Health Law Perspectives

September 2000

In this issue:

Enforcers Cross Drug Pricing Line

Medi-Cal Prosecutor Joins Firm

Vencor’s Corporate Integrity Agreement

Congress Urged to Maintain Medicaid Integrity

AG Finds MSO Agreement Illegal

Suit Filed to Stop Enforcement Agencies from Establishing Drug Prices

Hooper, Lundy & Bookman has filed a complaint in federal court on behalf of client Alpha Therapeutic in an attempt to halt the widening threat of Medicaid fraud control units' encroachment on Medicaid ratemaking for pharmaceuticals.

Filed against the Washington, D.C.-based National Association of Medicaid Fraud Control Units (NAMFCU), the civil rights action is based in part on a letter sent by NAMFCU to Medicaid fraud control units throughout the country stating that the organization believes manufacturers are exaggerating the average wholesale price (AWP) of their drugs when reporting information to private information clearinghouses. The letter tells the single state Medicaid agencies that NAMFCU will inform the clearinghouses to ignore the AWPs submitted by the drug companies and that NAMFCU and the clearinghouses will instead determine pricing based on their own calculations.

"Fraud control units are not only investigating fraud, but interfering with the power of the single state Medicaid agencies designated by federal Medicaid law to engage in ratemaking," said HLB Attorney Patric Hooper, who filed the suit, along with Daron Tooch and Glenn Solomon. "We want to stop fraud enforcement agencies from illegally setting Medicaid payment rates for pharmacy products."

The states most heavily targeted by NAMFCU's new policy include New York, Florida, Texas, and Kentucky.

For more information, contact Mr. Hooper, Mr. Tooch or Mr. Solomon at (310) 551-8111.

Medi-Cal Prosecutor, New Associate Join Firm

Hooper, Lundy & Bookman, Inc. is pleased to announce that John Dratz, Jr. and Stamos Akrivos have joined the firm.

Prior to joining HLB, Mr. Dratz was a top state health care prosecutor. Employed by the California Department of Justice since 1985, he was most recently Supervising Deputy Attorney General of the Bureau of Medi-Cal Fraud's Civil Prosecution Unit. The focus of his practice at HLB will be civil and criminal defense of health care providers. Mr. Dratz will be based in the firm's Los Angeles office.

Mr. Stamos is the firm's newest associate to join the San Francisco office. He received his law degree from the University of California Hastings College of Law in 1988. He also has a B.A. in Psychology and a B.S. in Biology.

Vencor Signs Sweeping Compliance Agreement with OIG

Nursing home giant, Vencor, Inc., has agreed to a landmark corporate integrity agreement (CIA) with the federal Office of Inspector General.

The CIA requires Vencor to implement a system-wide quality improvement program and resolves in part the ongoing investigations by the OIG and the Department of Justice involving allegations of poor quality of care and billing abuses at Vencor.

Over the course of the five-year term of the agreement, Vencor is required to implement a variety of compliance measures to ensure the integrity of federal health care program claims submitted.

The required quality improvement program will be created by Vencor with the assistance of the University of Wisconsin's Center for Health Services Research and Analysis (CHSRA), which is known in the industry for its development of industry quality indicators.

In addition to creating a quality assurance infrastructure, CHSRA will also monitor Vencor's program and provide OIG with an ongoing assessment of the systems and quality of care measures. CHSRA also will review and analyze Vencor's policies, procedures and operations, along with individual facilities' internal reports, staffing data and assessments of patient and resident care. CHSRA will work collaboratively with Vencor and the OIG to identify and correct system deficiencies and to enhance existing quality improvement programs, according to OIG.

COMMENTARY:
Congress Should Proceed Cautiously Before Modifying Medicaid Single State Agency Requirement

By Patric Hooper

Recently, California State Controller, Kathleen Connell, appeared before Congress to urge the repeal or modification of the Medicaid single state agency requirement. The single state agency requirement has been a part of the Medicaid law since its enactment. The provision helps to assure that Medicaid policy is developed and administered, at the state level, by a single agency in each state, an agency with experience and expertise in health care. In California, the single state Medicaid agency is the State Department of Health Services, not the State Controller's Office.

Realizing the obvious political advantages to be gained by being viewed as tough on health care fraud, Ms. Connell and other ambitious government officials have insinuated themselves into the health care fraud enforcement arena by conducting Medicaid audits and exercising other discretionary functions, which are supposed to be performed exclusively by the Medicaid single state agency. The result has been devastating to many health care providers who were unfortunate enough to have been visited by the Controller.

