Top Ten Health Law Stories Of 2012 - Healthcare

As another year draws to a close, the Patient Protection and Affordable Care Act (the "Affordable Care Act" or "ACA") and its impact have remained in the forefront of top health law topics, not only in the courts, but in the federal and state legislatures, the court of public opinion, and the recently-ended local, state and national elections. Health care reform, or "Obamacare", wasn't the only health law story of 2012, however. A broad range of issues in a broad range of subject areas claimed the spotlight at various times during the year, including FCPA and False Claims enforcement efforts, federal scrutiny of hospital merger activity, compounding pharmacy safety and oversight issues, off label drug use restrictions, and healthcare payment reform. This Top Ten summarizes ten of 2012's most important health law developments.

1. States Hesitate, Then Scramble to Implement Various Forms of Insurance Exchanges in the Wake of the Supreme Court Ruling on the ACA

At first, some states said that they were waiting to see whether the ACA survived the Supreme Court challenge posed in National Federation of Independent Business v. Sebelius ("NFIB v. Sebelius"). Then they said they were waiting to see if it survived the 2012 elections. Well, now there is no more waiting. ACA and its "insurance exchanges" ("Exchanges") are here to stay and the states that were waiting for ACA to fail, have generally now either deferred to the federal government or are scrambling to decide by the new December 14, 2012 deadline whether or not they will be operating their own insurance exchanges. As of November 29, 2012, 17 states and the District of Columbia chose to operate State-Based Exchanges, 6 states indicated that they are planning for State-Federal Partnership Exchanges, 17 states had opted to utilize the Federally Facilitated Exchange, and 10 states remained undecided.

While recently published proposed federal regulations addressed many of the issues swirling around the implementation of Exchanges, many practical and marketplace questions remain unanswered. 2013 will see significant discussion regarding the pros and cons of the various types of Exchanges (State-Based, State-Federal Partnership, and Federally Facilitated), the reaction of employer groups to the costs and benefits of directing their employees to the Exchanges, and the technological and backroom functionality that both Exchanges and participating health plans will have to develop in order to ensure a smooth Exchange enrollment process. And while January 1, 2014 is the date that is associated with the start of the Exchanges, open enrollment in the Exchanges is actually slated to begin on October 1, 2013. In-house counsel should anticipate a somewhat frantic next 9 months as the states and the federal government figure out how to move forward.

2. States Respond to Medicaid Expansion Option Under the ACA

When the Supreme Court issued its opinion in NFIB v. Sebelius, it upheld the ACA's individual mandate but also ruled that the potential sanctions associated with the ACA's Medicaid expansion provisions were unconstitutionally coercive. The ACA's Medicaid expansion would extend Medicaid coverage to all individuals who meet citizenship or lawful alien status requirements and who have income under 133% of the Federal Poverty Level. One hundred percent of the cost of providing services to the newly eligible individuals from 2014 through 2016 is underwritten by the federal government pursuant to the ACA, though federal funding phases down to 90% in 2020 and thereafter.

The Court held that the federal Government could not withhold Medicaid funds for the operation of a state's existing Medicaid program to penalize that state's failure to implement the ACA's Medicaid expansion. In effect, the Supreme Court's decision granted states the choice whether to implement the ACA's Medicaid expansion program. As a result, the expansion of coverage contemplated by the ACA may vary depending on decisions made at the state level.

As of late November, 2012, approximately 15 states had indicated that they would not, or likely would not, implement the ACA's Medicaid expansion, primarily citing budgetary concerns, and approximately 18 states had either already implemented the Medicaid expansion or were preparing to do so on January 1, 2014. The remainder of the states are still deliberating. Some states have sought additional clarity from the Centers for Medicare and Medicaid Services ("CMS") regarding their ability to cover some, but not all, of the expansion population. Partial expansions may be pursued by states through the Medicaid waiver process, but federal funds will be provided at a state's normal Medicaid matching rate. In addition, CMS has informed states that there is no deadline for when they must decide whether to implement Medicaid expansion, and that states that begin the expansion can later drop out without penalty.

3. Massachusetts Enacts First in the Nation Comprehensive Payment Reform Law

Massachusetts' healthcare reform law was the model for ACA, and Massachusetts' version has been very successful in expanding access to healthcare within that state. Neither the Massachusetts, nor the federal, healthcare reform law took direct aim at cost containment, however, reflecting a choice to address issues of access first, and then issues of cost. On August 6, 2012, Massachusetts embarked on what is being called "Health Reform II", enacting Chapter 224 of the Acts of 2012, " An Act Improving the Quality of Health Care and Reducing Costs Through Increased Transparency, Efficiency, and Innovation" ("Chapter 224")—an act designed to constrain healthcare costs by looking directly at provider charges in the context of overall state economic strength and the state's ability to absorb cost increases.

