Transparency Requirements, Health Care Fraud and Abuse Law Changes, and Program Integrity Provisions Enacted as Part of Health Reform Legislation

I. Introduction

On March 30, 2010, President Obama made law of the final chapter of health care reform when he signed the reconciliation bill (H.R. 4872, the "Health Care and Education Affordability Reconciliation Act of 2010" or "Reconciliation Bill") passed by both houses of Congress on March 25, 2010, which amended the landmark health reform legislation, H.R. 3590 (the "Patient Protection and Affordable Care Act") signed by the President on March 23, 2010. Except for the postponement of two effective dates noted in Section III.A below, the Reconciliation Bill does not affect the provisions we discuss; accordingly the amended law will be referred to as "the Act." The Act enacts a number of provisions designed to enhance transparency and improve the integrity of federal health care programs, including several important changes in the health care fraud and abuse laws. Although the "physician payment sunshine" provisions requiring disclosures by manufacturers of drugs, devices, biologicals, and medical supplies are perhaps the most widely recognized new transparency requirements, the full array of fraud and abuse-related changes affect not only manufacturers, but hospitals, physicians, nursing homes, group purchasing organizations (GPOs), and a host of other providers.

This article summarizes the "physician payment sunshine provisions" and provides an overview of other notable transparency enhancements, fraud and abuse law changes, and program integrity provisions, with citations to the applicable sections in the Act. We address provisions on:

• Transparency and Disclosure of Financial Relationships
• Changes to the Stark Whole Hospital and Rural Provider Exceptions
• Creation of a Stark Self-Disclosure Mechanism
• Reduction of the Intent Standard for an Antikickback Law Violation
• Required Provider Reporting of Medicare Overpayments
• New Civil Monetary Penalties
• Other False Claims Act and Program Integrity Changes

II. Transparency and Disclosure Provisions

A. Physician Payment Transparency Provisions for Manufacturers of Drugs, Devices, Biologicals, and Medical Supplies (Section 6002)

As widely expected, federal "physician payment sunshine" provisions have become a reality as part of the comprehensive health reform legislation. Companies must prepare to track expenditures made in 2012 for the first disclosure, which is due March 31, 2013. As compared to the broad disclosure requirements contained in legislative proposals previously introduced by the House of Representatives, manufacturers likely will welcome the comparatively narrow disclosure requirements in the Act. However, weak state law preemption provisions will do little to allay concerns that manufacturers may be faced with myriad state-specific requirements in the coming years.

Applicability: The Act adds a new Section 1128G to the Social Security Act, which requires "any applicable manufacturer that provides a payment or other transfer of value to a covered recipient (or to an entity or individual at the request of or designated on behalf of a covered recipient)," annually to submit information to the Secretary regarding the value, nature, purpose, and recipient of the transfer of value. An "applicable manufacturer" is defined as an entity engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply for which payment is made under Medicare or Medicaid and Children's Health Insurance Program (CHIP) state plans (or waivers of such plans). While the Act's application to entities engaged in the "propagation" of a covered product creates some room for interpretation, unlike an earlier version of the legislation proposed by the House, "distributors" are not specifically covered. However, an entity under common ownership with an applicable manufacturer "which provides assistance or support to such entity" with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological, or medical supply is covered by the Act. This leaves open the question as to whether research or other affiliates of a covered entity may be subject to the disclosure requirements. Note that an "applicable manufacturer" covered by the Act is limited to a manufacturer "which is operating in the United States, or in a territory, possession, or commonwealth of the United States."

Effective Date: The first disclosure under Section 1128G will be due on March 31, 2013 for payments or other transfer of value made during calendar year 2012. Subsequent disclosures will be due on the 90th day of each subsequent calendar year.

Covered Recipients: Covered recipients are narrowly defined as "physicians" and "teaching hospitals."

