Health Highlights

Fraud and Abuse 2017: Understanding Trends and Avoiding Actions

By Richard S. Hartunian, Partner, Corporate Investigations and White Collar Defense | Jacqueline C. Wolff, Partner, Co-chair, Corporate Investigations and White Collar Defense and Co-chair, False Claims Act | Randi Seigel, Counsel, Manatt Health

Editor’s Note: In a recent webinar for Bloomberg BNA, Manatt examined game-changing fraud and abuse trends and cases—and revealed strategies for avoiding False Claims Act (FCA) actions. In a new, three-part series, Manatt summarizes key insights and guidance from the program. Part 1, below, speaks to the current state of play—and defines what a false claim looks like in 2017. Coming in December, part 2 will examine the latest enforcement trends, and in January, part 3 will explain how to build an effective compliance program, as well as provide practical recommendations for preparing for and responding to government inquiries.

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


The Current State of Play: Healthcare Fraud Remains a Priority

Under the Trump administration, healthcare fraud will remain a key focus. At his nomination hearing, Attorney General Jeff Sessions promised to “make it a high priority to … root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims.”

The President’s budget, released in March, clearly supports investing in activities to prevent Medicare and Medicaid fraud, waste, and abuse. The budget proposed $751 million in discretionary funding—up about $70 million from fiscal year (FY) 2017—for fraud and abuse control. Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), underscored this administration’s focus on healthcare fraud, saying, “I will ensure that efforts around preventing fraud and abuse are a priority, since we cannot afford to waste a single taxpayer dollar.”

We are seeing the results of healthcare fraud prosecutions continuing to be a top priority. In 2017, the Department of Justice (DOJ) announced the largest healthcare fraud takedown1 in history. The record-breaking 2017 healthcare takedown involved 41 districts, approximately $1.3 billion in false billings and 30 state Medicaid Fraud Control Units (MFCUs). It resulted in charges against 412 defendants, including 115 doctors, nurses and other licensed professionals.

The emphasis on healthcare fraud continues to yield significant funds for the government. Healthcare accounted for $2.5 billion of the $4.7 billion in settlements and judgments that the DOJ obtained from civil fraud and abuse cases in FY 2016. In fact, FY 2016 marked the seventh consecutive year that healthcare civil fraud recoveries exceeded $2 billion. Between January 2009 and the end of FY 2016, the DOJ recovered $19.3 billion in healthcare fraud claims—and these figures represent just federal dollars. In many cases, the DOJ was instrumental in recovering additional millions of dollars for state Medicaid programs. Plus, states continue to bring their own healthcare fraud cases.

Key Fraud and Abuse Laws: Criminal

There are a significant number of criminal fraud and abuse laws from which the government can choose—not just healthcare fraud statutes but also general criminal statutes that can be used in healthcare fraud cases, such as Mail and Wire Fraud (18 U.S.C. §§ 1341 and 1343), False Statements (18 U.S.C. § 1001) and Obstruction of an “Official Proceeding” (18 U.S.C. § 1512 (c)). These general statutes are easier to prove and can be used effectively in false claims situations. In addition to the federal statutes, states have their own false claims act statutes and can piggyback onto federal cases. There are many different avenues available to pursue people believed to be engaging in activities that would fall under the FCA.

Let’s look first at the criminal fraud and abuse laws:

  • 18 U.S.C. § 287—the standard FCA statute—is not particular to healthcare. It applies to any “false, fictitious or fraudulent” claim made knowingly to any U.S. government department or agency.
  • 18 U.S.C. § 1035 is specific to false statements that are “knowingly and willfully” made in connection with the delivery of or payment for any healthcare programs, benefits, items or services. This includes falsifying, concealing or covering up material facts; making materially false, fictitious or fraudulent statements; or making or using any materially false writing or document knowing the same contains materially false, fictitious or fraudulent statements. (It is important to note that in criminal statutes, the term “knowingly” does not only mean actual knowledge but also covers reckless disregard for the truth or a knowing closing of one’s eyes to the facts.)
  • 42 U.S.C. § 1320a-7b(a)(1) covers false statements in an application for any benefits or payment under a federal healthcare program.

The penalties for violating these statutes include fines and imprisonment for up to five years per count.

Another critical healthcare fraud statute is 18 U.S.C. § 1347, which applies to those who “knowingly and willfully” execute a scheme or artifice to defraud a healthcare benefits program. Like the mail and wire fraud statute, it is fairly easy to prove because it is a general statute. It focuses not just on a particular claim but on an overall scheme to defraud.

The healthcare fraud statute carries much more serious penalties than do the criminal statutes in titles 18 and 42. Conviction under the healthcare fraud statute can result in imprisonment for up to ten years. The penalty increases to up to 20 years if the violation causes serious bodily injury—and up to life in prison if it results in death. It is also important to note that the DOJ has the option of bringing on injunctive action, if a defendant is violating or “about to violate” the healthcare fraud statute.

Finally, misbranding is considered a misdemeanor. If, however, the misbranding is done with the intent to defraud or after a criminal conviction, it can be classified as a felony and punishable by up to three years of imprisonment per count.

Key Fraud and Abuse Laws: Civil

Civil false claims cases start with a whistleblower advising the government—the U.S. Department of Justice—that the whistleblower is filing a complaint on its behalf, and then filing the complaint under seal. The government then begins to investigate while the complaint is under seal in order to decide whether or not to intervene in the whistleblower’s action. A civil FCA complaint is based on the False Claims Act, which prohibits:

  • Knowingly presenting or causing to be presented a false claim for payment or approval;
  • Knowingly making, using, or causing to be made or used a false record of statement material to a false or fraudulent claim; and
  • Knowingly making, using, or causing to be made or used a false record to avoid or decrease an obligation to pay or transmit property to the government.