As one of the first states to set healthcare spending goals in an ACA-like environment, Massachusetts will alter its healthcare landscape by changing existing state agencies, creating cost growth benchmarks, and increasing transparency through reporting requirements. Chapter 224 includes provisions that:

Establish an independent Health Policy Commission to set health care cost growth benchmarks, improve transparency, monitor accountable care organizations (ACOs), and review the impact of the changes to the Massachusetts healthcare system;
Set cost growth benchmarks for 2013-2017 equal to the potential gross state product (for 2013 growth is set at 3.6%; for 2018-2022 the growth is 0.5% less than the potential gross state product; and for after 2023 the growth is to be equal to the potential gross state product);
Establish a registration and certification process for ACOs;
Authorize the Attorney General to monitor the healthcare market, access information from insurers and providers, and investigate unfair competition practices;
Create a Health Planning Council to avoid placing burdens on providers which are not reasonably necessary to accomplish goals;
Create a Health Planning Council to avoid placing burdens on providers which are not reasonably necessary to accomplish goals;
Establish the Distressed Hospital Trust Fund, which will be funded in part by the interest on revenues and will make grants to certain non-profit community hospitals;
Create the Center for Health Information and Analysis, the state databank for healthcare information, which will be the central repository for data to monitor hospitals' financial conditions;
Create the Mass e-Health Institute, which will plan for all Massachusetts providers to have electronic health records systems and facilitate compliance with meaningful use standards; and
Create a Health Information Technology Council to implement a health information exchange.

The timeline for implementation of these changes began in 2012 and spans to 2017 and beyond.

4. 2012 Sees Significant Increase in False Claim Act Recoveries

In 2012, the federal government recovered $4.96 billion in False Claims Act (FCA) settlements. DOJ collected approximately $3 billion of that amount from health care fraud cases that settled or were tried through verdict in this calendar year alone. With this year's recovery, DOJ has collected $9.5 billion from health care fraud cases in the last four years -- the largest four-year total in the department's history. The 2012 amount is $1.7 billion more than the previous record, set in 2011.

The FCA has increasingly become the government's primary civil tool to combat health care fraud and abuse, and permits the government to recover on false or fraudulent claims submitted for payment. Most FCA actions are filed by whistleblowers, who are permitted by statute to receive up to 30% of any government recovery. In 2012, 647 FCA actions were filed by whistleblowers, netting the government $3.3 billion of its 2012 total. This is the second year in a row that DOJ has set a record for health care fraud recoveries under the FCA. Not surprisingly, DOJ touted its coordinated efforts -- including the Health Care Fraud Prevention and Enforcement Action Teams (HEAT) -- with helping to obtain significant awards. HEAT teams are comprised of state and local law enforcement agencies and attorneys who use data and cooperating witnesses to increase the number of civil and criminal suits against targets. Some of the single largest 2012 FCA recoveries involved the pharmaceutical and medical device industries, which netted the government nearly $2 billion in federal recoveries and $745 million to state Medicaid programs.

Given the increasing monetary recoveries and number of lawsuits filed by whistleblowers, in-house counsel in the healthcare industry should pay closer attention to their potential FCA liabilities.

5. Pfizer Settles Foreign Corrupt Practice Act Charges (August 2012)

Pfizer's settlement this summer with DOJ and the SEC, stemming from Foreign Corrupt Practices Act ("FCPA") violations in Bulgaria, China, Croatia, the Czech Republic, Italy, Kazahkstan, Russia, and Serbia, reflects continuing FCPA enforcement activity involving pharmaceutical and medical device companies. Because such firms deal regularly with physicians who are employed by foreign governments and thus often qualify as "foreign officials," the FCPA risks in the healthcare industry are omnipresent.

The Pfizer case also represents the latest in a series of enforcement actions based on successor liability; that is, against acquiring companies, based on the pre-acquisition conduct of their targets. The case contains helpful guidance for M&A transactions generally and for those who operate in the healthcare industry specifically. The Pfizer settlement's value for those participating in M&A transactions is the direction it offers to acquirers regarding pre-acquisition due diligence of their targets. Even more fundamentally, the settlement stresses the importance of conducting FCPA and anti-corruption due diligence before acquiring a target. Ignorance may be bliss in some circumstances, but it isn't a viable option in the eyes of federal regulators and prosecutors.

