Health Law Perspectives

March 2007

In this issue:

Hospitals Beware: RAC Reviews of Inpatient Rehab Services Seriously Flawed

Discount Health Plans May Need Knox-Keene Licensure

New Drug Discount Program for the Uninsured Calls for Early DHS Contract Negotiations

HLB Calendar

Hospitals Beware: RAC Reviews of Inpatient Rehab Services Seriously Flawed

The current RAC (recovery audit contractor) conducting reviews of California hospital inpatient rehabilitation services is consistently performing audits that are unlawful, often inaccurate and incomplete, HLB has found, as it examines numerous reviews in preparation for appeals on behalf of clients.

A RAC demonstration project was established in California, Florida and New York as a result of Section 306 of the Medicare Modernization Act (MMA). The purpose of the project is to demonstrate the use of RACs in identifying Medicare Part A and B underpayments and overpayments, and to recoup overpayments.

According to the MMA, RACs may be paid for their services on a contingent basis. They must be staffed by personnel with clinical knowledge of and experience with Medicare payment rules and regulations or they must contract with another entity that has qualified staff. PRG Schultz International, Inc. was selected by HHS in March 2005 as the RAC for providers serviced by a fiscal intermediary or a carrier in California.

PRG Shultz is paid a percentage of the overpayments it identifies and that are recovered by the Medicare program. PRG retains its fee with respect to an overpayment that is appealed if the overpayment is upheld at the first level of the appeal process, even if the overpayment is later overturned.

Over the past year, PRG Schultz has been reviewing Medicare payments for inpatient rehabilitation services, focusing on rehabilitation services following joint replacements. To date, PRG Schultz has reviewed and continues to review payments to most California providers of inpatient rehabilitation services who have NGS (formerly UGS) as their fiscal intermediary.

“PRG Schultz has denied an overwhelming majority of the claims for inpatient rehabilitation services it has reviewed,” according to HLB attorney Lloyd Bookman. “In fact, we are seeing denial rates of 95% to 100%. As a result, many facilities are facing multimillion dollar assessments.”

In the firm’s experience with clients facing RAC reviews, Mr. Bookman noted a number of improprieties in the reviews conducted, including:

PRG Schultz has acted beyond the authority granted to RACs by the MMA. Section 306 does not authorize RACs to audit inpatient records to determine whether services were medically necessary. The firm has found that PRG Schultz is doing precisely that in its review of inpatient rehabilitation claims.
The reviews violate the terms of Medicare manual provisions. The manual provisions prohibit the denial of claims based on the screening criteria provided, and requires physician review of claims. PRG Schultz denies claims based solely on the screening criteria without physician review.
RAC staff often lacks the appropriate background or expertise to conduct reviews.
RAC staff is not conducting a thorough and individualized review of each claim, which is a requirement for denial.
Providers have been unlawfully denied the opportunity to appeal RAC denials until the amount at issue is recovered by Medicare.
Providers’ due process rights are being denied because the RACs receive a significant portion of any recovery and therefore are necessarily biased.

If your facility receives an RAC review, receives claims denials and plans to appeal, we suggest the following steps:

Immediately calendar the appeal deadlines. The first level appeal is due 120 days after the reimbursement is recovered by the fiscal intermediary.
File appeals timely at all levels of the appeal process on any claims the facility thinks should be paid. A missed deadline can be fatal to an appeal.
Point out in the appeals specific portions of the medical record that supports the medical necessity of the services.
Provide all relevant documentation in an organized and understandable way. Note that all documentation that you may wish to use in any part of the appeal process generally must be filed in the second level (QIC) appeal.
Raise all issues, including the legal issues, in the appeal letters. HLB continues to represent clients in their appeals of the RAC findings, while working with the hospital industry to urge HHS to change the RAC process.

For additional information, please contact Mr. Bookman or Jodi Berlin in Los Angeles at 310.551.8111, Mark Reagan in San Francisco at 415.875.8500 or Mark Johnson in San Diego at 619.744.7300.

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Discount Health Plans May Need Knox-Keene Licensure

By Carolyn Hoff

If you provide access to or are considered a discount health care plan, you may need to obtain licensure as a health care service plan from the California Department of Managed Health Care (DMHC) under the Knox-Keene Health Care Service Plan Act.

A discount health care plan is a membership program offering subscribers discounted fees for health care services provided by network providers such as doctors, hospitals and pharmacies, usually in return for a periodic fee. Common attributes of discount health care plans are that they: (1) charge a fixed rate periodic membership fees (generally paid monthly or annually); (2) offer a network of health care providers who have agreed to provide discounted services to program subscribers or enrollees; (3) provide a list of participating program providers to subscribers or enrollees; (4) are not involved in the subscriber’s decision regarding which health care provider to utilize or the provider’s decision regarding what health care services should be provided; and (5) are not financially liable for the health care services provided to subscribers by health care providers. Section 1345 of the Knox-Keene Act makes it unlawful for any health care service plan to engage in business in the State of California without first obtaining a license from the Director of the DMHC.

Section 1345(f )(1) of the Knox-Keene Act defines a health care service plan as any person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees.

It has not always been clear whether a discount health plan would be meet the definition of a health care service plan under the Knox-Keene Act and therefore, need to be licensed as a health care service plan. Most discount health plans charge a periodic or prepaid fee to subscribers. However, discount health plans may not be seen as undertaking or arranging for the provision of health care services, since the subscribers or enrollees decide which providers to utilize and are responsible for paying for the service provided by such providers.

