HEALTH LAW OUTLINE

I. Introduction: Health Policy

a. Introduction: Healthcare Financing and Delivery System i. Insurance and Regulation (33-42) 1. Pre-1929: Neither medicine nor health coverage was very advanced prior to the Great Depression. 2. 1929-1940: Blue Cross plans organized by hospital associations, typically at the state level. 3. 1940s & 1950s: Workplace insurance became prevalent after the IRS deemed such benefits taxable neither to employer nor employee. 4. 1960s & 1970s: Expansion of government-subsidized health care through enactment of Medicare and Medicaid. 5. 1980s: Creation of Prospective Payment System (PPS) for inpatient hospital services under Medicare. Private firms moved towards managed-care through HMOs and PPOs 6. Beyond: Health spending continues to take-up an ever increasing portion of the GDP. ii. The Health Care Crisis (42-50) 1. American medicine has been declared in a crisis since the 60s. Health care counts for a larger portion of the GDP than any other sector of the economy. On aggregate, the U.S. ranks lower than many other developed nations in terms of health statistics. 2. What makes a HC system good? a. Cost b. Quality c. Access iii. Changes in Financing & Delivery Systems (50-56) 1. Insurance plans begin to attempt to constrain expenditures by playing an active role in the delivery of services 2. HMO (health maintenance organization) subscribers receive their care from a limited group of providers 3. PPO (preferred provider organizations) & POS (point-of-service) may not be subject to the same level of plan oversight as in HMOs; generally they may go to any provider, but their outof pocket payments are lower if they choose participating providers that give insurer discounted rates A Right to What? Defining Health Care (9-14; 20-33) i. Nature of Medical Practice (Commonly held notions on Pg. 10) 1. Doctors and Hospitals 2. Nature of Medical Judgment a. Variation in Practice some docs don't define diseases the same. Also, difficulty in selecting a procedure for treatment i. How do we synthesize all the information? ii. Danger in oversimplification. A large number of incentive encourage simplifications that can lead to overutilization iii. Raises the question Are medical decisions based in science? b. There is a culture clash b/t doctors and lawyers 3. Evidence-Based Medicine (76-81) ii. Moral, Economic, & Political Themes Health Care Rationing 1. 2 questions: a. Who should decide what care is not worth the costs? b. What criteria of benefit should be used to make the determinations? Health Care Economics (68-73; 361-374) i. Economics Market v. Regulation 1. Three approaches to medical care: a. Scientific professionalism What medical science suggests a given patient needs i. Care allocated w/o regard to cost ii. Focus on Quality and Access

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iii. Supporting Assumptions: 1. Medical decisions are scientific 2. Physicians are scientifically trained 3. Medicine is a technical activity with occasional moral and social overtones iv. Consequences 1. Physician autonomy a. Surrogate decision making b. Professional self-regulation 2. Unitary standard of medical care a. Medicine is like water supply, not education v. Critique 1. How effective is medical care? 2. Is medicine based on science? 3. Can science alone determine appropriate medical policy? 4. Is professional regulation appropriate? vi. Command-and-Control Addendum 1. Preferred Hierarchy of Decision Making a. Private regulation (guild system) i. Most preferred b. Bureaucratic decisions by experts c. Uniform democratic state decisions d. Pluralism of market decisions i. Least preferred 2. Critique a. Can medical science answer all our policy questions? b. Can the requisite information be gathered? c. Does one size fit all? d. The monopoly problem e. The Nirvana fallacy i. It is ridiculous to assume that docs can solve all the medical problems; therefore, the market should do all the work ii. Just b/c one option is bad, the next isnt necessarily good b. Hippocratic tradition i. Science and mystery ii. The inevitability of death iii. Caring and curing Medicine as ministry iv. Medicine is a social and moral activity with a technical substratum v. Markets should not overrule virtue vi. Govt should hesitate to interfere in personal relationship b/t doc and patient vii. Critique 1. Unscientific/Supernaturalist 2. Loss of cultural authority a. Loss of intelligibility in secular culture b. What is govt buying? 3. Relies heavily on professional virtue c. Economic utilitarianism i. What informed consumers demand in a competitive market 1. Consumer sovereignty ii. Wealth affects consumption of medical services iii. Supporting assumptions: 1. Medical decisions involve science, economic and value judgments 2. Resources are scarce 3. Tradeoffs are inevitable and desirable 4. Skepticism about the scientific basis of some medical care 5. Focus on cost

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iv. Consequences 1. Consumer decision making 2. Physicians are advisors 3. Professionals are subject to dictates of marketplace 4. Multiple levels of case based on ability and willingness to pay v. Moral Hazard: the tendency of insured not to take precautions against insured risks and not to economize in the consumption of funds in the insurance pool 1. Health insurance tends to increase consumption of medical services 2. Managed care as a reaction to moral hazard 3. Efficiency of insurance despite moral hazard vi. US Tax Policy 1. Employer-provided health insurance premiums a. Deductible to employer b. Not taxable to employee 2. Tax incentive induces overinsurance a. Exacerbates moral hazard problems vii. Can Markets Allocate Health Care Resources Efficiently? 1. Markets, Allocative efficiency and ordinary goods and services 2. Three problems with markets and health care: a. Information b. Agency c. Moral Hazard ii. Economic and Regulatory Theory 1. California Dental Assn v. Federal Trade Commission a. Facts: California Dental Association (CDA), a nonprofit association of local dental societies, provides its members with insurance and financing arrangements, and engages in lobbying, litigation, marketing, and public relations for members' benefit. Members agree to abide by the CDA's Code of Ethics, which prohibits false or misleading advertising. The FTC brought a complaint against the CDA, alleging that the CDA's guidelines restricted two types of truthful, non-deceptive advertising: price advertising and advertising relating to the quality of dental services and therefore had violated section 5 of the FTC Act. b. PP: An Administrative Law Judge held that the FTC had jx over the CDA and found a violation of 5 of the FTC Act. The FTC adopted most of the ALJ's factual findings and held that the price advertising, as well as the non-price, restrictions were violations of the Sherman and FTC Acts. The Court of Appeals sustain the FTC's jx. c. Issue: (1) Does the FTC have jx over the CDA? (2) Does an abbreviated rule-of-reason analysis suffice to justify the conclusion that the CDA's advertising restrictions violated the Sherman and FTC Acts? d. Holding/Reasoning: 5-4 CDA. (1) Yes. FTC's jx extends to associations like the CDA, which provide substantial economic benefit to their for-profit members, but that because the disputed anti-competitive efforts were not obvious, more than the abbreviated rule-ofreason analysis, performed in this case, was required. Nonprofit entities organized on behalf of for-profit members have the same capacity... to engage in unfair methods of competition or unfair and deceptive acts." (2) No. Court of Appeals should have used a less-abbreviated standard of review to determine whether the FTC's invalidation of the CDA's rules was justified. Managed Care i. Weiner & deLissovoy, Razing a Tower of Babel 1. Argue that what usually distinguishes managed care plans from (plans) that are more traditional is that there is a party that takes responsibility for integrating and coordinating the financing and delivery of services across what previously were fragmented provider and payer entities" They then divide this broad category into five mutually exclusive types of managed care plans: a. fee-for-service plans with utilization review (what they call "managed indemnity plans" (MIPs)),

b. PPOs, EPOs, open-ended HMOs (O/HMOs), and c. Regular HMOs. 2. Although they propose a fairly complicated scheme for distinguishing among these five plan types, the crucial distinguishing features are twofold: a. Whether plans require their patients see certain specified medical providers (EPOs and regular HMOs do, MIPs do not, and PPOs and O/HMOs do but penalize patients who receive care from providers outside the network), and b. Whether physicians bear financial risk (only in HMOs do they do so, they argue, because HMOs rely on capitation). 3. With the exception of MIPs, they dub all these plans "integrated delivery systems." 4. Job-lock ii. Corporate Restructuring: 1. HMO the integration of health care delivery and finance. Bringing together of the two functions. Use finance to control delivery. a. Staff model Has its on clinics b. Group model more like insurance company. Has a K w/ 1 or more specialty groups c. IPA model arrangement b/t HMO and a certain group of doctors 2. PPO less integrated than an HMO. Economic incentive to use the doctors in the book. The doctors get in the book by agreeing to the reduced fee schedule 3. POS capacity of a patient to choose care in or out of network; often grafted onto different networks 4. Direct employer contracting another way of describing when a large employer self-insures and possibly makes arrangements with a network to get better plans for an employee a. Self-insurance with Third-party administration (TPA) 5. Three such features seem to us to be most critical: (1) the degree of risk sharing between providers and the primary risk-bearing agent (such as a health plan or a self-insured employer), (2) the degree to which administrative oversight constrains clinical decisions, and (3) the degree to which enrollees in a plan are required to receive their care from a specified roster of providers.

II. Introduction: The U.S. Health Care System

a. Right to Health Care i. United States v. Milligan 1. PP: Ds sought review of a decision, which convicted and sentenced Ds with 4 counts of mail fraud; 1 count of wire fraud; and 1 count of conspiracy. 2. Facts: D, uninsured friend, was injured, and D, insured couple, took him to the hospital and had him admitted under their insurance info as if he was the insured spouse. The insurance company investigated them. At first Ds denied all charges but then admitted they lied due to necessity. A jury convicted D couple on all counts and found D friend guilty on five counts. DC sentenced them and ordered all to make restitution. 3. Holding: Court affirmed, finding that govts proof was sufficient to justify the jury's conclusion that Ds failed to establish a necessity defense, that the jury charge was fair, that a conspiracy existed, and that sentencing and order for restitution was w/in contemplation of the Sentencing Guidelines and DCs discretion. Private Health Insurance (164-187) i. The Virtues of Markets 1. Cost Containment: Allocative & Productive Efficiency 2. Constructive Destruction (Schumpeter) replacing old w/ new from w/in 3. Diversity & Private Decision Making 4. Accountability & Adaptability ii. The Trouble with Health Care Markets 1. Info Problems: Incomplete info (uncertainty about risk); Asymmetric Info (adverse selction); Externalities (risk selection & unsurance) 2. Agency Problems a. Differing consumer preferences

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b. Agents conflict of interests i. Insurers: Conflict b/t providing good care and being a good steward of resources ii. Physicians: Depends on whether the are paid FFS or capitation iii. Employers: May want the cheap plan 3. Moral Problems: Allocation; social function of insurance? 4. Multiple Markets: Professional services; Institutional services; Insurance 5. Externalities and collective Action Problems 6. Other Problems a. Heterogeneity of Service b. Barriers to Entry: Keeps costs from being contained & Occupational licensure i. Ex: need permission of state for new health care services (AL legislature sees this as a way to keep costs down Does this make sense?) c. Cartelization d. Innovation and Free Riders innovator takes a big risk while others can just copy e. Administrative Costs of a Fragmented System iii. Solutions (?): Regulation; Tax Reform; Better Agents (encourage docs to provide quality over quantity); Better Information; Organizational Restructuring; Better Insurance Policy Designs 1. These are ways to improve markets not give up on them iv. HYPO: 1. Imagine that you are the CEO of Acme Health Insurance Company. You want to increase your market share. How can you do it? a. Profit = Premiums collected (claims paid + administrative expense) i. Increase premiums collected? 1. Raise prices? 2. Increase premium volume? How? ii. Reduce claims paid and/or administrative expenses 1. Claims paid = price * volume a. Control utilization (volume) i. Insure healthy people b. Negotiate lower provider fees (price) 2. Efficient administration v. Paying for Health Care vi. Uninsured Patients; Insurance Fraud; Patient Cost-Sharing vii. Access to Private Health Insurance viii. Patient Cost Sharing c. Public Health Insurance (187-204) i. Medicaid: Joint fed and state program that mainly covers poor people 1. Participating: almost 20% of ALs total population (tremendous budgetary issue for AL) 2. Grew out of the idea that we wanted to pay for deserving families who could not necessarily pay for themselves 3. Paid: Federal matching grants to states; States may impose nominal copayments; No balance billing 4. W/o Medicaid revenue, critical components of Alabamas healthcare infrastructure could not continue to exist: 52% of the patient days at Childrens Hospital are paid for by Medicaid & 77% of the patient days at UAB Womens and Childrens Center are paid for by Medicaid. 5. Eligible: Deserving Poor: categorically needy must be covered (welfare or SSI eligible); Optional coverage for medically needy a. ACA changes this approach 6. Mandatory Medicaid Eligibility Groups (can be more generous): a. Low income families receiving cash assistance (welfare) through DHR b. Children under age 6 and pregnant women whose family income is at or below 133% of the federal poverty level c. Children under age 19 and over to 100% of poverty level d. Low income SSI receipts

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7. Benefits: Inpatient hospital svcs; Lab service; Physician svcs; Screening svcs for kids; Family planning; Nurse midwife svcs; Nursing facility svcs; home health svcs 8. Optional Benefits: Dental svcs; Physical therapy; Prescription drugs; Eyeglasses ii. Medicare 1. Paid: Social Insurance Program financed through payroll taxes, premiums and cost-sharing. Not subject to federal appropriations process it just gets covered. 2. Covers: Persons 65 or over who receive SS or RR retirement system benefits; Persons under 65 who have qualified for SS disability benefits; Persons w/ end-stage renal disease (ESRD) 3. Part A: Hospital Insurance payroll taxes which accumulate in trust fund a. Covers inpatient hospital stays and some skilled nursing care. b. Pays out only on strict calendar schedules, if time limits exceeded Part A stops paying. c. Payments based on prospective cost schedule; The actual allotment of funds is based on a list of diagnosis-related groups (DRG). The actual amount depends on the primary diagnosis that is actually made at the hospital. There are some issues surrounding Medicare's use of DRGs because if the patient uses less care, the hospital gets to keep the remainder. This, in theory, should balance the costs for the hospital. However, if the patient uses more care, then the hospital has to cover its own losses. This results in the issue of "upcoding," when a physician makes a more severe diagnosis to hedge against accidental costs. 4. Part B: Medical Insurance 25% paid by enrollee premiums, rest by taxes a. Helps pay for some services and products not covered by Part A, generally outpatient; covers some preventative care. b. Physician billing: Akin to fee-for-service c. Complex rules are used to manage the benefit, and advisories are periodically issued which describe coverage criteria. On the national level these advisories are issued by CMS, and are known as National Coverage Determinations (NCD). Local Coverage Determinations (LCD) only apply within the multi-state area managed by a specific regional Medicare Part B contractor 5. Part C: Medicare Advantage Plans some payment by enrollee premiums, rest by taxes a. Uses capitation and network coverage 6. Part D: Prescription Drug Plans - some payment by enrollee premiums, rest by taxes a. Anyone with Part A or B is eligible for Part D. b. Must Cover: Cancer medications, HIV/AIDS treatments, Antidepressants, Antipsychotic meds, Anticonvulsive treatments for epilepsy and other conditions, Immunosuppressant meds c. Excluded Drugs: Drugs for Anorexia, weight loss, or weight gain, Fertility, Cosmetic purposes or hair growth, Symptomatic relief of cough and colds; Prescription vitamins and mineral products (except prenatal vitamins and fluoride preparations); Nonprescription drugs; Barbiturates; Benzodiazepines d. Benzodiazepines 7. Doesnt Cover: Long-term Care; Deductibles; Copayments a. RESULT: Elderly pay for 18% of their health care expenses out of pocket iii. State Childrens Health Insurance Program (SCHIP): For poor kids whose parents dont qualify iv. FEHBP v. CHAMPUS civilian health care plan for military members vi. VA vet health care vii. Indian Health Service PPACA Overview (Hall et al. Supp. 1-21; 23-38) i. Timeline 1. Effective at passage a. State review of insurance premium increases b. New requirements for nonprofit hospitals: Uninsured people charged more than insured people c. Codify economic substance tax doctrine: Trying to get the CBO scoring of the bill elevated; Estimated: $4.5 billion revenue through 2019