The California Court of Appeal and the federal District Court in Los Angeles have insisted that the Medicaid law, including the single state agency requirement, be followed regardless of the current attitude of the "ends justify the means," embraced by government officials. Thus, the courts have consistently prohibited the Controller from exercising any discretion, including conducting audits, in connection with the Medi-Cal program.

For example, in rejecting the Controller's arguments that she should be permitted to audit providers of Medi-Cal services notwithstanding the single state agency requirement, the California Court of Appeal in Doctor's Medical Laboratory, Inc. v. Connell, (69 Cal.App.4th 891 (1999)), recognized that "knowledgeable" and "fair review" are essential to the basic statutory purpose of providing medical care to the indigent and elderly. Implying that such may not be the result when the Controller conducts her audits, the court pointed out that private providers would soon be discouraged from offering Medicaid services if they are not paid promptly and fairly for their services (69 Cal.App.4th at 898).

Although she continues to refuse to cease auditing Medi-Cal providers notwithstanding the Courts' repeated holdings prohibiting her from doing so, Ms. Connell is now seeking a legislative "fix" to allow her to continue to perform audit activities and investigate and review Medi-Cal providers. She testified that her "office cannot be effective and operate with one arm tied behind my back." Thus, she is urging Congress to change the law to accommodate her exercise of discretion with respect to the Medi-Cal program. Such a change would also presumably allow other state officials (outside of the single state Medicaid agency) to enter the arena of auditing, reviewing and investigating Medicaid payments.

The health care industry and health care consumers, including taxpayers and Medicaid beneficiaries, do not need more enforcement agencies. Rather, Congress should try to assure that those many agencies who are currently engaged in fraud and abuse enforcement activities be knowledgeable, fair, and objective with respect to the administration of the Medicaid program. The single state agency requirement helps to achieve those goals. Its repeal or modification will only continue the current, unwise trend of allowing enforcement officials to determine health care policy, especially Medicaid health care policy. While such a result may serve the short term goals of ambitious politicians, it does not serve the long-term best interests of health care providers, taxpayers, or patients.

Mr. Hooper represents Medi-Cal providers in a number of related actions. He may be reached at (310) 551-8165.

MSO May Not Manage Union's Radiology Services

A Management Services Organization (MSO) may not enter into an agreement with a labor union to select, schedule, secure and pay for radiology diagnostic services ordered by the union's physician for union members and charge the union a fee for its management services, according to an opinion issued by the California Attorney General.

Such an action, according to the opinion, would constitute a violation of the state's bar on the corporate practice of medicine.

"Essentially, we are asked whether a corporate entity unlicensed to practice medicine may, for a fee, select, schedule, secure, and pay for radiology diagnostic services ordered by a physician for members of a labor union responsible for obtaining medical care for its members," the attorney general said. We conclude that such an entity. . ., an [MSO], would be engaged in the unlawful practice of medicine if it were to perform its duties under its contract with the labor union."

Under the agreement, the MSO would select a radiology site with the appropriate imaging equipment and qualified operators of the equipment, as well as selecting a qualified and duly licensed radiologist to view the films and prepare an interpretive report.

"We believe that the selection of a radiology site with appropriate equipment and operational personnel best suited for the performance of a diagnostic radiology study of a patient's particular physical disorder, as well as the selection of a qualified radiologist to view and interpret the films, would involve the exercise of professional judgment and evaluation as part of the practice of medicine," the attorney general said. While certain of [these tasks] may be deemed primarily commercial in nature, they may not be so considered in the context of a professional practice."

The attorney general also rejected the portion of the agreement under which the MSO would pay for the radiology services and profit by adding a fee for its own management services. Such a financial arrangement would be a further intrusion into the relationship between the physician and the patient, according to the opinion.

The attorney general further noted that none of the existing exceptions to the prohibition against the practice of medicine by a corporate entity apply to MSOs.

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Health Law Perspectives is produced monthly, 10 times per year and is provided as an educational service only to assist readers in recognizing potential problems in their health care matters. It does not attempt to offer solutions to individual problems but rather to provide information about current developments in California and federal health care law. Readers in need of legal assistance should retain the services of competent counsel. Occasionally articles produced in Health Law Perspectives will reference California Health Law Monitor, a biweekly publication covering legislation, litigation, and regulation. For more information on California Health Law Monitor, contact M. Lee Smith Publishers at (800) 274-6774.