Health Update

Hospitals and Health Systems Prepare for a Value-Based Future

By Jonah P. B. Frohlich, Managing Director, Manatt Health | Megan K. Ingraham, Director, Manatt Health | Sarah A. Lewis, Consultant, Manatt Health

Editor’s Note: Hospitals and health systems are actively working to service their communities in numerous ways, including through the adoption of initiatives that control costs, improve outcomes and enhance patient-centered care. Many are working with payers to establish value-based payment (VBP) arrangements to support these goals. There is a wide range of approaches to VBP, from programs that incentivize public reporting on quality metrics to prospective payments for all of the healthcare needs of a given population.

With no single VBP destination, hospitals and health systems are evaluating which models may best support their organizational and community needs. In a new TrendWatch report prepared for the American Hospital Association, summarized below, Manatt Health provides information to help hospitals and health systems evaluate which VBP model(s) may support their organizational goals and shares insights from seven hospitals and health systems participating in different VBP arrangements. Click here to download a free copy of the full TrendWatch report.


VBP Arrangements: Drivers

There are six key drivers of the movement to a risk-based healthcare environment:

1. Rising Healthcare Expenditures

The growth in healthcare expenditures is driving policymakers, employers, and public and private purchasers to explore VBP arrangements that incentivize quality and performance improvements that drive efficient, cost-effective care. With hospitals representing 32% of total healthcare expenditures, they have become targets for cost reduction initiatives.

2. Reimbursement From Medicare and Medicaid

Hospitals and health systems are motivated to reduce costs to stem losses from the growing portion of patients who are insured through public health programs. Reimbursement for publicly insured patients is generally lower than for those who are commercially insured and is often below provider costs.

3. Federal Policy

Medicare is a major driver of the transition to VBP. The Affordable Care Act (ACA) created new Medicare pay-for-performance programs. In addition, the ACA encouraged the development and implementation of new payment and delivery models by authorizing the Medicare Shared Savings Program (MSSP) for accountable care organizations (ACOs) and creating the Centers for Medicare & Medicaid Services (CMS) Center for Medicare & Medicaid Innovation (CMMI), tasked with testing “innovative payment and service delivery models to reduce program expenditures … while preserving or enhancing the quality of care.”

Building on the foundation set by the ACA, in 2015, the Department of Health and Human Services (HHS) announced new goals to increase the percentage of Medicare payments tied to value and made through alternative payment and delivery models. Specifically, the department’s goal was to tie 30% of Medicare payments to alternative payment models (APMs) by the end of 2016 and 50% by the end of 2018. In early 2016, HHS announced that it had met its first goal.

Most recently, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) mandated a new physician payment system that further advances adoption of VBP arrangements by tying a greater percentage of physician payment to performance and encouraging participation in risk-bearing payment models. Medicare’s push toward value may encourage some hospitals to consider engaging more rapidly in APMs, including models that require downside risks.

More recently, CMS signaled that it may provide additional flexibility in the move to VBP. The agency has issued regulations that reduce the number of hospitals and physicians required to participate in VBP models. In September, CMS solicited input on the future of CMMI and expressed interest in promoting patient-centered care, market-based reforms, pricing transparency, and increased choice and competition to improve quality and reduce costs.

4. State Policy

States have encouraged VBP adoption through a variety of mechanisms related to Medicaid, including state Delivery System Reform Incentive Payment (DSRIP) programs and contractual arrangements with managed care organizations (MCOs). Some states require Medicaid MCOs to adopt rigorous incentive payment programs—and up to 22% of states have implemented Medicaid pay-for-performance or bundled payment programs.

5. Financial Stability and Access to Capital

Hospitals and health systems’ uptake of VBP is influenced by financial stability and access to capital. VBP arrangements inherently involve a greater level of financial risk, which may discourage hospitals experiencing financial uncertainty from participating. However, as VBP arrangements become more prevalent, hospitals may seek to standardize clinical processes and align financially and/or operationally with other providers to achieve economies of scale, improve financial stability and enhance access to investment capital.

Health systems and aligned provider networks are more likely to seek oversight of a larger portion of healthcare spending via VBP. These collaborative networks often result in more integrated healthcare organizations that combine the functions of traditional hospital systems, provider networks and insurers.

6. Payer Dynamics and Culture

Many commercial payers also have begun to implement VBP arrangements similar to those being developed by federal and state governments. However, payers differ in their interest and pursuit of VBP arrangements. In some markets, providers may need to initiate discussions with payers on new payment models. In other markets, some large employers are bypassing the traditional insurer intermediary and establishing VBP arrangements directly with providers.

Organizational Experience With VBP

The timing and process of transitioning to VBP are complex and require the consideration of both external factors and the organization’s internal readiness. Following are critical requirements to consider:

1. Provider Alignment

Value-based arrangements require buy-in from physicians, as well as alignment of hospitals’ clinical leadership and the broader care delivery system. Some systems seeking to align leadership and engage clinical leaders in finance and risk decisions establish either a dual reporting structure or a dyad management model. In a dual reporting structure, physician leadership reports to both the system’s clinical lines and the medical group. In a dyad model, a clinical lead and an administrator are paired to jointly oversee a service line or clinical area.

While clinical alignment is critical, determinations on operational configuration vary. Ownership of the entire continuum of care is not always necessary but can produce efficiencies in many cases.