d. Fraud and Abuse Changes 2. June 2010: $5 billion in temporary fed support to enable citizens with pre-existing conditions to buy insurance (Pending implementation of insurance exchanges); Temporary national highrisk pool; Early retiree reinsurance coverage 3. 2010 a. Medicaid expansion permitted: Parents and childless adults up to 133% of FPL b. Part D donut hole rebate: Gradual reduction of coinsurance in subsequent years c. Small Business Tax Credit i. Eligible small employers are eligible for tax credits of 35% of the employers contribution to the purchase of employees health insurance ii. Eligible small employer: employer w/ no more than 25 FTE employees; pays avg. annual wages of $50k or less; and contributes at least 50% of the prem. cost d. 85% Medical Loss Ratio Requirement: Blue Cross plans only initially; care vs. costs e. Medical Loss Ratio Reporting f. 10% tanning Bed Tax g. Medical Liability Protections Hardly any med mal reform 4. 2011 a. Insurers must begin providing a rebate to each enrollee if the amount the insurer spends on clinical services provided to enrollees is less than 85% (large groups) or 80% (small groups) of premium revenue b. HHS must develop long-term care insurance program to be funded by voluntary payroll deductions c. Medicare Advantage Program (Part C) payments frozen d. Employer disclosure of value of health benefit on W-2: Make you more aware of how much your health insurance plan is costing your employer and by extension you e. Standard qualified medical expense definition for all HSAs, FSAs f. Increase in early withdrawal taxes on HSAs and Archer MSAs g. Simple Cafeteria Plan for small businesses h. Annual Pharmaceutical Manufacturing Fee Anticipated annual revenue: $2.5B i. Alternative liability reform demonstration project funding j. ARRA Medicare and Medicaid HIT incentive payments begin for eligible profs 5. 2012 a. Physician Payment Reforms: Medicare/Medicaid parity for primary care (greatly expanding Medicaid program; elevate $ to doctors taking it; Accountable care orgs. b. Hospital Value-Bases purchasing programs c. Hospital Readmission Tracking/Penalties d. Required use of uniform coverage documents e. Phase-in of new Medicare Advantage payment system begins: tied to state spending levels and quality scores 6. 2013 a. $2500 cap of FSA contributions b. Electronic Exchange Standards c. Medicare rates for Medicaid physicians d. Increase in AGI threshold for claiming itemized deductions for medical expenses from 7.5% to 10.5% e. .9% Increase in Medicare payroll tax for wages over $200k/$250k married filing jointly f. New 3.8% tax on net investment income in the same salary range g. Executive Compensation limitations h. 2.3% medical device excise tax: Eyeglasses, contact lenses, hearing aids and other items generally purchases by the public at retail are exempt i. Executive Compensation Limitations: Health insurers may not deduct executive compensation in excess of $500k annually paid to any one executive j. Insurance Plan annual fee k. Public reporting of physician performance data 7. 2014

a. Fed Medicaid matching & expansion: 100% fed matching (2014-16) for state Medicaid funding and increase in Medicaid eligibility to 133% of FPL for all non-elderly b. Insurance Market Reforms, Phase II c. Insurance Exchanges d. Individual Coverage Requirements and Penalties (individual mandate) e. Fee for Employers Not Offering Coverage (pay or play) f. Premium Tax Credits g. Small Business Tax Credit (Phase II) h. Health Insurance Sector Annual Fee i. Essential Health Benefits requirement (except grandfathered plans) 8. 2015 and beyond a. Value-Based Payment Program (pay for performance) b. Independent Payment Advisory Board: Can recommend provider payment reduction; The decisions can only be overridden by the same process it takes to pass a bill c. Interstate Health Choice Compacts: Insurance offered across state lines, but most restrictive consumer protection guidelines apply d. Optional Large Employer Participation in Exchanges e. High-cost health plan excise tax: Cadillac tax 40% tax on insurers/plan admins for portion of premium amount above $10, 200 (individuals) and $27,500 (families) (2018) ii. Reform Categories 1. Insurance Market Reforms a. Phase I (September 2010): When health reform passes, you will be able to keep the coverage you have today . . . i. Some plans are grandfathered with respect to some, but not all, reforms ii. Grandfathered plan is: (1) Group health plan or insurance coverage in which an individual was enrolled on 3/23/10, regardless of whether the coverage is renewed after that date; (2) Enrollment of addl family members/employees pursuant to plan terms doesnt cause loss of grandfathered status; (3) Collectively bargained plans ratified on or before 3/23/10, are also grandfathered for some purposes iii. Applicable to all plans: No lifetime or annual dollar limits on benefits (exception for restrictions on benefits that are not essential health benefits); No rescission, except for fraud, misrepresentation, nonpayment of premiums or termination of plan; Must cover dependents through age 26; No pre-existing condition limitations for enrollees under age 19; Benefit Summary/Reporting Requirements iv. Non-grandfathered plans: Must cover immunizations and preventive care w/o cost-sharing; Comply with patient protection requirements (e.g., Flexibility in selection of primary care physicians; No prior authorization for ER visits) b. Phase II (2014) i. All plans: Blanket prohibition on pre-existing condition exclusions; Maximum 90day waiting period ii. Non-grandfathered plans: Limitations on premium rating (Only can rate premiums based on age (3x is the limit), tobacco use (1.5x) Can reduce premiums based on well-ness programs) Limitations on cost-sharing: Limitation of about $6000/individuals; Guaranteed issue; Must provide essential health benefits; No routine care denials due to participation in clinical trial 2. Public Coverage Programs: Gradual elimination of Medicare Pat D donut hole; In 2014: Medicaid expansion to cover everyone up to 133% of Federal poverty level (100% Federal financial assistance to cover expansion until 2016, when states start picking up costs) 3. Delivery System Reforms 4. Provider and Plan Payment Changes 5. Financing a. Employers Pay or play i. Lg. employers (>50 FTEs) must offer min. essential coverage to employees ii. If that is not done, assessed a monthly penalty equal to 1/12of $2000 for each fulltime employee, excluding first 30 employees

iii. If they offer coverage but do not contribute sufficiently to its cost to make it affordable, and an employee enrolls in a plan through the exchange and receives a premium credit or cost-sharing reduction, the employer is assessed a monthly penalty equal to 1/12 of $3000 for each such employee iv. No employer penalty is due where an eligible employee uses a free-choice voucher to enroll in an Exchange plan. b. Individual Mandate i. Individuals must buy HI as long as premium costs less then 8% of income ii. Penalty: 1. 2014: $95 or 1% of income, whichever is greater 2. 2016: $695 or 2.5% of income, whichever is greater 3. Penalty is capped at an amount equal to the national average premium for bronze health plans offered through state exchanges iii. IM and the Commerce Clause: Alleged infirmity Can govt require one private party to do business with another private party? 1. Responses: a. Yes b. No requirement; just a tax that falls on people who elect not to engage in the transaction c. necessary and proper mandate is incidental to insurance market reforms that are clearly within governments power (Severability?) c. New payroll and investment taxes d. Miscellaneous taxes an fees e. Cuts in Medicare spending f. States begin absorbing increased Medicaid costs in 2017 g. Called job-killing act b/c employers will have to pay extra $ to employ people 6. Compliance and Transparency (aka Fraud & Abuse) a. Violations of Anti-Kickback Statute = false claim b. Amendment clarifying that AKS violation doesnt require specific intent to disobey the law (Reversing Hanlester (9thCir.) and similar decisions) c. Limits whole hospital and rural provider Stark Law exceptions to hospitals that have Medicare provider agreements and physician investments as of 12/31/10, plus other requirements d. Imposes patient disclosure requirements with respect to imaging services provided pursuant to in-office ancillary services exception iii. Insurance Exchanges (Likely models on Massachusetts Connector) 1. Sate-run marketplaces designed to: 1. Facilitate individual and small group enrollment in health plans brings all options together in 1 place; 2. Present transparent info consumers can make informed choices; 3. Receive and evaluate data received from health plans w/ respect to claims payment policies, enrollment, denied claims, justifications for premium increases, etc. 2. Participation in exchange will also provide regulatory lever with respect to federal quality regulation on health plans iv. Access and Affordability 1. Moves toward universal coverage: 1. Expands Medicaid for those with incomes less than 133% of FPL; 2. Subsidizes insurance purchases through tax credits where premium cost is greater than 9.5% of income (or employer plan actuarial value is less than 60%) and income < 400% of FPL; 3. Subsidizes cost-sharing for families with income < 400% of FPL (Sliding scale); 4. Penalizes large employers (>50 FTE) who fail to provide health coverage; 5. Provides tax incentives for small employers to provide health coverage; 6. Requires everyone to purchase HI unless the cost of insurance is greater than 8% of income (individ. mandate) 2. Premium Subsidy Example: Pat is 45 years old and has an income in 2014 that is 250% of poverty (about $28,735). The cost of the second lowest cost silver plan in the exchange in Pats area is projected to be about $5733. a. Under PPACA, P would not be required to pay more than 8.05% of income, or $2,313, to enroll in the second lowest cost silver plan.

b. The (refundable, advanceable) tax credit available to P would be $3420 ($5733-2313). 3. Cost-Sharing Subsidy Example: John is 40 years old and makes $25,000 per year (about 230% of FPL). J sustains a serious injury, requiring repeated doctor visits and hospitalization. a. Under PPACA, Js cost sharing is limited to $2975 (50% of $5950 individual out-ofpocket max). All cost sharing over that amt. is absorbed by plan and billed to the govt 4. Insurance market reforms a. Access to Health Insurance: Medical underwriting; Community vs. Experience rating; Consumer choice; Transparency b. Quality of Health Insurance: Adequacy of benefit package; Consumer protection v. The Public Option 1. Government-run plan that could have been included as an option in state insurance exchanges 2. Proponents: keep private sector plans honest by giving them competition 3. Opponents: government gets benefit or Medicare pricing 4. Pathway to single-payor? vi. Essential Health Benefits Mostly vague term appearing several places in the legislation: 1. Elim. lifetime policy limits on EHBs; 2. Restrictions on annual limits on EHBs; 3. Lg. employers must offer coverage including EHBs; 4. Health plans offered in exchanges include EHBs 1. Statutory definition: Ambulatory patient services; Emergency services; Hospitalization; Maternity and newborn care; Mental health and substance abuse disorder services, including behavioral health treatment; Prescription drugs; Rehabilitative and habilitative services and devices; Laboratory services; Preventive and wellness services and chronic disease management; Pediatric services, including oral and vision care 2. Scope of EHB: equal to the scope of benefits provided under a typical employer plan 3. In defining EHB, the Secretary may not: make coverage decisions; determine reimbursement rates; establish incentive programs; design benefits in ways that discriminate against individuals b/c of their age, disability, or expected length of life. 4. Secretary must also ensure: EHBs are not denied against the wishes of patients on the basis of the individuals age or expected length of life or of the individuals present or predicted disability, degree of medical dependency, or quality of life. vii. Issues: 1. Federalism states have usually been regulators of health care; 2. The politics and economics of mandated benefits (Theyre expensive every time something is added that people have to cover, costs $); 3. Medical necessity, cost-benefit analysis and quality; 4. Culture wars

III. Adjudicating Disputes Over Health Care Resources

a. Rights to Treatment: i. State Law (83-88; 90-96; 98-103) 1. Duty to Treat a. Usually, a patient-provider relationship is consensual & both parties must agree. An independent physician may, usually, refuse to accept patients for any or no reason. The same is true to a lesser extent for hospitals, but they cant turn away patients in an emergency until their condition is stabilized. b. Hurley v. Edingfield i. PP: Circuit Court entered judgment for D physician, in an action against the D commenced by P, administrator of the deceased, seeking damages for Ds allegedly wrongfully causing the death of the deceased. Administrator appealed. ii. Facts: D had been the decedent's family physician. When the decedent became dangerously ill, he sent for D. The decedent's messenger informed D of decedent's violent sickness, tendered him fees for his services, and stated to him that no other physician was procurable in time and that the decedent relied on him for attention. W/o any reason D refused to render aid to the decedent. Decedent died. The wrongful act alleged against D was his refusal to enter into a contract of employment with the decedent. iii. Holding: Court found that the act of regulating the practice of medicine was a preventive, not a compulsive measure. Thus, the physician, in obtaining the state's license to practice medicine, was not required to practice at all or on other terms

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than he might choose to accept. Therefore, D was not required to have entered into a contract of employment with the decedent. iv. NO Duty to Treat c. Wilmington General Hospital v. Manlove i. PP: Hospital (D) appealed an order of the trial court, which denied the Ds motion for SJ but held that D was liable to P, the administrator of a decedent infant's estate, for refusing to furnish medical treatment to the child in an emergency. ii. Facts: Parents took their baby to the ER of a hospital, presenting a history of two days of high temperature, sleeplessness, and diarrhea. The nurse refused to admit the baby, saying it was hospital policy not to treat a patient who was already under the care of a physician. Parents returned home and made an appointment to see the child's doctor that evening, but the child died in the afternoon of bronchial pneumonia. The administrator of the infant's estate filed suit against the hospital. iii. Holding: Ct. affirmed denial of SJ but disagreed with the trial court's reasoning. Ct. explained that D was a private institution and had the right to deny any person admission or treatment. However, a hospital's liability could be predicated on the refusal of service to a patient in an unmistakable emergency, if the patient relied upon a well-established custom of the hospital to render aid in such a case. iv. Hospital has duty to treat in unmistakable emergency d. Burditt v. U.S. Department of Health and Human Resources i. Facts: The federal agency responsible for administering Medicare assessed a fine against the physician for violating EMTALA; the physician had refused to treat a Medicare patient in active labor and had signed a transfer order w/o specifying the required reasons to justify the transfer. EMTALA compliance is strict, and deviation from the statute puts you in violation. ii. Holding: Court concluded that the doc violated EMTALA and government regulation under EMTALA was not an unconstitutional taking without just compensation because only hospitals that voluntarily participated in the federal government's Medicare program had to comply with EMTALA. iii. Must comply w/ EMTALA regulations ii. EMTALA 42 USC 1395dd (103-109) Federal Patient Dumping Statute 1. Creates Two Distinct Duties: (1) SCREEN (2) STABILIZE 2. Elements of a successful EMTALA claim a. Failure to screen for emergency condition; or b. Failure to stabilize the emergency condition (or labor) c. Failure to appropriately transfer emergency patient, if necessary i. Request for transfer in writing (with informed consent) ii. Physician certified that benefits of transfer outweigh the risks 3. There is no exception for futile care under EMTALA (In re Baby K) a. Shows the reach of EMTALA b. Distinguished by Bryan b/c the patient was already admitted and EMTALA was intended to regulate the hospitals care only in the immediate aftermath of the act of admitting her for emergency treatment. 4. Hospitals obligation ceases once patient has been admitted and condition has been stabilized 5. Note: only hospitals voluntarily participating in Medicare program are subject to EMTALA 6. Sup. Ct. There is no requirement/need to show an improper motive for lack of stabilization 7. Hospital cant divert a non-hospital-owned ambulance unless there is an inability to provide treatment to the patient. 8. EMTALA is triggered whenever a patient is on hospital property 9. Emergency medical cond. is defined in (e)(1). 10. To stabilize is defined in EMTALA (e)(3)(A). 11. Problem: Brenda Baber on page with EMTALA statute & Problem a. Hosp shouldve given B the screening that anyone w/ her symptoms gets. b. Did B have an emergency med cond? Did Doc deviate from normal routine b/c B was uninsured?