In civil FCA cases, as in criminal FCA cases, “knowingly” includes reckless disregard, as well as a deliberate closing of the eyes to the truth.

Potential penalties have gone up in the last two years and include treble damages. Publicly traded companies also face the possibility of shareholder and derivative suits and 10-b(5) cases brought by the Securities and Exchange Commission (SEC). In addition, resolving these cases may involve implementing a Corporate Integrity Agreement, requiring regular reporting to the Office of Inspector General (OIG).

The Effects of Escobar

In June of 2016, in a unanimous opinion written by Justice Thomas, Universal Health Services v. United States ex rel. Escobar, the Supreme Court resolved a circuit split as to whether an implied certification theory was available under the FCA. The plaintiff in Escobar alleged that, in submitting a claim for mental health services, the provider implicitly certified that its employees administering the services were qualified per required licensing and regulations.

The Court held that the implied certification theory can be the basis for liability under the FCA when a defendant submitting the claim makes specific representations about the goods or services provided but fails to disclose noncompliance with material statutory, regulatory or contractual requirements that make those representations misleading. “Material” is key because questions remain around what materiality is and how it can be established.

It is interesting to note that evidence that a false statement or omission of a fact could have affected the government’s decision to pay is not sufficient to establish materiality for the purposes of surviving a motion to dismiss. The relator must establish that the government’s decision was likely to have been affected or, in fact, was affected by the false statement or omission. The Court found that a decision by the government to continue to pay following being made aware of the falsity may negate an allegation of materiality, but it is not fully determinative.

Since Escobar left open the question of whether or not the government’s decision to pay following the receipt of knowledge of falsity always negates an allegation of materiality, courts continue to grapple with this issue in a number of cases—and different courts are coming up with different answers.

The Impact of Caronia

In 2012, in U.S. v. Caronia, the Second Circuit overturned a criminal conviction on First Amendment grounds when a sales rep for a pharmaceutical company made truthful statements regarding off-label benefits. That case sowed the seeds of change, and we’ve seen lessening enforcement in the off-label market area. Based on Caronia, in August 2015 in Amarin v. FDA, in the Southern District of New York, the district court granted a preliminary injunction on First Amendment grounds permitting Amarin to engage in truthful off-label marketing.

The lack of focus in the off-label arena is evident when we look at the activities of the Federal Drug Administration’s (FDA’s) Office of Prescription Drug Promotion (OPDP). In 2010, the OPDP issued 52 Warning and Untitled Letters relating to off-label drug marketing, misbranding and potential misbranding violations. As of August 2017, however, the OPDP had issued only one letter.

In 2015, the FDA proposed a rule regarding the scope of intended use stating:

“… if the totality of the evidence establishes that a manufacturer objectively intends that a drug introduced into interstate commerce by him is to be used for conditions, purposes, or uses other than ones for which it is approved (if any), he is required, in accordance with section 502(f) of the Federal Food, Drug, and Cosmetic Act, or, as applicable, duly promulgated regulations exempting the drug from the requirements of section 502(f)(1), to provide for such drug adequate labeling that accords with such other intended uses.”

The effective date of the rule was postponed until March 2018, and it remains open for comments. Overall, the evidence indicates that we will see fewer standard off-label and misbranding issues used as the basis for FCA cases.

The FCA and the Anti-Kickback Statute (AKS)

The AKS is alive and well as the basis of a false claim. Just last month, it was announced that Galena Biopharma agreed to pay $7.55 million to resolve allegations under the civil FCA that it had paid monies to doctors for speaker programs and post-marketing trials that the government viewed as kickbacks to boost prescribing of its fentanyl-based drug.

The facts alleged in that case are reminiscent of the cases against big pharma in the early 2000s. At that time, big pharma was paying doctors to serve on advisory boards and enroll patients in post-marketing surveillance studies. These types of activities became the basis for civil and criminal FCA cases focused on such payments as kickbacks to prescribe the defendants’ drugs. Big pharma has since engaged in robust compliance programs to ensure that such initiatives involve remuneration to the physicians at fair market value. Smaller pharma and biotech companies—that are hot and growing—should look back at those cases and learn from them when deciding on programs to engage with prescribers.

The Overpayment

The Affordable Care Act (ACA) § 6402(d)(3) ties Medicare and Medicaid overpayments to the FCA, stating that “any overpayment retained by a person after the deadline [of 60 days from the date the overpayment was identified] for reporting and returning overpayment is an obligation for purposes of [the FCA.]” Although this law dates back to 2015, the DOJ now has begun to focus on it.

The clock starts ticking the date an overpayment is identified as needing to be reported or returned. If a company does not act within 60 days of the overpayment being identified, it can face an FCA case. Liability can exist even when a company is unaware of the overpayment if it shows “reckless disregard” or “deliberate ignorance” of the mistake.

If a company suspects an overpayment has been made, it is critical to start investigating quickly so if the government claims that no action has been taken within the 60 days, there is proof that, in fact, actions are underway. The importance of being aware of that 60-day clock is demonstrated in U.S. ex rel. Kane v. Continuum Health Partners, No. 11 Civ. 2325, 2015 WL 4619686 (S.D.N.Y. August 3, 2015). In Kane, the court ruled that the 60-day clock starts running when a provider becomes aware of a “potential” overpayment. At the end of the 60 days, the payment gives rise to FCA liability. Due to the First-to-File Rule, this creates a strong incentive for whistleblowers to file an FCA case on day 61. If, however, a provider has started to conduct a good faith investigation within the 60-day time frame, it provides a potential defense that the repayment is not being improperly withheld.