2. Technical Capabilities

As providers accept increasing levels of financial risk, they must invest substantial time and resources to develop new capabilities. The technical requirements associated with VBP expand as hospitals and health systems increase their exposure to financial risk.

3. Financial Requirements

The financial investments to build new competencies can be significant. For example, ACO startup costs, much of which were attributable to information technology and other systems infrastructure, were estimated to be $4 million in 2013, while provider-sponsored plan startup costs were estimated to be $9 million in 2014. Systems can complement their own operations by leveraging partners’ capabilities.

4. Culture and Organization

Ensuring that an organization’s culture and institutional supports align with delivering value is essential for success in VBP models. The organizational transition to become a truly integrated delivery system can be challenging. Strong leadership and consistent incentives across management, operations and clinicians along the care continuum is critical. Leaders must establish clear definitions and measurements of success that apply throughout the organization.


Hospitals and health systems—influenced by both policy and market forces—are increasingly moving away from fee-for-service payments toward value-based arrangements. There is no single model that will work for everyone. Hospital and health system leaders should assess the personnel, infrastructure and other capabilities required for success in each model when considering the most appropriate path for their organization.

Hospitals and health systems may find that their value-based destination evolves over time as policy, market and organizational forces change. Leaders will want to revisit their vision and objectives frequently to assess which model may best help them achieve organizational goals and understand the tools, information resources and delivery network required to succeed in a particular model.

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Opioid Enforcement Surge Focuses on Pharmacies and Prescribers

By Richard S. Hartunian, Partner, Corporate Investigations and White Collar Defense

Data Analytics Become a Primary Tool to Support Enforcement Actions

On January 31, 2018, Attorney General (AG) Jeff Sessions announced that over the next 45 days, as part of its continued increase in opioid-related enforcement, the Drug Enforcement Agency will “surge” agents and investigators to opioid “hot spots.” The surge will “focus on pharmacies and prescribers who are dispensing unusual or disproportionate amounts of drugs.” He noted that the surge will rely on transaction reports from manufacturers and distributors, and that the agency will “aggregate these numbers to find patterns, trends [and] statistical outliers—and put them into targeting packages.”

This announcement follows on the heels of related initiatives to address the opioid crisis roiling the country. In August, AG Sessions announced the creation of the Opioid Fraud and Abuse Detection Unit. Data analytics will be used to “identify and prosecute individuals that are contributing to this prescription opioid epidemic.” The unit, which assigns a prosecutor to each of 12 participating districts, is particularly focused on the nexus between healthcare fraud and opioid abuse.

In November, AG Sessions ordered every U.S. Attorney to designate an Opioid Coordinator by the close of business on December 15, 2017. These Opioid Coordinators not only will handle cases involving trafficking of heroin and fentanyl, but will manage prescription opioid cases as well. The Opioid Coordinators will work with other law enforcement agencies to determine when a case will be brought as a criminal prosecution and will assess the overall effectiveness of their districtwide strategy. In doing so, they will maintain data on opioid prosecutions.

Taken together, these developments signal a commitment to using a data-driven approach to frame the federal government’s prosecution-focused response, which now clearly targets pharmacies and distributors that handle larger-than-expected doses of opioids. Such metrics have been used to uncover large-scale opioid diversion. A Pulitzer Prize-winning series in the Charleston Gazette-Mail in 2016 found that 780 million doses of painkillers had been distributed, many in small towns where the population would not justify such numbers. A follow-up article on January 29 of this year found that one town had received 20.8 million doses over ten years, despite a population of only 2,900.

Why It Matters

Data-driven metrics illustrating opioid distribution have been cited in civil litigation filed against opioid manufacturers, distributors and dispensers, including cases that have been consolidated in Multidistrict Litigation in the Northern District of Ohio. It is now clear that data metrics will become a primary tool to support enforcement actions as well, allowing the Department of Justice to focus its limited resources on the most egregious cases. The announcement of a 45-day surge should serve as a warning not just to pharmacies, but to all those involved in distributing opioids, highlighting the need for rigorous internal compliance and monitoring programs as well as robust investigative follow-up.

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Part 3: Megatrends Reinventing How Payers Think

By Helen R. Pfister, Partner, Manatt Health | Sandy W. Robinson, Managing Director, Manatt Health | Annemarie V. Wouters, Senior Advisor, Manatt Health | Adam M. Finkelstein, Counsel, Manatt Health

Editor’s Note: In a recent webinar for PharmaVOICE, Manatt Health revealed the megatrends driving new thinking by patients, providers and payers. We kicked off our three-part series summarizing the program in December, with a look at the megatrends for patients. In January, part 2 of our series explored the megatrends for providers, with a detailed look at the 340B program, and this month, in the article below, we focus on the payer segment.

To view the full webinar free on demand, click here. To download a free copy of the webinar presentation, click here.


CMMI—The R&D Lab for Medicare and Medicaid

The Center for Medicare & Medicaid Innovation (CMMI) can be a powerful lever in promoting value-based contracting for drugs. CMMI—an independent office at the Centers for Medicare & Medicaid Services (CMS)—has huge influence for two reasons. First, Medicare and Medicaid are themselves massively large payers, so when CMS goes into value-based contracting, it has a significant effect on the market. Second, CMS can support other payers in their value-based purchasing by changing its rules.