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b.

c. To stabilize B, aside from head injury, doc wouldve had to prescribe her medication so that she would return to a normalish state. d. If docs had found head injury, they wouldve had to refrain from transferring or discharging B, & wouldve had to perform brain surgery. e. Could Ms. Baber have sued Dr. Kline under EMTALA? See (d)(2)(A)No, but Medicare can levy fines against non-complying docs. Benefits Litigation (ERISA Statutory Supplement; 259-279; 294) i. Determining What is Medically Appropriate 1. Retrospective utilization review: determine when care is medically necessary after it has been administered 2. Prospective utilization review: done beforehand a. Goldberg may be entitled to a pre-treatment determination 3. Concurrent: 4. Mount Sinai Hospital v. Zorek (260) a. Facts: Hospital (P) filed an action against patient's husband (D1) for payment of hospital expenses that arose out of treatment of the patient for obesity. D1 filed a third-party action against third-party defendant health insurer (D2) to provide coverage and reimburse for the hospital expenses incurred in the treatment of the patient. D2 argued that its policy did not cover a hospital confinement for obesity and that the care rendered to the patient was convalescent or sanitarium type care, which the policy excluded. D2 also argued that obesity was not an illness and therefore not included within the policy's coverage. b. Holding: Court disagreed w/ D2s position and awarded judgment in favor of the patient's husband in the exact amount of the judgment that the hospital obtained against the patient's husband. Court noted that whether or not obesity was an illness was debatable, but it was certainly a condition. Court concluded that the test was whether the confinement in the hospital was necessary for proper treatment. Court further noted that the test called for an exercise of judgment and the court concluded that the applicable standards of judgment had to be those of the treating physician. Thus, if the treating physician chose a treatment for which hospitalization was proper, and K did not specifically exclude that treatment, full coverage existed for the hospital stay. c. Outcome: Court granted judgment in favor of P against the D1 and also granted the D1 a judgment against D2 for the same amount awarded to P. Penalty not to be imposed d. Docs judgment should determine medical necessity 5. Bechtold v. Physicians Health Plan of Northern Indiana (p.263) a. PP: Beneficiary (P) sought review of a decision, which denied her motion for SJ and granted SJ in favor of health plan (D) in Ps suit against D under ERISA, seeking coverage for high-dose chemotherapy w/ autologous bone marrow transplantation. b. Facts: P sought coverage from D, which was governed by the Employee Retirement Income Security Act, for high-dose chemotherapy with autologous bone marrow transplantation, an experimental treatment, to treat breast cancer. D refused to cover the treatment. P brought an action to recover benefits for the treatment. c. Holding: Court affirmed and stated that under the facts in the case, even applying de novo review, the clear and unambiguous language of the policy dictated that D properly denied coverage for the treatment. Court agreed w/ D that its plan did not authorize reimbursement for the procedure and that Ds complaints committee lacked authorization to make its recommendation that D should cover the treatment. Court accordingly held that P had received a full and fair review as required under ERISA. d. Look at language of K. e. Note: No punitive damages under ERISA. Only remedies are injunctive relief or pmt of treatment cost. If patient dies before its given, only remedy is cost of treatment. 6. Analysis (Met Life): a. Default: De novo review b. Next step: deference unless there is a conflict of interest

12

c. If so, then: that is used as one factor in determining whether there was an abuse of discretion instead of just going right back to de novo review Rush Prudential HMO v. Moran (p. 267) d. Facts: The HMO denied coverage for an unconventional surgery for the beneficiary's shoulder pain as not medically necessary. While the ensuing lawsuit was pending, the beneficiary went ahead w/ surgery at her own expense. An independent medical review of her claim, as provided for in the Illinois statute, found that the procedure was medically necessary. e. Holding: Court held that the state statute was a law "directed toward" at the insurance industry, and an insurance regulation under a commonsense view, thus it was not preempted by ERISA. Ct. rejected the HMO's arguments holding that the state statute did not enlarge a claim beyond the benefits available in any action brought under ERISA. Ct. noted that the state statute bore a closer resemblance to second-opinion requirements than to arbitration schemes. The state law operated before the stage of judicial review and its effect was no greater than that of mandated-benefit regulation. f. Supreme Court held: (1) Statute requiring HMOs to provide independent review of disputes b/t primary care doc & HMO, & to cover services deemed medically necessary by independent reviewer, regulated insurance under ERISAs saving clause; (2) Statute didnt conflict w/ ERISA by supplementing its civil enforcement scheme; (3) Statute didnt impose scheme at odds w/ ERISA civil enforcement scheme; & (4) Statute didnt conflict w/ ERISA by depriving HMOs of deferential standard of review of benefits determinations. In deciding if law regulates insurance under ERISA's saving clause, Ct starts w/ common-sense view, law must be specifically directed to insurance industry rather than simply having impacting it; Ct then tests results of inquiry by employing 3 factors used to point to insurance laws spared from fed preemption under McCarranFerguson Act. g. Outcome: The judgment of the circuit court was affirmed. 7. HYPO 1: ABC Widget Corp operates an employee benefit plan by purchasing group insurance for its employees from the local Blue Cross plan. Blue Cross administers benefits under the plan, and the contract provides that Administrator shall have the right in its sole discretion to make benefit determinations under the plan and to interpret the provisions of the Plan, and all such determinations and interpretations shall be final and binding upon any party affected by such decisions. a. Will the court defer to plan benefit determinations? i. Yes, the plan documents give the administrator discretion ** A 2008 US Supreme Court case (Metropolitan Life v. Glenn) case clarifies these rules and tries to determine whether the plan abuses its discretion in the interpretation of the plan conflict of interest is only one factor that the reviewing court should take into account 8. HYPO 2: ABC Widget Corp operates a self-insured employee benefit plan. It hires Blue Cross to provide administrative services only in connection with the Plan and names BC the plan administrator. K provides that Administrator shall have the right in its sole discretion to make benefit determinations under the plan and to interpret the provisions of the Plan, and all such determinations and interpretations shall be final and binding upon any party affected by such decisions. a. Will the court defer to plan benefit determinations? i. Yes, the plan documents give the administrator discretion and there is no direct conflict of interest b/c BC just runs the administrative services ii. There is an indirect conflict of interest b/c BC has an incentive to deny claims and be economical so that it can conserve the $ of the client 1. Is this a strong enough incentive to reduce the level of the deference given by the court? a. Yes, USSC says that this is a conflict of interest as well 9. Problem: Appealing Adverse Medical Patient Appeal Procedures a. How do we approach this type of problem?

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b. Want to know whether ERISA is applicable. Want to know what the plan says. Does it give the plan administrator discretion to make decision or not? Is there a conflict of interest? c. Blanket exclusion: As an HMO, unless there is a state law that governs, the clause will control. (Rush) d. If the doctor hasnt done it before but says that he can do it, he can get sued. Could this be a self-regulating situation? If he doesnt feel comfortable doing it, he wont do it out of fear of a lawsuit. 10. Medicare & Medicaid Appeals a. Medicare statue prohibits federal supervision/control over practice of medicine b. Medicare uses physician peer review to reconcile noninterference w/ the need for judging medical necessity c. B/c coverage denials affect treatment decisions, utilization review might be characterized as an illegal interference w/ medical judgment 11. Pilot Light v. Doe bad faith claims against ERISA are preempted too bad for patient a. One PPACA becomes effective, everyone will have the right

IV. Regulating Health Care Providers

a. Physician Payment i. Nagele and Welch, The New Healthcare has a very pro-doctor slant ii. Prudent Purchasing 1. From Reasonable Cost to PPS a. Diagnosis-Related Groups (DRGs) i. Instead of rewarding for incurring more costs, wanted to figure out a way to be more efficient one set price for his patient for this diagnosis ii. Medicare classifies diagnoses into 23 categories & a/b 500 subcategories (DRGs) iii. Payment rate is set prospectively on the basis of diagnosis (DRG selection) iv. Payment assumes average cost of treatment for patient with the diagnosis in question; can be modified for other cost factors 1. Single payment per hospitalization 2. From Usual, customary and Reasonable to Fee Schedule a. Resource-Based Relative Value Scale (RBRVS) 3. Competitive Bidding iii. Prospective Payment System (PPS) 1. Old Method: Medicare paid reasonable cost or caring for patients, including capital costs, depreciation, etc. a. Recall discussion of the incentives this created b. Shift to prospective payment based on DRGs 2. Shift to prospective payment 3. Incentives? a. Efficient care? Or just inexpensive care? b. Discharge patients quicker and sicker? c. Game codes? 4. Results a. LOS: from 10.3 days to about 7 days b. Hospital profitability: initially high, but government scaled back payments c. Decrease in inpatient admissions i. Increase in outpatient treatment d. No clear evidence of quality diminution e. Helped reduce rate of growth of Medicare inpatient spending, but mostly offset by increased outpatient spending iv. Physician Payment 1. Traditional UCR payment 2. Fee Schedule a. Resource-based relative value scale (RBRVS)

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b. Bonus/penalty/withhold? 3. Capitation 4. Salary 5. Which method is best? v. Improving Payment Strategies 1. Pay for Performance/Value Based Purchasing (P4P) a. Dont just pay for doing something. Pay for generating good outcomes b. You get what you pay for c. CMS Premier Demonstration Project i. Bonuses for top 10% hospitals based on performance benchmarks for AMI, heart failure, pneumonia, CABG and hip and knee replacements d. CMS Hospital pay for reporting Report indicators or face 2% penalty e. Physician Quality Reporting Initiative: Pay for reporting; 1.5% bonus f. Goal: Transform Medicare from a passive payer to an active purchaser 2. Never Events a. Examples: Artificial Insemination with the wrong donor sperm or egg; Foreign object in body after surgery; Death/disability from medication error; Patient elopement (disappearance); Surgery on the wrong body part; Surgery on the wrong patient b. Should also apologize, report the event (to a state agency, accreditor, etc.), perform a root cause analysis, waive the cost c. There has been a good bit of resistance to these things d. Reports Medicare-gathered data to facilitate hospital comparison i. Hospital process-of-care measures: Surgical infection prevention process of care; Heart attack process of care; Pneumonia process of care; Heart failure process of care; Childrens asthma process of care ii. Hospital outcome-of-care measures iii. Survey of patients hospital experiences 3. Bonus/penalties based on reporting 4. Privately generated information: NCQA and MCOs; Physician Ratings 5. Physician Tiering: Pay physician better if they meet certain standards 6. ACOs, Hospitals and Gainsharing a. ACOs integrated partnerships of hospitals and providers b. Gainsharing splitting proceeds of efficient care between doctors and hospitals i. Hospitals tell docs if you meet benchmarks, we will share in the benefits w/ you. Law says you cant do that. You cant take your money and give it to someone else to make medical decisions could compromise docs medical judgment b. Corporate Practice of Medicine (459-471) i. Pros: Prevents commercialization; Concern about conflicts of interest; May be reduced if it is a onprofit because motivations are different; Appearance of nobility of profession; Nobility of profession; Preserve physician authority; Prevents commodification; Distribution of $ ii. Cons: Lets doctors do what they are good at (efficiency); Reduce costs; Better incentives in terms of information (market competition) iii. Concern about commercialization: docs wouldn't care as much a/b their work b/c it would be less personal, etc. Also, incentive to make a profit over treating patients fully iv. States are going 3 ways: (1) CPMD makes no sense; (2) No sense when applied to non-profit; (3) No sense when applied to licensed hospitals v. Bartron v. Codington County (p. 459) 1. Facts: Docs associated into a clinic, which incorporated. Corp comprised of docs, not lay people. Lawsuit started when corp. tried to payment for services provided. County said it didnt want to pay and wouldn't b/c it was a corp. practicing medicine in violation of CPMD. 2. Holding: County didn't have to pay. K was null and void as a violation of CPMD. Ct voided collection action although there was no unlawful action b/c tendency for conduct was there. Corp.s inject the profit motive into professional practice, undermining professional ethics. The doctors corp. was therefore against public policy, and in violation of CPMD

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vi. Right of Corporation to Practice Medicine 1. The statues are designed to preserve the public health by excluding from practice persons w/o adequate morality, ability, and training. 2. Professional corporate laws now allow groups organized like one in Barton. vii. Berlin v. Sarah Bush Lincoln Health Center (Modern CPMD p. 465) 1. Facts: Doctor sought to invalidate restrictive covenant after he took a job < 1 mile away. Trial court said the non-prof hospital violated CPMD. AppCt affd. 2. Holding: The court declined to apply CPMD to licensed hospitals. The court also held that the public policy concerns, which supported the corporate practice doctrine, were inapplicable to a licensed hospital in the modern health care industry. viii. States are going 3 ways concerning CPMD: 1. Makes no sense b/c hospitals employing physicians arent practicing medicine, just making it available 2. No sense when applied to non-profit 3. No sense when applied to licensed hospitals b/c the hospitals are authorized by other laws to provide medical care ix. Corporate Practice of Medicine and Choice of Entity (Notes: 467-71) c. Fraud and Abuse: i. 2 aspects: 1. Ordinary Fraud send Medicare a bill for services you didnt provide 2. Regulatory Fraud fraud and abuse a. Abusing the system b. Practicing health care in a way that the government disapproves of ii. HYPO: G is a cardiologist. Whenever primary care doc sends G a patient, he sends doc $100. G doesnt keep his practice a secret & tells those docs his practice each time he meets a new one. 1. Problems w/ Gs practice? a. Primary care doc might care more about the money than the care his patient would receive from G. A where to refer problem. b. Whether to refer. Doc creates a conflict of interest. c. Cost economic & social d. Commercialization of the profession e. Gs conduct is a violation of the AMAs E-6.02 Fee Splitting prohibition and possibly AMA E-6.10 Services Provided by Multiple Physicians. 2. Will the conduct violate the AKS? a. Yes, it violates AKS (b)(2)(A) b/c G is paying remuneration for patient referrals. b. Primary care doc would be violating AKS (b)(1)(A) if he accepted Gs payment. c. G only committed a felony under AKS if the patient is a Medicare or Medicaid patient. iii. The Anti-Kickback Statute (579-581; 587-600) 1. Has a long list of exceptions: a. Exception (3)(a) for a properly reported discount. b. Exception (3)(b) allows for employees to be paid. c. There is also an exception for an HMO type price negotiation. 2. Under the AKS, remuneration is tailored to broadly cover doctor actions. 3. United States v. Greber (one purpose test) (p.580) a. Rule: Payments, even for legitimate services, made with any purpose of inducing referrals are barred. b. Facts: D argues that referring doc is actually performing a service for which he should be compensated, so the 40% he returns to referring doc is for services (by interpreting results for patient). D argues that payment for professional services cannot be basis of fraud under AKS. D insists that absent a showing that the only purpose behind the fee was to induce future services, compensating for services actually rendered could not be a violation. c. Holding: Ct rejects Ds argument & says that just b/c some payment may be for services, if part of it is to induce referrals it is still a violation.

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i. Where to refer & commercialization objection: if doc didnt get consulting fee, he wouldnt use s service. ii. Cost objection: full opinion states that Medicare may be paying higher prices b/c of these arrangements. iii. Court held that materiality was an essential element and further held that the record contained enough evidence to support the district judge's ruling that the certifications to Medicare were material. 4. AMA Principles (handout) a. Prohibits fee-splitting 5. The Anti-Kickback Statute a. Referral fee statutes are intended to prevent: ordering unnecessary services (whether), increasing charges for needed services (cost), & influencing w/ financial considerations decision of where best to refer a patient (where). b. Any incentive plan that has a referral aspect in a literal sense will always conflict w/ at least one of the statutes stated purposes namely, the potential to influence where a patient is referred. c. Fees incidentally related to a referral are valid if they dont exceed the FMV of legitimate nonreferral services bargained for at arms length. 6. Little Rock Treatment Center Problem: For LP, referral would be that LPs are referring patients. Remuneration would be docs ROI. Also possible violation of AMA E-6.03 & a where to refer problem. Likely not a whether to refer problem, b/c must be treated. a. Identify the places in the fact pattern that would bring the anti-kickback statute into play: i. Direct payment of the Fee! ii. Physicians paying for machine hoping to get money from sending a lot of patients there iii. The other centers always prescribe a return visit iv. Allowing the doctor to assist they could then bill the Medicare program for participating in the procedure. (Though Greber suggests that this might not be enough) b. Is follow up care necessary for everyone? c. Recommending for referring doctor may be indirect remuneration d. Is there remuneration for referral? Yes, not really a flat-out referral fee, doc is supposed to have a follow-up visit. Cross-referral could be remuneration as well, it is valuable. But, specialists typically send patients back to where they come from. e. Normally, prosecutors do not follow the Greber test by their own discretion, but it is still possible that docs, etc could be indicted based on this type of cross-referral that violates the language of AKS. f. Cross-referral apparently doesnt violate E-6.03 b/c payment comes from insurance co. & not referring facility. Referring docs participating in treatment is possibly a violation of E-6.05 b/c doc doesnt really do anything. g. AKS analysis of referring doc participating in treatment: Under Greber test, it comes down to the subjective intent of the referring & participating doc. iv. AKS, Joint Ventures and the Gray Area (582-584) 1. Safe Harbor Regulations (handout) 2. Anderson (Safe Harbor Handout p.8) a. Facts: Hospital paid docs to continue referring patients. Saying there should be no documentation probably wasnt smart even though lawyer was trying to keep client out of trouble. Ls were tried in addn to hosp execs & docs, but got off. The Ls were acquitted after a widely publicized prosecution alleging that they had structured sham transactions for their hospital client as part of a conspiracy to violate AKS. b. The law isnt interested in whether the program was well run, benefited patients or saved Medicare money . . . law clearly states that providers cannot pay for patient referrals. The jury apparently found that documents and testimony contained enough evidence to support the governments conclusion 3. The Hanlester Network v. Shalala (p.582)