Not Complying With REMS—the New Misbranding

The Food and Drug Administration (FDA) requires companies to engage in a risk evaluation and mitigation strategy (REMS) for certain drugs that can pose potential health issues. The REMS mandate requires that manufacturers educate providers and ensure they fully understand any possible problems. Novo Nordisk recently paid $58 million for allegedly not complying with the REMS mandate, which included $46.5 million for alleged violations of the FCA. This case broke new ground, with the finding that failure to comply with REMS requirements to communicate accurate risk information renders the drug misbranded under the law and can become the basis for an FCA case.

Examining an FCPA Case

Since 2002, there has been a long line of Foreign Corrupt Practices Act (FCPA) cases around kickbacks that some pharmaceutical companies were allegedly paying to physicians overseas. Because doctors in most countries outside the United States are employed by the state through state-run universities or hospitals, they are considered government officials under the FCPA. If, for example, a company gives a physician a nice gift for serving on an advisory board or takes a doctor out for a relatively expensive meal, those actions could raise potential FCPA problems.

Facing the Opioid Crisis

The government is focusing on the opioid crisis, which some are suggesting is responsible for 150 deaths a day. One example would be the Mallinckrodt case from July 2017. Although the case was not brought under the FCA, Mallinckrodt—one of the largest manufacturers of generic oxycodone—paid $35 million to settle with the DOJ after being accused of failing to design and implement an effective system to detect and report suspicious orders of controlled substances, such as oxycodone, to the Drug Enforcement Agency (DEA).

Mallinckrodt came under scrutiny after DEA investigators noticed a large quantity of pills in another jurisdiction and began to ask questions. Mallinckrodt had a manufacturing facility in the Northern District of New York and also did business in Michigan. The U.S. attorney’s office in eastern Michigan joined forces with the Northern District of New York office in investigating Mallinckrodt.

One notable learning from the Mallinckrodt case for companies that are involved in the distribution of narcotics is that they have to be mindful of information in their possession that would indicate excessive quantities being distributed to downstream customers. During the investigation, the government learned that Mallinckrodt had charge-back information based on sales to downstream customers that should have detected the excessive sales.

The second critical learning is for companies to ensure they have accurate methods for counting the actual number of tablets being manufactured and accounting for waste and other aspects in the manufacturing process. While Mallinckrodt did not admit liability, it acknowledged that certain aspects of its monitoring systems and record-keeping practices did not meet DEA standards. Companies need to be mindful that the DEA is augmenting its standard approaches to deal with the opioid issue.

1Takedowns are multidistrict, nationwide, coordinated arrests of multiple defendants together with enforcement actions, such as search warrant executions.

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The Regulatory Burden on Hospitals, Health Systems and PAC

By Jonah P. B. Frohlich, Managing Director, Manatt Health | Stephanie Anthony, Director, Manatt Health | Randi Seigel, Counsel, Manatt Health | Ellen F. Sweeney, Senior Manager, Manatt Health | Devin A. Stone, Manager, Manatt Health

Editor’s Note: Every day, health systems, hospitals and post-acute care (PAC) providers—such as long-term care hospitals, rehabilitation facilities, skilled nursing facilities and home health agencies—confront the daunting task of complying with a growing number of federal regulations. To quantify the level of administrative impact of this regulatory burden, Manatt Health worked with the American Hospital Association (AHA) on a comprehensive review of federal law and regulations in nine regulatory domains from four federal agencies—the Centers for Medicare & Medicaid Services (CMS), the Office of Inspector General (OIG), the Office for Civil Rights (OCR) and the Office of the National Coordinator for Health Information Technology (ONC). Key findings and opportunities to reduce regulatory burden are summarized below. Click here to download the full report.


Federal regulation is largely intended to ensure that patients receive safe, high-quality care. In recent years, however, doctors, nurses and other caregivers find themselves devoting more time to regulatory compliance, taking them away from patient care. Some of the federal rules do not improve care, and all increase costs. Patients also are affected through less time with their caregivers and unnecessary hurdles to receiving care.

In a new study for the AHA to assess regulatory burden, Manatt Health interviewed 33 executives at four health systems, and conducted a survey of 190 hospitals that included systems and hospitals with PAC facilities.

Major Findings

1. Health systems, hospitals and PAC providers must comply with 629 regulatory requirements across nine domains. CMS, OIG, OCR and ONC are the primary drivers of federal regulations impacting these providers. However, providers also are subject to regulations from other federal and state entities not accounted for in our report.

2. Hospitals, health systems and PAC providers spend nearly $39 billion a year solely on administrative activities related to regulatory compliance across the nine regulatory domains covered in the report. The nine regulatory domains studied include quality reporting, value-based payment models, meaningful use of electronic health records, hospital conditions of participation (CoP), program integrity, fraud and abuse, privacy and security, PAC, and billing and coverage verification requirements. Looked at another way, regulatory burden costs $1,200 every time a patient is admitted to a hospital.

3. An average-size hospital dedicates 59 full-time employees (FTEs) to regulatory compliance, over one-quarter of which are doctors and nurses, pulling clinical staff away from patient care responsibilities. PAC regulations require an additional 8.1 FTEs.

4. The timing and pace of regulatory change make compliance challenging. The frequency and rate with which regulations change often results in duplication of efforts and substantial amounts of clinician time away from patient care.