Reporting: Manufacturers will have to report the name, address, National Provider Identifier (for physicians), amount of payment or other transfer of value, date(s) on which payment was provided to the covered recipient, a description of the form of the payment or other transfer of value (e.g., cash, in-kind items or services), and the nature of the payment or other transfer of value. In addition, if the payment or other transfer of value is related to marketing, education or research specific to a covered product, the name of that product must also be provided. Payments made to an entity on behalf of a covered recipient must be disclosed under the name of the covered recipient.

Payment or Other Transfer of Value: The disclosure of any "payment or other transfer of value" includes not only gifts and payments for meals, travel, honoraria, research, and certain consulting and educational payments, but also current or prospective ownership and investment interests, royalties and licenses, profit distributions, dividends, and option grants. The Act includes a provision, potentially applicable to some market research activities, that excepts from the definition of a "payment or other transfer of value" any payment made indirectly to a covered recipient through a third party in connection with an activity or service where the manufacturer is unaware of the identity of the covered recipient.

Exemptions: Certain payments or other transfer of value are exempt from the reporting requirements including:

• payments or transfers of $10 or less (unless the aggregate annual payments or transfers to a recipient exceed $100 (both amounts indexed for inflation beginning in 2012));
• educational materials that directly benefit patients or are intended for patient use;
• in-kind items for the provision of charity care;
• product samples;
• loans of a covered device for a short-term time evaluation, not to exceed 90 days;
• items or services covered under a contractual warranty;
• discounts (including rebates);
• dividends and other distributions from publicly traded securities and mutual funds; and
• transfers to physicians solely for services with respect to a civil or criminal action or an administrative proceeding.

In addition, manufacturers may delay reporting payments to covered recipients for services furnished pursuant to a product research or development agreement or in connection with a clinical investigation of a new drug, device, biological, or medical supply, or with a new application of an existing drug, device, biological, or medical supply. The delay extends the reporting deadline until the earlier of (1) the date of the approval or clearance of the covered drug, device, biological, or medical supply by the U.S. Food and Drug Administration (FDA), or (2) four calendar years after the date such payment or other transfer of value was made. Information subject to the delayed reporting would be considered confidential and not subject to disclosure under the Freedom of Information Act (FOIA) or any other state or federal law.

Penalties: Manufacturers that fail to comply with the reporting requirements in a timely manner are subject to penalties ranging from $1,000 to $10,000 for each unreported payment (not to exceed $150,000), and $10,000 to $100,000 for each knowing failure to report a payment (not to exceed $1,000,000). In addition to enforcement by federal authorities, state attorneys general would have the authority to enforce the reporting provisions.

Preemption: As noted above, the law preempts only duplicative state laws but would not preempt state laws that require reporting of information that is more robust. As a transparency and disclosure statute, the federal law also does not preempt provisions in state laws that may impose restrictions on the types of transfers of value that may be made by manufacturers, such as the "gift" limits and restrictions in the state laws in Minnesota, Vermont, and Massachusetts. The law also does not preempt provisions in state laws, such as those in California, Nevada, and Massachusetts, that require companies to adopt a code of conduct.

Public Availability: Information submitted to U.S. Department of Health and Human Services (HHS) will be made available through a searchable internet website.

B. Reporting of Payments Where there is Physician Ownership or Investment (Section 6002)

The Act takes a small step to address some of the inherent conflicts of interest that exist when referring physicians secure a revenue stream from the products they order for their own patients through ownership in manufacturers, as well as other medical device supply chain companies, such as GPOs. Where physicians have an ownership interest in an applicable manufacturer, described above, or in a GPO, the Act requires annual reporting of all transfers of value to that physician by such entity. In addition, the Act requires annual reporting of information regarding the dollar amount invested by each physician (or immediate family member) in the manufacturer or GPO and the value and terms of such ownership or investment interest (which would seem to require, among other things, that the report include the physicians' return on investment).

