FOR HOSPITALS
CMS Proposes to Address Patient Severity/Effects on Specialty Hospitals

To address the financial incentives that have driven, in part, the construction of specialty hospitals, CMS has proposed an update to the hospital inpatient prospective payment system for fiscal year 2008. While the payments for FY 2008 will increase payments to all hospitals on an average of 3.3 percent, the bulk of the increase will go to hospitals treating patients with the most serious illnesses. The proposed change includes the adoption of a severity diagnosis related group (DRG) system, called the Medicare-Severity DRGs. Considered in the mid-1990s, CMS formally proposed the new Medicare-Severity DRGs, replacing the current 538 DRGs with 745. The proposal will be budget neutral, meaning that CMS will increase payments under certain DRGs (those reflecting more severe patient conditions) and will decrease payments under other DRGs. The impact of budget neutrality will be felt most heavily on specialty hospitals which currently treat the healthier, least costly patients compared to the sicker, more costly patients of full-service hospitals. For example, CMS’s proposal will likely reduce payments to cardiac specialty hospitals by approximately 4 percent. In addition to the new Medicare-Severity DRGs, CMS is asking for additional public comment on whether CMS should expand from 13 to 19 hospital departments used by CMS to weigh DRGs and provide improved payment accuracy.

Federal Court Rules finds that Resident Research Time May Be Included in IME Reimbursement

In a decision having a significant impact on research hospitals, the Federal Court for the District of Arizona ruled that Medicare must reimburse hospitals through indirect medical education (IME) for resident time spent on research. Initially, the fiscal intermediary denied the University Medical Center IME reimbursement because the resident time was not attributed to direct patient care. The University appealed the decision to the Provider Reimbursement Review Board which ruled in its favor, only to have the CMS Administrator reverse the decision. Both the federal magistrate and the District Court granted the University’s motion for summary judgment approving the IME reimbursement for resident research time. Ultimately, the ruling keyed on the federal IME regulations, noting that the resident must be assigned to "the portion of the hospital subject to the prospective payment system" or to the outpatient department in order to be included in IME. See 42 C.F.R. § 412.105(f)(1)(A). The District Court did not believe CMS’s argument that "portion of the hospital" somehow implied that the resident must be providing direct patient care. Rather, the District Court ruled that the regulations simply required that the resident must be assigned to the hospital, nothing more. University Med. Ctr. Corp. v. Leavitt, No. 05-CV-495 TUCJMR (D. Ariz. Mar. 21, 2007).

FOR PHARMACEUTICAL MANUFACTURERS
OIG Issues Advisory Opinion On Free Outpatient Drugs for PAPs

In Advisory Opinion No. 07-04 (April 6, 2007), the OIG permitted the distribution of free outpatient pharmaceuticals to financially needy patients enrolled in Medicare Part D. A subsidiary of a pharmaceutical manufacturer had operated patient assistance programs (PAPs) providing drugs to certain qualifying patients who lacked insurance coverage. The company desired to extend its PAP programs to patients enrolled in Medicare Part D. The targeted patients would be limited to those who are eligible for the Part D low-income subsidy. In addition, patients would have to meet certain financial need tests. For self-administered drugs, the patients must have annual incomes of 200% or less of the federal poverty level. For physician administered drugs, patients must have annual incomes of 275% or less of the federal poverty level. Assistance would not be conditioned on the type of provider, practitioner or supplier of drugs, or the type of Part D plan used by the patient. The company would pay the pharmacy fair market value for providing the drugs. In addition, the free drugs would not count as true out-of-pocket spending under the Part D program. The company will not charge the patient, the Part D plan, or Medicare for the provision of the drug. The OIG was convinced that the PAP program had sufficient safeguards to avoid an Anti-Kickback violation. Specifically, the OIG noted that the PAPs will notify the patient’s Part D plans that the drugs are outside of the Part D benefit. Second, eligibility for PAP assistance is limited to those having a demonstrated financial need using a methodology that does not consider the patient’s type of Part D plan. The OIG believed the form of the program avoided the risk that the PAP covered drugs would be used to tie patients to particular drugs payable by Part D or that the drugs would be used to increase costs to the Part D program.

Pfizer Subs Hit with $34.7 million Criminal Kickback Penalties for Off-Label Promotions

The Pharmacia & Upjohn subsidiaries of Pfizer agreed to a combined settlement of $34.7 million with the United States on April 2, 2007. The agreements to plead guilty involved the promotion of Pfizer’s Genotropin growth-hormone product. Genotropin is FDA-approved for the treatment of hormone-related growth problems. Pharmacia solicited bids from pharmacy benefit managers (PBMs) to administer the distribution of Genotropin. Pharmacia paid the winning PBM over $12 million above the other bids. The government alleged that this payment was a kickback to induce the PBM to promote Genotropin, through formulary manipulation and marketing. In spite of the kickback, Pharmacia’s own calculations established that it would still make money on the drug given the PBM’s efforts. In addition to the kickback, Pharmacia admitted to the improper promotion of Genotropin for uses not approved by the Food and Drug Administration, including for anti-aging, cosmetic use, and improved athletic performance. In addition to the fine, the Pharmacia subsidiaries are permanently excluded from federal health care programs. The activities occurred prior to Pfizer’s acquisition of Pharmacia.

FOR PROVIDERS
CMS Provides Guidance On Employee Education About False Claims Recovery

As part of the Deficit Reduction Act of 2005, Congress has imposed a requirement on providers making or receiving more than $5 million annually in Medicaid payments to implement an employee education program about the False Claims Act prohibitions and related whistleblower protections. CMS has provided additional guidance to state Medicaid programs. In addition to clarifying which providers are affected by this requirement, the CMS guidance also explains the impact of the Act’s employee education requirements on a provider’s contractors. Affected contractors would include not only those that perform billing and coding functions but any vendor that providers use to furnish Medicaid reimbursed goods or services. Not only must a provider implement compliance policies that are included in its employee handbook, but it must ensure that its policies are abided by its contractors and the contractors’ employees. While CMS indicates that current contracts between providers and their contractors need not be amended to comply with the Act, contractors must agree to abide by, i.e., adopt and enforce, provider policies on employee false claims education and policies and procedures for detecting and preventing fraud, waste and abuse. Although the CMS guidance was not released until March 22, 2007, the deadline for provider compliance was January 1, 2007. Enforcement of the Act’s employee education provisions, including whether noncompliance can lead to removal from a state’s Medicaid program, is left up to the states.