5. Among the nine areas investigated, providers dedicate the largest portion of resources to documenting CoP adherence and billing/coverage verification processes. More than two-thirds of FTEs associated with regulatory compliance are within these two domains, which also represent 63% of the total average annual cost of regulatory burden.

6. Meaningful use (MU) has spurred provider investment in IT systems, but exorbitant costs and ongoing interoperability issues remain. The average-size hospital spends nearly $760,000 annually to meet MU administrative requirements annually. In addition, an average-size hospital invests $411,000 in related upgrades to systems during the year, over 2.9 times more than the IT investments made for any other domain.

7. Quality reporting requirements are often duplicative and have inefficient reporting processes, particularly for providers participating in value-based purchasing models. An average-size community hospital devotes 4.6 FTEs—over half of whom are clinical staff—and spends approximately $709,000 annually on the administrative aspects of quality reporting.

8. Fraud and abuse laws are outdated and have not evolved to support new models of care. The Stark Law and Anti-Kickback Statute (AKS) can be impediments to transforming care delivery. While CMS has waived certain fraud and abuse laws for providers participating in various demonstration projects, those who receive a waiver generally cannot apply it beyond the specific demonstration or model. The lack of protections extending care innovations to other Medicare patients or Medicaid and commercially insured beneficiaries minimizes efficiencies and cost savings realized through these types of models and demonstration projects.

General Opportunities to Reduce Burden

A reduction in administrative burden will enable providers to focus on patients, not paperwork, and reinvest resources in improving care and health, as well as reducing costs. Given these findings, we have several recommendations to reduce administrative requirements without compromising patient outcomes.

  • Regulatory requirements should be better aligned and consistently applied within and across federal agencies and programs and subject to routine review for effectiveness to ensure the benefits for the public good outweigh additional compliance burden.
  • Regulators should provide clear, concise guidance and reasonable timelines for the implementation of new rules.
  • CoPs should be evidence-based, aligned with other laws and industry standards, and flexible in order to support different patient populations and communities.
  • Federal agencies should accelerate the transition to automation of administrative transactions, such as prior authorization.
  • Meaningful use requirements should be streamlined and should increasingly focus on interoperability, without holding providers responsible for the actions of others.
  • Quality reporting requirements should be thoroughly evaluated across all programs to better determine what measures provide meaningful and actionable information for patients, providers and regulators.
  • PAC rules should be reviewed and simplified to remove or update antiquated, redundant and unnecessary rules.
  • With new delivery system and payment reforms emerging, Congress, CMS and OIG should revisit the Stark Law and AKS and their respective regulations, as well as other requirements aimed at combating fraud, and make meaningful changes to ensure that statutes provide the flexibility necessary to support the provision of quality, high-value care.

The AHA also has put together recommendations for immediate relief. These are listed in the full report and described in greater detail in AHA letters to President Trump, CMS and Congress, available at

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Now On Demand: Strategies for Becoming a Destination Provider

Click Here to Download a Free Copy of the Presentation.

International patients seeking advanced medical treatment spent more than $3.5 billion in the United States in 2015, increasing more than 25% since 2010.1 Each year, 300,000 international patients visit this country for quality medical care.2 Domestic medical travel is also on the rise. It’s estimated that 15% of the nation’s top-50 employers now offer domestic medical travel programs.3

In a recent webinar, Manatt Health provided guidance on how you can tap into the growing global and national patient markets. The program offered a market overview and shared strategies for becoming a destination provider. We want to be sure you don’t miss out on this important information. 

Key topics covered include:

  • Perspectives on relative market size and potential
  • Successful strategies that destination medical centers use to attract and support national and international patients
  • The challenges of providing care and follow-up to patients beyond your geographical boundaries—and how to overcome them
  • The potential for using telehealth to engage patients, facilitate services and improve care quality
  • Customer relationship management (CRM) approaches from other industries that can further the ability of health systems to manage a distributed referral network and better facilitate interactions with patients and providers

If you have any questions or issues you’d like to discuss after viewing the program, please contact:

1U.S. Cooperative of International Patient Programs
2Patients Beyond Borders
3“Medical Travel: Access to Savings and Quality Healthcare,” The Balance, Laura Carabello, September 2015.

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Integrating Hospitals and PAC Providers to Optimize Patient Care

By Stephanie Anthony, Director, Manatt Health | Alex Morin, Senior Manager, Manatt Health | Carol Raphael, Senior Advisor, Manatt Health

Editor’s Note: An aging population and shifting reimbursement models are spurring acute care and post-acute care (PAC) providers to work more collaboratively. Increasingly, hospitals and health systems are forming PAC preferred provider networks that support the exchange of clinical information, align care management protocols and share savings. In a new article for Hospitals and Health Networks Magazine, summarized below, Manatt Health shares how preferred provider networks can help hospitals integrate PAC providers into their care delivery models.


As the percentage of older Americans grows and the incidence of chronic disease increases, new models of care that extend outside of hospitals’ walls and leverage medical advances across nonhospital sites of care will be required. Simultaneously, new value-based payment models incentivize acute care and PAC providers to work together to improve care coordination, quality and cost efficiency.

Responding to these trends, an increasing number of hospitals and health systems are forming PAC preferred provider networks (PPNs). These networks are partnerships between hospitals and PAC providers that focus on facilitating smooth transitions between care settings, preventing unnecessary hospital readmissions, and optimizing health outcomes for patients. While some hospitals are looking to buy or build PAC services as part of their own network of services, more organizations are instead looking to align with PAC providers by creating PPNs.

