Policy and Medicine

Physician Payment Sunshine Act: Final Rule Top 50 Things to Know

 

The Physician Payment Sunshine Act final rule was released this past week.  The final regulations will greatly affect the entire pharmaceutical and medical device industry.  In general, the Sunshine Act requires applicable manufacturers of drugs, devices, biologicals, or medical supplies to report annually to the Secretary of HHS certain payments or other transfers of value to physicians and teaching hospitals.  It also requires applicable manufacturers and applicable group purchasing organizations (GPOs) to report certain information regarding the ownership or investment interests held by physicians or the immediate family members of physicians in such entities. 

In the coming days we will be posting in-depth analysis and stories regarding the final regulations.  We previously wrote about the impact the regulations will have on the continuing medical education (CME) industry.  In addition to providing you in-depth analysis of the final regulations we are also providing you a list of the Top 50 aspects of the final rule we think all stakeholders should be aware of.  We have organized our list by topic.  We will likely supplement this list as the days go by and we dig deeper into the 287 pages of the final rule. 

General Reporting  

1.Data collection will begin on August 1, 2013 for applicable manufacturers and applicable GPOs sufficient time to prepare.  Applicable manufacturers and applicable GPOs will report the data for August through December of 2013 to CMS by March 31, 2014 and CMS will release the data on a public website by September 30, 2014.  CMS is developing an electronic system to facilitate the reporting process.

2. “Applicable manufacturers should be able to demonstrate that they made a good faith effort to obtain an NPI for the physician.”  A good faith effort includes, but is not limited to, specifically requesting an NPI from the physician, checking the NPPES database, and calling the NPPES help desk.” 

3. CMS said it will provide Frequently Asked Questions (FAQs) and other methods to help users find and understand this important contextual information. 

Conferences, CME, Food & Beverage 

4. Payments or other transfers of value provided as compensation for speaking at a continuing education program are not required to be reported, if all of the following conditions are met: (1) The event at which the covered recipient is speaking meets the accreditation or certification requirements and standards for continuing education of one of the (i) ACCME; (ii) AAFP; (iii) ADA; (iv) AMA; or (v) AOA; (2) The applicable manufacturer does not pay the covered recipient speaker directly; and (3) The applicable manufacturer does not select the covered recipient speaker or provide the third party (such as a continuing education vendor) with a distinct, identifiable set of individuals to be considered as speakers for the continuing education program. 

5. The per person value of the meal must be reported as a payment or other transfer of value only for covered recipients who actually partook in the food or beverage.  Applicable manufacturers are not required to report or track buffet meals, snacks, soft drinks, or coffee made generally available to all participants of a conference or similar events where it is difficult to identify the identity of those who partook in the offering.  

6. CMS provided additional guidelines for the “reporting of payment or other transfers of value at conferences or similar events.”  In general, these guidelines will apply to “conference and similar events, as well as events open to the public.”  At events open to the public, CMS recognized that “it will be extremely difficult for applicable manufacturer to identify physician covered recipients.”  Therefore, CMS finalized “that small incidental items that are under $10 (such as pens and note pads) that are provided at large-scale conferences and similar large-scale events will be exempted from the reporting requirements, including the need to track them for aggregation purposes.” 

Research Payments 

7. “Payments or other transfers of value related to research for new applications of products already on the market will be treated differently due to the statutory distinction between new products and new applications of existing products. Pursuant to the statute, payments related to research on new applications of existing products will be granted a delay only if the research does not meet the definition of "clinical investigation."  CMS recognized that clinical investigations are a subset of research; however, “the statute clearly differentiates them for purposes of delayed publication from research and development, and indicates that payments or other transfers of value made in connection with clinical investigations related to new applications of existing products should not be granted a delay.” 

8. CMS clarified that for “purposes of determining eligibility for delayed publication under section 1128G(c)(1)(E) of the Act, new generic products will be considered new products, including drugs receiving approval under an Abbreviated New Drug Application (ANDA), and devices under the 510(k) process. 

9. Payments for “business development activities” will not be granted a delay.  Any related payments or other transfers of value that would not be reported as a part of the “research” nature of payment category, … will not be granted delayed publication. 

10. CMS, agreed that requiring both a written agreement or contract and a research protocol is limiting for some types research, ant thus finalized that if a payment falls within the nature of payment category for research, it only needs to be subject to a written agreement or contract or a research protocol.   

11. CMS clarified that “Congress clearly intended that all payments should be included on the public website, even if a product never received FDA approval, licensure or clearance.” 

12. CMS defined “research” based on the Public Health Service Act definition of research in 42 CFR 50.603; which defines research as: “a systematic investigation designed to develop or contribute to generalizable knowledge relating broadly to public health, including behavioral and social-sciences research.  This term encompasses basic and applied research and product development.”  CMS concluded that “this definition includes pre-clinical research and FDA Phases I-IV research, as well as investigator-initiated investigations.” 

13. “material transfers (such as provision of a protein) to a researcher for discovery collaboration does not need to be reported when not part of a commercial or marketing plan and precedes the development of a new product.”  CMS said that for the purposes of this regulation that due to the early stage of the research process, “the transferred material does not have independent value.” 

14. With respect to research payments, applicable manufacturers will not be responsible for indicating whether a payment was direct or indirect.  Instead, a single research payment is reported once and includes the entity paid, as well as the name of the principal investigator(s).  Applicable manufacturers must report each research payment once as a single interaction 

15. For pre-clinical research, which CMS said includes “laboratory and animal research that is carried out prior to beginning any studies in humans,” there is no requirement to report an “associated product, or study name.” 

16. CMS finalized what should be included in the total research payment amount.  “The amount should include the aggregated amount of any payments for services included in the written agreement/research protocol.”  CMS envisioned that this would include the “costs associated with patient care, including diagnostics, exams, laboratory expenses, time spent by health care professionals treating the patient and managing the study, and the provision of study drugs, devices, biologicals, and medical supplies or other in-kind items.   

17. In addition to research payments, CMS also stated “that meals and travel should be reported separately (under the food and travel nature of payment categories) unless included in written agreement or research protocol and paid for through the large research contract.”

Nature of Payment Categories; Exclusions 

18. Items “[]such as medical textbooks and journal reprints[] … do not … fall within the statutory exclusion of Educational Materials that Directly Benefit Patients or are Intended For Patient Use.  Wall models and anatomical models which are ultimately intended to be used with a patient, are excluded. 

19. Based on the timing of the publication of the final rule CMS finalized that the Report to Congress will be submitted annually on April 1st, beginning April 1, 2015, and will include aggregated information submitted by each applicable manufacturer and applicable GPO submitted during the preceding calendar year (that is, data collected in CY 2013 and submitted in March of 2014), as well as any enforcement actions taken and any penalties paid. 

20. A device manufacturer may give a physician an anatomical model to help explain to patients how a procedure would work.  CMS agreed that “such an item, which is given to physicians for the purpose of educating patients, falls within the exclusion.  Similarly, if a manufacturer provides educational materials to a physician on a flash drive to be distributed to patients, the flash drive would also fall within the exclusion.  CMS also stated that overhead expenses, such as printing and time, should be included in the exclusion as long as they are directly related to the development of the materials, which directly benefit patients or are intended for patient use. 

45-Day Review 

21. Following the end of the 45-day review and correction period, applicable manufacturers and applicable GPOs will have an additional 15 days to correct data for purposes of resolving disputes, and after which they may submit (and provide attestation for) updated data to CMS to finalize their data submission.  Undisputed data will be finalized for publication after the close of the annual 45-day review and correction period. If a dispute cannot be resolved in this time, the parties may and should continue to work to reach resolution and update the data.  However, CMS will continue to move forward with publishing the original and attested data, but will mark it as disputed.  The applicable manufacturer's or applicable GPO's most recent attested data subject to the dispute will be the only account of the information published. 

22. CMS “plans to monitor the rate of disputes and resolutions, including whether an applicable manufacturer or applicable GPO has an abnormally high number of disputes or has an abnormally high rate of unresolved disputes.”  CMS will also “monitor the volume and terms of disputes and resolutions, and plan[s] to provide additional guidance regarding situations when the cost of resolving a dispute may outweigh the benefits.” 

23. CMS said “that errors and changes need to be reported to [CMS] as soon as possible so that [CMS] has the most accurate information possible.”  CMS reiterated the responsibility that applicable manufacturers or applicable GPOs have to provide information to CMS “immediately after confirming that an update is needed or an error needs to be corrected; failure to do so may be considered incomplete reporting and may give rise to penalties.” More importantly, CMS clarified that it does not intend that errors corrected during the review and correction, and dispute resolution periods will be subject to penalties for failure to report in instances when the original submission was made in good faith.

Penalties, Enforcement, Recordkeeping, Preemption  

24. Compliance with reporting under the Sunshine Act “does not exempt applicable manufacturers, applicable GPOs, covered recipients, physician owners or investors, immediate family members, other entities, and other persons from any potential liability associated with payments or other transfers of value, or ownership or investment interests (for example, potential liability under the Federal Anti-Kickback statute or the False Claims Act).” 