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a. Facts: See p. 24 of HL notes for Flowchart of parties involved. Docs share risk. Argument is docs get an ordinary ROI w/ little effect by their own practices; therefore, doc is not negatively incentivized. Money goes from Medicare, out to docs (LPs), Hanlester (GP), & labs. Hithcock (VP of Marketing) untruthfully told potential investing docs (LPs) they must refer patients to lab b/c ROI depends on it. Remuneration is discount that SmithKline gives to shell labs & is passed on to docs & Hanlester by ROI. Enterprise is structured so that docs only receive a ROI, actual referral fees are not involved in docs return. Any single docs referrals are unlikely to affect his ROI. Ultimately, all docs, labs, GP, & owners/officers got off the hook except for Hitchcock. All, except Hitchcock, took steps to stay w/in law. Inducing referral is a violation, but mere encouragement to refer is not. b. Holding: Hitchcock knew what she was doing was illegal, so she met knowingly & willfully requirement under AKS. Ct says AKS requires alleged offenders to (1) know the prohibits offering or paying remuneration to induce referrals & (2) engage in prohibited conduct w/ specific intent to disobey the law. Ct (9th Cir.) basically says ignorance of the law is an excuse when it comes to the AKS. c. What is wrong w/ the Hanlester venture? i. Actual investment of docs seems insignificant & only serves to lower ROI of GP. One argument is that the only reason to include docs is to generate business through their referrals to the labs in which they have invested. 1. Must determine how tightly tied the docs decision to refer is to his ROI. 2. Under AKS, you must know what you are doing is unlawful, but you dont have to know which Code makes it so. 3. All courts have not accepted this analysis and Hanlester has been called into question in other circuits. Scienter requirement in other jurisdictions: a. 8th: ct refused to adopt ignorance is no excuse reading; good faith is a defense; bad faith triggers statute. b. 11th: in Starks, asks whether a reasonable D knew conduct was wrongful. 4. What is a good middle ground between Hanlester and the AMA section imputing liability without knowledge? a. Note 5 p. 595: Bryan v. United States: SC held that as a general matter, when used in the criminal context, a willful act is one undertaken with a bad purpose, which the Court defined to mean acting with an evil-meaning mind and with knowledge that [the] conduct was unlawful. However, it is not necessary to show knowledge of the precise statutory provision in question. b. Court in Kansas dismissed a case against a group of doctors finding that they tried in good faith to structure an arrangement that they thought complied with the law 5. Little Rock Problem Revisited Is selling investment interests in lithotripter treatment center a violation of the AKS or Stark laws? a. Under Greber, if one purpose is to induce referrals then AKS is violated. b. Under Hanlester, you cant induce referrals, but encouragement might be OK. Ensure docs they arent reqd to refer & that ROI doesnt depend on referrals. So doc ROI depends only on investment. Also no prohibited subjective intent to disobey the statute. c. Also helpful/reqd to ask whether transaction was at FMV. d. Which safe harbor provisions apply to this problem? i. Investment interests (a)(2): 8 standards must be met for safe harbor to apply (see handout). Limited partners are passive investors, managers are active investors. ii. Little Rock Lithotripter does not meet the requirements of the safe harbor. First, all of the LPs were urologists, so they could all make referrals (100% > 40%). e. Stark Law violated? No. Lithotripsy is not on list of DHS & Stark Law is not violated if the only remuneration results from ROI interest. i. Safe harbor protects you from AKS, but if you dont fit in, venture may or may not be legal. Argue that you fit into as many of the provisions as possible & there is

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a reason why you cant meet the others. Could show you arent trying or are trying not to break the AKS. v. The Stark Laws (584-587) 1. Stark I: banned self-referral to physician-owned clinical labs, effective in 92. 2. Stark II: banned self-referral for designated health services, effective in 95. 3. Stark does not have a knowledge or intent requirement so it is strict liability (unlike AKS). a. There is no I didnt know out. Unlike AKS, if you dont fit into the exceptions, the arrangement is illegal. There is no safe-harbor 4. Stark II Regulations 5. The Stark Law: Statutory Structure a. (a)(1): General prohibition i. (a): of physician self-referral of Medicare patients ii. (B): of billing to any entity for services that result from self-referral b. (a)(2): What is self-referral? (financial relationship) i. No referrals if there is a financial relationship ownership interest or compensation arrangements c. (d) Generally applicable exceptions d. (d) Ownership interest exceptions e. (e) Compensation arrangement exceptions f. (h)(1): compensation arrangement g. (h)(6): designated health services 6. HYPO 1: Paul Physician is an internist working with Physician Group, PC (PGPC). He is a shareholder of PGPC and also has an employment agreement with PGPC. In the course of seeing his Medicare patients, P regularly orders that blood be taken and analyzed by PGPC lab. a. Is Paul violating Stark Law? i. There is an investment interest and an employment arrangement and designated health services and a referral ii. No! There is an exception for in-office ancillary services. (b)(2)(A)(1) 7. HYPO 2: Same as HYPO 1, except that P is referring his patients for in-office MRI services a. Result? i. Nope still falls under ancillary office services (b)(2)(A)(i) 8. HYPO 3: Suppose PGPC owns a subsidiary, which leases MRI to Hospital on a per-click basis. Doc refers patients to Hospital for MRI services. Permissible under Stark? a. MRIs are a DHS, but is there a financial relationship b/t referring Doc and Hospital? i. Referring Doc is not paid directly by the Hospital, but he is a shareholder of PGPC, which owns the MRI subsidiary and has lease agreement w/ the Hosp. ii. How direct does the compensation agreement have to be? By reg., Sect says physician stands in the shoes of his entity. So, this would raise Stark issues. b. Per-click lease problem? i. Could look like a disguised kickback b/c Doc refers to Hospital, which uses MRI. ii. Recent regulations have banned per-click leases. 9. Problem: Recruiting Dr. Jost a. Is Stark Law violated? There is a financial relationship (compensation arrangement) created b/t hospital & Jost. It would violate Stark w/out an exception. Jost isnt moving, so question is whether she fits into the recruitment exception? i. Basically, Stark is just trying to prevent covered kickbacks. d. False Claims Act; Managed Care Regulation (333-339) i. 42 USC 1320(a) 7a(b)(1) Regulates hospitals (p. 333): If a hospitalknowingly makes a paymentto a physician as an inducement to reduce or limit services provided to [Medicare/Medicaid patients who] are under [his] care, the hospital [is] subject to a civil penalty. 1. Different interests b/t doctor and hospital 2. Doctors worried about malpractice 3. Hospitals worried about getting $ expended back from Medicare/Medicaid 4. No requirements to meet to make this ok

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5. Appears to prohibit only physician specific payments and not incentives that are pooled across a group of physicians ii. 42 USC 1395mm(8) Regulates HMO (p. 333): Regulating HMO physician incentive plans and tracking the language of the above statute. 1. Regulates capitation. 2. Defending against abuse by hospitals. Don't want hospitals to force doctors to accept less Medicare by lowing their payments 3. Can be met by requirements: a. No specific payments are made b. If physician is placed at a substantial risk HMO must: i. Provide stop loss insurance ii. Conducts surveys 4. For most incentives, it is merely regulatory, not prohibitory 5. Only prohibition for inducements to reduce medically necessary treatment of individual patients 6. Substantial financial risk is 25% of the capitation payment going somewhere else meaning that HMOs can put physicians at risk for losing up to of their Medicare compensation w/o incurring any regulatory oversight. a. Applies only to placing a physician at financial risk for services they order from others iii. U. S. ex rel. Thompson v. Columbia HCA 1. PP: As part of a multi-district litigation of False Claims Act (FCA) qui tam suits, plaintiff relator sued Ds, a healthcare organization and related entities, alleging kickback and fraudulent JCAHO certification claims. Intervenor US moved to dismiss the kickback claims and to expedite. Ds moved to dismiss the kickback and JCAHO certification claims. 2. Facts: The relator alleged that a hospital fraudulently procured certification from the JCAHO and that such fraud excluded it from participation in Medicare. The relator also alleged a scheme of illegal kickbacks to physicians for referrals. Ct. determined that the kickback claims were barred by the first-to-file rule under 31 U.S.C.S. 3730(b)(5). The relator was not the first to file the kickback allegations since two complaints predating the relator's first amended complaint alleged the same kickback scheme, and the complaints rested on the same material facts. The court rejected the relator's arguments regarding a variation in geographic location, relation back, and amendment. The court also determined that the JCAHO allegations did not state a claim under the FCA, because JCAHO certification was not a prerequisite to participation in Medicare, and thus defective JCAHO certification would not affect the Government's decision to pay Medicare claims. 3. Holding: The court granted the govts motion to dismiss as to the kickback claims and granted Ds motion to dismiss as to the JCAHO certification claims. Court denied as moot the motions to dismiss as to the other claims. Court granted the govt's motion to expedite. a. App. Ct. said that violations of AKS/Stark do not necessarily make a violation of the FCA, but they do not sustain the trial cts ruling. i. THIS HAS BEEN CHANGED BY PPACA b. Ct does question whether it matters to govt if Medicare payment relies on certification. c. Ct also says the Stark law already says you arent entitled to payment w/ a violation so it is stronger for FCA purposes than AKS. 4. From Thompson, is the cert. for Medicare payment material? a. Outcome materiality different decision would have resulted had govt known of false statement. b. Natural tendency materiality decision potentially affected by knowledge of false statement. 5. Two main elements of FCA: (1) False Claim and (2) False Statement a. Civil monetary penalty liability + treble damages for either of the above. 6. Types of Claims: a. Medical Necessity - Certifies that svcs rendered were medically indicated & necessary. b. Worthless Services - The performance of the services is so deficient that it isnt really performance of services at all; see Mikes.

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iv. Qui tam - allows for a private individual, or "whistleblower," with knowledge of past or present fraud committed against the federal government to bring suit on its behalf. 1. Also called disgruntled ex-employer lawsuit 2. Ex-employer gets a share of the judgment from the lawsuit 3. Suit is filed under seal in fed ct. Govt has 60 days to decide whether to join the suit, but govt can get extension if it wants. 4. Relator can proceed on her own if govt declines. Relator shares in govt recovery if successful (15-30%). v. Gainsharing incentive programs that reward physicians for initiatives that improve the efficiency of care, such as by identifying and eliminating wasteful practice patterns. 1. Intended to focus on practice patterns and professional standards rather than on discrete treatment decisions for particular patients and pool the incentive payments and refuse to reward any initiatives that compromised medically necessary care a. Originally, DHHS said they were illegal b/c it would be problematic to say which programs are and are not permissible b. Following ruling indicated some flexibility approving a plan to pay cardiac surgeons a share of the savings from being more efficient with operating room supplies, with various safeguards, limits, and oversights to guard against abuses vi. Pegram suggests that doctors may be liable for not disclosing financial incentives (p. 338) vii. PPACA 6402 (d) Reporting And Returning Of Overpayments. (1) In General. If a person has received an overpayment, the person shall (A) Report and return the overpayment to the Secretary, the State, an intermediary, a carrier, or a contractor, as appropriate, at the correct address; and (B) Notify the Secretary, State, intermediary, carrier, or contractor to whom the overpayment was returned in writing of the reason for the overpayment. (2) Deadline For Reporting And Returning Overpayments. An overpayment must be reported and returned under paragraph (1) by the later of (A) Date which is 60 days after the date on which the overpayment was identified; or (B) The date any corresponding cost report is due, if applicable. *** (f) Health Care Fraud. (1) Kickbacks. Section 1128B of the Social Security Act (42 U.S.C. 1320a7b) is amended by adding at the end the following new subsection: (g) In addition to the penalties provided for in this section or section 1128A, a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of subchapter III of chapter 37 of title 31, United States Code. e. ERISA Preemption (224-237) i. 3 main clauses of 514 Preemption Provision: 1. Preemption Clause: relate to 514(a) a. Very broad language, construed broadly by the courts. 2. Saving Clause: allows states to retain the ability to regulate banks, insurance laws, and securities; 514(b)(2)(a); regulates insurance 3. Deemer Clause: states cannot pass laws that deemed employer plans as insurers, banks, securities, if they do, that law is not protected by the savings clause; 514(b)(2)(B) ii. Although ERISAs preemptive scope is broad, savings clause explicitly saves from preemption state laws that regulates insurance. Deemer clause provides state insurance laws arent saved from preemption if they deem an employer benefit plan to be an insurance company to regulate it. iii. Though plans that provide benefits in form of insurance may be indirectly regulated through regulation of insurance, self-funded or insured plans may not be regulated as insurance cos. even if the plan purchases stop-loss insurance to cover losses or benefits payments beyond a specified level. iv. Broad ERISA preemption was intended to ensure uniform fed regulation of employee benefits. McGann illustrates that ERISA creates virtually no fed regulation to replace state oversight. v. Retail Industry Leaders Association v. Fielder (225)

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1. Facts: MD attempted to pass law regulating Wal-Marts employee benefits plan. The Act required employers with 10,000 or more employees to spend 8% of their payroll on employees' HI costs or pay amount their spending fell short to the state. Wal-Mart was subject to this minimum-spending requirement. 2. Holding: On the merits, the court agreed with the district court that the Act was preempted by ERISA. The only rational choice for employers under the Act was to structure their ERISA health care benefit plans to meet the minimum-spending threshold. Because the Act effectively mandated that employers structure their employee health care plans to provide a certain level of benefits, the Act had an obvious "connection with" employee benefit plans, and it was preempted by ERISA. Accordingly, the court upheld the district court's ruling granting summary judgment in favor of the association. vi. American Medical Security, Inc. v. Bartlett (228) 1. Facts: Employers & insurers sought judgment that MD insurance regulation fixing min. attachment point for stop-loss insurance policies issued to self-funded employee benefit plans was preempted by ERISA. DC entered S.J. in favor of employers & insurers. App Ct affirmed 2. Issue: Whether Maryland's regulations relate to ERISA employee benefit plans and thus whether they fall within ERISA's preemptive scope? 3. Holding: v ERISA preempted MD insurance regulation designed to prevent insurers & selffunded employee benefit plans from depriving plan participants & beneficiaries of state mandated health benefits. State insurance regulation may not directly or indirectly regulate selffunded ERISA plans. This law clearly relates to employer benefit plan & would be preempted but for savings clause b/c this law does regulate insurance. MDs losing argument against deemer clause applying: not regulating self-insured employer, but regulating stop-loss insurance carrier. Ct says MDs law isnt really concerned w/ stop-loss insurers, but is actually concerned w/ regulating employer benefit plans. If a self-funded plan insured by stop-loss insurance having an attachment point of $5,000 provided no benefit for organ transplants, the regulations would either raise plan costs by including unwanted, state-mandated insurance coverage for organ transplants or convert the self-funded plan into a fully insured plan contrary to its preference. These effects impermissibly intrude on the relationship between an ERISA plan and its participants and beneficiaries. Also could argue reinsurance is just a scam to make employer benefit plans look self-insured when they really are not. The min. attachment point would be a way to ensure that a plan is really self-insured instead of just in name. While we recognize that self-funded plans may not be providing Maryland residents with the range of benefits mandated by state law and that such plans' benefits may not always be as secure as those offered by regulated insurance companies, the remedy for any such deficiency must be requested of Congress. In other words, courts have interpreted this clause broadly to carry out Congress' purpose of displacing any state effort to regulate ERISA plans. vii. McGann v. H&H Music Co. (231) 1. Facts: John McGann (P) was diagnosed w/ AIDS in December 1987. After P informed his employer, H. & H. Music Co. (D), of his diagnosis, D informed its employees that beginning August 1, 1988, there would be a change in its healthcare insurance plan, including a limit on lifetime benefits for AIDS-related claims and several other types of claims of $5k, as opposed to the $1 million limit on many other claims. P sued his employer under 510 of ERISA, arguing that his employer discriminated against him by decreasing lifetime healthcare benefits available to him. USDC ruled in favor of D and P appealed. 2. Holding/Reasoning: On appeal, the SC upheld the decision that an individual must show that an employer intended to discriminate against him or her and that he or she was being deprived of an absolute right to healthcare benefits, not just a healthcare benefit that had been offered previously. Court also examined the Congressional intent of 510, finding that the interpretation espoused by P was contrary to the Congressional intent to allow employers to modify or terminate existing healthcare insurance plans. Court also found that ERISA did not require employers to offer employees who have been vested a continued level of healthcare benefits just b/c the vested benefits once had been included in an overall health insurance plan. a. SC cited other ERISA cases to support its position. Each of these cases showed that as long as an employer's modification to a healthcare insurance plan was legal,

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viii. ix.

x.

xi. xii.

xiii. xiv. xv.

discrimination did not exist. The asserted discrimination is illegal only if it is motivated by a desire to retaliate against an employee or to deprive an employee of an existing right to which he may become accustomed. (p. 233) 3. ERISA imposes no substantive obligations on employers as to the benefits they must provide. Self-insured health benefits may never be subjected to state reg. 1. States cant require self-insured employers to cover mental health services. Employer -> BCBS -> Employees 1. State laws regulating BCBS do relate to employee benefit plans, but they are saved from ERISA preemption b/c they are insurance laws w/in the meaning of the Savings Clause. Employer (self-insured)-> BCBS (admin services only) -> Employees 1. It does relate to employee benefit plans. It is an insurance law. But, b/c there is no insurer in the picture, you would have to say the employer is acting as an insurer, but you cant do that b/c of the Deemer Clause. So, cant require self-insured plan to do anything. States may not force employers to purchase insurance as this would relate to employer benefit plans, but it would not be saved b/c it regulates employers and not insurance. In KY Assn of Health Plans v. Miller, Sup Ct announced common sense test, 1st, state law must be specifically directed toward entities engaged in insurance.2nd, state law must substantially affect the risk pooling arrangement b/t the insurer and insured. States may not regulate the rates that hospitals charge w/ respect to self-insured employers, but they can regulate the rates for insurers/HMOs. Deemer clause doesnt matter unless you reach a yes w/ respect to the savings clause. Analysis: 1. Although ERISA's preemptive scope is broad, the savings clause explicitly saves from ERISA's preemption those state laws that regulate insurance. 1144(b)(2)(A). 2. At the same time, however, the deemer clause provides that state insurance laws are not saved from preemption if they deem an employee benefit plan to be an insurance company in order to regulate it. 1144(b)(2)(B) a. In determining whether a state law is one that regulates insurance, it is not enough that it operates only on insurance companies or insurance policies. The regulation must regulate the business of insurance in the sense that the object of its regulation: (1) has the effect of transferring or spreading a policyholder's risk; (2) is an integral part of the policy relationship between the insurer and the insured; and (3) is limited to entities within the insurance industry.

f.