The Benefits of PPNs

Both hospitals and PAC providers benefit from PPNs. Mutual benefits for hospitals and PAC providers include:

  • A care coordination and patient management infrastructure that is collaborative and seamlessly connects providers along the care continuum
  • Joint development of quality improvement initiatives and shared clinical pathways
  • Consistent patient transfer and clinical protocols and processes
  • Data integration and data sharing, allowing for a heightened focus on analytics and more targeted interventions
  • Competitive differentiation, an enhanced brand and stronger patient loyalty
  • Preparation for success in population health and value-based payment initiatives

PPNs also provide important benefits specific to hospitals, including:

  • Immediate and consistent access to high-quality PAC services, placing patients in the optimal levels of care, regardless of payer type
  • Reductions in readmissions and emergency department visits
  • Increased hospital throughput, a reduced average length of stay and a more efficient discharge process

Forming PAC PPNs

The formation of PAC PPNs is complex and requires a clear understanding of referral patterns to PAC providers, PAC financial and quality performance, PAC providers’ capacity and ability to serve patients from certain geographies, and varying levels of acuity. Network formation also requires identifying the hospital’s need for PAC services based on patient demographics, as well as its knowledge of associated legal and compliance risks. Thoughtful planning is essential to developing a robust network with an agreed-upon set of standard policies and procedures that optimize patient care.

Getting Started

There are four initial steps that hospitals should take in evaluating the strategic benefits of forming a PPN:

1. Document organizational objectives for PAC. Establish a small team of stakeholders to document the organization’s objectives for working with a group of partners to manage the PAC population.

2. Conduct a PAC population assessment. Develop a data-driven assessment, including an analysis of all discharges to the PAC setting.

3. Perform a discharge/care-transitions assessment. Conduct a thorough and candid self-assessment of discharge planning and transition-of-care processes to understand major issues and areas for improvement.

4. Evaluate potential partners and begin initial discussions. Assess the performance and capabilities of local PAC providers and their potential inclusion in the PPN. Develop an evaluation framework and criteria for selecting high-quality partners. Once the short list is created, hold work sessions to understand and document potential partners’ objectives for joining the PPN.

Beyond these initial steps, hospitals must define the terms of PPN participation (i.e., terms related to discharge planning, patient choice, information sharing, care coordination and follow-up, and clinical support). Hospitals also must assess the legal and regulatory implications of developing PPNs; develop quality scorecards for measuring, reporting and benchmarking outcomes regarding utilization, clinical outcomes, patient experience and other performance metrics; and implement continuous process improvements.


PAC providers play a critical role in ensuring patients receive the care they need to recover after a hospital discharge, as well as helping to minimize readmissions and emergency department visits. Integrating PAC providers into care delivery models can deliver powerful benefits, including improved care, lower costs and more appropriate service utilization.

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Texas Medical Board Immune From Antitrust Suit

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

In 2015, the Supreme Court injected great uncertainty into the operation of state medical boards with its ruling in North Carolina Board of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015), that when a state board is controlled by active market participants, that entity must be actively supervised to enjoy state action immunity. Later that year, the Supreme Court’s decision was applied to deprive the Texas Medical Board (TMB) of state action immunity in Teladoc, Inc. v. Texas Medical Board, No. 1-15-CV-343 RP (W.D. Tex. Dec. 14, 2015).

A recent decision about the TMB from the Western District of Texas provides new insights into the scope of sovereign immunity and state action protection from the antitrust laws. In granting the TMB’s motion to dismiss a physician’s antitrust claims, the court held that the TMB is a state agency entitled to sovereign immunity under the Eleventh Amendment and any gap left by that immunity was covered by the state action doctrine. (Allibone v. Texas Medical Board, 17-cv-00064 (W.D. Tex. Oct. 20, 2017)) This case provides a road map for understanding the interplay between sovereign and state action immunity when applied to state boards. Compared with the Teladoc decision, the case also highlights that state action immunity may apply to some actions taken by a state board, but not others.


Dr. George Allibone filed suit against the TMB and its individual board members on January 30, 2017, after they initiated formal disciplinary proceedings against him following complaints from former patients and a former employee. The complaint sought an injunction, declaratory judgment and damages. According to Dr. Allibone, the defendants conspired to benefit conventional allopathic physicians at the expense of physicians who, like him, offer complementary and alternative medicine. Dr. Allibone alleged that the defendants used illegitimate complaints to threaten and recommend disciplinary proceedings against him, as well as improperly selected conventional physicians to review the complaints. As a result, the plaintiff argued that these actions not only damaged his practice but also limited consumer choice by restricting access to complementary and alternative medicine services in Texas. In response, the defendants argued that, as a state agency and state officials, they were immune from being sued, and the court agreed.

The Court’s Opinion

Relying on Fifth Circuit precedent, Judge Sam Sparks held that the TMB is a state agency entitled to sovereign immunity under the Eleventh Amendment. Because the individual board members were sued in their official capacity, the suit against them is also construed as against the state. Sovereign immunity, however, does not extend to claims for prospective, declaratory or injunctive relief. Despite that finding, Judge Sparks found that any immunity gap left by the Eleventh Amendment is covered by state action immunity.

Under the Supreme Court’s decision in Parker v. Brown, 317 U.S. 341 (1943), the party seeking immunity must demonstrate that (1) the challenged collaboration was undertaken pursuant to a “clearly articulated” affirmative state policy to supplant competition with regulation and (2) the state actively supervises the implementation of its policy. Judge Sparks found that the board members satisfied both requirements because their actions in investigating complaints were within a clearly articulated and affirmatively expressed state policy, which described part of the TMB’s purpose as disciplining physicians and other medical professionals. Next, Judge Sparks found that because the disciplinary proceedings are conducted before an independent administrative law judge, subject to judicial review, and required to comply with requirements set by the Texas Legislature, the state retained active supervision, and those protections promoted state policy rather than individual interests.