25. CMS finalized that a CMP may be imposed for failure to report information in a timely, accurate, or complete manner.  “This includes failure to report timely or accurately an entire transaction, as well as failure to report timely or accurately certain fields related to a transaction. 

26. CMS revised the final regulation “to clarify that the penalties imposed for failures to report and knowing failures to report will be aggregated separately and are subject to separate aggregate totals, with a maximum combined annual total of $1,150,000.  In addition, CMS finalized that the procedures in 42 CFR 402 subpart A and subpart B will apply with regard to imposition, appeal, and collection of CMPs. 

27. Applicable manufacturers and applicable group purchasing organizations must maintain all books, contracts, records, documents, and other evidence for a period of at least 5 years from the date the payment or other transfer of value, or ownership or investment interest is published publicly on the website.  CMS acknowledged that this policy “may require the records to be retained for up to 9 years” because of payments or other transfers of value eligible for delayed publication 

28. HHS, CMS, OIG or their designees may audit, inspect, investigate and evaluate any books, contracts, records, documents, and other evidence of applicable manufacturers and applicable group purchasing organizations that pertain to their compliance with the requirement to timely, accurately or completely submit information in accordance with the rules established under this subpart.  CMS reiterated that it and the HHS OIG are authorized to impose CMPs and both agencies will have the ability to investigate failures to report timely, accurately or completely. 

29. CMS said it does “not intend to use the assumptions document for prosecution, but acknowledge[s] that the reporting based on the assumptions would be open to prosecution.  Specifically, CMS stated that “other HHS divisions, the Department of Justice (DOJ), or the Office of the Inspector General (OIG) could request access to the documents as part of an audit or investigation into an applicable manufacturer or applicable GPO.” 

30. With respect to preemption, CMS recognized that State and local entities may require reporting of nonrequired categories of information for payments or other transfers of value reported to CMS, which are not required under Federal law.  This includes payment categories excluded by the Federal law (including those listed at section 1128G(e)(10)(B) of the Act), with the exception of those that do not meet the minimum dollar threshold ($10).  

Covered Recipient 

31. CMS clarified the definition of “covered recipient” to mean “any physician, except for a physician who is a bona fide employee of the applicable manufacturer that is reporting the payment” so that applicable manufacturers do not try to “circumvent the reporting requirements by styling a physician as an “employee” and not reporting payments made to such a physician.  Thus, applicable manufacturers should consult guidance from HHS-OIG regarding the bona fide employment exception in the Anti-Kickback Statute and the corresponding HHS OIG regulation at 42 CFR 1001.952(i).  

32. CMS clarified that “Payments or other transfers of value to residents (including residents in medicine, osteopathy, dentistry, podiatry, optometry and chiropractic) will not be required to be reported for purposes of this regulation.”   

33. CMS will be employing a case-specific analysis for determining whether board members, medical directors, prospective employees and retirees are “employees” of applicable manufacturers or GPOs, whose payments would be excluded from reporting. 

34. CMS was “unable to state that payments to such physicians, such as recruiting costs paid to prospective employees, do not need to be reported.” 

Indirect Payments 

35. CMS defined Indirect payments or other transfers of value refer to payments or other transfers of value made by an applicable manufacturer (or an applicable group purchasing organization) to a covered recipient (or a physician owner or investor) through a third party, where the applicable manufacturer (or applicable group purchasing organization) requires, instructs, directs, or otherwise causes the third party to provide the payment or transfer of value, in whole or in part, to a covered recipient(s) (or a physician owner or investor).

1. For example, if an applicable manufacturer provided an unrestricted donation to a physician professional organization to use at the organization's discretion, and the organization chose to use the donation to make grants to physicians, those grants would not constitute "indirect payments" because the applicable manufacturer did not require, instruct, or direct the organization to use the donation for grants to physicians. 
2. However, if an applicable manufacturer gave money to a medical professional society earmarked for the purpose of funding awards or grants for physicians, the awards or grants would constitute indirect payments to covered recipients and would be subject to the reporting requirements. 

36. CMS finalized that an applicable manufacturer is "unaware" if it does not know the identity of a covered recipient, and that "know" means that the manufacturer has actual knowledge of the identity or acts in deliberate ignorance or reckless disregard of the identity.  If a payment meets the definition of an indirect payment or other transfer of value, then the payment can only be excluded from the reporting requirements if the applicable manufacturer did not "know" the identity of the covered recipient.  

37. CMS clarified that, for purposes of this rule only, it will not consider an applicable manufacturer to be acting in deliberate ignorance or reckless disregard of a covered recipient's identity in situations when the reason a payment or other transfer of value is being made through a third party is that the identity of the covered recipient remains anonymous. 

1. For example, an applicable manufacturer may hire a market research firm to conduct a double-blinded market research study, which includes paying physicians $50 for responding to a set of questions.  The applicable manufacturer clearly intends a portion of the payment to be provided to physicians, but given that the reason for the third party's involvement is specifically to maintain the anonymity of the respondents and sponsor, CMS does not intend this to be considered a reportable indirect payment or other transfer of value.
2. However, a “manufacturer that directs a third party to make payments to the top billing cardiologists in a certain city or the chiefs of staff of a certain class of hospitals should be required to report these payments, even though they do not have actual knowledge of the identities of such individuals 

38. CMS explicitly asserted that it would not expand the definition of covered recipients to “include other provider types.”  Thus, CMS recognized that it will “not be able to fully capture financial relationships between industry and prescribers, specifically non-physician prescribers such as nurse practitioners.”  However, “to the extent that applicable manufacturers make payments or other transfers of value to non-physician prescribers to be passed through to a physician, they would be indirect payments to the physician and would have to be reported under the name of the physician.”  CMS also concluded that “all physicians (including all providers types listed in the statutory definition) that have a current license to practice will be considered covered recipients.”  CMS also recognized that the term “physician” applies to physicians regardless of whether the physician is enrolled in Medicare, since the “statute did not indicate that physician covered recipients be limited to those enrolled in Medicare, Medicaid or CHIP.” 

Applicable Manufacturers 

39. Applicable manufacturers for whom total (gross) revenues from covered drugs, devices, biologicals, or medical supplies constituted less than 10 percent of total (gross) revenue during the fiscal year preceding the reporting year are only required to report payments or other transfers of value that are related to one or more covered drugs, devices, biologicals or medical supplies. 

40. The definition of applicable manufacturer does not include distributors or wholesalers (including, but not limited to, repackagers, relabelers, and kit assemblers) that do not hold title to any covered drug, device, biological or medical supply. 

41. “Entities based outside the United States that do have operations in the United States are subject to the reporting requirements.”  “entities that have operations in the United States are not permitted to circumvent the reporting requirements by making payments to covered recipients indirectly through a foreign entity that has no operations in the United States.”  CMS explained that “Such payments are considered to be made by the entity that is operating in the United States as an indirect payment or other transfer of value and must be reported as such, so long as the entity operating in the United States is aware of the identity of the covered recipients receiving the payments as required for all indirect payments or other transfers of value. 

42. CMS revised the definition of “applicable manufacturer” to exclude “hospitals, hospital-based pharmacies and laboratories that manufacture a covered product solely for use by or within the entity itself or by an entity's own patients” because it was not the “intent of the statute to include these entities as applicable manufacturers.” 

43. In addition, the definition of applicable manufacturer does not include pharmacies, including compounding pharmacies, that meet all of the following conditions:  (1) maintain establishments that comply with applicable local laws regulating the practice of pharmacy; (2) regularly engage in dispensing prescription drugs or devices upon prescriptions from licensed practitioners in the course of their professional practice; and (3) do not produce, prepare, propagate, compound, or convert drugs or devices for sale other than in the regular course of their business of dispensing or selling drugs or devices at retail to individual patients 

44. CMS provided clarification for what applicable manufacturers should do when a product becomes “covered” and thus, when data collection and reporting requirements will begin.  Agreeing with one comment, CMS will “allow the applicable manufacturer a grace period of 180 days following a product becoming "covered" to begin complying with the data collection and reporting requirements. 

Covered Drug, Device, Biological or Medical Supply; Related Covered Product 

45. CMS finalized that a covered drug, device, biological or medical supply is one for which payment is available under Medicare, Medicaid or CHIP, and “products which are reimbursed separately or as part of a bundled payment.”  Thus, CMS concluded that “bundled payment” would be interpreted as meaning IPPS, OPPS, and other prospective payment systems. 

46. If a “payment or other transfer of value is not related to at least one covered product, then applicable manufacturers should report “none.”  Conversely, “if the payment or other transfer of value is related to a specific product, which is not a covered product, then applicable manufacturers are to report “non-covered product.”  Finally, if the payment or other transfer of value is related to at least one covered product, as well as at least one non-covered product, then applicable manufacturers must report the covered products by name (as required), and may include non-covered products in one of the fields for reporting associated product.” 

47. With respect to reporting multiple products, CMS finalized that applicable “manufacturers may report up to five related covered products for each interaction.” If the interaction “was related to more than five products, an applicable manufacturer should report the five products which were most closely related to the payment or other transfer of value.”  