Professional and Facility Regulation i. Professional Licensure (380-398) 1. Purpose of medical licensure? Protect public from incompetence, unnecessary care, etc. Health care medical professional licensure is a matter of state law. 2. Cts have routinely upheld state licensing statutes under rational basis review. Most cts have also found that there is no fundamental right of access to treatment from unlicensed docs. a. Medical licensure essentially cedes to the medical profession control of how many docs can enter practice, since the AMA can control the size of medical school classes through the accreditation process. 3. State v. Miller (p. 385) a. Facts: Miller (D) treated people at his home for various ailments through the use of electric shocks, massage, or magnets. Additionally, D often sold or recommended natural vitamins or nutrients to the people who visited him and consistently accepted donations of $10 for each treatment. D sought review of a judgment, which convicted him of 7 counts of practicing medicine w/o a license. b. Holding: Affirming, the court held that D knowingly and intelligently waived his right to counsel because when he was correctly advised by the district court that he could not be represented by unlicensed counsel, he clearly and unequivocally chose to represent himself. Court also concluded that the DC adequately advised D of his right to counsel, explained the nature of the charges, and warned of the ramifications of self-

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representation. The court further determined that there was sufficient evidence to support the conclusions that D had publicly professed to assume the duties incident to the practice of medicine and had routinely prescribed and furnished medicine. SC held vitamins were med for purposes of prosecution for practicing med w/out a license. Conviction of practicing med w/out a license was supported by evidence that D treated people for various ailments, even though he didnt claim to be a doc & didnt advertise his services. c. Cant hold yourself out to be a doctor. 4. Physicians & other licensed health care pros are subject to professional disciplinary action, such as license revocation or suspension, for assisting in the unlicensed practice of medicine. 5. Legislative definition of practice of medicine typically is quite broad. The breadth of the definition is important b/c persons who engage in the specified activities w/out an appropriate license are subject to criminal penalties. 6. Many states permit physicians to delegate more tasks, such as signing certain prescriptions, in medically underserved areas of the state. 7. Modi v. West Virginia Board of Medicine a. PP: Board sought review of a judgment, which reversed and vacated an underlying administrative order that imposed sanctions against respondent psychiatrist for engaging in unprofessional conduct and for violating a state code by using an experimental therapy w/o first obtaining a full, informed, and written consent. b. Facts: Disciplinary proceeding grows out of M's care & treatment using a technique known as depossession therapy. P filed a claim w/ Board (staff - prosecutorial role) hearing officer initially dealt w/ complaint (judicial function); reached a 1st decision Full Bd review (appellate role). c. Holding: Court concluded that the lower court was correct in finding that the board made inadequate findings of fact and incorrect conclusions of law. They noted that the board's order utterly failed to address the findings of fact and conclusions of law proposed by the parties or the reasons for rejecting such findings. Court further noted that the requirement that the agency rule on such proposed findings and conclusions was mandatory and was to be enforced by the courts. Court additionally noted that it was not apparent from the record that the board's order reflected a reasoned, articulate decision, which set forth the underlying evidentiary facts, which had lead the board to its conclusion. Nevertheless, Court reversed, holding that given the finding by the hearing examiner and the board that the psychiatrist had used an experimental depossession therapy w/o first obtaining a signed, written, and informed consent, a remand to the board was necessary for reconsideration of the issues and an appropriate, reviewable order. d. Cant arbitrarily call something quackery 8. Professional Licensure Problem (p.397) - Nurses/doc assistant did/would not hold themselves out as docs, but public would be likely to be confused and think that they were seeing a doctor. a. The clinic staff are acting like docs and practicing medicine. But, staff would be diagnosing based on physicians protocol. b. In many states, the nurses and physicians assistants are also subject to licensing and fall under the professional licensure regulations. i. Occupational licensure usually results in services being of higher quality & higher cost, but doesnt necessarily result in better outcomes for consumer. ii. Most state medical licensing boards are composed mainly of physicians. Good for consumers? 1. Yes and no, the physicians know what is required of other docs, but maybe not b/c they can control the market. iii. We could worry that the lack of consumer representation in private certification groups makes them better for professionals than consumers. ii. Facility Licensure (398-409) 1. 3 Terms are commonly used to describe multi-level process for inspecting & approving health care facilities by state, fed, and private agencies:

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2.

3.

4.

5.

a. Licensure a mandatory governmental process whereby a health care facility receives the right to operate b. Accreditation a private voluntary approval process through which a health care org. is evaluated and can receive a designation of competence and quality c. Certification a voluntary procedure for health care orgs. to meet the qualifications for participation in govt funding programs, specifically Medicare & Medicaid JCAHCO: primary healthcare facility regulator. Begun as a joint venture. Sets standards on what a good hosp looks like. In many states if you met requirements of JCAHO, you also meet requirements for state licensure & participation (certification) in Medicare and other programs. 3 main categories: a. Structure (inputs) i. Easiest to measure b. Process: Asks what goes on in structures? i. For law school ex: Do teachers follow a syllabus? c. Outcomes = Results i. Ex: Law school do students know anything when they graduate? d. Need all 3 for a functioning facility e. Movement has become more outcome-based approach Estate of Smith v. Heckler (facility-oriented v. patient-oriented care management) (p. 401) a. Facts: P sought to improve awful conditions in nursing homes funded by Medicaid. P claimed Secretary of HHS was required to ensure high standard of care through Medicaid certification. i. If state wants to get Medicaid funding it must submit a medical assistance plan to the secretary for approval. The state agency must maintain the standards of the facilities where Medicaid recipients receive treatment and ensure high quality. Quality shall be ensured by a system of review. ii. Federal law gives secretary authority to look behind states determination of quality and make its own determination. Here, the secretary has chosen to use a survey/certification method to enforce state compliance. iii. The states conduct a survey of the facility and the secretary certifies the states plan based on that survey. iv. P argued that the scheme was facility-oriented (focused on the ability of the facility to provide care) rather than patient-oriented (focusing on the care actually provided). b. Holding: Due to the Medicaid Acts focus on the care which patients actually receive, the federal delegation of authority in overseeing the quality of state facilities to the secretary, and the implementation of that authority in the look-behind provision which allows the secretary to actively inform himself of conditions at the facility; that the secretary has a duty to regulate in a patient-oriented scheme and a facility-oriented scheme was an abdication of that duty. i. The secretary must promulgate and enforce a patient-oriented scheme of state compliance. ii. Ct of Apps held (1) Sec. has duty to est. a system to adequately inform herself as to whether facilities receiving fed money are satisfying requirements of Medicaid Act, including provision of high quality patient care; (2) by promulgating a facilityoriented enforcement system, rather than a patient-oriented system, Sec. failed to follow focus of Act. Ct ordered change in way that Medicaid ensured compliance. Cospito v. Heckler (p. 402) a. Facts: Patients in psychiatric hospital whose Medicare, Medicaid and SSI benefits were terminated when hospital lost its JCAHO accreditation, and as a result, its certification by HHS. They brought a suit challenging loss of their federal benefits. Patients argue that in the case of psychiatric hospitals, the statute places JCAHO accreditation in a position of ascendancy over approval by the Secretary, thus leading to the question of unconstitutional delegation to a private group. b. Holding: Since, in effect, all actions of JCAH are subject to full review by a public official who is responsible and responsive to the political process, court found that there

25

has been no real delegation of authority to JCAH. See Todd & Co. v. SEC, 557 F.2d 1008 (3d Cir.1977) (where actions of private organizations were subject to review by wholly public body, no unconstitutional delegation has occurred). Court held: (1) Ps were not denied procedural due process; (2) certification procedure did not deny Ps equal protection; (3) termination of social security benefits for Ps in decertified hospitals did not violate substantive due process; and (4) Medicare and Medicaid provisions did not improperly delegate authority to commission. 6. One common licensing issue: whether a license for a central facility such as a hospital covers satellite facilities (i.e. urgent care centers) or if they must be separately licensed. Physician offices dont require facility licenses. iii. Certificate of Need (410-421) 1. Cert. of Need (CON) laws operate like a building permit for hospitals and other medical facilities (usu. not physicians offices). Medical facilities must show that a need exists in the community, and satisfy financial feasibility, before beginning new construction, purchasing major new equip., initiating new services, or changing ownership. 2. What is cost containment strategy adopted by CON law? a. Limit supply to lower costs, contrary to tradl monopolist thought. b. Incumbent providers are given a monopoly to keep costs low. 3. CON laws have had essentially no impact on hospital costs. Partly b/c they address primarily capital investment, not operating expenses. CON law constrains only what hospitals spend, not what they charge. 4. Need is defined by medical professionals and therefore functions as an expansive, rather than limiting, concept. 5. Roehmers Law: A bed built is a bed filled is a bed billed. 6. Traditional thought health care facilities dont function like traditional markets. It is thought that health care supply creates its own demand. 7. Rationales for health planning: insurance & moral hazard; physician-induced demand; and nonprofit organizational form 8. Services subject to CON Review (AL): a. CON required for construction, development, acquisition of a new health care facility or HMO. b. Capital expenditure for major medical equip. > $[2mil] c. New annual operating costs > $[800K] d. Other capital expenditure > $[4mil] e. Changes in bed capacity f. New health services g. MRI, ESWL, PET scanners & physicians offices exempt 9. Criteria for CON review (AL): a. Consistency w/ State Health Plan b. Availability of alt., less costly or more effective methods of service c. Determination of a substantially unmet public requirement for new facility or service d. Appropriate applicant 10. See CON Review Board organizational chart from PP Slides. 11. Statewide Health Coordinating Council (SHCC) drafts State Health Plan 12. Health Service Areas & Health Systems Agencies (HSAs) - Mini-SHCCs developing needbased health plans for local area, advise SHCC 13. Criticisms of CON a. Is planning process scientific? Democratic? b. Would we expect this process to produce cost-containment? i. Focus on need likely to limit new technology? ii. Limitation of competition iii. No limit on overall expenditures of facilities iv. No regulation of prices c. Data suggests that CON programs do not contain costs. 14. SHCC v. General Hospitals of Humana, Inc. (p. 410)

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a. Facts: Corp sought to build a hospital in an area where the bed-to-person ratio established by federal and state regulations had been exceeded. State agency granted the corporations application. The court reviewed. b. Holding: The hospital-bed-to-person ratio was a maximum limit that could be exceeded only if the circumstances fell w/in the ambit of specific exceptions. The court held that there was no showing that the circumstances at issue fell w/in any of the listed exceptions. Thus, the agency was without authority to grant the corporation's application. c. The state plan is not a mere guideline that can be disregarded. d. Exceptional conditions: (p. 412) 15. Irvington General Hospital v. Department of Health (p. 415) a. Facts: Irvington General Hospital submitted an application for a CON in Nov. 1973. It sought permission to construct an addition to the hospital and to add 19 medical/surgical beds. After several delays attributable both to the Department [of Health] and the applicant, hearings were held in Sept. and Oct. 1975. The hearing officer recommended that the application be approved. B/t the time of the hearing and the time when the Health Care Administration Board (Bd.) considered the hearing officer's recommendation, the Board reclassified 150 long-term care beds at Clara Maas Hospital as medical/surgical beds, thereby creating an excess of medical/surgical beds in Essex County. On May 6, 1976 the Bd. remanded this application to the hearing officer, instructing him to make additional findings of fact "particularly pertinent to the current effect of the reclassification of the beds in the area." The remand hearing was held, and thereafter the hearing officer recommended that the application be denied solely on the ground that Department of Health statistics now showed an excess of medical/surgical beds in the county . . . . b. Holding: Court agreed w/ Ps contention that the Bd. erred in giving conclusive weight to the Dept.s statistics. The Legislature has required the Bd. to take into account several factors: (a) the availability of facilities or services which may serve as alternatives or substitutes, (b) the need for special equipment and services in the area, (c) the possible economies and improvement in services to be anticipated from the operation of joint central services, (d) the adequacy of financial resources and sources of present and future revenues, (e) the availability of sufficient manpower in the several professional disciplines, and (f) such other factors as may be established by regulation. i. In light of those established considerations and the general policy of providing the highest quality health care, it is not sufficient for the Bd. to consider only the # of beds available in the area, particularly where the area designated by the Dept. as the "area to be served" may not, in fact, coincide w/ the area for which the services will, in fact, be provided. Total reliance upon bed statistics would permit the Bd. to make its decision solely on the basis of the first factor noted. It would permit the Board to ignore the remaining factors, notably, in this case, the second one: "the need for special . . . services in the area." ii. Ct. believed that the Bd., in deciding whether to grant a CON, may not, as it did here, rely solely on bed need statistics. It must also take into account all of the factors and must, if appropriate, recognize and accept a need for special services in any local area smaller than the larger health care area established by the Dept. iii. B/c the Bd. failed to make those considerations, remand is required. On remand we direct that the Bd. take into account an additional factor: At the time of the original hearing the Dept. statistics showed that the County needed 73 more medical/surgical beds. iv. Application should have been viewed in fact that at the time there was need c. Board cant rely solely on bed statistics. iv. Most CON programs contain 3 competing goals: quality, accessibility, & cost control. Goals are of different importance to 3 groups. Physicians see quality as most important, consumers see quality & accessibility as most important, & regulators see cost control as most important.

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g.

Corporate Form i. Nonprofit Corporations (422-433) 1. Vanderbilt Hypo 2. B/c most hospitals and some HMOs are organized as nonprofit corps, they are subject to a special set of corp. governance and tax rules. Public hospitals are subject to similar restrictions. 3. Queen of Angels Hospital v. Younger (p. 422) a. Facts: Queen of Angels Hospital was established and incorporated in 1927 as a nonprofit corporation in California. In 1971, the nonprofit leased its hospital to W.D.C. Services, Inc. but retained ownership of an outpatient clinic and a convent house. Queen of Angels intended to use the proceeds from the lease to establish and operate outpatient medical clinics that would provide free medical services for the indigent in Los Angeles. In order to determine the validity of their lease agreement with W.D.C., Queen of Angels filed a declaratory relief action against the California Attorney General. b. PP: The lower court ruled in favor of Queen of Angels. c. Holding: However, the CA Appellate Court reversed the ruling in favor of the AG, who argued that using the assets from the sale for outpatient services constituted an abandonment of the nonprofits dominant charitable purpose. In its ruling, the appellate court concluded that Queen of Angles abandoned its primary charitable purpose and violated the terms of the charitable trust imposed on its assets by using the assets, including the proceeds from the lease, exclusively for the purpose of operating outpatient clinics. i. [U]nder its articles of incorporation, it was intended to and did operate a hospital and cannot, consistent with the trust imposed upon it, abandon the operation of the hospital business in favor of clinics. d. Its articles of incorporation and other formal manifestations of its declared purposes first evidence the expressly declared charitable purposes of a charitable corporation. May also be evidenced by oral and informal declarations of the corp.'s charitable purposes. Moreover, such purposes may be deduced from the corp.'s dominant activities and its representations to tax authorities and the public. i. Compromise of religious Order's claim for past services was not a proper exercise of sound business judgment or fiduciary duties of hospital bd. where there was no basis for such claim & neither Order nor hospital had a reasonable basis for believing in its validity. Member of hospital bd. who assisted in negotiating lease was entitled to fee, despite not being a licensed real estate broker where he was a licensed attorney & rendered legal services to hosp. Queen was entitled to carry on activities other than operating a hospital but essential to all those activities was continued operation of a hospital. 4. Queen of Angels applies 3 doctrines of nonprofit & charitable trust law: a. Ultra vires (beyond its powers) or charitable purpose Asks whether proposed transaction goes w/ nonprofits charitable purpose or is against it (i.e. running clinics instead of hospital in Queen of Angels). i. Orgs new purpose must still pursue main charitable aims. ii. Courts sometimes require strict adherence when gifts are given that have specific strings attached. b. Duty of care or the business judgment rule c. Duty of loyalty and conflict of interest 5. Cy pres (as near as possible) determines what alt. use to make of proceeds from sale of a nonprofit org. Doctrine created to deal w/ problem of dead-hand control. Basically says that where donee has a general charitable intent & that intent is proved impracticable, then ct will usu. OK use of the funds in a charity serving a similar purpose. 6. It would be difficult, if not impossible, to share ownership of a NP corp. b/c no profits can be distributed. 7. NPs get capital from profit-margins, fed. programs, donations, bond issues (tax exempt), etc. 8. State Law Nonprofits a. There is a distinction b/t corp. status (state law) & tax exempt status (fed & state law).