This settlement involved two separate Pfizer acquisitions: one of Pharmacia, and one of Wyeth. DOJ and the SEC held Pfizer liable for Pharmacia's (entirely pre-acquisition) conduct, but Pfizer was not held liable for Wyeth's (likewise, entirely pre-acquisition) conduct. The difference in liability was due to the fact that Pfizer conducted an extensive review of Wyeth's corrupt practices and made substantial efforts to integrate Wyeth into Pfizer's system of internal controls and its FCPA compliance program.

Pfizer's deferred-prosecution agreement ("DPA") describes in substantial detail the nature of those controls (in several addenda that are well worth the time to read), and has value for all those who operate globally in the healthcare industry. Pfizer's DPA represents an important update to the last significant settlement in the healthcare industry, with Johnson & Johnson in April 2011. Perhaps most important, federal regulators are more explicitly warming to the idea of a risk-based approach to due diligence, which Pfizer used in the form broad-based risk assessments, an approach that varied the time and resources devoted to unearthing potential FCPA violations based on the target and country. This approach recognizes the limited resources that companies have, and also recognizes that extensive due diligence might not always be appropriate, which should be welcome news to any corporate compliance department.

6. Heavy Activity in the Hospital Merger Area; Enforcement Record Improves for Agencies

This year saw the second chapters of several hospital merger challenge sagas originating in 2011, as well as new battles between hospitals and state and federal antitrust enforcers. 2012 did not match 2011's frenetic and record-setting levels of hospital merger activity, but hospitals continue to try to find ways to merge or affiliate in the face of health care reform, a phenomenon that is being carefully watched and policed by antitrust watchdogs. Several notable merger challenges are described below:

Rather than face opposition from the FTC and the Pennsylvania Attorney General, non-profit Reading Health System abandoned its plan to acquire the for-profit Surgical Institute of Reading in November 2012. In its administrative complaint, the FTC quoted from internal documents in which the parties described each other as being head-to-head competitors on the basis of both price and quality. The FTC cited four narrow markets in which the merged entity would have between 49 and 71 percent market share, allegedly reducing price and quality competition. Alleging that the merger would reduce competition in most of those markets from three competitors to two-- a reduction that the FTC is often hesitant to allow-- the FTC forecast that post-merger prices would rise with the increased bargaining leverage of the merged entity, that efficiencies were unlikely to be created by the deal, and that quality and patient satisfaction would decrease.

In the spring of 2012, the FTC successfully blocked the consummation of a 2010 acquisition of St. Lukes Hospital by ProMedica Health System, finding that the transaction would substantially lessen competition in the Toledo, Ohio area. The hospitals had argued that the merger would help prepare the entities for health reform by advancing collaboration for the sake of capturing cost savings, allowing a struggling St. Luke's to continue in the face of a possible failure. The FTC identified narrow relevant markets, including one relevant market limited to general acute care inpatient services and a separate relevant market for inpatient obstetrical services, highlighting a potential trend toward narrow definition of relevant markets. The decision also reflects a continuing skepticism of the "failing firm" defense. The district court decision in favor of the FTC is currently on appeal to the Sixth Circuit.

Also in the spring of 2012, the FTC successfully blocked OSF Healthcare System and Rockford Health System from merging. The parties abandoned the transaction shortly after the agency challenge was announced. This Rockford, IL merger would have reduced competitors in the market for general acute care services sold to commercial health plans from three to two. The court rejected the argument that the presence of the remaining non-merged hospital in the market would preserve competition. The court also rejected a stipulation proposed by the parties to refrain from anticompetitive contracting practices, noting that it did not "specifically preclude price increases" and other harmful conduct. The decision is notable as a reminder that although savings through consolidation may seem compelling to providers urgently looking to cut costs, the FTC remains skeptical of efficiencies arguments.

In November 2012, the U.S. Supreme Court heard arguments on appeal from the Eleventh Circuit Court of Appeals' decision in FTC v. Phoebe Putney Health Systems, Inc. That decision affirmed a lower court ruling that an alleged two-to-one hospital merger in Georgia was immune from FTC challenge under the state action doctrine. Specifically, the FTC sought Supreme Court review of the appellate court's decision that immunity applies to anticompetitive actions of municipalities and other political subdivisions when the state generally authorizes the challenged action via legislation and when anti-competitive conduct is a foreseeable result of the legislation. In addition to being significant to any hospital that might benefit from application of the state action doctrine in a merger transaction, the case also demonstrates that the FTC continues to dedicate significant resources to hospital merger enforcement and to continuing its streak of recent successes in this area.