48. For drugs and biologicals, CMS finalized that applicable manufacturers must report the market name of the product and must include the NDC (if any).”  If a market name is not yet available, applicable manufacturers should use the name registered on clinicaltrials.gov.  CMS said that reporting the NDC will greatly help CMS aggregating the data by product.  However, if there is no NDC available for a product, it does not have to be reported.   

Payments to Group Practice 

49. CMS “finalized that payments provided to a group or practice (or multiple covered recipients generally) should be attributed to the individual physician covered recipients who requested the payment, on whose behalf the payment was made, or who are intended to benefit from the payment or other transfer of value.  “This means that the payment or other transfer of value does not necessarily need to be reported in the name of all members of a practice.”  For example, many payments or other transfers of value may need to be divided evenly, whereas others may need to be divided in a different manner to represent who requested the payment, on whose behalf the payment was made, or who was intended to benefit from the payment or other transfer of value.   

Payments Designated or At the Request

 50. If a covered recipient directs that an applicable manufacturer provide a payment or other transfer of value to a specific entity or individual, rather than receiving it personally, then the payment is being made "at the request" of such covered recipient and must be reported as described in this section (under the name of the covered recipient, but also including the name of the entity paid or "individual," in the case of an individual). 

1. For example, in the event that a covered recipient directs an applicable manufacturer to “donate a payment or other transfer of value—to which he would have otherwise been entitled—to a particular charity, the applicable manufacturer must report the payment in the name of the covered recipient and provide the name of the charity that received the payment at the covered recipient's request. 
2. However, if a covered recipient decides to “neither accept the payment or other transfer of value nor request that it be directed to another individual or entity, then the payment or other transfer of value that was offered by the applicable manufacturer does not need to be reported.” 

 

 

Update on IRS Medical Device Tax Final Rule

Section 1405(a) of the Health Care and Education Reconciliation Act (HCERA), which amended the Patient Protection and Affordable Care Act (PPACA), provides that any “manufacturer, producer, or importer” of taxable medical devices must pay a tax equal to 2.3 percent of the sales price of the device.  Over the past few years since the PPACA was enacted, the medical device industry has made numerous attempts to repeal the tax, and several legislative proposals have been introduced in Congress.   

In addition, dozens of reports from the medical device sector and other stakeholders have shown the significant affect this tax will have on medical device innovation and jobs.  Small device companies asserted that the tax would practically put them out of business.  The tax is expected to raise $29 billion in government revenues through 2022, reported Reuters.  

Nevertheless, the Obama administration and the Internal Revenue Service (IRS) moved forward with the implementation of the device tax by publishing final regulations in early December 2012.  Concurrently with the final regulations, the IRS also issued interim guidance (Notice 2012-77) dealing with certain pressing issues — including the determination of a manufacturer’s taxable sales price.  The tax applies to sales of taxable medical devices after Dec. 31, 2012. 

The government has defended the tax by noting that “medical device manufacturers and importers (who) will now have access to 30 million new customers due to the health care law,” Treasury Department spokeswoman Sabrina Siddiqui said in a statement.  However, the device tax “could cost upwards of $660 million annually in implementation costs alone.” 

The law firm of Arnold & Porter LLP provided an in-depth review of the final regulations and their impact on medical device manufacturers.  The IRS is requesting comments on the interim guidance (Notice 2012-77).  The comments are due by March 29, 2013. FierceMedicalDevices also provided a good summary of the IRS guidance. 

What is a “Taxable Medical Device”? 

A “taxable medical device” is any device defined under section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) that is intended for humans.  For purposes of the medical device excise tax, the IRS final rule has adopted a listing system in which taxable devices that are “intended for humans” are those that are listed with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA.  If a device is not listed with the FDA, but the FDA later determines that it should have been listed as a device, the device will be deemed listed as a device as of the date the FDA notifies the manufacturer in writing that such device should have been listed. 

The final rule also addresses biologics and combination products.  Biological products that are listed with the FDA under section 510(j) of the FFDCA are taxable medical devices; however, other biologics will not be considered taxable medical devices, including those listed under 21 C.F.R. part 607 (dealing with human blood products).   

Combination products — combining drugs, devices, and/or biological products — that are listed as a device with the FDA under section 510(j) also will be treated as taxable medical devices without exception.  Other combination products that are not listed under 510(j) as a device are not taxable under the new rules. 

Medical device excise tax and branded prescription drug fee.  

“Although public comments requested that manufacturers be exempt from the medical device excise tax in instances where a particular product is accounted for when computing the branded prescription drug fee enacted pursuant to PPACA, the IRS indicated that there is no statutory basis for doing so and that the health reform legislation did not provide for coordination between the two provisions,” the advisory said.  The IRS believes that “few, if any, combination products will be subject to both the medical device excise tax and the [branded prescription drug] fee.” 

Convenience kits.  

The IRS interim guidance also addresses the determination of the taxability of “convenience kits,” which are sets of two or more medical devices enclosed in a single package for the convenience of a health care professional or other end user.  For the moment, and until IRS and the Treasury Department issue further guidance, “no tax will be imposed upon the sale of a domestically produced convenience kit.  The medical device tax will still apply, however, upon the sale of a taxable medical device that goes into a domestically produced convenience kit.” 

Exclusions to the Tax 

Statutory exemptions.  There are specific statutory exemptions from the medical device excise tax for eyeglasses, contact lenses, and hearing aids. 

Retail exemption.  There is also an exemption for other devices that are “regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional.”  For purposes of this “retail exemption,” the IRS has adopted a “facts and circumstances approach” for evaluating whether a medical device is of a type that is generally purchased by the public at retail for individual use.   

The determination of whether a device is of a type that qualifies for the retail exemption is made based on the overall balance of factors relevant to the particular type of device. The fact that a device is of a type that requires a prescription is not a factor in the determination of whether or not the device falls under the retail exemption.  The factors for “regularly available” include: 

1. Whether consumers who are not medical professionals can purchase the device in person, over the telephone, or over the internet, through retail businesses such as drug stores, supermarkets, or medical supply stores and retailers that primarily sell devices (for example, specialty medical stores, durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) suppliers and similar vendors);
2. Whether consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional; and
3. Whether the device is classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices). 

The IRS factors for determining whether a device is designed primarily for use in a medical institution or office or by a medical professional include: 

1. Whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional;
2. Whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average individual consumer;
3. Whether the device is a Class III device under the FDA system of classification;
4. Whether the device is classified by the FDA under certain regulations (see p. 45)
5. Whether the device qualifies as durable medical equipment, prosthetics,orthotics, and supplies for which payment is available exclusively on a rental basis under the Medicare Part B payment rules, and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222. 

Safe Harbor 

The final regulations establish a safe harbor that identifies certain devices as exempt from the tax.  Specifically, the following devices are in the safe harbor: 

1. Devices that are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database
2. Devices that are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading.
3. Devices that are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database
4. Devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in Subpart C of 42 CFR part 414 (Parenteral and Enteral Nutrition) and Subpart D of 42 CFR part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices), for which payment is available on a purchase basis under Medicare Part B payment rules, and are—

1)    “Prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional;

2)    “Parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);

3)    “Customized items,” as described in 42 CFR 414.224;

4)    “Therapeutic shoes,” as described in 42 CFR 414.228(c); or

5)    Supplies necessary for the effective use of durable medical equipment (DME), as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100-02). 

The guidance provides fifteen (15) examples of how the rules and factors IRS enumerated will be applied. 

Paying the Medical Device Excise Tax 

The interim guidance published by the IRS includes guidance for determining the constructive purchase price — based upon distribution chains — upon which the tax will be based.  The manufacturer or importer of a taxable medical device is responsible for filing Form 720, Quarterly Federal Excise Tax Return, and paying the tax to the IRS. Form 720 is filed with the IRS quarterly, and the first return to report the medical device excise tax will be due by April 30, 2013, for the quarterly period including January, February, and March 2013.   

Manufacturers and importers must, however, make semi-monthly deposits where the tax liability exceeds US $2,500 for the quarter.  Failure to file or pay the taxes due may result in penalties assessed by the IRS.  Under certain circumstances, these penalties may be abated.  The IRS has additional information about deadlines and payment on its website, in the form of frequently asked questions (FAQs). 

Discussion 

FierceMedicalDevices noted that while the IRS acquiesced to expanding its over-the-counter provision to include devices bought over the Internet or by telephone, but requests to better define "affordable," elaborate on "minimal or no training" and to exempt Class III devices were all spurned by the IRS.

 Mark Leahey, CEO of the Medical Device Manufacturers Association, said the final ruling does nothing to dull the blow the 2.3% tax will deliver to jobs and innovation in the industry.  “There is growing bipartisan support in Congress to repeal the medical device tax, and MDMA remains committed to working with elected officials to fix a policy that was a bad idea when it passed, and is proving to be more harmful than imagined to our economy and patient care as it gets closer to implementation,” Leahey said in a statement. 