C. Prescription Drug Sample Transparency (Section 6004)

The Act establishes a new Section 1128H of the Social Security Act requiring manufacturers and authorized distributors of prescription drugs for which payment is available under Medicare or Medicaid or CHIP plans (or a waiver of such plans) to submit annual reports to the Secretary regarding the identity and quantity of drug samples requested and distributed under Section 503 of the Prescription Drug Marketing Act of 1987. For purposes of this provision, "authorized distributors" means those distributors with whom a manufacturer has established an ongoing relationship to distribute the manufacturer's products.

D. Pharmacy Benefit Managers Transparency (Section 6005)

Health benefit plans and Pharmacy Benefits Managers (PBMs) that contract with a Prescription Drug Plan (PDP) sponsor or a Medicare Advantage (MA) organization offering an MA-PD plan under Medicare Part D, or that contract with qualified health benefits plans also are required to disclose information to the Secretary regarding their activities. Among other things, these entities must report the percentage of drugs that are distributed through retail pharmacies versus mail order pharmacies; the generic dispensing rate by pharmacy type; the aggregate amount of rebates, discounts, or price concessions the PBM negotiates on behalf of the plan (excluding bona fide service fees) and the aggregate amount of such rebates, discounts, or price concessions that are passed through to the plan sponsor; the aggregate amount of the difference between the amount the plan pays the PBM and the amount the PBM pays the pharmacies; and the total number of prescriptions dispensed. PBMs face penalties and are subject to suspension of their agreements with PDPs and qualified health plans for failure to comply with these requirements or for knowingly providing false information.

E. Nursing Home Transparency (Title VI, Subtitle B)

Extensive transparency and program integrity provisions in the Act also are designed to address long-standing concerns about conflicts of interest, quality of care, and patient safety in long-term care facilities, such as skilled nursing facilities and nursing facilities. Among other requirements, the Act imposes robust transparency requirements, including with regard to ownership, organizational structure, direct care staffing, wages and benefits paid to direct care staff, and nursing facility closures. As with many transparency requirements included in the Act, much of the information subject to these disclosure requirements will be made available on public websites. Certain facilities also are subject to a number of other requirements — such as a requirement to implement a compliance and ethics program — and the Act creates programs within HHS to both enforce these requirements and to otherwise improve the quality and safety of these facilities for their residents. Finally, if these facilities self-report and promptly correct deficiencies for which civil monetary penalties were imposed, they may be entitled to a reduction of up to 50 percent of the applicable penalties provided they are not repeat deficiencies or result in a pattern of harm that jeopardizes residents' safety or health.

F. Disclosures Related to Referrals for Radiology Services (Section 6003)

The Act also addresses potential conflicts of interest in referrals for radiology services. For services furnished on or after January 1, 2010, physicians referring patients for radiology services under an in-office ancillary services exception to the physician self-referral ("Stark") law must inform patients in writing at the time of referral of the availability of other suppliers who may provide such services and furnish a written list of suppliers who provide the services in the area where the patient resides.

III. Provisions Regarding Self-Referrals

A. Restriction on Availability of Whole-Hospital and Rural Provider Exceptions to Stark Law (Section 6001, as amended by Section 10601; Section 1106 of Reconciliation Bill)

The Act amends the Stark law to prevent the formation of new physician-owned hospitals pursuant to the whole-hospital ownership exception. As amended, the exception requires that a hospital must have a Medicare provider agreement in place as of December 31, 2010. Additionally, a hospital must not have been converted from an ambulatory surgical center to a hospital after the date of enactment.

The Act permits existing physician-owned hospitals to continue to qualify for this exception but prohibits the hospital from increasing the percentage of its physician ownership interests above such percentage as of the date of enactment of the Act, significantly restricts the ability of those hospitals to expand, and imposes additional compliance and safety requirements, which the hospitals are required to satisfy no later than 18 months after the date of enactment.

The Act also requires each qualifying hospital to submit an annual report to the Secretary containing information concerning all owners of or investors in the hospital and the nature and extent of those ownership and investment interests. Hospitals also must have procedures in place requiring both the hospital and referring physician owners to disclose the physician ownership interests to patients and the general public.