Created under the Affordable Care Act (ACA), CMMI is the Medicare and Medicaid research and development (R&D) lab. It has two main tools—a budget of $10 billion for every 10 years and the ability to waive Medicare, CHIP and some Medicaid requirements. CMMI’s purpose is to test innovative payment models in Medicare, Medicaid and CHIP with the goal of reducing care cost and increasing care quality.

Typically, CMMI carries out its mission through model tests, sometimes called “demonstration projects.” The CMMI Model Life Cycle is a three-part process:

  • Testing: CMMI runs a small-scale pilot program.
  • Evaluation: An independent third party evaluates the pilot’s cost and quality.
  • Expansion: If the program improves quality without increasing costs, or decreases costs without harming quality, it can be made permanent, without the need for an act of Congress.

Recent RFI Announces a New Direction for CMMI

Because CMMI was created under the ACA, there was widespread speculation that it would be eliminated under the Trump administration. Instead CMS recently released a request for information (RFI) announcing a “new direction for CMMI.” The RFI, which was accompanied by a Wall Street Journal editorial by CMS administrator Seema Verma, announced the guiding principles for creating new model tests, as well as rethinking the old ones. It shared new priorities—and also provided an opportunity for those interested to submit comments and new ideas to influence CMMI’s direction.

There are six overarching principles for new model tests presented in the RFI, including:

  • Choice and competition in the market
  • Provider choice and incentives, particularly voluntary tests
  • Patient-centered care
  • Benefit design and price transparency
  • Transparent model design and evaluation
  • Small-scale testing

The six principles promote a market-based approach, including ways providers, patients, and plans can leverage regulatory flexibility, costs, contracting and innovation to improve care. They also support transparency, as well as small-scale, voluntary testing.

What Did the CMMI RFI Say About Drugs?

Among the model categories discussed in the RFI, CMMI indicated that it is specifically interested in pharmaceuticals. Although the RFI language is rather opaque, it is clear that CMMI is focusing on solutions to reduce drug costs in Medicare and Medicaid. In line with CMS’s current preference for market-based approaches, CMMI showed strong interest in using consumer cost sharing and incentives as levers.

CMMI also showed interest in encouraging value-based purchasing of pharmaceuticals. One sentence in the RFI speaks to “increase[ing] drug price competition while protecting beneficiaries’ access to drugs.” This could mean that CMMI is considering formulary flexibility in exchange for cost reduction, as long as there are adequate protections for beneficiaries.

It is important to remember that CMMI lacks the authority to waive the Medicaid best-price rule, which frequently is cited as a barrier to value-based contracting. CMS, however, has been active in using other tools to promote value-based contracting. The potential value-based arrangement announced in August 2017 for Novartis’s Kymriah is a prime example. (For more information, please see the article in our January Health Update, “Gene Therapy: Pipeline of Possibilities but Challenges for Pricing.”)

Most of what we know about this arrangement is from Novartis’s own public statement describing its agreement with CMS for gene therapy as “focused on improving efficiencies in current regulatory requirements” to permit indication-based pricing. CMS has not confirmed the arrangement, but put out its own press release stating that it is “continuing to explore the development of payment models and arrangements for new and potentially life-saving treatments.” CMS also promised to issue “further guidance to explain how pharmaceutical manufacturers can engage in innovative payment arrangements.” The future guidance may shed light on how to report prices of drugs in value-based arrangements without triggering best-price obligations.

What Does the Future Hold for CMMI?

A year into the new administration, it looks like CMMI will survive, but its direction is in flux. It has yet to enact new policies, though its priorities are coming into focus, including an interest in reducing prescription drug costs and a willingness to experiment with consumer incentives, VBP and formulary flexibility.

CMMI, however, may not be the only vehicle used to address these issues. CMS guidance on value-based contracting may be coming soon and will illuminate both agency priorities and methods for prescription drug contracting.

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The Strange State of Substance Use Disorder Information Sharing

By Alex Dworkowitz, Associate, Manatt Health

Editor’s Note: In a new article in Bloomberg BNA’s Health IT Law & Industry Report, summarized below, Manatt Health examines the nation’s substance use disorder (SUD) privacy rules—which both privacy advocates and proponents of increased health information exchange consider unsatisfactory. To read the full article, click here.


When Pennsylvania’s Congressman Tim Murphy resigned in October after the married father of two sent text messages urging his girlfriend to obtain an abortion, little was said about the effect his departure might have on the confidentiality of SUD information. In July, Congressman Murphy had introduced the Overdose Prevention and Patient Safety Act, or H.R. 3545. Among other things, the law would have rewritten the Drug Abuse Prevention, Treatment, and Rehabilitation Act (DAPTRA) to allow the sharing of patients’ SUD information without patients’ consent for purposes of “treatment, payment, or healthcare operations.”

While federal law currently requires a patient’s written consent to exchange SUD records except in very limited circumstances, the legislation would allow such records to be shared among healthcare professionals, plans and entities under the same circumstances as other types of medical records. State privacy laws would not be preempted, so it would be up to each state to decide whether SUD records could be shared in the same way as other medical records or tighter controls should remain.

The Origins of SUD Confidentiality

DAPTRA was enacted in 1972—a time when there was a surge in the use of illegal drugs, as well as in the number of clinics to treat patients with addiction. The stigma against those with SUDs was strong, leaving advocates concerned that failing to protect medical records related to SUD care could lead to discrimination and even criminal charges against SUD patients.