In July of 1983, then Commissioner of the Department of Corporations (predecessor agency to DMHC), Franklin Tom, issued interpretive opinion No. 4615H in response to a request by the National Benefit Association (NBA). NBA provided its members with multiple discount buying services in return for a payment of an annual membership fee. NBA wished to determine whether it would be deemed to be operating a health care service plan if it offered discount health care services to its members as part of the multiple discount buying services for no additional membership fee. Franklin Tom stated in the NBA Opinion that:

“NBA, by contracting with dentists, doctors, pharmacists, and optometrists to provide services to members of NBA and by making such services available to members of NBA in return for an annual membership fee, is arranging for the provision of health care services to subscribers or enrollees in return for a prepaid or periodic charge paid by or on behalf of such scribers or enrollees.”

However, in June of 2001, then DMHC director Daniel Zingale issued interpretive opinion No. 01/01 that reversed the position taken in the NBA Opinion regarding discount health plans. The Zingale Opinion generally discussed “so-called discount membership entities” that had “dramatically proliferated” in the years following the NBA Opinion. After explaining the common attributes and the workings of these discount membership entities, the Zingale Opinion concluded that “discount membership programs are not engaged in ‘arranging for the provision of health care services’ when and to the extend they contract to obtain fee discount on services their members choose to receive from participating program providers.” The Zingale Opinion ordered the rescission of the NBA Opinion.

In the past few years, DMHC has investigated and filed a number of enforcement actions against discount health care plans. Many of these investigations and enforcement actions have been due to complaints and inquiries received from consumers regarding discount health plans.

In December 2005, DMHC rescinded the Zingale Opinion and reinstated the NBA Opinion indicating that DMHC intended to require licensure of discount health care plans.

Then, in September 2006, DMHC adopted an Administrative Law Judge’s decision In the Matter of the Cease and Desist Order Issued to:The Capella Group, Inc., d/b/a Care Entrée, which rejected the Cappella Group’s argument that it was not arranging for the provision of health care, because it only arranged for the provision of discounts on health care services. In addition, the Cappella Group had argued that its business model does not fit the model of a health care service plan contemplated by the Knox-Keene Act and therefore, should not be subject to licensure under the Knox-Keene Act, because it does not assume risk for service provided, it does not maintain the required financial reserves and it does not meet the requirements regarding quality of care. However, the Administrative Law Judge in the Care Entrée Decision also rejected that argument.

During discussions with DMHC, the department has indicated that it will be issuing proposed regulations regarding the licensure of discount health plans, but there is no guarantee of when those regulations will be issued. In addition, DMHC indicated that entities that provide discount health care services, and are not sure whether they are required to obtain licensure, should seek interpretive opinions from DMHC.

If you currently offer or are considering offering discount health care services to members or subscribers in return for a periodic fee, you should determine whether you will need licensure under the Knox Keene Act. Further, if you are contracting with any entity that provides discount health care services to your employees or members (such as pharmacy benefit managers and PPOs), you should inquire whether the entity has obtained the necessary licensure or has obtained an interpretive opinion that it does not need such licensure.

For additional information, please contact Ms. Hoff, Brad Tully or Elspeth Delaney at 310.551.8111.

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New Drug Discount Program for the Uninsured Calls for Early DHS Contract Negotiations

On September 29, 2006, Governor Schwarzenegger signed into law The California Prescription Drug Discount Program (AB 2911).

The program, designed to save Californians without health care coverage millions of dollars on the cost of prescription drugs, could also significantly impact drug manufacturers. Under the new program, certain eligible Californians, including those without prescription drug coverage and who also are under 300 percent of the federal poverty level, seniors, and those with high health care costs, will receive a prescription drug card in exchange for a nominal $10 fee. Program participants will be able to present the discount cards at certain pharmacies under contract with the State of California and pay for designated drugs at discounted prices, as negotiated between the State and particular drug manufacturers.

The program, to be administered by the Department of Health Services (DHS), ostensibly is voluntary for drug manufacturers, as manufacturers are not required to offer discounts to DHS. However, after the third year of the program, there will be accountability for those manufacturers that have elected not to extend discounts to the department.

Beginning in 2010, DHS is authorized to require prior authorization in the Medi-Cal program for any drug produced by a manufacturer that has (1) failed to negotiate with DHS regarding drug discounts as part of the program or (2) failed to agree upon an appropriately discounted price for a particular drug under the program.

Through the use of this prior authorization mechanism, DHS will be able to effectively steer Medi-Cal business away from manufacturers that elect not to participate in the program and toward drug companies that do offer good discounts. In addition, DHS will be able to post on its website the names of drug manufacturers who do not enter into discount agreements under the program.

The program became effective on January 1, 2007. DHS has said that its goal is to begin enrolling participants in the program by the Summer of 2008 and to have contracts in place with the drug manufacturers before it begins participant enrollment.

Given the stakes involved, drug manufacturers are advised to negotiate aggressively with DHS to ensure a favorable discounted rate.

For additional information, please contact Bob Lundy, Byron Gross or Jordan Keville in Los Angeles at 310.551.8111; Stephen Phillips in San Francisco at 415. 875.8508; or Mark Johnson in San Diego at 619.744.7301.

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HLB Calendar

March 15	Healthcare Financial Management Assn-Southern California Chapter Educational Program, Los Angeles. Lloyd Bookman presents a session on AB 774’s Impact on Charity Care and Discounted Payment Programs.
March 21-23	AHLA Institute on Medicare & Medicaid, Baltimore. John Hellow presents Medicare Litigation Update; Byron Gross presents Medicaid Litigation Update; Jon Neustadter presents Medicare Bad Debt.
March 26-27	CAHF March Conference, Sacramento. Mark Reagan and Mark Johnson present RAC Recoupment and Provider Challenges.

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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.