As of December 31, 2010, an existing physician-owned hospital also is not permitted to increase the number of operating rooms, procedure rooms, or beds included in its license. Certain eligible hospitals may apply for a limited expansion of the hospital's main campus once every two years, with a total maximum increase of 100 percent. Finally, the amended whole hospital exception also contains provisions designed to ensure that the physicians have made a bona fide investment in the hospital. The Secretary is required to establish policies and procedures to ensure compliance with these requirements — which may include unannounced site reviews of hospitals — and must conduct audits to determine if hospitals violate these requirements.

The Act also amends the Stark law's rural provider exception as it applies to hospitals. In order to meet the exception, which applies to ownership interest in entities in rural areas, if the entity in the rural area is a hospital, the hospital is subject to the same restrictions the Act imposes on hospitals described above, including new reporting and disclosure requirements and limitations on expansion and additional investment by physicians.

B. Medicare Self-Referral Disclosure Protocol (Section 6409)

The Act addresses the problem of the absence of a realistic mechanism for settling "technical" or other non-fraud violations of the Stark law by requiring the Secretary, in cooperation with the Office of Inspector General (OIG), to establish a Medicare Self-Referral Disclosure Protocol (SRDP), by which healthcare providers and suppliers may disclose actual and potential violations of the Stark law. Importantly, the Act gives HHS the authority to compromise any amount due and owing for Stark law violations. In other words, HHS now has the discretion to forgo requiring a provider to repay the full amounts collected as the result of billing for services provided in connection with a prohibited referral. Among the factors that the Secretary may consider in determining the amount owed in connection with a violation are: (i) the nature and extent of the improper of illegal practice; (ii) the timeliness of a self-disclosure; and (iii) cooperation in providing additional information related to the disclosure.

This new self-disclosure process, and the Secretary's authority to adjudicate a resolution, including the amount of repayment, is particularly important in light of the OIG's announcement last year that it would no longer allow entities to self-disclose Stark law violations under the OIG's existing self-disclosure protocol unless there were other potential violations present as well, such as a "colorable" violation of the Antikickback Statute. Additionally, last year's Fraud Enforcement and Recovery Act (FERA) Amendments to the False Claims Act, which heightened the disclosure and repayment obligations for non-fraudulent receipt of an overpayment, made it essential for providers to have a clear and meaningful pathway for accomplishing this. The SRDP must be established within six months of enactment.

IV. Kickbacks, Overpayment Reporting and Civil Monetary Penalties (CMPs)

A. Revision to Anti-Kickback Statute's Intent Standard (Section 6402(f))

The Act adds a provision to the Anti-Kickback Statute that effectively codifies an articulation of the Statute's "knowing and willful" standard that is applied today by a majority of federal courts. Specifically, the Act amends Section 1128B of the Social Security Act to add the statement: "With respect to violations of this section [i.e., the Anti-kickback Statute], a person need not have actual knowledge of this section or specific intent to commit a violation of this section." The change does not eliminate the requirement that the government prove that the defendant knew his or her conduct was unlawful. Instead, this change squarely rejects the construction of "knowingly and willfully" adopted by the Ninth Circuit in its Hanlester decision, which had required the government to prove that a defendant: (1) knew that the Statute prohibited the conduct they were alleged to have committed, and (2) engaged in prohibited conduct "with the specific intent to disobey the law."

B. Overpayment Reporting (Sections 6402(a) and 6506)

The Act adds a new Section 1128J(d) to the Social Security Act, which sets forth an affirmative obligation for any provider, supplier, Medicaid managed care organization, Medicare Advantage organization, or PDP sponsor that has received an overpayment to report and return the overpayment to the Secretary, state, intermediary, carrier, or contractor along with a written notification of the reason for the overpayment. The deadline for reporting and returning such overpayments is the later of 60 days after the date on which the overpayment was identified or the date that any corresponding cost report is due. FERA created new False Claims Act liability for knowingly concealing or knowingly and improperly avoiding an "obligation" to pay money to the government. The Act specifically defines overpayments retained beyond the deadline as an "obligation" under the False Claims Act.

