Archives for December 2012

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Significant Medicare Cases: The Year In Review

In 2012, the Medicare program welcomed another 2 million new beneficiaries to the program, pushing the total number of Medicare beneficiaries to just shy of 50 million. Even as the new members were getting used to new types of enrollment procedures, coverage options, and deductibles and copayments, the program continued to litigate the past, to deal with present-day issues, and to prepare for the future as health care reform continues to get implemented.

The following is an overview of judicial decisions released in 2012 involving Medicare, with a brief look ahead at significant issues looming in 2013.

Medicare Coverage

Jimmo v. Sebelius, D. Vermont, October 16, 2012. A proposed settlement agreement between the HHS Secretary and a class of Medicare beneficiaries will change a long-standing Medicare coverage policy that requires medical or functional improvement or restoration to receive reimbursement for skilled nursing facilities (SNFs), home health (HH), and outpatient therapy (OPT) services. Under the proposed settlement, certain Medicare beneficiaries would be able to receive such services under a new maintenance coverage standard. The proposed settlement arose out of a class action case filed by Medicare beneficiaries seeking declaratory, injunctive and mandamus relief against the HHS Secretary.

Acute Inpatient Hospital

Abraham Lincoln Memorial Hospital v. Sebelius, 7th Cir., October 16, 2012. The district court was correct in finding that the Secretary’s decision to adjust the cost reports of a group of Illinois hospitals to take into account payments the hospitals received from the state just days before paying a health care tax which the hospitals claimed in full as a Medicare cost was proper. The Secretary’s decision (1) was not arbitrary or capricious, or contrary to law; (2) correctly applied Medicare law to the term “actually incurred”; (3) was not inconsistent with her decision in the state plan amendment (SPA); (4) was not a reversal of a long-standing policy; and (5) did not create a new rule in violation of the Administrative Procedures Act. The district court’s decision, which granted summary judgment in favor of the Secretary, was affirmed.

Kindred Hospitals East, LLC v. Sebelius, 8th Cir., September 12, 2012. The Secretary’s decision to uphold an intermediary’s adjustment to reduce a hospital’s state tax expense on its cost report was affirmed. The hospital claimed all the state tax it paid, but the intermediary reduced that amount by the amount of the refund the hospital received from that tax from an organization of hospitals. The hospital organization was established to equalize the amount of state tax paid by all hospitals. The Secretary was authorized by 42 U.S.C. §1395x to deny reimbursement for cost that were not actually incurred. The Provider Reimbursement Manual is not contrary to law, and the amount of the refund was not a donation.

Disproportionate Share Hospitals

Memorial Hospital at Gulfport v. Sebelius, 5th Cir., December 6, 2012. The Fifth Circuit ruled that the district court properly determined that only Medicare Part A patients covered by supplemental security income (SSI) are included in the disproportionate patient percentage and that excluding patients not covered by SSI did not yield a result “so bizarre that Congress could not have intended” it. The Fifth Circuit Court of Appeals held that under 42 U.S.C. §1395ww(d)(5)(F)(vi)(I), the statute’s plain language indicated that Congress chose SSI eligibility, rather than Medicaid eligibility, as the income proxy for the Medicare fraction. SSI benefits are conditioned in part on an individual recipient’s income and SSI recipients are defined as categorically needy under 42 U.S.C. §1382(a) and 42 U.S.C. 1382(a)(10)(A)(i)(II).

Inpatient Psychiatric Hospitals

Michigan Dept of Community Health v. Secretary of HHS, 6th Cir., August 23, 2012. A complaint filed against HHS and CMS by the Michigan Department of Community Health and the psychiatric hospitals it operates for calculating reimbursements due for services provided to Medicare patients from 2003 to 2006 in violation of the Medicare Act was properly denied. In granting summary judgment to the government, the district court held that the applicable sections of the Medicare statute are clear and unambiguous, and CMS’ determination of the amount of Medicare reimbursements is compelled by the statute. In the alternative, the court also concluded that, even if the statute is considered ambiguous, it is likely that CMS would prevail because its regulations would be entitled to deference. The Sixth Circuit affirmed the district court decision.

Skilled Nursing Facilities

Greenbrier Nursing and Rehabilitation Center v. HHS, 8th Cir., July 17, 2012. The finding of the Departmental Appeals Board (DAB) that the skilled nursing facility’s (SNF) failure to perform PT/INR tests at least monthly on all residents taking regular doses of anticoagulant medication violated professional standards of nursing and 42 C.F.R. §483.25 at the immediate jeopardy level was not clearly erroneous. Challenges to the penalties imposed could not be considered because they were not raised with the DAB.