Companies including Boston Scientific Corp, 3M Co and Kimberly-Clark Corp have been lobbying the U.S. Congress for a repeal of the tax.  A repeal bill passed the Republican-controlled U.S. House of Representatives in June, but it has not been voted on by the Democratic-controlled Senate.  Democratic Senator Kay Hagan (D-NC), however, “is looking to her state's business leaders to find a way to repeal the 2.3% medical device tax and make up for the make up for the $30 billion in revenue it's slated to raise to support healthcare reform,” reported MassDevice.com. 

In one potentially problematic aspect of the tax, companies selling dual-use products to medical and non-medical customers must pay the tax on those products, potentially putting them at a competitive disadvantage, said Lew Fernandez, a director at PricewaterhouseCoopers LLP and a former IRS official.  For example, it remains “an open question” when latex gloves come under the tax, he said.

HHS Offers Look into the Future for Meaningful Use Stage 3

One of the central pieces to the Affordable Care Act (PPACA), along with the American Reinvestment and Recovery Act (ARRA) was the implementation and “meaningful use” of electronic health records (EHRs)—through the HITECH provision.  Consequently, the Office of the National Coordinator for Health IT's (ONCHIT) HIT Policy Committee has released a copy of its proposed recommendations for public comment. 

Under the 2009 federal economic stimulus package, health care providers who demonstrate meaningful use of certified electronic health record systems can qualify for Medicaid and Medicare incentive payments.  The final rules for Stage 3 of the program are expected to take effect in 2016. 

The 38-page document, unveiled at the committee’s meeting Nov. 7, recommends some of the percentage thresholds be increased and suggests several new objectives for stages beyond Stage 3.  Some of the provisions new to Stage 3 include offering patients the capability to submit patient-generated information, and to request amendments to their records online, requiring electronic health records to receive, generate or access appropriate immunization recommendations, and requiring EHRs to be able to query other entities for outside records. 

One recommendation would require participating hospitals and physicians to “provide 10% of patients with the ability to submit patient-generated health information to improve performance on high-priority health conditions and/or to improve patient engagement in care.”  The committee also is seeking input about: 

• Whether existing standards could incorporate medical device data from the home; and
• How consumer-reported data could be incorporated into clinical quality measures.  

In a prior meeting this past June, some of the concepts addressed included aligning with emerging payment, supporting population health, and tools to assist interaction with patients "that may be a bit more difficult" according to the meeting materials.  At another meeting in late October, the Committee had several potential opportunities for inclusion of prescription drug abuse: 

• Including prescription drug monitoring program (PDMP) prescription drug history in medications reviews before a prescriber finalizes a controlled substance prospection order;
• Adopting a clinical quality measure that reports a provider's performance based on the use of the PDMP prescription drug history;
• Mandatory provider registration with the applicable state PDMP drug monitoring program
• Requiring a single sign-on or hyperlink to access PDMP data. 

Reporting the release of the recommendations, FierceEMR noted that the committee explained that to be considered for Stage 3, an objective should support new models of care, address national health priorities, have broad applicability, promote advancement, be achievable, and reflect the reasonableness/feasibility of EHR products.  The committee prefers that standards for EHRs should be available if not widely adopted.

The committee also said that it recommends that “Stage 3 is the time to begin to transition from a setting-specific focus to a collaborative, patient- and family- centric approach. 

ONC added several additional items for public comment, including questions on identity matching, transitions of care and the need for health IT safety risk assessments.  The recommendations will be published in the Federal Register later this month; public comments will be accepted for 45 days after that date.  Here is where public comments are to be submitted. 

The committee said that it will analyze the comments and hold further public meetings about Stage 3 in 2013 before formal rules are issued.

In addition to these rules, ONCHIT recently announced applications to be considered for Health IT Policy and Standards Committee Workgroups.  Also, ONCHIT released a new primer on the 2014 Edition of the certification criteria for electronic health records under Stage 2 of the Meaningful Use program. The primer provides an overview of the new certification requirements and compares the 2014 Edition to the current 2011 Edition. The materials also detail how to prepare for the objectives and clinical quality measures, and outline timing and penalty concerns

 

The 2012 Elections and it's Impact on Healthcare Policy

Last week, in another historic Presidential election, Americans reelected President Barack Obama in a decisive victory that will lead to the continued full implementation of the landmark Patient Protection and Affordable Care Act (PPACA or ACA).  The Senate will remain in the control of Democrats, adding several more seats.  The House, however, will remain in Republican control—making it very difficult to overturn or change any piece of the ACA in the upcoming Congressional session.   

Shares in hospitals and other healthcare companies that will benefit from the health reform law jumped last week, but health insurers fell as the law sets limits on their profits and sets mandates on coverage. 

Big pieces of the ACA will be moving forward—including the Medical Loss Ratio (MLR) for insurance companies; coverage of pre-existing conditions; insurance for 26-year-olds; and bans on lifetime limits for insurance coverage.  It also means that the Patient Centered Outcomes and Research Institute (PCORI), which will carry out and offer grants for comparative effectiveness research will continue.   

Importantly for the Senate, there will be four (4) openings on the Senate Finance Committee, which oversees all of the federal dollars spent on health care; one opening on the Senate Health Education Labor and Pensions (HELP) Committee; and the Special Committee on Aging will be losing its Chairman Herb Kohl (D-WI)—who was co-author of the Physician Payment Sunshine Act—which we are watching closely for the final regulations.   

In addition to these policies and changes, Congress and the Obama administration must also face the Physician Payment Fix, or Sustainable Growth Rate (SGR)—which is scheduled to shrink by 29.5 percent on January 1, 2013—and another debt ceiling fight.   

Many health agencies will be affected by the President’s re-election.  Below is a summary of some of the major shifts in personnel, as well as some analysis and projections for how the ACA will continue to be implemented, including dates and important deadlines.  Analysis comes from several news stories, appropriately references, as well as DC based healthcare lobbying firm Thorn Run Partners and law firm SNR Denton’s 34-page report on what’s ahead for the 113th Congress and the Obama Administration over the next four years.

With many proposed and finalized regulations set to be issued in the next few weeks by many federal health agencies, such as the Centers for Medicare and Medicaid Services (CMS), the Office of the National Coordinator for Health Information Technology (ONCHIT), and the Department of Health and Human Services (HHS), healthcare stakeholders will have their hands full.  Rules and regulations will include and issues affected by the election include: 

Medicare 

• Sequestration – Medicare could be cut by two percent
• 2.3% Medical Device Tax
• Health Plan Provided Tax – The ACA included a health plan tax to fund part of the ACA.  Health plans serving public programs (Medicare, Medicaid and CHIP) are very concerned about the impact of the tax and want to be carved-out from the tax. 
• Medicare Part D Rebates –The Congressional Budget Office (CBO) has scored additional rebates in the Part D program as a savings well over $100 billion to the federal government; Average Sales Price (ASP) – Adjustments in the formula could be made to generate budget savings.
• Independent Advisory Board (IPAB) – with Democrat gains it is unlikely to be repealed.
• Reauthorization of Medicare Advantage Special Needs Plans (SNPs) – authorization for the program expires at the end of 2013.  However, to ensure the 2014 contract year can proceed, Congress must act to extend authorization by early 2013.  MedPAC has recommended changes to the program.
• The Medicare Competitive Bidding Program for durable medical equipment is set to expand drastically in 2013, although some are working to postpone its implementation or replace it entirely.  

The ACA will also include $716 billion in Medicare cuts. That’s a major source of funding for the law’s expanded health coverage, and it comes mainly from trimming Medicare payments to providers and paying less to Medicare Advantage plans in high-spending areas.  The catch is, about 70 percent of the first wave of Medicare Advantage cuts are effectively being masked right now through a separate program giving plans quality bonus payments, according to the Government Accountability Office.  Over the next two years, the bonuses offset less of the law’s cuts. 

Medicaid 

• States making final decisions on Medicaid expansion to all persons with incomes below 133 percent of the federal poverty level.  The ACA provides 100 percent federal funding for 2014, 2015 and 2016.  In 2017 the rate begins to decrease, but never below 90 percent.  However, some are concerned this commitment could be altered.
• Medicaid Per Capita Caps, Block Grants or a Blended Federal Rate – As part of entitlement reform discussions, it is possible Congress could alter the formula used to determine how much funding states receive for their Medicaid programs.
• Medicaid Provider Taxes – Proposals to reduce the cap on provider taxes, thus limiting the amount of funding they can generate, have been advanced by the Simpson-Bowles Commission and others.
• Duals Demonstrations - The Centers for Medicare and Medicaid Services (CMS) is expected to proceed to the roll out of the demonstrations projects in 26 states to integrate Medicare and Medicaid benefits and services for dual-eligible beneficiaries. 

A handful of red-state governors, like Texas Gov. Rick Perry and Florida Gov. Rick Scott, have ruled out expansion. 