As we previously reported, back in 2015, the Supreme Court decided North Carolina Board of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015), holding that when a non-sovereign entity, such as a state board, is controlled by active market participants, that entity must be actively supervised to enjoy state action immunity. Following that decision and its limited guidance on what constitutes “active supervision,” the FTC issued guidance and suits against state licensing boards increased. In one case, Teladoc, Inc. v. Texas Medical Board, No. 1-15-CV-343 RP (W.D. Tex. Dec. 14, 2015), the TMB was sued for allegedly violating the antitrust laws by introducing a rule that effectively limited telemedicine. The TMB argued that it was entitled to state action immunity, but the court disagreed, finding that the board was not actively supervised because the avenues for review simply reflected the presence of some state involvement and monitoring. (Click here for a more detailed discussion of this case.)

In light of the contrast between the Teladoc and Allibone cases, state boards should be mindful that their conduct may not be insulated from judicial scrutiny and should consult with antitrust counsel where they are uncertain of how their actions may be perceived.

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The Legality of Cost-Sharing Reduction Payments Under the ACA

By John M. LeBlanc, Partner, Healthcare Litigation | Andrew H. Struve, Partner, Healthcare Litigation | Michael Godino, Associate, Litigation

Health insurers may have experienced uncertainty in 2017 when they were setting 2018 rates for individual plans sold on federal and state exchanges pursuant to the Affordable Care Act (ACA). One reason may have been the status of Cost-Sharing Reduction (CSR) payments to health insurers. CSR payments are intended to compensate health insurers for offering plans to lower-income individuals who require reduced “cost-sharing” payments in the form of copayments, deductibles and coinsurance. The federal government estimates in advance the amount of the subsidy to which each individual is entitled, and makes a CSR payment for that amount to the individual’s insurance company.1 People whose income is between 100% and 250% of the federal poverty level can buy plans with reduced cost-sharing.

The ACA requires insurers to offer plans with CSR payments. Significant legal controversy has arisen, however, over whether the ACA actually appropriated money for CSR payments. If it did not, then the payments cannot be made unless Congress authorizes them on an annual basis—something that has not yet occurred, and that is unlikely to happen while Republicans control both houses of Congress.

The legal question around CSRs has been addressed by judges from two different federal district courts in two different circuits. The most recent decision—which is the focus of this article—was issued by Judge Vince Chhabria of the U.S. District Court, Northern District of California (the court), in State of California v. Trump, Case No. 17-cv-05895-VC.

The court found that while both sides have reasonable arguments, at the present stage it appears the Trump administration has the stronger legal position—that the ACA did not appropriate funds for CSR payments, and that as a result, it would be unconstitutional for the administration to make those payments absent further action from Congress. The court also found that due to many states’ actions in anticipation of the end of CSR payments, most lower-income individuals will not see their effective premiums increase in the absence of those payments, at least in the short term. The court denied the motion for preliminary injunction, and expects to reach a final decision in the case by early 2018.

Brief History of Litigation Over CSR Payments

As the court notes in its opinion, in 2013, the Obama administration concluded that the ACA could be interpreted as making a permanent appropriation for CSR payments. Therefore, beginning in 2014, the administration began drawing money from the U.S. Treasury to make CSR payments on a monthly basis. The House of Representatives disagreed with the administration’s interpretation of the ACA, and filed a federal lawsuit against the administration in Washington, D.C.

In May 2016, U.S. District Judge Rosemary Collyer ruled in favor of the House of Representatives, concluding that the ACA did not include a permanent appropriation for the federal government to make CSR payments. As a result, the administration could not continue making CSR payments absent annual appropriations from Congress or an amendment to the ACA providing for a permanent appropriation. See U.S. House of Representatives v. Burwell, 185 F. Supp. 3d 165, 168 (D.D.C. 2016). Judge Collyer stayed her ruling while the Obama administration pursued an appeal in the D.C. Circuit. Shortly after President Trump was elected, however, the House of Representatives moved to stay the appeal, explaining that it believed the incoming Trump administration might reconsider the executive branch’s legal position. The D.C. Circuit granted the motion in December 2016 and stayed the case. See Order Granting Motion to Hold in Abeyance, U.S. House of Representatives v. Burwell, No. 16-5202 (D.C. Cir. Dec. 5, 2016). In the spring of 2017, the states intervened in the D.C. Circuit appeal, but the stay remained in place.

On October 11 and 12, 2017, the Trump administration, including the U.S. Attorney General, expressed its view that the ACA had not made a permanent appropriation for CSR payments, and informed the D.C. Circuit of its decision. On October 13, the state of California, along with 17 other states (many of which had intervened in the D.C. Circuit appeal) and the District of Columbia, brought a separate suit against the Trump administration in the U.S. District Court, Northern District of California. The case was assigned to Judge Chhabria. The plaintiffs sought a temporary restraining order that would force the administration to make CSR payments while the case was pending, which was then converted into a motion for preliminary injunction.

The Court Denies Plaintiffs’ Motion for a Preliminary Injunction

In its October 25, 2017, order, the court first addressed whether it was proper for the plaintiffs to sue in the Northern District of California, while a separate appeal was pending before the D.C. Circuit. The court held that it was proper, for several reasons. The court cited the emergency nature of the states’ requested relief—resulting from the administrative costs caused by the disruption to state exchanges once the federal government stopped making CSR payments—and noted it was unclear how quickly the plaintiffs’ request for relief would be heard in the D.C. Circuit since the appeal had been stayed. The court also questioned whether the House of Representatives had standing to bring suit, and consequently whether the D.C. Circuit had jurisdiction over the appeal.