Reflecting those concerns, DAPTRA prohibited anyone from disclosing SUD records for any reason, subject to certain exceptions—primarily, the written consent of the patient. Other exceptions allow such information to be shared to provide care during a medical emergency; to support those conducting an SUD program audit or scientific research; to assist a state agency, if relevant to a suspected incident of child abuse; or, if a court has ordered it, to avert a substantial risk of death or serious bodily harm.

At the time DAPTRA was enacted, its prohibition against sharing SUD records fit relatively well with the treatment model. It was believed that only specialized SUD providers should be responsible for SUD care, so there was no need to share patients’ SUD information with other healthcare professionals. In 2018, however, the trend has moved toward physical and behavioral health professionals working together to coordinate a patient’s care.

A Strange Status Quo

Today, some providers find it difficult to comply with DAPTRA and the regulations promulgated under the law, 42 C.F.R. Part 2, viewing the consent requirements as administratively unworkable. Others accept the strict consent requirements but find that they prevent information sharing.

Advocates of health information exchange believe that consent should be a one-time process. If a patient consents to the sharing of his or her SUD information, then the organizations and individuals who are engaged in that patient’s care should never have to obtain that consent again. But the regulations in 42 C.F.R. Part 2 were not structured with such a model in mind. For example, the regulations require the consent form to include the name of the recipient of the patient’s information.

In its revision to the regulations earlier this year, the Substance Abuse and Mental Health Services Administration (SAMHSA) modified this requirement to allow a “general designation” of information recipients who have a “treating provider relationship” with the patient, but that exception only applies to entities such as health information exchanges. Moreover, SAMHSA has suggested that care managers do not meet that standard for “treating provider relationship.” Therefore, most consent forms must continue to name the recipients of all SUD information to comply with 42 C.F.R. Part 2.

This requirement, although seemingly minor, substantially impacts the exchange of SUD information. For example, it effectively prohibits any sharing of SUD information on a population level.

To privacy advocates, this may be an acceptable sacrifice to protect SUD information. But privacy advocates have reasons to be unhappy as well. There is no agency that enforces violations of DAPTRA and 42 C.F.R. Part 2. SAMHSA may establish some SUD privacy rules, but it does not have a mechanism for enforcing those rules. Technically, the Department of Justice (DOJ) may bring cases against those who violate SUD confidentiality regulations. But the DOJ has never brought actions to enforce the Part 2 consent form requirements or anything but the most flagrant violations of the SUD laws and regulations. In practice, the federal government does not rigorously enforce the SUD confidentiality law and regulations. While many states incorporate the federal requirements into their own SUD confidentiality law and regulations, the extent to which states seek to enforce those laws varies.

In addition, the SUD law and regulations do little to protect patients against perhaps the greatest threat to SUD confidentiality: hacking. Predating the personal computer, DAPTRA and 42 C.F.R. Part 2 do not address the significant threat hacking poses to patient confidentiality.

Future Reform

Though its fate is unclear, Congressman Murphy’s bill does point the way forward for SUD confidentiality reform. Congress could seek to narrow the scope of DAPTRA to allow for more free exchange of SUD information. Combining additional exceptions to the consent requirement and directing SAMHSA to adopt more lenient consent form rules could go a long way in helping promote the appropriate exchange of SUD information. In return, the legislation could establish a mechanism to enforce these requirements at a federal level.

For now, federal law and regulations continue to prevent the sharing of SUD information. At the same time, these rules largely go unenforced. As the nation confronts the opioid epidemic, reform of the SUD laws and regulations is critical.

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New Webinar: What Are the Megatrends Shaping Data-Driven Healthcare?

Join Us on February 27 from 1:00 – 2:00 p.m. ET—and Discover How Applying Analytics Can Help You Achieve Your Strategic Goals. Click Here to Register Free.

For state health programs, payers, providers and life sciences companies, data and analytics have become essential to facilitating efficient and effective healthcare delivery. The right data assets and analytics expertise are core requirements for ensuring access to care, optimizing population health initiatives, and achieving quality and financial goals.

Which healthcare megatrends have transformed using data and analytics from an option to a necessity? How are public and private healthcare organizations collecting, sharing, analyzing and applying data to meet their strategic objectives? What do you need to know about what’s next in analytics to stay ahead of the curve? Find out at a new Manatt webinar, “The Promise of Data-Driven Healthcare: Megatrends for 2018.” Click here to register free. During the session, you will:

  • Discover the healthcare megatrends driving the need for more targeted and actionable analytics.
  • Gain key insights into how these megatrends impact your ability to meet your strategic goals.
  • Learn best practices for navigating the challenges and opportunities associated with data and analytics megatrends.
  • Explore how healthcare leaders are strategically developing and implementing long-term plans for sustainable data and analytics capabilities.
  • Find out what the future holds for healthcare data and analytics—and what new developments mean for your organization.

Even if you can’t make the original session on February 27, click here to register free now, and you will receive a link to view the session on demand.


Valerie Barton, Managing Director, Manatt Health
Laura Braslow, Director, Manatt Health
Kevin McAvey, Senior Manager, Manatt Health

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Physician No-Poach Agreements in the Antitrust Spotlight

By Lisl J. Dunlop, Partner, Antitrust and Competition | Shoshana S. Speiser, Associate, Litigation

“No-poach” or “no-hire” agreements involve employers agreeing not to steal each other’s employees, and have long been a feature of industries in which skilled talent is in short supply. These agreements, however, can violate the antitrust laws by restricting employee movement and limiting compensation.  In public comments in January, incoming Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ), Makan Delrahim, reported his surprise when he learned of the number of no-poaching agreement investigations underway at the DOJ and indicated that prosecutions would be publicly announced soon.