7. Pharmacy Compounding Takes Center Stage Following Meningitis Outbreak

A widespread fungal meningitis outbreak traced to contaminated steroids produced by the New England Compounding Center ("NECC") in Framingham, Massachusetts has triggered an outcry for more federal regulations on compounding and additional FDA oversight over these matters. The outbreak, which has reportedly been linked to hundreds of injuries and dozens of deaths, has led to criticism that FDA's oversight of the NECC facility was insufficient. Reports indicate that in the past, FDA considered the business activities of the NECC to not constitute manufacturing operations meriting current federal good manufacturing practice safety standards, and thus, oversight of the NECC was largely relegated to the standards of the state pharmacy board.

Precisely where to draw the line between drug compounding (within the scope of the traditional practice of pharmacy) and drug manufacturing has emerged as a central question in this debate. In light of the lack of federal oversight of the NECC facility, there have been calls for additional federal regulations requiring compounding pharmacies distributing sizeable quantities of preparations, and those operating interstate, to be registered with FDA and subject to periodic inspections. However, these efforts may be constrained by the lack of clear cut FDA authority to enforce in the area of compounding, as the practice of pharmacy (which generally includes compounding) is traditionally regulated by the states.

While some lawmakers have asserted that FDA should generally regulate compounding pharmacies that ship products interstate, FDA Commissioner Dr. Margaret Hamburg has proposed that traditional compounding remain under the jurisdiction of the states, while federal standards address high risk products involved in non-traditional compounding. Hamburg has further proposed a requirement that compounding pharmacies register with FDA, which would appear to facilitate FDA's coordination with state authorities when appropriate. As FDA seeks to clarify its role in the oversight of compounding pharmacies, members of the pharmaceutical industry are likely to watch FDA's next steps closely.

8. FDA Looks to Regulate the Marketing and Sale of Medical Mobile Apps

With the rapid expansion of mobile application software ("mobile apps") used for smartphones and other handheld consumer devices, the Food and Drug Administration ("FDA") has taken more assertive steps to support its jurisdiction to regulate the marketing and sale of such products. In fact, the FDA has been clear that it may regulate certain mobile apps and accessories as medical devices.

Mobile apps may be considered medical devices subject to FDA enforcement because the Federal Food, Drug, and Cosmetic Act ("the Act") creates a relatively broad umbrella for medical devices. Section 201(h) of the Act defines a medical device as including:

. . . an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is . . . [either] intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals . . . [or] intended to affect the structure or any function of the body of man or other animals . . .

In July 2011, the FDA issued a non-binding draft guidance on mobile medical applications. In the draft guidance, the FDA stated that a "mobile medical app" meets the definition of "device" under Section 201(h) of the Act if it either: is used as an accessory to a regulated medical device; or transforms a mobile platform into a regulated medical device.

The increasing introduction and visibility of mobile medical apps has engendered Congressional involvement, notably, there have been recent congressional plans to introduce legislation creating an FDA Office of Mobile Health to provide recommendations on mobile health app issues. Consistent with these efforts, the FDA recently announced that final guidance regarding mobile medical apps will be published by the end of the year. As the FDA finalizes its stance on the regulation of mobile apps, it is essential for mobile app developers to monitor these next regulatory steps.

9. Feds Release the Stage 2 Electronic Health Records Meaningful Use Regulations While also Increasing Scrutiny of Fraud and Abuse Issues Involving EHRs

On September 4, 2012, CMS published final regulations establishing the Stage 2 meaningful use criteria for the Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs. The EHR Incentive Programs, which were authorized under the American Recovery and Reinvestment Act of 2009, have made over $4.4 billion in Medicare payments and $3.7 billion in Medicaid payments to hospitals and health care professionals to date. Among other things, the Stage 2 regulations:

Establish the criteria necessary to satisfy Stage 2 meaningful use;
Delay the onset of the Stage 2 meaningful use criteria;
Amend certain of the Stage 1 meaningful use criteria;
Provide group practices with additional flexibility when reporting meaningful use objectives and clinical quality measures;
Provide additional guidance regarding the timing of Medicare payment penalties for health care professionals and hospitals who do not become meaningful users of EHR; and
Expand eligibility for the Medicaid EHR Incentive Program.