Insurance Exchanges 

The insurance exchanges are marketplaces, run either by the state, the federal government, or both, where people can get insurance coverage if they do not have insurance through their employer or a government program like Medicare.  Of course, if an individual does not have health insurance they will be penalized or taxed—unless they fall in one of the several exceptions, which are mostly related to income and poverty levels and the ACA provides grants or subsidizes such persons insurance.  The Congressional Budget Office has already raised its cost estimates for the subsidies by $112 billion — to $574 billion between 2012 and 2019 — before they even start. 

The first year, the penalty for ignoring it is only $95, or 1 percent of income, whichever is greater.  But the health plans have to start covering everyone with pre-existing conditions in 2014.  The penalties rise by 2016, but that makes two years that the insurers have to take in everyone, before the higher penalties help bring more healthy people their way. 

• States must indicate by this Friday November 16, 2013 the type of exchange they plan to operate – state, partnership or federally facilitated.
• Those states that have not chosen their exchange benchmark health plan are expected to do so by November 16, 2012 (the original deadline was October 1).
• The Center for Consumer Information and Insurance Oversight (CCIIO) must certify by January 1, 2013 whether a state is ready to pursue a state exchange.
• Numerous regulations governing state health exchanges are needed to allow states to create or finalize their exchanges.
• Some have suggested federal subsidies for persons receiving coverage inside of the health insurance exchanges could be reduced during deficit negotiations. 

According to POLITICO, 13 states and the District of Columbia have said they’ll definitely set up their own exchanges, and there are “somewhere between 20 and 30” states that could either build them or seek partnerships, citing to Joel Ario, managing director of Manatt Health Solutions and the former director of the HHS Office of Health Insurance Exchanges.  The rest will let the feds do it.  Here’s a map of states from Kaiser.  

There is a lot of risk that comes with the exchanges.  “To be successful, the health exchanges have to attract a mix of healthy and sick people so that the costs balance out.  There’s a risk that some won’t attract enough healthy people.  That means the people who do join will be those with health problems — leading to high premiums and the “rate shock” Holtz-Eakin warned about.”   

How it’s shaping up should be clear when enrollment opens next October. Kaiser’s Altman expects a mixed verdict, because states are so diverse.  “There will be great success stories and there will be failures, and a lot of state exchanges that will fall somewhere in the middle,” he said. 

There is also the numerous surveys and reports showing that many employers will decide its cheaper to stop covering their workers, pay a fine, and let them get coverage through the exchanges instead.   

HHS 

Many speculate that HHS Secretary Kathleen Sebelius will remain in office, particularly because holding another hearing on the Senate to confirm a new Secretary would open the door for Republicans to make continued criticisms of the ACA. 

Food and Drug Administration (FDA) 

Most also speculate that FDA Commissioner Margaret Hamburg is expected to stay at least through the first year of Obama’s second term, which is typical for senior staff.  Some speculate that Hamburg’s continued presence will mean continued scrutiny of manufacturers, and a continued focus on stepping up the pace of drug approvals.   

Several of Hamburg’s senior advisors have already shifted positions.  Jeannie Ireland has changed jobs and David Dorsey, a former Kennedy staffer, has moved out of Director in the Office of Policy—the regulations writing office.  Center for Drug Evaluation and Research (CDER) Director Janet Woodcock, and John Jenkins, head of CDER’s Office of New Drugs, are expected to stay in place, at least for now.  These folks are key to the pipeline for new drugs, which has been operating quite smoothly during the reign of Commissioner Hamburg.  Rachel Behrman, who supervises the Office of Prescription Drug Promotion (OPDP), also is expected to remain, which likely will lead to few changes in the OPDP staff or policies.  

Forbes did a good article on the outlook of the election for pharma and a historical look at FDA during Obama’s first term.  FDA Matters also did a good analysis of what the agency would look like after the election.  

On the Horizon  

There is a good possibility of a “lame duck” session in Congress. Without a deal on the “fiscal cliff,” the sequestration of government staff funds could cause huge layoffs throughout government, including FDA’s CDER—and up to $300 million at FDA.  Assuming that at least a short-term solution is found to avoid the “fiscal cliff,” the larger debate on the reform of the corporate tax code will begin in 2013.  

The Coalition for Healthcare Communications expects pressure on privacy from Senate Democrats and Obama appointees who will continue efforts  to limit the marketing use of data collected online.  Sen. Jay Rockefeller (D-WV), the most aggressive Member seeking limits and explicit op-out rules, will continue as the key chairman of the Senate Commerce Committee. On the other hand, two major industry supporters won re-election to the Senate: New York’s Kirsten Gillibrand and Kansas’ Claire McCaskill.   

Meanwhile, the House Commerce Committee leadership, which largely is supportive of the self-regulatory privacy program, will see few Member or staff shifts.  However, senior staff members who favor privacy rules are expected to remain in control at both the Federal Trade Commission (FTC) and the Department of Commerce. 

In addition to these issues, Liberty University is challenging the constitutionality of the ACA provision that requires most businesses with more than 50 workers to provide health coverage or pay a fine—and has vowed to fight all the way to the Supreme Court.  There are also numerous lawsuits regarding the mandatory requirement that insurance cover contraception. 

Health Care Regulations After the Election -- Implementation at Light Speed

Sometime tonight or early tommorow, the 2012 Presidential election will be decided, and according to a recent article from POLITICO, we are likely to see a “post-election flood of ‘Obamacare’ rules regardless of the outcome.  This may include the long awaited final regulations for the Physician Payment Sunshine Act, which many speculate have been finished but merely waiting for the election to be decided.   

The article noted that the Department of Health and Human Services (HHS) remained busy writing regulations to implement the Affordable Care Act, but slowed down the roll out in the past few months because of the election.  This is typical of any incumbent to ensure no controversial rules or regulations are proposed, finalized or implemented. 

POLITICO reported that HHS is expected to issue its final regulations about the health insurance exchanges, which states face a November 16 deadline to tell the Obama administration whether they will implement such exchanges. 

“One of the most important regulations not yet issued is the potentially controversial one to specify what health insurance policies must cover. And final rules have not been issued on other significant pieces of the law, such as those governing the health insurance exchanges, the individual mandate and how to define “full-time” and “part-time” employees in regard to employer penalties.” 

“If Obama wins, that work is likely to continue through the early years of his second term. Democrats will want the law put in place as quickly as possible. They face a late 2013 deadline to have the exchanges ready to go.” 

If Romney wins, Democrats may try to push through the regulations even faster because “Any rules or regulations that are not final by Nov. 22 — 60 days before Romney would be sworn in — can be easily put on hold on Jan. 20.”  This makes the case for issuing the final regulations for the Sunshine Act even more likely to come shortly after the election.  After Inauguration Day, Romney has promised that implementation of the law would come to a crashing halt. 

HHS Secretary Kathleen Sebelius has held fewer news conferences on the law than she did in the first two years after the law passed.  That’s all the more reason that David Merritt, managing director at Leavitt Partners, is expecting a “torrent of regulations” after Election Day.

We will provide post election coverage on Wednesday and will be closely monitoring the Federal Register to provide a complete and detailed analysis of the finalized Sunshine Regulations when CMS issues them. 

 

Affordable Care Act: Medical Device Tax a Problem for Innovation

One of the most controversial provisions from the Patient Protection and Affordable Care Act (ACA) is a provision that will impose a 2.3% excise tax on the medical device industry, which is set to take effect in 2013.  The tax applies to all sales occurring on or after January 1, 2013, even though coverage for the newly insured begins in January 2014; and the tax is based on top line sales, not profit.  

Since the ACA was passed, numerous attempts have been proposed to repeal the tax but have been unsuccessful.  Meanwhile, numerous reports have shown that the device tax would have a significantly adverse impact on the medical device industry.  Nevertheless, industry has not received guidance on how the tax will be implemented or collected.  The primary justification for the tax appears to be the expectation for an increase in volume of newly insured patients for medical device companies. 

Over the past few decades, the Medical Device industry (or Med Tech) has positively affected the quality of US health care in a cost effective manner.  In addition, the industry provides substantial contributions to the economy through innovation, quality jobs, higher earnings, and sales.  Consequently, a recent report and white paper from Roth Capital explains the significant impact the device tax will have on the industry, healthcare providers, and patients.  Specifically, the report outlines the impact the medical device industry has on the US economy and the US health care system and identifies the negative effect the Medical Device tax will have on an industry. 

Impact of the Medical Device Industry 

The US Med Tech industry ships $136 billion in products, pays $25 billion in salaries, and employs well over 400,000 individuals.  Investment in quality health care has provided positive economic returns and improved patient outcomes:  

• Death rates are down 16%,
• Life expectancy has increased by over 3 years (+4%), and
• Disability is down 25%.  

Medical Technology is cost effective: Prices grew slower than Consumer Price Index (CPI) and remained consistently only 6% of national health expenditures.  For example,

Smaller companies account for innovation and jobs: 80% of Medical Device companies have fewer than 50 employees and 98% have fewer  than 500.  In addition, more jobs, earnings, and sales: Each medical technology job generates an additional 1.5 jobs in a given state, as well as 90% more earnings and sales.  

Why is Med Tech already suffering?  