In addition, earlier this month, a North Carolina federal district court judge certified a class of University of North Carolina (UNC) School of Medicine and Duke University School of Medicine clinical faculty in an antitrust suit alleging no-hire agreements between the two universities.1 These developments serve as important reminders that no-hire or no-poach agreements are under increasing scrutiny, not only from the DOJ but also from private litigants, particularly in the healthcare field.

UNC/Duke Case Background

As we reported in our September 2015 Health Update article, plaintiff Danielle Seaman, an assistant professor of radiology at Duke, was allegedly told via email by UNC’s head of radiology that she was rejected from a position at UNC because the Duke and UNC deans had agreed not to permit faculty to make lateral moves between the two universities. Seaman sued the universities, alleging that they had conspired not to hire each other’s medical faculty in an effort to suppress competition and wages for faculty, physicians, nurses and skilled medical staff.

UNC settled the case in August 2017, agreeing not to enter into or enforce any unlawful no-hire agreements or similar restraints on competition. The case continues against Duke. On February 1, 2018, Judge Catherine Eagles certified a class of all persons employed from January 1, 2012, to the present as a faculty member with an academic appointment at the Duke or University of North Carolina Schools of Medicine. Although the court denied extending the class to nonfaculty physicians, nurses and skilled medical staff on manageability grounds, the success of this partial class certification is likely to inspire plaintiffs’ attorneys to continue pursuing these types of cases.

Increasing DOJ Enforcement and Criminal Prosecutions Expected

Since about 2010, when the DOJ announced a settlement requiring Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar to cease entering into nonsolicitation agreements for employees, the DOJ has increasingly stepped up its enforcement against no-poach agreements. The DOJ’s suit against Adobe et al. was followed by private class actions against the tech companies, culminating in a $415 million settlement against Apple, Google, Intel and Adobe.2

As we reported in our article in the October 2016 issue of Health Update, the DOJ and the Federal Trade Commission issued Antitrust Guidance for Human Resources Professionals (HR Guidance) focusing on wage-fixing and no-poaching agreements.3

While the HR Guidance noted that “the DOJ intended to proceed criminally against naked wage-fixing or no-poaching agreements” to date, the DOJ has not announced any criminal actions. On January 19, 2018, however, Delrahim announced that the DOJ is currently working on criminal no-poach agreement cases and will be announcing indictments in the coming months. Delrahim said that he has “been shocked about how many of these there are.” Of course, once the government brings criminal charges, private class actions are sure to follow.


The recent class certification decision and DOJ announcement make it clear that, whether formal or informal, no-poach agreements are currently in the spotlight. The agreements are subject to both civil and criminal liability, through both government enforcement and private actions and can carry significant penalties and repercussions. Hospitals, universities and other healthcare providers are on notice that agreements with competitors about employees are off-limits. Should any such arrangements come to light, companies may want to consider utilizing the DOJ’s leniency guidelines and seeking amnesty or penalty reductions for early reporting and cooperation.

1Seaman v. Duke University, No. 1:15-cv-00462 (M.D.N.C.).

2In re High-Tech Employee Antitrust Litigation, Case No. 11-VC-2509-LHK (N.D. Cal.).

3DOJ and FTC, Antitrust Guidance for Human Resource Professionals (Oct. 2016), available at

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Applying Escobar’s Heightened Materiality Standard: Limiting FCA Liability

By John M. LeBlanc, Partner, Healthcare Litigation | Katrina Dela Cruz, Associate, Litigation

Editor’s Note: Since the Supreme Court decided Universal Health Services, Inc. v. United States ex rel. Escobar (Escobar), 136 S.Ct. 1989 (2016), several federal circuit courts and district courts have applied the ruling in a way that has limited False Claims Act (FCA) liability. (Click here to read our article in the March 2017 issue of Health Update: “Escobar’s Impact: Recent Application of ‘Materiality’ in Ninth Circuit.”) In the article below, we analyze how these lower courts have applied the heightened materiality standard set forth in Escobar, including what courts look to when deciding whether to dismiss FCA complaints on materiality grounds.


Analysis of Recent Cases Applying the Heightened “Materiality” Standard

In United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481 (3d Cir. 2017), the Third Circuit affirmed the district court’s order dismissing an FCA complaint on the grounds that the relator could not establish materiality based on the guidance set forth in Escobar. The relator alleged that his former employer, Genentech, submitted false claims to the federal Medicare program when it suppressed data that caused doctors to certify incorrectly that a particular drug was “reasonable and necessary” for certain at-risk Medicare patients.

In affirming the district court, the Third Circuit reasoned that the relator did not dispute the district court’s findings that there were no allegations in the complaint that (i) the Centers for Medicare & Medicaid Services (CMS) would not have reimbursed these claims had the alleged reporting deficiencies been cured, (ii) knowledge of the noncompliance could influence the government’s decision to pay, or (iii) CMS consistently refused to pay claims like those alleged. Id. at 490. The relator had essentially conceded that the government would have paid the claims with full knowledge of the alleged noncompliance. Id. In fact, the relator admitted that he disclosed evidence to the government, but the Food and Drug Administration (FDA) continued to approve the drug, added three more approved indications of the drug and took no action against Genentech. Id. 

