Health Law Perspectives

July 2006

In this issue:

Recent IRS Initiatives Alert Tax-Exempt Health Care Providers

OIG’s Major Enforcement Initiatives Outlined

Brockovich Suits Claim Health Care Facility Obligation for Medicare Claims

HLB Calendar

Recent IRS Initiatives Alert Tax-Exempt Health Care Providers

The Internal Revenue Service has initiated a number of significant initiatives to investigate and target noncompliance by tax-exempt organizations. Some of these initiatives, relating to excessive compensation and enforcement of exempt bond requirements, are of particular significance to tax exempt health care providers. They underscore the importance to exempt providers of regularly assessing their compliance with exemption requirements and, if applicable, tax-exempt bond requirements.

Excessive Compensation Initiative. In 2005, the IRS signaled a new emphasis on investigation and enforcement of exempt organizations, by sending out approximately 1,250 compliance check letters, and starting a significant number of field examinations, seeking information about salaries, loans and other issues relating to excessive compensation paid by tax-exempt organizations. The IRS expects to continue these examinations throughout 2006 and, based on its findings from such initial examinations, subsequently target additional examinations and compliance checks. The IRS’s enforcement emphasis is further reflected in several other recent substantive and procedural developments, including:

Proposed Excess Benefit Regulations
Pending Revisions to Form 990
Increased Enforcement Budgets

Tax-Exempt Hospital Initiative. In its FY 2006 Implementing Guidelines, the IRS identified a new compliance project to specifically determine how exempt hospitals establish and pay executive compensation and meet the community benefit standard for purposes of Section 501(c)(3). This initiative will initially involve the sending of compliance check letters to a significant number of exempt hospitals. Before submitting such compliance check letters to the IRS, tax-exempt organizations should have their legal counsel review the content of the responses. The IRS focus on nonprofit hospitals is likely to increase in the face of mounting congressional interest, and pressure on the IRS to monitor nonprofit hospitals. On June 1, 2006, the Senate Finance Committee Chairman, Charles Grassley, sent a letter to the chief counsel of the IRS urging enforcement of perceived problems in the tax-exempt area, including in the health care industry. More particularly, Senator Grassley urged that the IRS counsel’s office “should be particularly engaged” in monitoring nonprofit hospital issues such as (1) the definition and required levels of charity care and community benefit, (2) the definition of joint ventures, (3) the payment of excess compensation, and (4) use of tax exempt bond proceeds.

Tax-Exempt Bond Initiative. The IRS also announced, in its Implementing Guidelines, that it will coordinate its other exempt organization initiatives with an initiative by the IRS’s Tax-Exempt Bond Division (TEB Division), announced in July of 2005, to examine bonds issued on behalf of 501(c)(3) organizations. This initiative reflects a dramatic reorientation by the TEB Division, away from its prior concentration on education and outreach. The TEB Division is now expecting to spend 80% of its resources on enforcement, with an initial plan to close more than 1,400 examinations of outstanding bonds in 2006.

The TEB Division is initially seeking, in substantial part, to determine whether transactions and facilities related to exempt bonds violate private benefit rules. More specifically, the initiative is focusing on the following arrangements and issues:

Excess Benefits Arrangements.
Joint Venture Arrangements.
Management Services Contracts.
Arbitrage Yield Restriction and Rebate Requirements.

The IRS’s attention to exempt organizations including exempt hospitals has, since last year, tilted significantly toward investigation and enforcement. In this environment, exempt organizations should take prudent steps to regularly assess their own compliance with applicable exemption requirements, including in particular (i) their compensation arrangements with officers, directors, key employees, and any highly compensated employees and independent contractors, and (ii) any joint ventures. Moreover, those organizations with outstanding 501(c)(3) bonds should also pay particular attention to their management services arrangements, bond yield history and arbitrage rebate reporting and payments.

Additionally, exempt providers should review their record retention practices, to make sure that they will have the records needed to support their continuing tax-exemption and establish compliance with bond requirements, should they be the subject of any IRS inquiries, under these initiatives or otherwise. The record retention requirements have taken on even more importance in light of regulations adopted by the United States Treasury in December of 2005, which changed the record retention requirements for exempt bonds and will, in many cases, condition the ability to refinance outstanding tax-exempt bonds on the ability to produce documentation related to compliance in connection with the pre-existing bonds.

Finally, exempt providers should carefully review their responses to any IRS inquiries or check letters with legal counsel before submission to the IRS.

For additional information, please contact Todd Swanson or Elspeth Delaney in Los Angeles at 310.551.8138, Craig Cannizzo at 415. 875.8511 in San Francisco or Stephen Treadgold at 619. 744.7304 in San Diego.

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OIG’s Major Enforcement Initiatives Outlined

The Health and Human Services Office of Inspector General (OIG) is targeting 17 areas in its current enforcement efforts, according to a review of the OIG 2006 Work Plan and a Supplemental Compliance Guidance presented recently by HLB Attorney Mark S. Hardiman to California hospitals.

“It is particularly important for hospitals to update their compliance plans and internal audits for 2006 to include a review of those areas which OIG has identified as raising significant fraud and abuse concerns because a failure to do so exposes hospitals to increased liability under the False Claims Act,” said Mr. Hardiman. The areas of most significant scrutiny by OIG include:

Dialysis Inpatient Admissions
DRG Coding
Dialysis Inpatient Admissions
Inpatient Rehab Facility (IRF)
Services
Inpatient Psychiatric Services
Long Term Care Hospitals
Organ Acquisition Costs
Rebates
Coronary Artery Stents
Outpatient Services
Lab & Radiology Services
Medicaid “72-hour” Payment
Window
Hospital/SNF Consecutive
Inpatient Stays
Outpatient Cardiac Rehab
Services
Provider-Based Designations
Education Costs
Clinical Trials

In his presentation, Mr Hardiman noted that since 1986, the U.S. Department of Justice has recovered more than $17 billion in civil False Claims Act and fraud settlements and judgments, 80 percent of which have been in the health care arena.