C. New and Enhanced CMP

In a number of areas, the act amends the civil monetary penalties provisions under Section 1128A to add and enhance CMPs for health care fraud. Most notably:

• CMPs for Failure to Report and Return an Overpayment (Section 6402(d)): In conjunction with the new 1128J(d) obligation discussed above, which requires entities to report and return overpayments, the Act authorizes a CMPs for any person that "knows of an overpayment . . . and does not report and return the overpayment" in accordance with those requirements.
• CMPs for False Statements in Provider Enrollment Applications (Section 6402(d)): Authorizes CMPs for knowingly making false statements, an omission, or a misrepresentation of a material fact on a provider enrollment application. The Act also makes such conduct grounds for permissive exclusion from federal health care programs.
• CMPs for False Statements in Claims for Payment (Section 6408(a)): Authorizes CMPs for knowingly making or causing to be made any false record or statement material to a false or fraudulent claim for payment for items and services furnished under a Federal health care program." Penalties amount to $50,000 per false record or statement.
• CMPs for Delaying Inspection (Section 6408(a)): Imposes CMPs for "failure to grant timely access upon reasonable request" to the HHS Inspector General "for the purpose of audits, investigations, evaluations, or other statutory functions of the Inspector General." Penalties amount to $15,000 for each day of the failure.
• Broadens CMPs for Services Ordered During Periods of Exclusion (Section 6402(d)): The Act adds new CMPs for ordering or prescribing an item or service during a period in which the person was excluded from a federal health care program and knew or should have known that a claim for such item or service would be made. The Act also expands the scope of the existing CMP for knowingly presenting a claim for an item or service that was furnished during a period in which the person was excluded so that the penalty is applicable for claims made not just to a program from which the individual was excluded but to any federal health care program.

V. False Claims Act (Sections 1313(a) and 6402(a) as amended by Section 10104)

In addition to the provisions that define "overpayment," the Act includes a series of amendments designed to enhance and simplify enforcement of the civil False Claims Act by the government and by whistleblowers in qui tam legislation. Foremost among these, the Act:

• Amends Section 1128B of the Social Security Act to provide that Anti-Kickback Statute violations constitute false or fraudulent acts under the False Claims Act. This should considerably lighten the burden on prosecutors and qui tam relators, who will no longer have to argue or prove another connection between a kickback and the submission of a false claim (such as an express or implied certification of compliance).
• Abolishes the jurisdictional bar against qui tam litigation based upon "public disclosures" of alleged fraud, replaces it with a narrower definition of public disclosure and a broader exception for those whistleblowers claiming to be an "original source" of the allegations and provides the Government with a veto that can be used to over-ride dismissal of a whistleblower who fails to qualify as an original source.
• Declares claims submitted to plans purchased through a health insurance exchange to be subject to the False Claims Act.

VI. Other Program Integrity Provisions

• Broad OIG Authority to Obtain Information (Section 6402(a)): The Act gives the HHS Inspector General broad authority to obtain information from providers, suppliers, grant recipients, contractors, and other individuals or entities "for purposes of protecting the integrity of [the Medicare and Medicaid programs]." Information collected may include any documentation necessary to validate claims for payments, such as a physician's medical records, and any records necessary for evaluation of "the economy, efficiency, and effectiveness" of federal health care programs.
• Expanded Subpoena Authority (Section 6042(e)): The Act also expands the subpoena authority for the Inspector General in cases involving the exclusion of certain individuals and entities from participation in Medicare and State health care programs.
• Suspension of Payments (Section 6402(h)). The Act grants the Secretary authority to suspend payments to a provider or supplier pending investigation of "credible allegations of fraud," unless the Secretary determines there is good cause not to suspend such payments.

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