Unpredictability in the regulatory environment is already hurting the industry: 53% of companies cite this as biggest challenge in running their business today.  In addition, uncertainty of reimbursement has reduced investment in the category.  Moreover, existing businesses impact by hospitals pushing back on pricing and volume.  

Venture Capital (VC) investment is already on the decline, particularly for early stage companies. This is a good indicator for the health of an industry.  Med Tech appears to be plagued mostly by regulatory uncertainty.  Furthermore, Med Tech Initial Public Offerings (IPOs) have been virtually non-existent in the past four years, which serves as another indicator of a change in the industry’s health.  Additionally, early stage, “Series A” funding is projected to shrink again in 2012, which tends to be a leading indicator of innovation in any industry, as it typically targets those new, and often more innovative ideas, that provide bigger opportunities for economic development and job growth. 

How ACA Should Affect the Med Tech Industry  

The white paper maintains that the rationale for applying the device tax is flawed for several reasons.  First, newly insured patients are likely to be much younger, and therefore not need medical devices.  After choosing five large medical device categories—(1) Heart Valves (70); (2) Implantable Cardiac Defibrillators (60’s); (3) Cardiac Stents (62); (4) Knee implants (64); and (5) hip replacements (75.1)—the average age of patients was well into the 60s for many devices and even 70s or others. Consequently, the report found that 80% of uninsured patients who will be getting insurance under the ACA are under 45 years old and 88% are under 55, well below the average device user.  Only 2% of the uninsured are over 65 years old. 

Second, hospital purchasing appears to be getting worse.  Medical device customers (i.e., hospitals) are attempting to reduce utilization and pricing in the future.  Roth conducted a survey of 13 companies representing just over $14.5 billion in industry revenue, which found that 77% expected purchasing behavior to worsen, and notably none anticipated a better environment.  

Finally, universal health care in Massachusetts provides an example of what might happen nationwide.  The reports finding showed that in Massachusetts, 8 out of 9 companies experienced negative comparative growth rates in Massachusetts as compared to the rest of the US following the implementation of universal health care in that state.  Using the six case studies, the report found that trends in Massachusetts, contrary to an expectation for higher medical device utilization rates, actually lagged the rest of the US in the years following the legislation of universal health care.   

In comparison to five other states in close proximity to Massachusetts, the result was the same: Growth in Massachusetts lagged that of the states in geographic proximity. The percentage of revenue out of Massachusetts between the 2002-04 through 2009-12 timeframe declined, suggesting no windfall was experienced in these businesses. 

Negative Impact of Device Tax on the Industry’s Financial Health  

Roth’s analysis showed that smaller companies, typically the industry’s innovators and job creators, take a disproportionate hit to profits as a result of the Medical Device tax. Greater than 70% expect a somewhat to very negative impact.  Of the 18 small-cap companies used in this analysis, they calculated an approximate average earnings decline of 34% on an aggregate basis.  

All 14 large-cap companies had less than a 10% decline in earnings, a stark contrast from the small cap group where only one of 22 companies had an earnings decline under 10%.  Greater than 70% expect a somewhat to very negative impact from the Medical Device tax.  The report also found an escalating hit to R&D budgets of smaller companies. 

The Device Tax Hurts Jobs & Innovation  

Roth also surveyed companies on their latest plans to manage through the implementation of the Medical Device tax next year.  The report determined that (1) over 80% would either cut jobs or forego new hires and (2) more than 75% would either cut or forego new R&D projects as a result of the tax.  The report also found that 85% of companies would be expanding overseas.   

Brendan Benner, vice-president of public affairs for the Medical Device Manufacturers Association (MDMA) noted that 80% of medical device companies have less than 50 employees.”  He noted how “these are companies that are literally just ramping up, they might have one, two, maybe three technologies or devices they are trying to get these into the marketplace, so they may have revenue, [but] they are not even close to profitability yet.”  This, of course, makes paying a device tax very problematic.   

He noted that there will be companies who will be paying a tax to the IRS without earning one penny in profits.  Although the IRS has not put out its final regulation, a 2.3 percent excise tax on $1 million in revenue, would be a $23,000 bill just for the excise tax—that’s on top of any other corporate income tax it would owe on any profits.    

Conclusions  

Ultimately, the Roth report noted that the device tax will only hurt patient care, and exacerbate current trends of reduced utilization and reimbursement of devices.  Until the Presidential election is over, we likely will not see a final rule from the IRS.  If Obama is re-elected, the device industry may be out of luck, unless Republicans can maintain control of the House and gain a majority in the Senate

CMS Medicare Prescription Plans Remain Constant – The Donut Hole is Filled

The Centers for Medicare & Medicaid Services (CMS) recently announced that the average basic premiums for Medicare prescription drug plans are projected to remain constant in 2013.  The average 2013 monthly premium for basic prescription drug coverage is expected to be $30. Average premiums for 2012 were projected to be $30 and ultimately averaged $29.67.  At the same time, since the law was enacted, seniors and people with disabilities have saved $3.9 billion on prescription drugs as the Affordable Care Act began closing the “donut hole” coverage gap.  Savings will increase over time until 2020, when the coverage gap will be closed.  

“Premiums are holding steady and, thanks to the health care law, millions of people with Medicare are saving an average of over $629 each year on their prescription drugs,” said Health and Human Services Secretary (HHS) Secretary Kathleen Sebelius.   

"Millions of people with Medicare have been paying less for prescription drugs thanks to the healthcare law," said Marilyn Tavenner, the head of the Centers for Medicare and Medicaid Services.  "Seniors and people with disabilities have already saved close to $4 billion. In 2020, the doughnut hole will be closed thanks to the Affordable Care Act."

In Maryland, the Baltimore Sun reported that seniors have saved $56.5 million on prescription drug costs because of a provision under health care reform that has eased the Medicare donut hole. 

Today’s projection for the average premium for 2013 is based on bids submitted by drug and health plans for basic coverage during the 2013 benefit year, and calculated by the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary.  

The upcoming annual enrollment period – which begins Oct. 15 and ends Dec. 7, 2012 allows people with Medicare, their families and their caregivers to choose their plans for next year by comparing their current coverage and quality ratings to other plan offerings. New benefit choices are effective Jan. 1, 2013. 

Because of the Affordable Care Act, out-of-pocket savings on medications for people with Medicare continue to grow.  Last month, CMS announced that more than 5.2 million people with Medicare have saved over $3.9 billion on prescription drugs in the Medicare Part D donut hole since the law was enacted.  In the first half of 2012, over 1 million people with Medicare saved a total of $687 million on prescription drugs, averaging $629 per person this year. 

As a result of the Affordable Care Act, coverage for both brand name and generic drugs in the coverage gap will continue to increase over time until 2020, when the coverage gap will be fully closed.   

This year, people with Medicare received a 50 percent discount on covered brand name drugs and 14 percent coverage of generic drugs in the donut hole. 

In 2013, Medicare Part D’s coverage of brand name drugs will begin to increase, meaning that people with Medicare will receive a total of 52.5 percent off the cost of brand name drugs (a 50 percent discount and an additional 2.5 percent in coverage) and coverage for 21 percent of the cost of generic drugs in the donut hole.

Physician Payment Sunshine Act: Senate Special Committee on Aging Roundtable “Let the Sunshine in: Implementing the Physician Payment Sunshine Act"

The U.S. Senate Special Committee on Aging held a roundtable discussion entitled, “Let the Sunshine in: Implementing the Physician Payments Sunshine Act.”  As we have written many times over the last four years, the Physician Payment Sunshine Act (Sunshine Act)—Section 6002 of the Affordable Care Act (ACA)—requires public disclosure of the financial relationships between physicians and applicable manufacturers, including pharmaceutical, medical device and biologics companies.   

The law also required the Department of Health and Human Services (HHS) to establish reporting procedures for manufacturers to submit information, as well as procedures for making that information available to the public, by October 1, 2011.  While the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule in December 2011, the law has yet to be implemented. 

The roundtable was moderated by Dr. Mark McClellan, Director, Engelberg Center for Health Care Reform at the Brookings Institution, and former CMS Administration and Commissioner of the Food and Drug Administration.  Senators Charles Grassley (R-IA) and Chairman of the Aging Committee Herb Kohl (D-WI)—co-authors of the Sunshine Act—made opening remarks.  Senator Richard Blumenthal (D-CT) also made comments.  While the CMS representative was in attendance, he not able to give substantive comment on the finalization of the rule—frequently noting he could not speak on a particular area or timeline.  Other round table members and their written statements included:

Diane Biagianti, Vice President, Chief Responsibility Officer, Edwards Lifesciences, Irvine, CA

Niall Brennan, Director, Policy and Data Analysis Group, Centers for Medicare and Medicaid Services, Washington, DC

Daniel Carlat, MD, Project Director, Pew Charitable Trusts, Washington, DC

Jeremy Lazarus, MD, President, American Medical Association, Washington, DC

Elizabeth O'Farrell, Senior Vice President, Policy and Finance Eli Lilly & Company, Indianapolis, IN

Douglas Peddicord, Ph.D., Executive Director, Association of Clinical Research Association (ACRO), Washington, DC

Charles Rosen, MD, Clinical Professor of Orthopedic Surgery, University of California, Irvine School of Medicine, Orange, CA

James H. Scully, Jr., MD, Medical Director and CEO, American Psychiatric Association, Arlington, VA  

Both Kohl and Grassley expressed their disappointment that almost one year after the statutory deadline to implement the Sunshine Act, and over two years since the passage of the ACA, CMS has still not issued a finalized rule.  They both expressed reaching out to CMS numerous times over the past year get a timeline for implementation for CMS, which has said it expects a final rule by the end of the year. 

