, most industry analysts believe meeting the exceptions will be challenging to virtually impossible for existing physician-owned hospitals.

According to a press release issued today by Physician Hospitals of America (PHA), the trade association for the industry, there are approximately 265 existing physician-owned hospitals, 29 of which are scheduled to open and receive their Medicare certification by December 31, 2010. An additional 45 hospitals are currently under development and are not expected to be open or Medicare-certified by December 31, 2010. According to PHA, there were also 39 hospitals that were previously under development but were abandoned as projects due to passage of Section 6001.

In response to Section 6001, PHA and Texas Spine & Joint Hospital (TSJH) jointly filed suit today in U.S. Federal Court, Eastern District of Texas, challenging the constitutionality of Section 6001 on grounds that the law is a violation of due process and equal protection rights, and that the Section is void due to a contradictory, vague and arbitrary nature. TSJH is a privately owned hospital specializing in orthopedic and spine surgery, procedures, and tests which had sought and won local zoning approval to expand its facility with an additional 20 Medicare beds, which expansion project would now be prohibited by Section 6001.

Industry supporters and opponents will be carefully following progression of the lawsuit as the resolution is anticipated to have a profound impact on the ability of the physician-owned industry to thrive.

Scott Oostdyk and Victor Moldovan of McGuireWoods are representing PHA and TSJH in the lawsuit. 

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Now more than ever, it is critical that anyone contemplating investment in a healthcare sector carefully review the target company’s compliance protocols. We have always strongly recommended that investors analyze the company’s compliance program, as well as efforts at adhering to the program requirements, in order to better gauge the company’s overall goals and philosophy regarding compliance. Understanding a company’s compliance culture can help the buyer assess the risks it may be taking with investment in the company and what challenges, if any, may be on the horizon for the company.

Now, under the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation), certain healthcare providers, as a condition to participation in Medicare, must have in place a compliance plan that meets the requirements to be laid out by the Secretary of HHS. The PPACA lists several detailed requirements for the compliance plans of skilled nursing facilities (SNFs), likely due to the industry’s historical scrutiny and highly publicized investigations from the SNF industry in the past few years. SNFs must implement these compliance plans pursuant to the requirements of Section 6102 of the PPACA within 36 months following passage of the PPACA, and regulations must be issued by the Secretary of HHS for SNFs with additional guidelines no later than two years following passage of the PPACA. 

By contrast, the Secretary of HHS is mandated with determining which provider types must have compliance plans in place and what those plans must entail. HHS has informally indicated that it would likely roll out the compliance plan requirements on an industry-by-industry basis. It is likely that the requirements for most industries will closely follow the key components of the DHHS Office of Inspector General model compliance plan published for healthcare providers in 1997, which has subsequently been updated.

For healthcare providers without compliance plans that wish to make early moves toward a full compliance program, or for buyers who seek additional comfort through early implementation, an article entitled “A Practical Compliance Plan Approach for ASCs” authored by Scott Becker, Melissa Szabad and myself is available here. Although this article speaks specifically to the ambulatory surgical center industry, it has practical implications for most healthcare providers. 

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