On the heels of the release of the Stage 2 regulations, federal regulators also indicated increased interest in fraud and abuse issues involving EHRs. On September 24, 2012, the Department of Health & Human Services and the Department of Justice sent a letter to several hospital trade associations emphasizing the need for accurate medical records documentation and coding when using EHRs (and the risks of failing to do so). In addition, the Office of Inspector General ("OIG") signaled its concerns regarding potential fraud and abuse related to EHRs by

Stating in its 2013 Work Plan that it would review EHR documentation practices associated with potentially improper payments;
Releasing a report in November 2012 in which it recommended that CMS conduct prepayment reviews of the supporting documentation used by professionals and hospitals to attest to meaningful use (CMS did not concur with the recommendation); and
Issuing an EHR questionnaire to hospitals who have received EHR incentive payments regarding fraud and abuse safeguards in their EHR systems.

So, while the government continues to make payments through the EHR Incentive Programs to encourage health care professionals and hospitals to adopt EHRs, it is also increasing its scrutiny of fraud and abuse issues involving EHRs.

10. Recent Decision Could Impact Federal Prosecutions of Off-Label Promotion Activity

A major enforcement focus of the Department of Justice ("DOJ") and the Food & Drug Administration ("FDA") over the past several years has been the promotion of drugs for off-label uses. The federal government has interpreted the misbranding provisions of the federal Food Drug and Cosmetic Act ("FDCA") to prohibit and criminalize the promotion by manufacturers (and their representatives) of drugs and medical devices for uses not approved by the FDA (although the FDCA does not prohibit physicians from prescribing drugs or devices for off-label uses). In a recent press release, while highlighting record recoveries of $4.9 billion in civil fraud cases in 2012, DOJ acknowledged that cases against pharmaceutical and device manufacturers were the source of some of the largest recoveries. In particular, the DOJ press release highlighted recent settlements with GlaxoSmithKline and Merck related to off-label promotion. GSK paid $1.5 billion in federal civil recoveries and $3 billion over all (including criminal restitution and fines, and state Medicaid recoveries) to settle allegations related to the promotion of Paxil, Wellbutrin, Advair, Lamictal, and Zofran for uses not approved by the FDA. In another FY 2012 settlement, Merck agreed to pay $441 million to resolve federal civil allegations ($963 million overall) related to the off-label promotion of Vioxx. A third case, against Abbott Laboratories, will be resolved for $561 million in civil settlement payments ($1.5 billion overall) related to the off-label promotion of Depakote.

A recent decision from the Second Circuit, however, could change all this. On December 3, 2012, the Second Circuit, in a divided 2-1 panel, threw out the conviction of a pharmaceutical sales representative related to off-label promotion on the grounds that the conviction infringed the representative's First Amendment free speech rights. The representative, Alfred Caronia, was convicted in 2009 of a misdemeanor for conspiracy to introduce a misbranded drug into interstate commerce. Caronia was employed by Orphan Medical, Inc., now known as Jazz Pharmaceutical. The off-label promotion related to Xyrem, a narcolepsy drug manufactured by Orphan that was being promoted for fatigue, insomnia, chronic pain, weight loss, depression, and bipolar disorder. Jazz had settled allegations in 2007 related to the off-label promotion of Xyrem, paying $20 million for a global criminal and civil resolution and entering into a corporate integrity agreement with the Office of Inspector General for the Department of Health and Human Services. Orphan plead guilty to criminal misbranding as part of the global resolution. In its decision, the Second Circuit concluded that the misbranding provisions of the FDCA do not prohibit or criminalize the truthful off-label promotion of FDA-approved prescription drugs. The court was careful to caution that its decision does not prohibit the FDA from regulating the marketing of prescription drugs, just that the government cannot prosecute pharmaceutical manufacturers and pharmaceutical sales representatives under the FDCA for "speech promoting the lawful, off-label use of an FDA-approved drug."

DOJ is likely to seek reconsideration and/or an en banc hearing from the Second Circuit, and if unsuccessful it is likely to petition the Supreme Court for a writ of certiorari. This decision will be followed closely by the pharmaceutical industry and legal community as it continues to wend its way through the court system. In the intervening time, the effect on ongoing prosecutions (and the collateral consequences for global resolutions), will likely be significant.

Conclusion

The recent developments in the healthcare industry created by new legislation and its implementation, renewed enforcement efforts, and recent scandals will shape the role of in-house counsel in this industry for the foreseeable future. This Top Ten provides a brief overview of the important issues raised in 2012 and how they will affect the industry going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.