Interestingly, Grassley expressed concern that “rumors” indicated that the rule was final, and that the Office of Management and Budget (OMB), which must review all regulations before they can be finalized, is stalling the rule until after the presidential election.  Grassley expressed his frustration, and noted the consequences the delay was having on industry and consumers due to the lack of guidance.  He recognized how companies need to buy and implement systems to track payments, train their employees, and ensure proper use of such systems.   

Kohl noted that the bill was “never meant to be burdensome.”  However, consumers and manufacturers have been left “in the dark” without a final rule.  Accordingly Kohl and Grassley urged CMS to finish the rules “and ensure that the definitions and guidelines are clear and workable for industry and patients alike … and the information is available to the public … easily understood, and provide[d with] enough context for patients to understand why their doctors’ names appear on this website.    

One interesting exchange happened when Senator Blumenthal asked if CMS could specifically reaffirm the time line for implementation of the bill including the date of data collection.  CMS acknowledged that this was a difficult question to answer as they were still in the clearance process, but they were hopeful that some data collection will occur in 2013.  Senator Blumenthal was not pleased with the use of the word hope and was encouraging CMS to provide more certainty. 

Consequently, Dr. McClellan focused the hearing on several major areas of concern: 

1. Continuing medical education (CME)
2. Payments for direct and indirect research
3. Indirect payments/third party payments
4. Implementation
5. Public reporting, online website
6. Process for resolving payment reporting disputes between manufacturers and doctors 

Continuing Medical Education (CME) 

As they acknowledged, CMS received numerous comments regarding CME and the impact the Sunshine Act may have on CME stakeholders.  American Medical Association (AMA) President Jeremy A. Lazarus, MD, provided substantial comments indicating AMA’s support for excluding certified CME payments from Sunshine Act reporting.  He noted that CMS’s proposed inclusion of certified CME is inappropriate because “the statutory language does not support such an interpretation.” 

With respect to CME, Lazaurs noted how AMA’s House of Delegates adopted an ethics policy on Financial Relationships with Industry in CME proposed by AMA’s Council on Ethical and Judicial Affairs (CEJA), which identifies the core ethical principles of transparency, independence, and accountability.  The policy provides practical ethical guidance to maintain the independence and integrity of continuing professional education and promote public trust. 

The AMA agreed that other educational activities including those that are characterized as CME (but which are not certified) could be subject to reporting as there could be direct transfers of value to individual physicians and industry could control and/or influence the content of the educational materials. He explained, however, that certified CME is independent and manufacturers have no control or input into the content, the speakers, slides or the attendees. In light of the foregoing, the AMA asserted that certified CME is not covered by the Sunshine Act and CMS should make this clear. 

Of interest, AMA noted that previous versions of the Sunshine Act, actually required reporting on CME or other educational programs.  Accordingly, because the statute does not include a reference to CME, AMA argued that the statutory language is clear “and certified CME does not involve transfers that trigger reporting.” 

On a similar note, Eli Lilly maintained that indirect payments—which CME would fall under—be reportable only when the applicable manufacturer controls or influences the selection of the covered recipients engaged by the third party.  Lilly noted that requiring such third party payment reporting based on CMS’ proposed standard would “require substantial changes in its existing processes to achieve.” Further, “such an expanded approach would challenge the independence of third parties and their justifiable interest in protecting their own dealings and compensation arrangements as proprietary and confidential.”  

Only one panel member—Dr. Charles Rosen, Clinical Professor of Orthopedic Surgery, University of California, Irvine School of Medicine was against the idea of exempting certified or accredited CME from reporting.  Dr. Rosen, however, seemed to have a misunderstanding of the accredited CME process for accredited providers that receive grants or support from pharmaceutical and device manufacturers.  In fact, Dr. Rosen repeatedly referred to the entity as the ACGME instead of the Accreditation Council for Continuing Medical Education (ACCME) not graduate medical education.   

Nevertheless, the strong support offered by the AMA, and the agreement among other panel members—including the lack of any other real objection to a certified CME exemption—demonstrated a clear consensus that certified CME is beyond the intent of Congress and the scope of the Sunshine Act.   

45-Day Review, Dispute Resolution 

AMA expressed its concern that the proposed rule does not require manufacturers to provide physicians with the option of an ongoing opportunity to check reports nor does it indicate that the agency or some other independent third party will arbitrate disputes between physicians and manufacturers. They were also concerned with having only the 45-window once a year to challenge reports.  AMA noted that 45 days is a minimum, and that when disputes occur, Congress showed no intent that such disputed payments still be reported in the same time frame.  As a result, AMA maintained that the proposed rule would deny physicians substantive and procedural due process rights. 

Instead, AMA asked that CMS provide physicians with ongoing access to reports to make modifications and establish a neutral arbiter to resolve disputes.  AMA’s concern was that inaccurate reporting could mislead people, leading to government investigations, disciplinary actions, and other adverse consequences to physicians.   

Covered Recipient Notification/Preview: Under Edwards Lifesciences’ voluntary disclosure program, we provide physicians with reasonable notice and a preview of the information we plan to publish on our website. This gives them a better understanding of the process, sets their expectations so that they can respond to patient inquiries, and provides them an opportunity to verify our data. CMS’s draft regulation appropriately contemplates the need for a dispute resolution process prior to publication by CMS, and we believe that providing a minimum amount of time for a reasonable “back-and-forth” between the manufacturer and physician is necessary once CMS makes the data available to physicians.

Accurate Attribution, Meals 

AMA and several others took issue with CMS’ proposal to attribute a transfer of value/payment to a physician even when a physician did not receive value directly (and even in some instances indirectly) based on employment, affiliation, or association with an entity or person that did receive a direct transfer. AMA noted, however, that the Sunshine Act provides for actual transfers of value to a covered physician, not estimates.  CMS’ proposal to apportion payments among physicians in the organization or institution could result in grossly misleading reporting.   

Physicians employed by a large organization or institution could have funding and transfers imputed to their report that they cannot reject, did not receive directly (or even indirectly), and for which they have no knowledge so they are unable to effectively challenge it.  AMA also strongly opposed CMS' proposal to attribute to a physician transfers of value or payment that are made to other individuals where the physician personally did not request the transfer, it was not designated on their behalf, and they did not receive it. 

In particular, this issue was addressed regarding the provisions of meals or food. Lilly maintained that the meal allocation methodology in the proposed rule is unworkable and inappropriate in several ways:  

(1)  It would require applicable manufacturers to undertake the operationally unmanageable task of identifying and attributing value to physicians that do not partake in a meal but are employed by or associated with a group practice or department;

(2)  It would require allocation of meal expenses to physicians with whom the applicable manufacturer does not actually interact (and may be legally restricted from interacting); and

(3)  It would force attribution to physicians and/or teaching hospitals of meal value provided to non-physician employees, functionally broa-dening the statutory definition of “covered recipient.”  

Lilly asserted that the final rule should not force manufacturers to attribute value to anyone who does not actually receive a meal because it is factually inaccurate and therefore misleading and will result in disputes and confusion regarding the reliability and accuracy of the reported data. Further, “requiring manufacturers to identify affiliations and employment relationships for persons attending business meals adds an inordinate level of complexity in record keeping and related processes, which will substantially increase the burden and cost relative to the added benefits of these incremental disclosures. Finally, flexibility will be necessary to address variables such as opt-outs, excess food, and no-shows.”  

Implementation 

Diane Biagianti, Vice President and Chief Responsibility Officer Edwards Lifesciences Corporation, expressed her concern about implementing the Sunshine Act, noting that it took over 6 months to revamp and automate their systems, processes and procedures to meet the requirements under the law.  She also noted that it may also take several months to adjust their current reporting systems – and launch an effective employee training program – if they have not guessed properly on what CMS will require. 

She recognized that other manufacturers, who may not have their own voluntary program or the resources to implement fully in anticipation of the final regulations, may not be in as enviable position as Edwards in terms of preparation. Biagianti noted that a majority of medical device companies in the U.S. are small to midsized businesses that are less likely to have the resources to do this quickly.   

As the first medical device company to implement such a program on a voluntary basis, she noted how Edwards was “challenged to develop the policies that would apply to our own reporting program, to develop the systems and processes to manage the data, and to work out discrepancies in the unexpected situations that can sometimes arise through the normal course of business.”   