The States’ Likelihood of Success on the Merits

The court then turned to the first element of the preliminary injunction analysis, which considered whether the plaintiffs are likely to succeed on the merits. While the court found that both sides had reasonable arguments, it held that it initially appeared the Trump administration “has the stronger legal position.” (State of Cal. v. Trump, No. 17-cv-05895-VC (N.D. Cal. Oct. 25, 2017), at p. 11.)

In analyzing whether Congress appropriated funds for CSR payments, the court compared the ACA’s provisions on CSR payments to its provisions on a related subsidy for low-income individuals—the premium tax credit. Premium tax credits help offset the cost of monthly insurance premiums. As with CSR payments, premium tax credits are estimated and paid in advance to insurance companies so they can reduce individuals’ premiums by a corresponding amount.2

The court found that the ACA contains clear language making a permanent appropriation for the premium tax credits. Section 1401 of the ACA, which authorizes the credits, is codified in the Internal Revenue Code at 26 U.S.C. § 36B. It provides that lower-income people buying insurance on the exchange “shall” receive the credit. The appropriation for the credits (which is distinct from the authorization) is located in a different statutory provision, 31 U.S.C. § 1324, titled “refund of internal revenue collections.” Subsection 1324(a) makes a permanent appropriation for tax refunds, stating that “[n]ecessary amounts are appropriated to the Secretary of the Treasury for refunding internal revenue collections as provided by law.” Then, subsection 1324(b) provides that appropriations may be made under the section for certain refunds, one of which is “refunds due from” Section 36B of the Internal Revenue Code. “Therefore,” as the court explained, “section 1324 clearly contains a permanent appropriation for the premium tax credit codified at 26 U.S.C. § 36B.” (Id. at p. 12.)

The court noted that “[t]his clarity is in contrast to the language in the Act involving cost-sharing reductions.” (Id.) Section 1402 of the ACA creates the CSR program. But unlike the premium tax credits, the CSR program is not codified in Section 36B of the Internal Revenue Code. Instead, it’s codified in the Public Health and Welfare Code, at 42 U.S.C. § 18071. While that section authorizes CSR payments by stating that the federal government “shall” make them, the court explained that there is no explicit language appropriating funds for the payments. Moreover, the Act did not add Section 18071 to the permanent appropriations statute (31 U.S.C. § 1324), as it did with Section 36B. “Nor does the Act appear to have included any other explicit language making a permanent appropriation for the CSR payments to insurers. This may suggest that Congress needed to make annual appropriations before the executive branch could make the CSR payments ….” (Id.)

One of the plaintiffs’ primary arguments was that 31 U.S.C. § 1324 impliedly includes a permanent appropriation for the CSR payments in 42 U.S.C. § 18071. The argument entailed four steps: “(i) 31 U.S.C. § 1324 appropriates money for ‘refunds due from’ 26 U.S.C. § 36B; (ii) the cost-sharing reductions from 42 U.S.C. § 18071 are closely coordinated with the premium tax credits throughout the statute; (iii) a person cannot receive the cost-sharing reductions unless he or she also gets the tax credits,” as provided by the ACA, “and therefore (iv) the cost-sharing reductions from 42 U.S.C. § 18071 should be considered ‘refunds due from’ section 36B within the meaning of section 1324.” (Id. at p. 13.)

In response, the court acknowledged that “the absence of a permanent appropriation for these [CSR] payments may be in significant tension with congressional purpose.” (Id. at p. 14.) Among other things, the premium tax credits and the CSR payments work together in forming a central pillar of the ACA. The tax credits allow lower-income people to buy health coverage, and the CSR payments allow people to actually use this coverage. Given this, it is not clear why Congress would have intended more certainty for one type of expenditure than the other.

The court found, however, that the plaintiffs’ “implied appropriation” argument effectively seeks to resolve an ambiguity in the ACA’s language where none appears to exist. As the Supreme Court held in King v. Burwell, 135 S. Ct. 2480 (2015), language that is unambiguous in isolation can become ambiguous upon reading other parts of a statute. (Id. at 2492.) But that is not true of these provisions of the ACA. The ACA treats provisions related to premium tax credits and CSR payments distinctly, often reciting not just the program names but also their respective statutory provisions, “suggest[ing] that Congress was cognizant of the different way in which each reform fit into the statutory scheme.” (Id. at p. 16.) As a result, the Act is not ambiguous even when read in context. The court concluded: “On the merits, it’s a close and complicated question, even if the Administration may seem to have the better argument at this stage.” (Id. at 19.)

The Remaining Three Elements Necessary for a Preliminary Injunction

The court then analyzed the remaining three elements necessary for a preliminary injunction together—irreparable harm to the plaintiffs, the balance of hardships and the public interest. (See id. at p. 19.) The court focused on how people would be affected for “a few months” in 2017 and early 2018, when the court anticipates reaching a final decision in the case. Somewhat counterintuitively, the court found that because of measures taken by many states in anticipation of the Trump administration’s decision to terminate CSR payments, “the large majority of people who purchase insurance on exchanges throughout the country will either benefit or be unharmed.” (Id. at p. 20.)