Therefore, the Third Circuit held that the misrepresentation was not material to the government’s payment decision. Id. The failure to plead allegations regarding the violation’s impact on the government’s payment decision rendered the complaint fatally deficient.

In Abbott v. BP Exploration & Production, Incorporated, 851 F.3d 384 (5th Cir. 2017), the plaintiff, a former control supervisor for oil company BP Exploration & Production, Inc. (BP), brought a lawsuit alleging that BP violated the FCA and the Outer Continental Shelf Lands Act (OCSLA) by falsely certifying compliance with various regulatory requirements in connection with a project that BP built and maintained (the BP project). Id. at 385-86. As a result of the lawsuit, the Department of the Interior (DOI) began reviewing BP’s compliance with those regulatory requirements, and eventually conducted a full investigation into the plaintiff’s allegations. Id. at 386. Although the DOI ultimately issued a report stating that the plaintiff’s allegations about the false submissions were unfounded and that there were no grounds for suspending operations of the BP project, the district court denied BP’s motion to dismiss. Id. After discovery, the district court granted summary judgment in favor of BP on all claims. Id.

On appeal, the Fifth Circuit affirmed the district court’s order. Id. at 387. The Fifth Circuit analyzed the materiality standard set forth in Escobar, noting that the standard was “demanding.” The Fifth Circuit also emphasized that it was not “sufficient for a finding of materiality that the Government would have had the option to decline to pay if it knew of the defendant’s noncompliance.” Id. (citing Escobar, 136 S.Ct. at 2004). Indeed, the plaintiff pointed to the following evidence to support that fact issues exist as to whether false certifications were material to support FCA claims: missing stamps, drawings not specifically marked as “As-Built,” BP internal procedures requiring “As-Built” markings, and testimony from a DOI official stating that the BP project wouldn’t have been approved had BP not certified its compliance with various regulations. Id. at 388.

The Fifth Circuit found this evidence insufficient, however, to overcome summary judgment under Escobar’s “demanding” materiality standard, given that the DOI report found that the BP project was in compliance with the regulations. Id. at 388. Therefore, when the DOI decided to allow the BP project to continue after a substantial investigation into the plaintiff’s allegations, that decision was “strong evidence” that the requirements in those regulations are not material. Id.

In United States ex rel. Harman v. Trinity Industries Inc., 872 F.3d 645 (5th Cir. 2017), the relator alleged that manufacturer Trinity Industries Inc. knowingly and falsely certified that its guardrail end terminals had been approved for reimbursement by the Federal Highway Administration (FHWA) to induce state governments to use end terminals and seek reimbursement from the FHWA. Id. at 649-650. Trinity lost at summary judgment, at trial and on post-trial motions, resulting in the entering of final judgment against Trinity in the amount of $664 million. The district court denied Trinity’s motion for a new trial, which Trinity appealed. Id. at 651.

On appeal, the Fifth Circuit overturned the $664 million judgment, holding that Trinity’s alleged failure to disclose changes to its guardrail end terminals was not material, as required to support the relator’s FCA claim. Id. at 652-53. In so holding, the Fifth Circuit recognized other circuits’ guidance on the impact of the government’s continued payment, and noted that “though not dispositive, continued payment by the federal government after it learns of the alleged fraud substantially increases the burden on the relator in establishing materiality.” Id. at 661-63.

In Trinity, the relator’s allegations that Trinity failed to disclose changes to its guardrail end terminals were presented to the government prior to the lawsuit. Even after being briefed on the allegedly material design changes, the government concluded that payment for the system was still proper. Id. at 650-651, 665, 667. Indeed, FHWA issued a memorandum explaining that the challenged guardrail end-cap design had been tested and that there was “an unbroken chain of eligibility for Federal-aid reimbursement.” Id. at 665. Therefore, based on the fact that the government continued payment under these circumstances, the relator could not meet the heightened materiality standard.

It is important to note, however, that in a recent case, the Ninth Circuit reversed dismissal under Rule 12(b)(6) for failure to state a claim, holding that questions of materiality remained even where the FDA continued to pay for the drug. In United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017), two former employees of Gilead Sciences, Inc., a large drug producer, filed suit against Gilead under the FCA, alleging that Gilead made false statements about its compliance with FDA regulations regarding certain HIV drugs, resulting in the receipt of billions of dollars from the government. Id. at 895. In particular, the relator alleged that Gilead utilized an unapproved vendor in China for a critical component of its HIV drugs for at least two years before the FDA approved the vendor. The district court dismissed the relators’ second amended complaint with prejudice, on the ground that the relators failed to allege that Gilead made a false statement related to a material precondition for payment. Id at 899.

On appeal, the Ninth Circuit reversed, rejecting Gilead’s argument that the violation was not material to the government’s payment decision, because the government continued to pay for the medications after it knew of the FDA violations. Id. The Ninth Circuit reasoned that (1) questions remained as to whether the approval by the FDA was itself procured by fraud; (2) other potential reasons existed for continued approval that prevented judgment for the defendant on 12(b)(6); and (3) the continued payment came after the alleged noncompliance had terminated and “the government’s decision to keep paying for compliant drugs does not have the same significance as if the government continued to pay despite noncompliance.” The Ninth Circuit also noted that the parties disputed what exactly the government knew and when, calling into question its “actual knowledge” that certain requirements were violated. Id. at 907.