“In Fiscal Year 2005, $1.1 of the $1.4 billion recovered was from health care cases,” Mr. Hardiman said. “The government has already recovered $1 billion in the first 3 months of Fiscal Year 2006, mainly from pharmaceutical manufacturers.”

For additional information, please contact Mr. Hardiman at 310.551.8197.

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Brockovich Suits Claim Health Care Facility Obligation for Medicare Claims

Nationally-known activist Erin Brockovich has recently filed virtually identical lawsuits against many California hospitals, skilled nursing facilities, and health systems.

HLB attorneys have been engaged by a number of health care providers and health systems to represent them in the litigation and have had an opportunity to review her claims. Following is a summary of the claims issues.

Ms. Brockovich brings her claims under the Medicare Secondary Payor (MSP) statute, 42 U.S.C. § 1395y(b). She alleges that the facilities have caused harm to Medicare patients and have improperly sought Medicare reimbursement for the services they have furnished to the patients as a consequence of such harm. According to Ms. Brockovich, the facilities themselves, rather than the Medicare program, are obligated to pay for the care to the extent they are self-insured.

Ms. Brockovich alleges that the facilities have received millions of dollars of Medicare reimbursement for which the facilities, rather than Medicare, were primarily liable. She seeks double damages on behalf of the United States, plus interest and attorneys fees. HLB strongly urges defendants to respond promptly and aggressively to Ms. Brockovich’s complaints once they are served. Certain important decisions must be made shortly after service, such as whether the complaints, which have been filed in state superior court, should be removed to federal court. Additionally, HLB believes there are significant bases upon which defendants may seek to have the cases dismissed at an early stage in the litigation. Several courts in other jurisdictions have dismissed claims brought by private individuals under the MSP statute that are similar to the claims advanced by Ms. Brockovich. See, e.g., Glover v. Phillip Morris USA, 380 F. Supp. 2d 1279 (M.D. Fla. 2005), appeal pending.

Given the HLB experience with similar claims, HLB anticipates that these cases will initially focus on complex issues concerning the interpretation of the Medicare Act and regulations, as well as Ms. Brockovich’s standing to pursue claims on behalf of the United States in a manner similar to qui tam, or whistleblower claims brought under the federal False Claims Act. If the cases are not dismissed, there is little doubt that the cases will be aggressively tried statewide.

Ms. Brockovich’s attorneys are very experienced plaintiffs’ litigators, and are known for pursuing elder abuse and personal injury claims, among others. The cases will involve facilities’ obligations under licensing and certification provisions to discover and address their own patient care errors; the impact of licensing, certification and accreditation surveys; clinical issues concerning care given to individual patients; and the availability of insurance coverage either for the claims or the cost of defense.

HLB brings together lawyers with the background and expertise required to defend Ms. Brockovich’s claims effectively. HLB is nationally known for its expertise in complex Medicare issues, and believes it has the most extensive Medicare practice in the country. HLB attorneys are frequently required to analyze and litigate the maze of Medicare statutes, regulations, manuals, and other relevant authorities. HLB also has one of the largest law practices in California addressing licensing and certification issues for both hospitals and skilled nursing facilities, issues which we believe may be central to effectively defending Ms. Brockovich’s claims.

HLB’s statewide litigation practice brings together some of the most experienced health care litigation attorneys in the state. Fifteen of the firm’s partners have substantial experience in defending health care providers against claims brought both by whistleblowers and the United States under the False Claims Act, which raise many issues analogous to those raised by Ms. Brockovich’s claims. Should these cases not be dismissed, and proceed to trial, the firm has extensive experience in trying cases involving issues relating to quality of care in both state and federal courts, including significant jury trial experience.

HLB has represented both national and state hospitals and long term care provider associations in landmark cases against the state and federal governments, as well as large groups of providers in prominent litigation. HLB is sensitive to the public relations issues these matters involve, and works with clients to ensure that a consistent and appropriate message is conveyed. HLB’s attorneys are also familiar with the administrative issues these cases entail, and have developed approaches to ensure equitable allocations of the litigation fees and costs and to maintain close communication with our clients.

For additional information, please call Lloyd Bookman, Glenn Solomon or Daron Tooch in Los Angeles at 310.551.8111, Mark Reagan in San Francisco at 415.875.8501, or Cary Miller in San Diego at 619.744.7302.

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HLB Calendar

July 23-26	California Association of Health Facilities Conference, Lake Tahoe. HLB Attorney Mark Johnson presents a 2-hour seminar on Nursing Facility Transfer/Discharge Law.
July 27	United Government Services Audio Conference. HLB Attorney Jodi Berlin participates in a teleconference with UGS Medical Directory Arthur Lurvey on How Hospices become Medicare Part B Certified to Provide Palliative Care Services.
August 13	Employee Pharmacists Association, San Diego. HLB Attorneys Stacie Neroni, Hope Levy-Biehl and Mark Hardiman join DEA officials to present a seminar on Inspections, Investigations, and other Regulatory Requirements.

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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.