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b. Nonprofits are not owned by anyone. They are typically set-up through charitable donations, but now they would be set up as incorp. entities. Many nonprofits have a selfperpetuating bd of directors. Some nonprofits have members instead of shareholders and they elect directors. c. Main difference b/t nonprofits & for-profits is called the non-distribution constraint, both as a matter of state & fed law. Nonprofits cannot distribute profits. If nonprofit is ever dissolved, the assets never go back to shareholders. d. When nonprofits are dissolved, money either goes to another charity in the same general area or back to the state. 9. For-Profit Joint Venture Problem (p.432-33) - Nonprofit MWH wants to est. business relationship w/ HMO. MWH & HMO each own a nursing home. MWH wants to invest $10M (35% of HMO value) from sale of its nursing home into HMO in return for 30% ownership in HMO & 5% ownership for trustees. MWH is also expecting profit distributions, patient flow, and better contractual terms w/ HMO. a. There is likely a problem w/ the trustees getting an ownership percentage. It is a violation of the non-distribution constraint. Also problems relating to the obligation of MWHs trustees, i.e. the business judgment rule. b. MWH trustees have a duty of care (diligence) & a duty of loyalty to MWH. The focus is mainly on process instead of substance (business judgment rule). c. There might also be an AKS problem in that MWH wants HMOs patient flow. d. Ultra vires (beyond the powers) question: Do constraints imposed by MWHs charter block the transaction? Everything corp. does must be consistent w/ charter. e. Cy pres not good argument for MWH b/c nursing homes are still in need & not outdated. f. Some donors and org. members would have standing to challenge the proposed transactions, but last resort is state attorney general. i. Do charitable directors owe a higher duty of care than for-profit directors? Traditionally they did, but modern trends have moved to make them equal. ii. Tax-Exempt Status (433-448) Question you should ask is how nonprofit hospitals differ from for-profit hospitals, & whether those characteristics also allow others in health care sector to qualify for exemption. Nonprofits still have to file forms w/ the IRS each year despite being tax exempt. It is similar to an SEC disclosure document. 1. Charitable Tax Exemption a. Eastern Kentucky Welfare Rights Organization v. Simon (p. 433) i. Facts: Various health/welfare organizations & several private citizens, all alleging indigence & inability to pay for hospital services, brought action seeking relief regarding validity of IRS policy. In Rev. Rul. 69-545, the commissioner interpreted I.R.C. 501(c)(3) to require private nonprofit hospitals to provide free or below cost treatment to individuals unable to pay to qualify for tax-exempt status as "charitable" organizations. The organizations and indigent persons alleged the ruling was invalid as an improper modification of previous policy and interpretation and sought to enjoin its implementation. ii. PP: USDC for DC granted the summary judgment motion for health and welfare organizations and indigent persons, in holding that Rev. Rul. 69-545, which related to qualifications for tax-exempt status under I.R.C. 501(c)(3), and was promulgated by the commissioner, was invalid. iii. Overview: Court reversed judgment and held: (1) Rev. Rul. 69-545 was not invalid b/c it was not inconsistent w/ 501(c)(3) and modification of the prior ruling was not determinative. Permissible definition of charitable wasnt contrary to any express congressional intent & such ruling didnt constitute an abuse of discretion & shouldnt be set aside; and (2) the term Charitable, may be broadly interpreted so as to allow private NP hospitals to qualify as charitable institutions under Code w/o requiring them to admit & provide free or reduced service rates to persons unable to pay. It isnt to be restricted to narrow sense of relief for poor. For a

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hospital to qualify as tax exempt, provision of free or below cost service to those unable to pay is no longer essential. b. 1983 Ruling liberalized rules if an ER isnt needed in a community, you don't have to have one or if the hospital is a specialty one i. Even if they didnt have ER room, they had: 1. Board of directors drawn from community 2. Open medical staff policy 3. Treatment of Medicare and Medicaid patients 4. Surplus is applied to good things facility betterment, residency program, education ii. Need a list of things that point to a charitable purpose c. Utah County v. Intermountain Health Care, Inc. (Non-profits can get a pass on CPMD by charitable immunity) (p. 435) i. Facts: State tax case. ii. Issue: Whether state law exempting from taxation hospitals meeting certain requirements, constituted an unconstitutional expansion of the charitable exemption. iii. Majority: Hospitals no longer represent a charitable institution as they tend to be money-making ventures, do not relieve the state of a significant burden (state still pays Medicaid), and generally require patients to pay for treatment. Charity exemption is therefore denied. Entity may be granted a charitable tax exemption for its property only if it meets the definition of a charity or if its property is used exclusively for charitable purposes. Gift to the community, for purposes of determining charitable tax exemption, can be identified either by a substantial imbalance in exchange b/t charity & recipient of its services or in lessening of govt burden through charity's operation. Factors which must be weighed in determining if particular institution is using its property exclusively for charitable purposes are: 1. Whether stated purpose of entity is to provide a significant service to others w/out immediate expectation of material reward; 2. Whether entity is supported, & to what extent, by donations & gifts; 3. Whether recipients of charity are required to pay for assistance received, in whole or part; 4. Whether income received from all sources produces a profit to entity in sense that income exceeds operating & long-term maintenance expenses; 5. Whether beneficiaries of charity are restricted or unrestricted &, if restricted, whether restriction bears a reasonable relationship to entity's charitable objectives; 6. Whether dividends or some other form of financial benefit, or assets upon dissolution, are available to private interests, & 7. Whether entity is organized & operated so that any commercial activities are incidental to charitable ones. 1. Problem is that state says hospital isnt providing enough indigent care. Is it enough that hospital is just providing health care to the community? a. Fed govt arguably says yes. 2. UT says org. must be giving a gift to community, either by substantial imbalance b/t paying/charitable service or alleviating state govt burden. 3. Ct also didnt like that hospital sought payment from everyone that came in, even if they didnt always collect. iv. Dissent (Majority View): The hospital is a charitable institution because its income is used solely to further its charitable purposes, it does not turn away indigent patients, it relieves the government of a burden by its sheer existence (better than no hospital at all). d. Why NP health care might be better than for-profit and justifications for tax exemption: i. Nonprofit hospitals dont engage in cream-skimming. Argument that for-profit follows money (in suburbs) and nonprofits are left w/ indigents in urban pops. ii. For-profits divert large amounts of $ towards compensating execs and shareholders, reducing money in pot for charitable services. iii. For-profit businesses are more likely to exploit consumers.

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iv. Nonprofits provide more charity care. v. Nonprofits provide other, less tangible benefits, i.e. more likely to engage in research, educational programs, unprofitable centers (burn units), etc. vi. Tax-exempt status of nonprofits provides govt w/ desirable regulatory leverage. e. Arguments against: i. Is it really true that nonprofits generate appreciably different levels of indigent care? Operate differently than for-profits? ii. Shouldnt for-profits get credit for paying tax, and when that is taken into acct. is it clear that nonprofits are more desirable? iii. If talking about indigent care, hospitals location may be better indicator of amt of indigent care than nonprofit/for-profit. iv. Competitive fairness, why should charity hosps be put in better position than forprofits when both operate in competitive markets. f. Fed Tax Exempt Status: i. Private inurement & unrelated business income are 2 issues that could threaten an entitys tax-exempt status. ii. IRS requires tax-exempt HMOs to offer open enrollment, community rating, discounted fees for low-income subscribers, & support for research & education. HMO exemption appears limited to staff model HMOs. iii. There is not necessarily a connection b/t corp. status of a hospital & tax-exempt status. It is possible to be nonprofit under state, but not tax exempt; or for-profit under state law, but tax exempt under fed. law (think Utah County v. Intermountain Health Care). g. Harding Hospital, Inc. v. United States i. Facts: The hospital commenced a civil tax refund suit to recover $ 141,730 from the US government, which represented the aggregate amount of income taxes paid by the hospital for 3 years. Hospital was a nationally recognized psychiatric institution, which treated mental and nervous diseases. ii. Holding: Court affirmed the finding that the H did not qualify under 501(c)(3). H was operated almost exclusively for the benefit of associates of the hospital, and it was not operated exclusively for charitable purposes. Hs participation in some educational and training programs was not sufficient to merit tax-exempt status. Looking at a number of factors in the aggregate, the court found no error in the district court's determination. Under 501(c)(3), tax exemption was not available if there were substantial non-charitable purposes for the organization, which was the situation here. In context of present case, essentially imposes 3 requirements for exemption: 1) corp. must be organized & operated exclusively for charitable purposes; 2) no part of net earnings may inure to benefit of a private ind. or shareholder; & 3) it cannot engage in certain lobbying & political activities. h. Harding gives an example of private benefits: a hospital that doesnt open its med staff to all physicians in community. i. IRC 501(c)(3): Groundwork for Tax-exempt status i. Organizational Test look at orgs stated charitable purpose, whether it is for research, education, etc.; does charter contain non-distribution constraint? Easy to meet. ii. Operational Test must operate for a charitable purpose, requires looking at how the org. will operate. More difficult to meet. 1. Eastern KY & modern IRS regs say anything promoting health could serve a charitable purpose. 2. Other factors (in addition to having ER): a. Bd of directors drawn from community, Open med staff policy, Accept Medicare/aid patients, Take surplus funds & apply them to improving hosp, buying equip., improving patient care, etc. iii. Non-Inurement Requirement - Specific prohibition about paying dividends to insiders (private individuals).

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1. This is an absolute requirement. Cant take surplus generated by tax-exempt org and pay out to people who have control over it. 2. Med staff members are deemed insiders at hospitals, even if they are not directors, etc. 3. Must also perform an AKS analysis. 4. Some transactions can occur, even w/ insiders, as long as everything is at FMV. iv. Community Benefit Requirement - Also seen as private benefit prohibition. It is global (meaning it doesnt just apply to insiders). 1. Must gauge amount of benefit community receives against what hospital is paying out. v. Prohibition against lobbying (and political involvement) 1. Substantial part test. Can only engage in such activities if they are an insubstantial part of operations. 2. Blanket prohibition on involvement in campaigns. 3. Safe harbors for small monetary contributions, etc. vi. Public policy accepting Medicare/Medicaid patients, not violating fraud and abuse laws, etc. 1. Stark laws, AKS, etc. can oppose tax exempt status. vii. PPACA has additional requirements If engaged in operation of health care & have ER open to everyone, you can qualify for 501c3 exempt status. 2. Intermediate Sanctions a. Caracci v. Commissioner i. IRS claims that the Caracci family owes over $250 million ii. How did they violate the rule? 1. The profits cannot inure to the benefit of the private individuals 2. Here, they took all the value out of the tax exempt org without paying for it this is what the government alleges 3. However, the tax exempt statuses are rarely yanked, thats why they created an intermediary sanction 3. Joint Ventures (448-459) a. GCM 39862 (p.448) i. Issue: Whether a hospital, tax exempt b/c it is described in 501(c)(3), jeopardizes exempt status by forming a joint venture w/ members of its med staff & selling to the joint venture the revenue stream derived from operation of an existing hosp dept. or service. ii. Facts: (See Flowchart) Z-Hospital proposed to est. a for-profit stock corp. that would be jointly owned in equal shares by hosp & its med staff. New corp. would in turn est. & serve as GP in 4 LPs (Z-LPs). Z-LPs were to allow med staff participation in operation of 4 Z-H outpatient depts. 4 departments represented in aggregate about 4% of Z-Hs gross revenues. Stated reason for proposed transactions was to maintain or increase utilization of Z-H's various services, so that it could provide the highest level of service at lowest price to public. Z-H maintained that ventures would help it by creating incentives for med staff to increase admissions. Currently, you cant do this type of corp. structure b/t hospital & docs (Greber, etc.). iii. Analysis: These transactions must be viewed as jeopardizing a hospital's tax exempt status for 3 reasons: (1) they allow inurement of part of a charitable org's net earnings to benefit of private individuals; (2) they confer more than incidental benefits on private interests; & (3) they may well violate federal law (prohibiting referral fees). Proscription against inurement generally applies to persons who, b/c of their particular relationship w/ an org, have an opportunity to control or influence its activities. The inurement proscription doesnt prevent payment of reasonable compensation for goods or services. Presence of a % compensation arrangement

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b. c.

d.

e. f.

g.

h.

i.

j.

will destroy org's exemption where it transforms principal activity of org into a joint venture b/t it & a group of docs or is merely a device for distributing profits to persons in control. Proper starting point for analysis of the net revenue stream arrangements is to ask what hospital gets in return for benefit conferred on physician-investors. Put another way: ask whether & how engaging in transaction furthers hospital's exempt purposes. In order to be exempt, an org must est. that it is not organized or operated for the benefit of private interests. In all partnership cases, initial focus should be on whether joint venture org furthers a charitable purpose; requires finding that benefits received by LPs are incidental to public purposes served by partnership. In instant cases, arrangements dont appear to result in improved patient convenience, greater accessibility of physicians, or any other direct benefit to the community. Gist of GCM appears to be that joint ventures that create new facilities may be permissible, but not those that merely reallocate existing revenue streams. If everything is accurate, isnt it just a completely equivalent exchange? Not really, b/c revenue stream is set at current year rates. Profitability to LPs depends on future increase of revenue stream. This incentivizes LPs to send their business to Z-H & its clinics. i. See p.451 for things that might have saved this arrangement if they had occurred. 3 legal issues involved in GCM 39862: i. Private inurement ii. Private benefit see green and pink on p.452. 1. Physicians being on staff at hosp dont create a private benefit that is an issue. Its not contrary to hosps purpose, moreover, hosps purpose couldnt be achieved w/out it. Therefore, it is incidental or a side-effect to the hosps fulfillment of its charitable mission. iii. Violation of fraud and abuse law Obtaining referrals or avoiding new comp. may improve comp. position of the hosp, but is not a benefit to the community. How could you make hosp.s position/argument better? Argue that proposed transactions would make the following more likely to occur, or is done for those purposes: i. New treatment, New access, More efficient Private Inurement A 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. Unrelated Business Income Tax i. The tax imposed on businesses when they engage in business that is unrelated to their charitable purpose ii. One reason for this tax is because it creates an unfair advantage against other competitors in the same business (Ex: NYU and pasta factory) iii. Also, it could create a tail wagging the dog scenario iv. If the amount made off the unrelated business becomes too substantial, they will revoke tax exempt status v. Test: (1) Result of a trade or business (undertaken with a profit motive?) (2) That is regularly carried on (3) And not substantially related to the entitys exempt purpose Finding private inurement can be fatal to tax exemption. Private benefit proscription doesnt require monetary payment & isnt limited to insiders, but it does have a de minimis exception. There are 2 basic tax exemption issues in complex corp. structures: i. Which subsidiaries will lose exemption if their functions are examined separately from the hospitals functions?