In summary, courts have demonstrated that they are willing to dismiss FCA complaints in the early stages of the litigation, especially if the complaint does not allege any facts establishing materiality. Moreover, if the defendant can establish that an alleged violation did not affect the government’s decision to pay a claim, e.g., if the government agency still paid the claim notwithstanding being on notice of alleged noncompliance, this is powerful evidence that can help a defendant defeat FCA liability, potentially even at the motion-to-dismiss stage.

In essence, the key to materiality appears to be government action or inaction after knowledge of the noncompliance, and defendants should try to obtain information regarding whether the government still paid the claims despite such knowledge. Based on a review of the cases to date, it is clear that the heightened materiality standard has real teeth and has made it more difficult for qui tam plaintiffs to plead materiality properly and move past the pleadings stage or ultimately succeed in their FCA claims.

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New Webinar: Healthcare Litigation in a Transforming Environment

Explore Game-Changing Trends and Cases Reshaping Healthcare Law and Policies. Click Here to Register Free—and Earn CLE.

In just the first year of the Trump administration, healthcare has faced an avalanche of change—from the proposed “conscience regulation” to tightening False Claims Act (FCA) scrutiny to new Medicaid work requirements. The disputes arising from the flood of new developments encompass both legal and regulatory challenges—and are being played out in both courts and government agencies. Ultimately, they may trigger significant shifts in existing healthcare law.

How will healthcare litigation be affected? What are the game-changing trends and cases to watch in 2018—and how could they remap the legal and regulatory landscapes? Find out in a new Manatt webinar for Bloomberg BNA. Click here to register free—and earn CLE. Participants will:

  • Gain the latest insights into the Trump administration’s healthcare positions, policies and priorities—including what we’ve seen in the first year and what’s likely to come.
  • Understand the major FCA cases transforming fraud and abuse litigation and the decisions to watch in the year ahead.
  • Explore the new guidance from the Centers for Medicare & Medicaid Services (CMS) for states seeking 1115 waivers that condition Medicaid eligibility on work and community engagement.
  • Examine the issues around the proposed “conscience regulation,” as well as the new CMS guidance to Medicaid directors restoring state flexibility to decide program standards.
  • Learn about the string of lawsuits drug and alcohol rehabilitation centers have filed across the country claiming that insurers are not properly reimbursing them, as well as the latest cases against detox clinics to combat fraud and abuse.
  • Get an update on the laws and litigation around discrimination on the basis of gender identity and termination of pregnancy.

Even if you can’t make the webinar’s original airing on March 28 from 1:00–2:30 p.m. ET, click here to register free now, and you’ll receive a link to view the program on demand.


Ileana Hernandez, Partner, Litigation, Manatt, Phelps & Phillips, LLP
Michael Kolber, Partner, Manatt Health
Craig Rutenberg, Partner, Litigation, Manatt, Phelps & Phillips, LLP

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Medicare Part D Cost-Sharing Trends for Adult Vaccines

By Annemarie V. Wouters, Senior Advisor, Manatt Health | Sandy W. Robinson, Managing Director, Manatt Health | Dhaval Patel, Senior Manager, Manatt Health | Devin A. Stone, Manager, Manatt Health | Kyla M. Ellis, Consultant, Manatt Health | Andre Mota, Consultant, Manatt Health

Editor’s Note: Vaccination utilization among U.S. adults is low, and well below the Healthy People 2020 targets, despite widespread availability of safe and effective vaccines and long-standing use recommendations by the Centers for Disease Control and Prevention (CDC) and the Advisory Committee on Immunization Practices (ACIP). The 2010 Affordable Care Act (ACA) eliminated some coverage and financial access barriers to adult vaccinations covered by private health insurance and Medicaid, but it did not substantially change vaccine utilization or cost sharing for beneficiaries enrolled in Medicare Part D. The law requires that Medicare Part D plans cover all commercially available vaccines not already covered under Medicare Part B, if the vaccine is reasonable and necessary to prevent illness.

In a new issue brief,1 summarized below, Manatt Health’s analysis shows that despite encouragement by the Centers for Medicare & Medicaid Services (CMS) for Part D plans to provide vaccines without cost sharing to incentivize the use of these preventive services, about 4% or less of Medicare Part D enrollees had access to the vaccines examined in this study with no cost sharing, depending on the vaccine, in either Medicare Advantage Part D Prescription Drug Plans (MA-PDPs) or stand-alone Prescription Drug Plans (PDPs) for CY 2017, with little change since 2015. Importantly, no PDPs offered zero-dollar cost sharing for the vaccines under study between 2015 and 2017. Click here to download the full issue brief and its companion chart pack.


The Focus of the Study

Medicare Part D plans include MA-PDPs and PDPs. PDPs may be purchased by beneficiaries enrolled in traditional Medicare Part A and B programs. In January 2017, Part D enrollment across all types of Part D plans was approximately 42.2 million, with about 59% in PDPs. Enrollment increased from 38.6 million in January 2015 (61% in PDPs).

Beginning in 2012, CMS permitted and encouraged Part D plans to create a “vaccine-only tier” that offers zero-dollar cost sharing to promote vaccine utilization. However, the inclusion of a dedicated vaccine-only tier—or a “Select Care/Select Diabetes” tier that contains vaccine products—as part of a five- or six-tier formulary is not required. Sponsors that choose to offer one of these formulary tiers must set the cost setting at zero dollars. Plans also may offer other tiers with zero-dollar cost sharing, such as preferred drug tiers.