Azalea Court v. CMS, 11th Cir., July 18, 2012. The decision of the Departmental Appeals Board (DAB) upholding the order imposing on a skilled nursing facility (SNF) per diem civil money penalties for multiple violations at the immediate jeopardy level was supported by substantial evidence. Regardless of the applicable burden of proof, the evidence of the deficiencies and of immediate jeopardy to residents was more than sufficient to support the conclusions that the SNF failed to: (1) have an adequate system to prevent elopement; (2) control the hazards of residents who smoke; and (3) care properly for a resident’s wound and that each deficiency presented immediate jeopardy to residents. There was no error, and HHS did not act arbitrarily or capriciously, in determining the number of days of noncompliance because 42 C.F.R. §488.430 permits the imposition of penalties for each day that an SNF is not in substantial compliance with one or more conditions of participation.


Back v. Sebelius, 9th Cir., July 5, 2012. A claim that the agency violated the Medicare Act and the Fifth Amendment Due Process Clause by failing to provide beneficiaries a process to appeal the hospice’s denial of coverage was moot. The trial court dismissed on the grounds that the beneficiary failed to exhaust administrative remedies. Because the representative asked only for the agency to establish an appeals process, and such a process already was established by statute and regulations, the dispute was moot. It was therefore unnecessary to consider whether administrative remedies had been exhausted.

Entitlement to Medicare

Hall v. Sebelius, D.D.C, February 7, 2012. There is no statutory avenue under 42 U.S.C. § 426(a) for those 65 or older and receiving Social Security retirement benefits to disclaim their legal entitlement to Medicare Part A benefits. Five retirees who automatically became entitled to Medicare Part A benefits when they became entitled to Social Security retirement benefits sued HHS and the Social Security Administration, seeking to disclaim their automatic legal entitlement to Medicare Part A so that they would be eligible to receive benefits from their private medical insurers not available to Medicare beneficiaries. 42 U.S.C. § 426(a) offered them no path to opt out of their legal entitlement to Medicare Part A benefits, the government was not required to offer them a mechanism to do so, and the agencies’ refusal to do so was not unlawful. One judge dissented, arguing that the group should be able to waive benefits and that there is no statutory basis for the SSA manual to say otherwise. The district court’s grant of summary judgment to the federal agencies was affirmed.

Medicare Secondary Payer

In re Avandia Marketing, Sales Practices and Product Liability and Litigation, 3rd Cir., June 28, 2012. A Medicare Advantage Organization (MAO) has the right to bring a private action against a drug company to recover for the treatment of injuries sustained from a drug manufactured by that company under 42 U.S.C. 1395y(b)(3)(A), more commonly known as the Medicare Secondary Payer Act (MSP). There is nothing in the text or legislative history of the statute to imply that Congress did not intend to facilitate recovery for MAOs in the same fashion as traditional Medicare. The drug manufacturer is the primary payer because it pays out of its own pocket to settle the claims related to the drug that cause the injury.

Medical Devices/Durable Medical Equipment

Nichole Medical Equipment & Supply, Inc. v. Tricenturion, Inc., 3rd Cir., September 13, 2012. A durable medical equipment (DME) supplier’s action against Medicare contractors for damages caused by their withholding of Medicare payments was improper because the supplier had failed to first raise claims arising under the Medicare Act in the administration process. The district court had lacked jurisdiction to hear the case without a final agency decision. Additionally, the government contractors were entitled to immunity because their official duties gave them the discretion to withhold payments and recoup alleged overpayments.

Almy v. Sebelius, 4th Cir., April 26, 2012. A federal district court properly upheld a Medicare Appeals Council’s (MAC’s) denial of coverage for a medical device because the device was not medically reasonable and necessary. While the device was granted the FDA’s 510(k) market clearance, this did not entitle the device to Medicare coverage. FDA’s clearance was not adequate proof of the device’s safety and effectiveness. Furthermore, the MAC decisions were not arbitrary and capricious because some decisions at the ALJ and contractor levels allowed coverage; the lower level decisions were not precedential and binding on MAC. Accordingly, the judgment of the district court was affirmed.

International Rehabilitative Sciences, Inc. v. Sebelius, 9th Cir., July 31, 2012. A district court applied the wrong legal standards when it overturned the ruling of the Medicare Appeals Council (MAC) denying coverage for the BIO 1000, a piece of durable medical equipment designed for the treatment of osteoarthritis of the knee. Notwithstanding the many decisions of administrative law judges (ALJs) allowing coverage, the MAC decision was not arbitrary because the reasoning behind it was explained and was supported by substantial evidence. Neither the ALJ decisions nor approval of the device by the Food and Drug Administration (FDA) was binding on the MAC.