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ii. Will the parent co. qualify for exemption even though it is a shell corp. that offers no charitable service directly, and even though a # of its subsidiaries are run as forprofit ventures? Usually yes under the integral parts test. It also appears essential that the network is hospital-run. k. See 501(c)(3). Under statute, a private shareholder/ind = an insider. l. For private benefit analysis, look at operated exclusively for charitable [read community benefit] purposes language in statutory text. m. How do you distinguish b/t private inurement & benefit as matter of law? i. For private inurement, you usually look first to FMV. ii. Private benefit really focuses solely on question of private benefits conferred on anyone. They must be conferred as incidental or ancillary to the purpose of the exempt org. n. You can only have private inurement when there is a transaction b/t exempt org & insider. Private benefit occurs b/t exempt org & any person. o. Private inurement problems might also be created when exempt orgs assume most, if not all, of the risk/liability associated w/ a joint venture. p. In order to make venture look good to IRS, might show that nonprofit has veto powers over certain types of transactions or is at no bigger risk than other partners. iii. Physician recruitment/Jost Problem, cont. Jost isnt a DQd person automatically or b/c of family relationship. 1. FMV question: Is Hospital paying out too much in terms of what it receives from Jost? 2. Test for private benefit? Benefit conferred on private individual has to be incidental to the charitys achievement of the permissible benefits it is seeking. 3. Will hospital needing Josts referrals satisfy the private benefit test? a. Keeping doors open a viable reason? Maybe b. Having more beds filled? No c. GCM 39862 says that having a competitive advantage doesnt count, avoiding competition doesnt count; new or enhanced services do count. i. Facts and Circumstances Test: See p.173-74 of Int. Sanctions Handout. ii. Insider status is not as automatic under int. sanctions as private inurement. iii. Must connect private benefit w/ some cognizable charitable purpose. iv. Physician Recruitment 1. If H can show a need (e.g. in an underserved area) for a particular doc, IRS has approved a list of limited recruitment incentives to assist w/ transitional costs of moving & setting up a new practice. (E.g., income guarantees, office support, subsidized malpractice insurance, and loan guarantees.) h. Organization: Medical Staff Structure (17-20) In an H, there are 2 org. structures. 1: hospital admin & 1: med staff. Hospitals are required to have separate bylaws for admin & med staff by state licensure laws. In Mahan, court ridiculed idea of hospitals being required to accept any qualified doc wanting to practice there, but that is almost precisely how it has happened in the past. Hospital medical staff has historically been its own governing authority. Even though restrictions of corp. control on med staff have loosened, most H have not changed b/c they are operating under their original charter & by-laws. Amendments would have to be passed by the hospital admin and medical staff, which arent likely if the staff is to lose authority. i. Medical Staff Bylaws (472-484) 1. St. Johns Hospital Medical Staff v. St. John Regional Medical Center (strong-contract view of medical bylaws) (p. 472) a. Facts: The med-staff bylaws were adopted and approved by the medical center. The bylaws contained an article stating that the bylaws were equally binding on both parties. Also, the bylaws provided a specific procedure for amendments (due process). Board unilaterally adopted new bylaws not approved by the med-staff. b. Holding: The court held that the original bylaws were binding upon the medical center. Thus, any amendments to the bylaws should have been made in accordance w/ the due

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process procedure contained in the bylaws. Court held that the medical center breached the K w/ the medical staff by ignoring procedure and unilateral amendments were void. 2. Mahan v. Avera St. Lukes a. Facts: Docs, filed suit against hospital seeking a permanent injunction for Hs decision to close its staff w/ respect to physicians requesting privileges for certain procedures. b. Holding: When appellant made its decision to close the medical staff, it was acting within its powers under its corporate bylaws. The decision was a reasonable administrative decision to ensure the continued viability of the hospital. Because the actions by appellant were permissible under the corporate bylaws and done in good faith, there was no breach of contract between the appellant and its staff. The medical staff had no authority over any corporate decisions unless specifically granted that power in the corporate bylaws or under statute. c. Hospitals survival at stake, allowed unilateral change of bylaws d. Notes 1 & 2: Is the tripartite division the best structure for efficient operation of hospital? In places with strong CPMD, it wont be gone any time soon. 3. Many other courts have agreed w/ St. Johns that med staff bylaws constitute a K & cannot be amended or ignored unilaterally by hospital bd. 4. Most courts also agree w/ Mahan that hospitals are free to enter unilaterally into Ks or stop admitting new members to a portion or all of the med staff. 5. Courts reconcile these two lines of authority in two ways: a. They distinguish, as Mahan did, between administrative decisions reserved to the hospital board versus medical decisions made by the medical staff. Then the reasons for action are economic, they fall in the boards realm to act unilaterally b. Courts also distinguish b/t the possession of clinical privileges and the right to exercise those privileges, reasoning that med. staff bylaws protect only the former, not the latters 6. Economic credentialing hospitals consider economic factors in choosing physicians, in addition to, or instead of, quality-of-care factors 7. Conflict credentialing Hs refuse privileges to physicians who est. specialty facilities that compete w/ the Hs services, under theory that there is a conflict of interest b/t the parties 8. In addition to private law rights of independent docs, law is concerned w/ public law rights of groups of health care employees. Priv. law rights = employment L. Pub. law rights = labor L 9. NLRA allows employees to unionize, but has exception for managerial employees. Covers only employees & would seem to exclude ind. physicians on hospital or HMO med staffs. Unionizing would allow docs protection from antitrust laws. 10. HYPO: Instead of deciding to close a portion of med staff to new applicants, hosp. bd unilaterally amended bylaws to provide that in the event there had been an incident report suggesting a danger to patients; bd would have authority summarily to suspend a docs staff privileges. a. Mahan court would likely say that board was making an admin decision concerning Hs liability. Might also argue med staff would be biased towards doc. b. Attack Hs position by arguing that board is making decision on docs med competence or that it creates conflict b/t admin and medical staff bylaws. i. Aluko (p.479) case says you should look to intent of H in making decision to close medical staff. Is it an economic or quality decision? ii. Medical Staff Disputes (485-498) 1. Greisman v. Newcomb Hospital (NOT a majority rule) a. Facts: Hospital challenged a requirement that hospital consider plaintiff doctor's application for membership on the med-staff, although bylaws established that applicant must have graduated from AMA approved medical. Hospital contended that it was a private rather than a public hospital and that no legal ground existed for judicial interference with its refusal to consider plaintiff's application for membership. b. The court held that hospitals exclusion was arbitrary. The public interest and considerations of fairness and justness pointed unerringly away from the hospital's position. c. Does he have standing to sue bylaws when they dont yet apply to him?

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i. Yes. The bylaws regulated the only hospital in town, which acts as a public utility, which is restricted from discrimination. d. Right to procedural fairness often only inferred under special circumstances; public/patient interest, antirust, tortuous interference, for example. e. Test: is it being done for a lack of individual merit or a reason unrelated to sound hospital standards and not in the furtherance of the common good? 2. Nanavati v. Burdette Tomlin Memorial Hospital a. Facts: Cardiologist, only one in county, gets hospital privileges. Seeks to get EKG privileges. He became disruptive when privileges not granted. This violated bylaws and the hospital sought termination b. Holding: Bylaws not followed at termination proceedings. Court remanded to the hospital to redo the proceedings in accordance with due process provisions of bylaws. i. Reasonable and constructive exercises of judgment should be honored. Thus courts should sustain a hospitals standard for granting staff privileges if that standard is rationally related to the delivery of health care. A decision is so related if it advances the interests of the public, particularly patients; the hospital or those who are essential to the hospitals operations, such as doctors or nurses. ii. Test for judicial review of such a decision is whether it is supported by sufficient reliable evidence, even though of a hearsay nature, to justify the result. (Relaxed standard of review) iii. Hospitals may adopt bylaws concerning a doctors inability to work with nurses and other doctors, however the mere fact that a doctor is irascible does not constitute good cause for termination of hospital privileges. Allegations of disharmony should not be used as a ruse to terminate staff privileges (pretext) 1. Hospital does not need to wait for a doctor to harm a patient before terminating their privileges (gives hospital latitude) but need more than general complaints. (p. 492) 3. Economic Credentialing Problem (484) - Whether H can use economic criteria to determine if certain docs are given med staff privileges, or if H can amend bylaws to provide such? a. Option 1: medical staff is unlikely to go along w/ this amendment. Hosp. admin. has to at least take into acct the staffs recommendation. b. Option 2: medical staff might, but probably wont go along w/ this amendment. Might can make a business efficiency (Mahan) argument. c. Option 3: Can hospital suspend privileges for docs that continually lose money? Facial validity: be concerned that it is tailored narrowly enough. d. Option 4: like Nanavati (Ct seems to say that hosp. deserves some deference). It would be difficult to defend hosp. taking this position when the real reason was economics, but the social/competence issues were the stated reasons. e. Option 5: highly unlikely even though no staff privileges are revoked, some docs just arent allowed to treat patients. Difficult to sell to cts. 4. Judy Jones Problem: Possible Causes of Action: Due Process: Public H can sue under the Constitution due to State-action & Private Hospitals (Greisman not universally available; AL doesnt have this type of review) o Procedural have to have a protected interest (life, liberty, or property) with notice and opportunity to be heard Probably would not have a PDP claim b/c there is not a state action. This is a corporate hospital Suppose she works for a county H does she have a protected interest? Yes, shes a member of the medical staff. The by-laws presume that there must be a procedure done before she can be let go What if someone is applying to the hospital for the first time? o Courts have said there is a liberty interest to practice medicine and the government must give due process when reviewing the initial application

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It is not clear for the due process claim whether they follow the specified process but whether they have some level of protection There is an argument that a post-deprivation hearing is valid here b/c she could be a danger to other patients. Is 3 months a reasonable time period? May be reasonable if a deprivation hasnt already occurred but since deprivation has already occurred, maybe not so timely o Substantive have a right to be free from arbitrary government (state) action must be a rational basis If we accept the hospitals story, the action does not seem arbitrary but theres a suggestion in the problem that the protection of the hospitals patients is not the real reason If you can show that the reason that they stated is a pretext, you can try to show the real reason that they let her go What if her excess # of Medicaid patients is the real reason? o Probably not acceptable to be the reason for a government hospital to let her go What about the competition from other OBs? o The administrators may not want to upset them b/c they may have a large share of the patients in the town and can take their referrals elsewhere o Any state law due process claims that may apply to a corporate or charitable H? Common law fairness doctrine If youre representing the corporate hospital, you want to separate yourself from Greisman? Argue that youre not the only hospital in town Youre not non-profit, you dont have the same goals Is the analogy b/t this scenario and the common carrier doctrine sound? How do they bridge the gap? o They are vindicating patients Patients follow their doctors to the hospital and not being able to go there keeps them out Greisman allows us to apply DP analysis to a non-state actor hospital Equal Protection Title VII: o Possible sex discrimination claim. However, they will argue that she is not an employee but an independent contractor Courts are split on whether med staff members are subject to Title VII Defamation: o They say that she is difficult o They make it seem like she is a bad doctor and kills people One defense the H may have is if they are correct and she is a bad doctor o In some states, you cannot bring a cause of action for negative peer reviews Public policy encourage hospital to have honest peer review and that it wont be chilled by the process of defamation liability Breach of K claim o Most courts consider the by-laws to be a contract b/t the hospital and the doctor o If they didnt follow the by-laws o Also, if they fired her for pretext, she could allege breach of K Maybe within the duty of good faith and fair dealing they fired Antitrust iii. Membership in Managed Care Networks: Managed Care Contracting (498-508) 1. Potvin v. Metropolitan Life Insurance Co. (Common law right to fair procedures) (p. 498)

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a. Facts: After removal from insurance company's preferred provider lists, physician sued. Citing the common law right to fair procedure, doc alleged he should have been given reasonable notice and an opportunity to be heard before his removal. b. Holding: SC concluded that appellant alleged that among the adverse effects of removal from respondent's preferred provider lists were rejection by physician groups which were dependent upon credentialing by respondent and devastation of appellant's practice. i. Proof of docs allegations could establish that, in terminating a physician's preferred provider status, respondent wielded power so substantial as to significantly impair an ordinary, competent physician's ability to practice medicine in a particular geographic area, thereby affecting an important, substantial economic interest. c. Common law right to fair procedures. Doc waived it in K w/ MCO i. Ct found the agreement void to the extent it limited the important public policy of the common law right of fairness. ii. Note that insurers often have a virtual monopoly and if they choose to exclude a doctor they can ruin his career. (States have not gone the same way on this issue) d. Dissent: W/ its decision today, majority declares that it is public policy of this state that docs are entitled to a min. income &, if removal of a doc from an insurer's preferred provider list would reduce docs income below that guaranteed min., doc is entitled to a hearing & judicial review that would inevitably follow upon an adverse decision. 2. **This is an extremely pro doc case. Actually says that termination w/o cause in provider K is void. Most courts will not go that far. Courts usu. adopt dissents theory, which allows docs to challenge no-cause terminations only if they can show true reason violates public policy. 3. Harper (p. 502): Forbids bad faith use of termination w/o cause provisions i. Antitrust: i. Introduction (508-513; 531-540) 1. Sherman Act 1 a. Every contract, combination . . . or conspiracy, in restraint of trade or commerce . . . is declared to be illegal. b. Criminal and civil remedies, including treble damages in private actions c. Elements: i. contract, combination or conspiracy 1. Concerted act requirement have to have more than one person acting a. 1 does not reach unilateral conduct b. But see 2, which prohibits monopolization ii. in restraint of trade 1. every contract . . . 2. The Rule of Reason (judicial gloss) a. Purpose i. Intent ii. What counts as a good purpose? 1. Will worthy purpose justify anticompetitive conduct?) iii. Naked v. Ancillary restraints: 1. Naked restraints: (only purpose is to exclude competitors) are illegal per se; object is to restrain trade among competitors a. Secondary purposes? (e.g., a public interest such as reduction of rate variability) i. Often used as a shield for naked restraints b. Ancillary restraints subject to Rule of Reason; byproducts of legit relationships i. May be legal c. Why can lawyers in the same firm fix prices? d. Why are noncompetition agreements ever valid? iv. Quality 1. Limited exemption from antitrust laws for professional services

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a. Cf. Goldfarb and n. 17 the court leaves a safety valve 2. Social benefit (effects) separate from competitive analysis? a. May be true that the market has been tied up but it has been done for social benefit 3. Ordinary competitive factor? a. Engineers engineers union didnt want shoddy work so they didnt want a price focus 4. Good purpose? a. Regardless of effect, the intent was to do good 5. These are dangerous arguments b/c of the unlikeliness of their legal success 6. Sup Ct has never found professional activity having adverse price & output effects justified by concerns over the quality of service provided. b. Power i. Simple definition: the power to charge a higher-than-competitive price for a good or service in a market ii. Market share percentage as proxy for market power 1. Be careful w/ this b/c a lot of stuff depends on how you define the market iii. Defining the relevant market 1. Product market 2. Geographic market c. Effects i. Harms to competition: Higher prices; Reduced output; Exclusion of competitors ii. Procompetitive effects: Product innovations; Lower prices; More output; Improving the market iii. Horizontal v. Vertical Relationships d. Less restrictive Alternatives? i. Could procompetitive purposes be achieved in a manner less restrictive of competition? 1. E.g., professional restrictions on advertising a. Ban advertising altogether? b. Regulate but permit? e. See Note 2 on p. 510 3. Per Se Rules a. Per se condemnation amounts to a (virtually) conclusive presumption of illegality b. Cf. stare decisis c. Categories of conduct prohibited per se: i. Price fixing ii. Market division iii. Some tying arrangements 1. One product has to come with another iv. Some group boycotts 4. Sherman Act 2 a. Every person who shall monopolize, or attempt to monopolize . . .any part of the trade or commerce . . . among the several States . . . shall be deemed guilty of a felony . . . b. Deals with Monopolization i. Applies to unilateral conduct ii. Elements 1. Monopoly power 2. Exclusionary conduct a. Either in acquisition of monopoly power or in exercise of such power once achieved 5. The Symbolic Importance of Antitrust Law a. Shifts the vocabulary of health care policy debates i. From regulated system to competitive marketplace ii. From traditional doctor/patient roles to efficiency