Those states’ approaches are tied to two aspects of the ACA’s structure, both of which relate to one of the four basic levels of health plans available on the exchanges: silver (the others being platinum, gold and bronze). First, the amount of the premium tax credit is calculated based on the cost of the second-cheapest silver plan available on the exchange in a particular geographic area and then is adjusted based on an individual’s income. Therefore, if premiums for the second-cheapest silver plan in an area increase, the amount of the tax credit for individuals in that area will increase by a corresponding amount. Second, the ACA only requires insurers to offer CSRs for silver plans.

Based on those two factors, many states’ solutions have been to allow insurers to make up for the loss of CSR payments through premium increases for silver plans only. In other words, the states have allowed a relatively large premium increase for silver plans, but no increase for platinum, gold or bronze plans. Therefore, the available premium tax credits in those states rise substantially for qualifying individuals. Because the amounts of the credits for all plans are tied to the second-cheapest silver plan, the available credits rise for all plans, not just silver ones. As a result, the court calculated that for lower-income people, the elimination of CSR payments will not increase premiums for the silver plans, once the available premium credits are factored into the equation.

Moreover, eliminating CSR payments will actually cause effective premiums to decrease in non-silver plans. Additionally, individuals who do not qualify for subsidies and who purchase platinum, gold or bronze plans should not see their premiums affected. Finally, some states have developed comparable off-exchange plans, where monthly premiums for off-exchange silver plans would not increase. As a result of the states’ changes, the three remaining elements in the court’s analysis did not weigh in favor of a preliminary injunction.


Because the court found that the elements necessary for a preliminary injunction were not met, it denied the plaintiffs’ motion. As noted above, the court anticipates reaching a final decision in the case by early 2018 and has scheduled a case management conference for November 21, 2017. Currently, it appears the plaintiffs will need to craft a more compelling argument in order to prevail.

1If, after the year is over, the individual used less money from the subsidy than the federal government gave to the insurer, the insurer must return the excess amount to the federal government.
2Any discrepancies at the end of the year are reconciled through the individuals’ tax returns.

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The Tipping Point in Digital Health

By Jared Augenstein, Senior Manager, Manatt Health

Editor’s Note: Below are some key takeaways from the recent Rock Health Summit, a digital health conference bringing together more than 650 thought leaders from technology, venture, policy, research and medicine to focus on tackling healthcare’s most challenging problems.


We Are at an Inflection Point in Digital Health

The digital health space is evolving from one of limitless opportunity but narrow scale to one of increasingly measurable impact. We are on the downward slope of the “peak of inflated expectations” and moving into a period where high-value solutions with scalable business models will emerge. Technology-enabled health services companies, such as Omada and Virta, are generating meaningful clinical evidence while successfully growing their user base. Digital-first health plans, such as Oscar and Clover, are moving past their first few years of rate uncertainty and effectively managing their medical loss ratios while expanding into new markets. The life sciences industry is being disrupted by the impact of low-cost genetic testing and the vast troves of data collected by companies like 23andMe and Helix.

The “People-Process-Technology” Triumvirate Is Woefully Out of Balance

The industry has begun to recognize that the “people-process-technology” triumvirate is out of balance. We are moving away from technology-driven solutions to fundamental people and process redesign, enabled by technology. Former Centers for Medicare & Medicaid Services (CMS) Administrator Andy Slavitt noted, “Airbnb doesn’t call itself a tech company. It just uses technology to get stuff done.”


Successful digital health companies, providers and life sciences firms have recognized that focusing on people and processes is at least as important as—if not even more important than—focusing on the technology. User testing is critical. It is also hard to overstate the importance of engaging front-line workers and clinicians in devising useful solutions. Companies that own the “full stack” from a product experience perspective will realize the greatest market success.

Openness and Flexibility Are Critical for Health Systems

Health systems operate as closed environments with respect to technology—and for good reason. Becoming a digital health leader, however, will require a culture shift toward openness and flexibility. Nontraditional healthcare players can solve very real healthcare problems. For example, many health systems now use Lyft or Uber to arrange for patient transportation, both increasing convenience for patients and reducing costs for health systems that previously ran their own transportation programs or paid higher rates.

New digital health companies, unencumbered by legacy IT systems and prohibitively expensive cost structures, can deliver high-value healthcare services, such as diabetes or asthma management, at more cost-effective prices. They are also far more scalable. Digital health leaders will need to be skilled at testing a multitude of potential partnerships and then having the focus to choose the two or three most promising partners or vendors.

Artificial Intelligence in Healthcare: Can’t Live With It, Can’t Live Without It—but How Do We Organize?

A survey of Summit attendees revealed that respondents rated artificial intelligence (AI) as both the most overhyped and the highest-potential technology in digital health. One speaker noted, “It’s tough to distinguish between which companies are actually doing AI and which have an Excel spreadsheet.”

Many health systems are behind the curve on AI and will need to expand their internal capabilities dramatically in the future. AI, machine learning and deep learning techniques will play a crucial role as health systems transition from completing and optimizing their electronic health record installations to meaningfully capturing value from the mass amounts and types of data they collect. Since talent is scarce, AI experts are commanding mid-six-figure salaries. To bring the greatest value to the full system, AI will need to remain centralized in the short term in nearly all organizations.

The Value-Creation Curve in Healthcare Is Non-Exponential

Despite the ambitious growth curves littering digital health pitch decks, there is a new acceptance that, unlike in consumer technology, the value-creation curve in healthcare is more linear than exponential. Most healthcare interactions are subject to the principal-agent problem. For the most part, clinicians are making decisions on behalf of (or at least significantly influencing) their patients. This principal-agent approach makes typically scalable direct-to-consumer models particularly challenging. In addition, there are few network effects in digital health. The value that patients realize typically accrues directly from the product itself—not from an increasingly large user base, as is the case with many other digital technologies.

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