Manatt analyzed whether the Part D plans were encouraging beneficiaries to be vaccinated by placing adult vaccines on tiers with zero-dollar cost sharing during calendar years 2015–2017. For this analysis, a “zero-dollar cost share” tier refers to any tier where cost sharing is zero, regardless of the tier label name.

Manatt’s study focuses on non-low-income subsidy (non-LIS) Part D enrollees in MA-PDPs and PDPs who can face high cost sharing, unlike enrollees eligible for LIS, who, by statute, have reduced cost sharing. The study excludes enrollees from demonstrations, national programs for all-inclusive care for the elderly (PACE) plans, employer group waiver plans (EGWPs), employer direct contract plans, and plans where Medicare has suppressed public use data for various reasons.

The study examines 10 vaccines: tetanus toxoid, reduced diphtheria toxoid and acellular pertussis vaccine, adsorbed (Boostrix®); zoster vaccine live (Zostavax®); varicella virus vaccine live (Varivax®); A/C/Y/W-135, meningococcal polysaccharide vaccine, groups A, C, Y and W-135 combined (Menomune®); hepatitis A vaccine (Havrix®); hepatitis A vaccine, inactivated (Vaqta®); hepatitis B vaccine recombinant (Engerix-B®); hepatitis B vaccine recombinant (Recombivax HB®); hepatitis A and hepatitis B recombinant (Twinrix®); and tetanus and diphtheria toxoids vaccine, adsorbed (Tenivac™). The vaccines selected for this study (known as study vaccines) address a broad range of preventable conditions and are recommended by ACIP/CDC for general use for all adults 65 years of age or older, as well as for adults with certain risk factors.

Key Study Findings

Manatt’s analysis revealed some critical facts.

Few non-LIS Part D enrollees had access to vaccines through zero-dollar cost share. Across MA-PDPs and PDPs, about 4% or less of non-LIS Part D enrollees had access to the vaccines examined in this study through zero-dollar cost sharing in 2017, depending on the vaccine. When zero-dollar cost sharing was available, it was usually offered through a dedicated vaccine-only tier. There was little change in access to vaccines through dedicated vaccine-only tiers or other zero-dollar cost-share tiers between 2015 and 2017.

Less than 9% of non-LIS MA-PDP enrollees had access to vaccines through zero-dollar cost share in 2017. Between 8.0% and 8.6% of MA-PDP non-LIS enrollees in 2017 had access to the vaccines examined in this study through zero-dollar cost sharing, depending on the vaccine. Among the MA-PDPs that required coinsurance for the study vaccines in 2017, more than 30% of non-LIS enrollees had a coinsurance rate exceeding 35% for these vaccines. Among MA-PDPs that required copayments in 2017, less than 3% of non-LIS enrollees had copayments less than $26 for these vaccines.

No PDPs offered zero-dollar cost sharing to non-LIS enrollees for these vaccines. Among PDPs that required coinsurance in 2017, coinsurance rates for the study vaccines were rarely less than 11% for non-LIS enrollees, and average coinsurance rates were 35% or greater for nine of the ten vaccines. Among PDPs that required copayments, less than 15% of non-LIS enrollees had copayments under $26 in 2015, declining to less than 9% under $26 in 2017.

Among non-LIS enrollees with cost sharing for these vaccines, MA-PDPs had higher weighted average copayment amounts, but lower weighted average coinsurance rates relative to PDPs. Although only MA-PDPs offered zero-dollar cost sharing for the vaccines studied, PDPs had a lower median estimated out-of-pocket cost for eight of the ten vaccines studied. 

Median estimated cost sharing for non-LIS MA-PDP enrollees in 2017 was between $39 and $47 across the vaccines studied. By comparison, median estimated cost sharing for non-LIS PDP enrollees ranged between $27 and $75 depending on the vaccine, a slightly broader range than for MA-PDP enrollees. However, estimated out-of-pocket costs could exceed $100 for either MA-PDP or PDP enrollees for some vaccines.

In 2017, for the study vaccines, average weighted cost sharing at the state level was generally more homogeneous across states in PDPs, compared with MA-PDPs. Among MA-PDPs, the South region typically had the highest cost sharing, with the exception of the District of Columbia and Maryland. Among PDPs, Illinois and Arkansas had the highest out-of-pocket costs for most vaccines.


Despite CMS recommendations since 2012 that Part D plans incentivize the use of adult vaccination by placing vaccines on zero-dollar cost-sharing tiers, most Part D plans (either MA-PDP or PDP-only) continue to require enrollees to pay out-of-pocket costs for vaccines. In 2017, about 4% of Part D enrollees had access to low- or zero-dollar cost sharing, and there has been little change since 2015. For non-LIS enrollees, only some MA-PDPs allowed zero-dollar cost sharing for the vaccines under study.

Most non-LIS enrollees faced a copayment—the most prevalent form of cost sharing for the vaccines under study in both MA-PDPs and PDPs. MA-PDPs had lower weighted average coinsurance rates but higher weighted average copayment amounts for these vaccines relative to PDPs. Non-LIS enrollees in MA-PDPs had slightly higher median estimated out-of-pocket costs compared to enrollees in MA-PDPs for eight of the ten vaccines studied.

1GlaxoSmithKline provided funding for this analysis. Manatt Health Strategies, LLC, maintained full editorial control over the selection of the vaccines, methodology, and content of this issue brief and the accompanying chart pack.

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