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iii. From science and ethics to economics b. Re-imagining health care relationships i. Physicians as sellers not providers 1. profession or cartel ii. Insurers as purchasers not payors 6. The Substantive Importance of Antitrust Law a. Limits private professional regulation i. Typically implemented through concerted action ii. E.g., 1. Professional Rules inhibit competition a. Business arrangements i. Goldfarb an attorney wants to buy a house and all the real estate lawyers quote the same price. There justification is that they dont want quality to suffer ii. Rules against contract practice iii. Payment terms 2. Relationships with other health professionals iii. Boycotts 1. Of disfavored arrangements 2. Of uncooperative physicians 7. Policy Goals of Sherman Act a. Promote economic competition, which is seen as a stimulant to lower prices and better quality in the goods and services consumers purchase b. Allocative efficiency c. Decentralization of economic and political power i. Protect small business? 8. 3 main views that courts have concerning whether a hospital entity can conspire with itself a. Medical staff (under Weiss) could conspire together (walking conspiracy) but not as an entity with hospital b/c they are one with the hospital i. Anytime med staff meets, could constitute conspiracy b. Med staff cant conspire w/ board itself i. Court looks for unity of economic interest c. Courts will go back and consider hospital & med staff could conspire under certain facts ii. Medical Staff Disputes (514-530) 1. Weiss v. York Hospital a. Facts: Plaintiff had sued the medical staff itself as an independent entity. b. Holding: Court found that the medical staff had no independent legal existence but accepted the plaintiff's allegation that the individual physicians were engaged in a conspiracy as defined in section 1 of the Sherman Antitrust Act: i. We agree with the Ps that, as a matter of law, the medical staff is a combination of individual doctors and therefore that any action taken by the medical staff satisfies the "contract, combination, or conspiracy" requirement of 1. ii. The key to this case is the distinction between the medical staff as an entity unto itself and the individual physicians who make up the medical staff. Although the trial court instructed the jury that the medical staff was an "unincorporated division" of the hospital and thus the two were a "single entity," incapable of conspiring, it was careful to distinguish the actions of the individual members of the medical staff. iii. The Court also instructed the jury, however, that if they found that some or all of the individual Defendants took action against the Plaintiffs "in whole or in part in their individual capacities and motivated in whole or in part by independent personal economic interests, then such individual-named Defendants are, under the law, independent economic entities ... legally capable of conspiring with York Hospital or its Medical and Dental Staff." 2. Hassan v. Independent Practice Association

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a. Facts: An HMO known as Health Plus of Michigan (Health Plus) and Independent Practice Associates (IPA), an organization of physicians who provided medical care to the subscribers of Health Plus. Health Plus was funded by subscribers who paid a fixed premium per month. Out of that funding, Health Plus paid IPA members for medical services, primarily on a fee-for-service basis. The amount paid to IPA members was limited by a maximum fee schedule that all IPA members agreed to accept. b. Issue: Whether this maximum fee schedule constituted unlawful price-fixing? c. Holding: The court held that although there was an agreement on fees among competing physicians, the agreement was related to a legitimate health care joint venture and, therefore, was not price-fixing. Maximum fee agreement only affected "what IPA member physicians can charge Health Plus members," and did "not dictate what those doctors can charge to non-Health Plus patients." The facts showed "that IPA member physicians share the risks of loss as well as the opportunities for profit by accepting a capitation payment from Health Plus, unlike the physicians in Maricopa." The court noted also that doc-members of IPA accepted the risk of nonpayment of a part of their fees, which was withheld to protect IPA against loss if its expenses exceeded the capitation payments received from Health Plus. It was also critical to the court that "Health Plus, unlike the foundations in Maricopa . . .underwrites and arranges for a comprehensive range of health services for a fixed premium from the consumer." By doing so, it provided consumers "with a new product: guaranteed comprehensive physician services for a prepaid premium different from fee-for-service physician services." In light of those considerations, the court upheld the maximum fee schedule. 3. California Dental Association v. FTC a. Facts: Petitioner California Dental Association (CDA), a nonprofit association of local dental societies to which about three-quarters of the States dentists belong, provides desirable insurance and preferential financing arrangements for its members, and engages in lobbying, litigation, marketing, and public relations for members benefit. Members agree to abide by the CDAs Code of Ethics, which, inter alia, prohibits false or misleading advertising. The CDA has issued interpretive advisory opinions and guidelines relating to advertising. Respondent FTC brought a complaint, alleging that the CDA violated 5 of the FTCA in applying its guidelines so as to restrict two types of truthful, nondeceptive advertising: price advertising, particularly discounted fees, and advertising relating to the quality of dental services. ALJ held the Commission to have jx over the CDA and found a 5 violation. As relevant here, the Commission held that the advertising restrictions violated the Act under an abbreviated rule-of-reason analysis. In affirming, the Ninth Circuit sustained the Commissions jurisdiction and concluded that an abbreviated or quick look rule-of-reason analysis was proper in this case. b. Holding: i. Where any anticompetitive effects of given restraints are far from intuitively obvious, the rule of reason demands a more thorough inquiry into the consequences of those restraints than the abbreviated analysis the Ninth Circuit performed in this case. 1. An abbreviated or quick-look analysis is appropriate when an observer with even a rudimentary understanding of economics could conclude that the arrangements in question have an anticompetitive effect on customers and markets. See, e.g., National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85. This case fails to present a situation in which the likelihood of anticompetitive effects is comparably obvious, for the CDAs advertising restrictions might plausibly be thought to have a net procompetitive effect or possibly no effect at all on competition. 2. The discount and non-discount advertising restrictions are, on their face, designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient. The existence of significant challenges to informed decisionmaking by the customer for professional services suggests that advertising

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restrictions arguably protecting patients from misleading or irrelevant advertising call for more than cursory treatment. In applying cursory review, the Ninth Circuit brushed over the professional context and described no anticompetitive effects from the discount advertising bar. The CDAs price advertising rule appears to reflect the prediction that any costs to competition associated with eliminating across-the-board advertising will be outweighed by gains to consumer information created by discount advertising that is exact, accurate, and more easily verifiable. This view may or may not be correct, but it is not implausible; and neither a court nor the Commission may initially dismiss it as presumptively wrong. The CDAs plausible explanation for its non-price advertising restrictions, namely that restricting unverifiable quality claims would have a procompetitive effect by preventing misleading or false claims that distort the market, likewise rules out the Ninth Circuits use of abbreviated rule-of-reason analysis for those restrictions. The obvious anticompetitive effect that triggers such analysis has not been shown. 3. Saying that the 9th Cir.s conclusion required a more extended examination of the possible factual underpinnings than it received is not necessarily to call for the fullest market analysis. Not every case attacking a restraint not obviously anticompetitive is a candidate for plenary market examination. There is generally no categorical line between restraints giving rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required is an enquiry meet for the case, looking to a restraints circumstances, details, and logic. Here, a less quick look was required for the initial assessment of the CDAs advertising restrictions. 4. Judy Jones Revisited: a. Who are our possible conspirators? i. Male OBs? b. Assuming there is concerted action, the next question was there a restraint of trade? i. If there is a per se violation, it is not open to the D to explain conduct ii. Can we fit this conduct into a per se violation? 1. Most likely fits into group boycott a. Classic Ex: group of retailers tells a manufacturer to stop dealing with one retailer (usually a discounter) or they will stop buying from him 2. Is the alleged conduct in Judy Jones Problem a per se violation? a. Wouldnt this be a hard rule b. NW Wholesale Retailers courts back off of harshly applying group boycott analogy (p. 523) b/c we don't want to ram situations into group boycotts that don't fit. This looks a lot like the rule of reason c. Do Defendants have market power? i. First, what is the relevant market? ii. In the medical staff context, there is probably not a big difference b/t market power and essential facility iii. Product Market? Geographic Market? d. Now ask, is there a legitimate business justification? i. They will say that it is in their business interest to get rid of bad doctors ii. Her personality creates efficiency problems iii. Reducing Medicaid patients is legitimate if youre trying to make $ since Medicaid doesnt pay well iv. Dont want to expand business isnt that a weird justification? 1. Its a weird argument b/c antitrust law is designed to increase competition e. If there is, go to the Rule of Reason analysis: i. Purpose real reason or pretext? ii. Power?

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iii. What are the effects? 1. What happens in this market as a result of what they do? 2. Does it matter that this doctor is not longer in the mix? Will she be replaced? Will the remaining doctors be able to step in? iv. Is there a Less Restrictive Alternative? 1. Could she have been put on probation? Required supervision? 2. Court may be hesitant to do this b/c they may not want to say Instead of doing X, you should have done Y. May not want to demand such precise acts v. Its not really a checklist it's a totality of factors iii. Immunities (540-549) 1. Bryan v. James E. Holmes Regional Medical Center a. The U.S. Court of Appeals for the Eleventh Circuit held that hospitals and physicians conducting a peer review of another physician enjoy statutory immunity under HCQIA if their action "would promote quality health care," restrain "competent" behavior, and "protect" patients. b. The Court reversed an award by a jury in excess of $4 million, by applying HCQIA immunity. The Court stated: i. The role of federal courts on review of [peer review] actions is not to substitute our judgment for that of the hospital's governing board or to reweigh the evidence regarding the ... termination of medical staff privileges" and ii. "[T]the intent of [the HCQIA] was not to disturb, but to reinforce, the preexisting reluctance of courts to substitute their judgment on the merits for that of health care professionals and of the governing bodies of hospitals in an area within their expertise." 2. Peer Review & State Action Immunity 3. HCQIA a. Act was motivated b/c they thought that Hospitals would be too reluctant to discipline dangerous doctors out of fear of being involved in a lawsuit even if the disciplinary action was warranted b. Also, this was to help with the problem of doctors moving from state to state after losing licenses c. Has two primary functions: i. Provides immunity for certain peer review activities 1. Immunizes anyone who participates in peer review action against doctor. 2. However, immunity is limited to damages a. Even this is limited ii. Established a databank of suspended and revoked licenses, malpractice claims, Hospital or HMO suspends or revoke privileges of a doctor 1. Hospitals are charged with knowledge of what is in the databank d. Peer review action has to be related to the quality of care e. What is immunized? i. No private right of action b/c it has to be brought by an attorney ii. Antitrust actions brought by the state are not immunized iii. Due process claims (federal) are not b/c they are a civil rights claim iv. Claims for injunctive relief are NOT immunized v. Claims for damages under state and federal law are immunized except for civil rights claims (1983 & Title 7) iv. Physician Networks Price Fixing Law (549-561) 1. Arizona v. Maricopa County Medical Society a. Facts: Respondent Maricopa County Medical Society and another medical society to promote fee-for-service medicine and to provide the community with a competitive alternative to existing health insurance plans organized respondent foundations for medical care. The foundations, by agreement of their member doctors, established the maximum fees the doctors may claim in full payment for health services provided to policyholders of specified insurance plans. Arizona filed a complaint against respondents,

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2.

3. 4.

5.

alleging that they were engaged in an illegal price-fixing conspiracy in violation of 1 of Sherman Act. Court denied the State's motion for partial summary judgment, but certified for interlocutory appeal the question whether the maximum-fee agreements were illegal per se under 1. Court of Appeals affirmed the denial of the motion for partial summary judgment and held that the certified question could not be answered without evaluating the purpose and effect of the agreements at a full trial. b. Holding: The maximum-fee agreements, as price-fixing agreements, are per se illegal under 1 of the Sherman Act. i. The agreements do not escape condemnation under the per se rule against pricefixing agreements b/c they are horizontal and fix maximum prices. Horizontal agreements to fix maximum prices are on the same legal footing as agreements to fix minimum or uniform prices. (no longer true) The per se rule is violated here by a price restraint that tends to provide the same economic rewards to all practitioners regardless of their skill, experience, training, or willingness to employ innovative and difficult procedures in individual cases. Such a restraint may also discourage entry into the market and may deter experimentation and new developments by individual entrepreneurs. ii. Nor does the fact that doctors rather than nonprofessionals are the parties to the price-fixing agreements preclude application of the per se rule. Respondents do not claim that the quality of the professional services their members provide is enhanced by the price restraint, Goldfarb & Engineers, distinguished, and their claim that the price restraint will make it easier for customers to pay does not distinguish the medical profession from any other provider of goods or services. iii. That the judiciary has had little antitrust experience in the health care industry is insufficient reason for not applying the per se rule here. "[T]he Sherman Act, so far as price-fixing agreements are concerned, establishes one uniform rule applicable to all industries alike." iv. The per se rule is not rendered inapplicable b/c the agreements in issue have procompetitive justification. The anticompetitive potential in all price-fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some. Even when respondents are given every benefit of doubt, the record in this case is not inconsistent with the presumption that respondents' agreements will not significantly enhance competition. The most that can be said for having doctors fix the maximum prices is that doctors may be able to do it more efficiently than insurers, but there is no reason to believe any savings that might accrue from this arrangement would be sufficiently great to affect the competitiveness of these kinds of insurance plans. v. Respondents' maximum-fee schedules do not involve price-fixing in only a literal sense. As agreements among independent competing entrepreneurs, they fit squarely into the horizontal price-fixing mold. Two dangers: a. Danger that, in essence, these are price fixing arrangements (more or less collective bargaining) i. Doctors don't enjoy the same exemptions that Labor unions do b. Arrangements like this can prevent competitors from entering the market Implied negative in the Maricopa case is that they want to promote the continuation of fee-forservice payments at the exclusion of managed care. Messenger model: Each doctor makes their own unilateral agreement concerning prices. Each individual doctor says yes or no to fee schedule a. Basically putting blinder on by not talking to other doctors b. Problem: insurance company doesn't know how many doctors will say yes i. Ex: ABC has 500 doctors will 50 say yes or will 450 say yes? c. Legal risk: worried that messenger will not behave correctly. Concern that messenger becomes the union boss if not done carefully and scrupulously. Statements of Enforcement Policy

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6. Problem: OZIPA First, ask to who do the enforcement statements apply? o Physician network joint ventures o Look at definition to see if it fits the elements of a PNJV Is it physician controlled? Maybe the split b/t physicians and directors is 50/50 Leans towards yes: Original board appointed by MDs, selfperpetuating Leans towards no: nonprofit Looks like it is physician controlled Do they collectively agree on prices or price related terms? DO they jointly market their services? Next, ask does it fit in the safety zones? o Is it exclusive? Are they sharing substantial financial risk? Looks like it may fit under 3(a) (p.5) o However we don't know what there specified costcontainment goals are Answer: NO o Is it nonexclusive? Says its non-exclusive but have to look at indicia to see whether they are really non-exclusive The problem does not say that there are other competing networks, so as far as we can tell there arent o This tends to lean towards exclusive Answer: NO Will this be treated as per se illegal? o Probably not o Even if there is no substantial financial risk there may be some clinical integration Is there? Do they have mechanisms in place to monitor & control costs? o Maybe? Do they selectively choose physicians like t further efficiency objectives? o Problem doesn't tell us Is there a significant investment of capital? o Doesn't look like Can ask: Is the problem more like MedSouth (p.10) or is it more like North Texas? There probably isnt substantial financial risk here need to know more facts but looks like a very think case o Couldn't we say that there is something inherently efficient in marketing your services together? Want you see a bunch of joint-selling agencies? Wouldn't this just be a recipe for undoing the whole law against price fixing? If not Per Se, Then Apply Rule of Reason o Step One: Define the Relevant Market Start getting worried at 50% but 45% here looks worrisome b/c no one has been able to come in and contract with the other 55%. In some cases, you could get worried at as little as 1/3 (33%) o Step Two: Evaluate the Competitive Effects of the Physician JV

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Are they raising the prices for physician services above competitive levels? Could they prevent or impede the formation or operation of other network or plans? o Step Three: Evaluate the Impact of Procompetitive Efficiencies o Step Four: Evaluation of Collateral Agreements What about the purposes of this agreement? o Always look at what led up to the formation of the group 7. Black Box Messenger Model Alternative Model a. 3rd party collects fee information from providers. This is generally fine, so long as the information is collected on an individual basis and the providers do not communicate with each other about the fee information. Where the messenger in this model goes astray, however, is by taking the fee information and developing a fee schedule.16 Sometimes the Black Box method is coupled with an opt-in or opt-out procedure in which the providers are permitted to opt in or opt out of that fee schedule. Networks that use this procedure sometimes believe that if the provider makes the decision whether or not to participate, there is no collective decision making on fees. But the enforcement agencies tell us otherwise. If a messenger has created a fee schedule, the opt-in/opt-out method will not save the network from a possible antitrust challenge. b. Doctors have appointed an agent c. Kind of a dicey arrangement 8. North Texas Specialty Physicians a. Power of Attorney Messenger Model (North Texas): i. Drs advise agent upfront of price they would like to get (This is what I would accept) ii. Advantage: allows agent, when negotiating w/ payor, to have a better idea of how many DRs will be willing to go along with the agreement 1. DR names price on their own iii. Problem with North Texas 1. They disseminate all of the information a. This facilitates the agreement b/c they all know what other DRs want 2. They werent messengering low offers back to the doctors a. They also allow an opt-out

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