Recovery Audit Contractors

Palomar Medical Center v. Sebelius, 9th Cir., September 11, 2012. The district court properly concluded that a Medicare provider could not litigate the reopening of a claim that was paid in full for medical services for which a Recovery Audit Contractor (RAC) revised the initial determination because Medicare regulations do not permit appeals of reopenings. An inpatient rehabilitation facility challenged the reopening after the RAC found that the services the IRF rendered were not reasonable or necessary and not covered by Medicare because they were done in a hospital setting rather than in a less intensive and less expensive setting. The Ninth Circuit concluded that Congress established the RAC program to recoup excessive Medicare payments and expressly permitted RACs to reopen claims under regulatory guidelines adopted by the HHS Secretary. Further, the court determined that the regulation is explicit that there are no appeals of reopening decisions and the decision to reopen a claim is final.

The Future

  • One of the biggest stories looming in 2013 is the first Medicare-related case to reach the U.S. Supreme Court in many years. The Court will hear arguments sometime in 2013 in Sebelius v Auburn Regional Medical Center. At issue is whether the 180-day statutory time limit for filing an appeal with the Provider Reimbursement Review Board (PRRB) from a final Medicare payment determination by a fiscal intermediary is subject to equitable tolling. The Court granted certiorari on June 25, 2012.
  • Accountable care organizations (ACO) will continue their expansion. About 30 million people already get their health care through some form of ACO and that number will increase for both people in the private insurance market and in Medicare.
  • Physicians and providers will continue reaping the benefit of incentive payments to adopt meaningful use of electronic health record systems.
  • If the federal budget cuts set to take effect on January 1, 2013, are repealed and the tax provisions set to expire on the same date are extended, all the money received by the federal government would go to spending on Social Security, Medicare, other health care programs, defense and interest payments by 2020, according to the Congressional Budget Office (CBO).
  • The first demonstration projects to test integration of Medicare and Medicaid services for dual eligibles will begin in 2013 with a capitated payment model in Massachusetts and a fee-for-service managed care model in Washington.
  • As CMS begins implementation of the hospital readmission reduction program (RRP), 2,211 hospitals face reductions to their Medicare reimbursements in fiscal year 2013 because of “excess readmissions,” patients who return to an acute care hospital within 30 days of discharge.

Pharmaceutical News: The Year In Review

In 2012, FDA related topics made headlines regarding compounded drugs, graphic tobacco labels, arsenic in rice, generic drug user fees and drug approvals. Looking forward to 2013, the Supreme Court’s anticipated ruling on pay-for-delay drug settlements looks to ensure the food and drug industry will continue to be busy.

Compounded Drugs

The Centers for Disease Control and Prevention (CDC) collaborated with state and local health departments and the FDA to investigate a multistate outbreak of fungal meningitis. Patients who were affected received contaminated preservative-free methylprednisolone acetate steroid injections used to treat back and joint pain from New England Compounding Center (NECC). Unlike drug manufacturers, which are regulated by the FDA, compounding pharmacies are overseen by state boards of pharmacy. All medications produced by NECC were recalled in early October. Over 424 cases of fungal meningitis and joint infections have been reported to date, with at least 31 deaths.

Graphic Tobacco Labels

The U.S. Court of Appeals for the District of Columbia Circuit ruled in August that tobacco companies do not need to print graphic warnings of the dangers of smoking on cigarette packages. In a 2-1 decision, the D.C. Circuit struck down an FDA regulation that requires tobacco companies to display graphic images such as a diseased mouth. The court held that the FDA’s rule on graphic cigarette label warnings exceeded the agency’s statutory authority and undermined tobacco companies’ economic autonomy. Subsequently, in December, the D.C. Circuit rejected a request for a hearing en banc. The question remains whether the federal government will ask for the matter to be heard before the Supreme Court.

Arsenic in Rice

The nation’s food safety supply was once again a matter of concern, as the levels of arsenic in rice were studied. Consumer Reports found measurable amounts of total arsenic in its two forms in almost every rice product it tested. Additionally, a significant level of inorganic arsenic, which is a carcinogen, was present in almost every rice product category. Using a proposed, but not promulgated, EPA five parts per billion standard, the study found that a single serving of some rice could give an average adult almost one and a half times the inorganic arsenic present in a whole day’s consumption of water, about 1 liter. Though many experts have been urging the FDA to set limits for arsenic in food and food agencies in other countries have already set safety standards for rice, the FDA has not urged consumers to change their eating habits.

Generic Drug User Fees

In July, the Generic Drug User Fee Amendments of 2012 (GDUFA) were signed into law. The user fees will be used to speed access to generic drugs for the public and reduce costs to industry. The law requires the drug industry to pay user fees to supplement the costs of reviewing generic drug applications and inspecting facilities. Additional resources will enable the FDA to reduce a current backlog of pending applications, cut the average time required to review generic drug applications for safety, and increase risk-based inspections.    

Drug Approvals

For the first time in 13 years, the FDA approved a new drug to help people lose weight. The FDA gave the green light to Arena Pharmaceuticals to sell Belviq, or lorcaserin generically, a twice-a-day pill that suppresses appetite and appears to affect metabolism by influencing levels of the brain chemical serotonin. This approval was 1 of 35 expedited new drug approvals during fiscal year 2012. The expedited reviews have generally been for new drugs that address needs of patients with cancer and other deadly diseases.

Pay-for-Delay Settlements

In 2013, the Supreme Court will hear oral arguments on the legality of drug companies paying their generic-making counterparts to keep generic drugs – in this case, a testosterone gel – off the market. The justices agreed to hear the case of Federal Trade Commission v. Watson Pharmaceuticals, as well as two other cases, to resolve conflicting rulings in lower courts. Both the pharmaceutical industry and the FTC requested a Supreme Court review to resolve a long-running battle that antitrust regulators have labeled as pay-for-delay settlements.

Watson, along with another generic drug maker, won approval from the FDA for a generic version of the testosterone gel in 2003, triggering a patent infringement lawsuit. In 2006, the generic companies agreed to hold off on marketing their products until August 2015 in exchange for tens of millions of dollars in annual payments from the brand-name drug maker. The FTC challenged the settlement as anti-competitive.

In April of 2012, the U.S. Court of Appeals for the 11th Circuit ruled against the FTC, holding that as long as the patent settlement did not extend exclusive rights beyond the patent expiration date, it was immune to antitrust violations. In contrast, the Third Circuit struck down payments made to delay generic versions of a potassium supplement. The FTC asked the Supreme Court to settle the issue, and 31 states filed a brief in support of the suit. Both the generic and brand-name drug companies involved asked the high court to weigh in as well.

The Supreme Court’s eventual decision can be considered the health care reform case of 2013, as it will have a pronounced impact on reducing health care costs. The FTC has estimated that the deals between brand-name drug makers and generics cost consumers as much as $3.5 billion annually. The CBO has estimated that the government would save more than $2.5 billion over 10 years in federal health care spending alone.

Drug Compounders Regulation Discussed

FDA officials met with their public health counterparts from 50 states last week about best measures to strengthen rules that govern compounding pharmacies in the wake of a national meningitis outbreak caused by a tainted product produced by a Massachusetts pharmacy. Patients who were affected received contaminated preservative-free methylprednisolone acetate steroid injections from New England Compounding Center (NECC) used to treat back and joint pain. So far over 600 cases have been attributed to the contamination, with 39 deaths attributed. The meeting was the first public discussion for the agency since FDA Commissioner Hamburg testified before Congress in November regarding what measures could be undertaken to address drug compounding, or tailor-making of medicine for individual patients.

Unlike drug manufacturers, compounding harmacies are primarily regulated under state law via state boards of pharmacy. The public hearing was convened to gather information for the FDA on gaps in the regulatory net and how the states view the role of the agency. Some states have requested that the FDA handle large-scale compounders such as NECC. 

Current law does not require compounders to give the FDA access to their books. Notably, about half of all the court orders the agency obtained over the past decade were for pharmacy compounders, although compounders are only a small part of the agency’s regulatory responsibilities.

At the testimony in November, the FDA stressed that it was unable to effectively monitor the compounding pharmacies and sought more authority for oversight. The FDA’s critics argue that the agency already has all the legal authority to police compounders. Noting that many compounders have been operating as major drug manufacturers, shipping to states across the country, critics have argued that the FDA should be using its jurisdiction over drug manufacturers to regulate those companies’ activities.

The FDA contends it is not as simple as labeling compounding pharmacies as drug manufacturers. Doing so would effectively require compounding pharmacies to file new drug applications for each product made, which could be costly and time-consuming for products that do not need it, such as IV feeding tube bags. In turn, this could affect the supply chain, especially when there are drug shortages. Under consideration is an oversight category for large-scale compounders, apart from the drug manufacturers.

Whether the FDA steps in and adopts a common pathway to address state and industry concerns remains to be seen, as there are requests for changes from compounding pharmacy groups to emergency state regulations following the Massachusetts contamination.