While Edwards was able to build and test their system for compliance, she noted how the company is “not as large and complex compared to some others.”  Nevertheless, she explained how Edwards still had to “develop systems to merge data from different financial reporting systems around the world to ensure that if any of our global operations incur an expense related to a U.S. physician, we are able to accurately capture and report that information.”  On this point, she noted the difficulty of reporting and aggregating without a unique indemnification number for each physician.  As a result, she recommended that CMS should publish a list of unique identification numbers for teaching hospitals and physicians. 

Although it was pointed out that a recent survey of industry executives said they were somewhat ready with implementing the Sunshine Act, this survey may have little value given that such comments were based off the proposed rule and much is likely to change between now and the finalized version.   

Identifying Covered Recipients 

Concern was also expressed about accurately capturing transfers of value to third parties “At the request of or designated on behalf of. . .” covered recipients. For example, individual clinicians may set up or work for small businesses that manage the financial transactions related to their consulting arrangements. Sometimes these businesses have names that provide data managers with little indication of any association with a physician (e.g., “Pinetree, LLC”). Even with aggressive employee training and education, it can be very challenging to identify every construct that could be used to manage a physician practice. Moreover, it is generally unknown by a medical device company how much, if any, of the compensation paid to the entity is received by the physician.  

In the interest of time, it was recommended that CMS take the approach proposed by AdvaMed: where a transfer of value is reportable to the Internal Revenue Service as gross income attributed to a covered recipient by the medical device company, it should qualify for reporting by that company under the Sunshine provisions.  In his written comments, Daniel Carlat, MD, Director of the Prescription Project for Pew Charitable Trusts, said that such an approach “allows for a possible scenario in which physicians could deliberately create LLCs or other entities so that the payments would be reported under a corporate name, as a way of avoiding disclosure under their own names.” 

Context of Payments  

Many panel members also emphasized the importance of manufacturers being able to provide ample opportunity to voluntarily provide meaningful context surrounding a transfer of value.  For example, information regarding the contribution an expert physician provided to a research project related to a disease she is uniquely familiar with could be very valuable to a patient’s understanding of that physician’s clinical capabilities.  Some suggested including different web pages for research payments so the public understood the context more.   

Research Payments – Direct and Indirect  

Douglas Peddicord, Ph.D., Executive Director, Association of Clinical Research Association (ACRO), Washington, DC, spoke primarily about the reporting of research payments.  He expressed his concern about research payment reporting by noting that 24% of doctors in the U.S. who conduct clinical research would be less likely to participate in the research if revenues (not revenues in excess of expenses or “profits” but gross revenues which is what CMS’s proposed rule requires) were disclosed, according to a 2010 survey.  Losing this many researchers will slow innovation and delay the delivery of needed treatments for patients. 

In contract research organizations (CROs), nearly all payments made to physicians and teaching hospitals on behalf of applicable manufacturers are “pass-throughs” for research; that is, the conduct of clinical trials. On average, CROs work with more than 500 research sponsors – applicable manufacturers – annually.  Payments can be made for basic research activities – for screening and recruiting patients, for engaging with the individual in the informed consent process, for administering test articles and monitoring patient reactions, for performing medical procedures, record-keeping and data submission, and the myriad activities involved in following a research protocol that is meant to produce accurate data for the evaluation of the safety and efficacy of a new drug, biologic or medical device by the FDA and other regulators. 

ACRO pointed to many inconsistencies with CMS’ proposal to report direct and indirect research payments, and urged CMS to exclude indirect payments from reporting.  While the Act requires reporting indirect payments and transfers that are made to a third party at the request of the physician or designated on behalf of the physician, “many payments related to research, such as travel and food costs, are not made at the request of a covered recipient or designated on behalf of a covered recipient, but are entirely incidental and thus, not reportable under the Act.” 

Instead, ACRO a standard for research payments or transfers of value that provides that in instances where a manufacturer (or CRO on its behalf) does not know the value of specific payments or imputed benefits that are presumed to flow to individual covered recipients and the payment or transfer is not made at the request of a covered recipient or designated on behalf of a covered recipient, such payments or transfers are not reportable.  To illustrate, to the extent that a manufacturer’s visibility into payments for research stops at the physician practice group or teaching hospital – and does not continue down to the specific dollar amount (whether gross or net ‘payment’) that ultimately flows to investigator A or B or C, the report that should be made to the Department by the manufacturer is of the total amount paid to covered recipients and there should not be any further effort required to derive or impute sub-amounts or divisions among physician recipients, to the extent that the manufacturer is not aware of those payments or transfers of value today. 

ACRO also recognized the tremendous compliance burden regarding tracing research payments, not only for manufacturers but on the physicians and hospitals who would be asked to report back to manufacturers the distribution of both direct and indirect payments to-the-penny, because that is the level of transparency that manufacturers will now believe they must have.  ACRO noted that CMS clearly underestimated the costs of dealing with such compliance and that the proposed rule “would force physicians to function as accountants or auditors to verify financial information that has nothing to do with the delivery of care or conduct of research within a medical practice or hospital.” 

ACRO also maintained that for research, all payments and transfers of value associated with a research project should be aggregated under the category of research, even if some of the transfers of value come in the form of food, travel, equipment, and the like—arguing against the “nature of payment” segregable categories.  Simply, if a payment or transfer of value occurs incidentally to a research project, the transfer of value would not occur at all absent the physician’s participation in the research project. Thus, to the extent that such payments or transfers are tracked to specific covered recipients, “the travel, food and other costs should be reported as research payments.”  

ACRO made an important point about bundling such payments: for those researchers whose payments would be delayed for four years, it would be misleading and inconsistent with the intent of the law to publish travel payments for researchers who’s other payments for research would not be published.  ACRO was also concerned about the potential for double and even triple counting of research payments that flow “directly” to teaching hospitals and “indirectly” to intermediary organizations and then “indirectly” again down to physician investigators. 

In addition, ACRO recommended that physicians who are employees of a CRO or who provide research services on a contract basis to a CRO should be excluded similar to how physician employees of applicable manufacturers are excluded.  Thus, ACRO proposed the following: “Any physician, except for a physician who is an employee... of an applicable manufacturer, or in the case of payments or transfers of value for research, an employee of or a person who provides research services on a contract basis to a CRO entity.” 

Finally, ACRO reaffirmed is position that fair-market payments made for legitimate research activities should have been excluded from the provisions of Section 6002.  They pointed to several state sunshine laws with such requirements for payments for bona fide research activities. 

The final rule should allow at least 180 days from publication until the commencement of data collection.  

Lilly recommended that the final rule provide applicable manufacturers with at least 180 days to implement the final rule, noting that it took up to 23 months to file its first full quarterly publication, as well as modifications that would need to be made to comply with the Sunshine Act.  Lilly noted a series of necessary steps required to implement any change to business processes: first the requirements must be clearly defined (which cannot occur until the final regulation is issued), then the requirements must be translated into required changes on various impacted processes, then those required changes need to be built into documented procedures and configured into IT systems, then those modified IT systems must be tested and validated to ensure they do what they are supposed to do, then the people who use those procedures and systems must be trained.  Each and all of these steps must occur and must occur in linear order to effect the required changes. Consequently, the more the final rule requires changes to the business and IT system rules already in place, the more complex the implementation implications for manufacturers and the more lead time that necessarily will be required.  

Phased Approach 

Lilly urged CMS to look at the phased implementation of Lilly’s corporate integrity agreement (CIA) requirements and consider a three phase approach to enable manufacturers and CMS to manage the complexity of data collection and reporting in a more measured and controlled manner and to reduce the risk of error or incomplete reporting.    

Phase I, for which data collection could commence in early 2013, could include all direct payments from manufacturers to physicians and teaching hospitals.  These direct payment data are the most readily identifiable and accessible in most company systems.  It was recommended that Phase 1 direct payments not include payments for research made to CROs or payments to reimburse expenses as the processes needed enable detailed reporting of these payments do not usually exist.  This would cover about 70% of all payments.   

Phase II could reasonably commence 6-12 months later and could include all reimbursed expenses as well as any indirect research payments made by CROs. Reimbursed expenses are suggested to be separated from Phase I because reporting of such expenses will likely require modifications to billing and invoicing practices, expense re-categorization to align to Sunshine Act definitions and requirements, and modifying IT systems to ensure that elements of such reimbursements get reported under the proper categories with the proper associated level of detail, all as dictated by the yet-to-be-issued final rule.  By the end of Phase II, there could be over 90% visibility into disclosure required under the Sunshine Act.  

Finally, Phase III could commence 12-18 months after Phase I and would complete the Sunshine Act reporting requirements by adding disclosure of any non-cash transfers of value.  Non-cash transfers of value would include transfers such as business meals, travel and educational materials for physician benefit.  Importantly, these non-cash value transfers represent a very small percentage of total value transfers to be reported under the Sunshine Act.  Specifically, for Lilly, in 2011, of all the value reported on Lilly’s payment registry, only 8% represented non-cash value. On the other hand, to capture this data for such reporting requires significant business process modifications.  For instance, for some non-cash items, new processes will be required to first assign a market value, then to record the distribution at the individual recipient level, and to train personnel to identify situations where such capture is required.  

Patient Materials  

The Sunshine Act expressly excludes educational materials intended for patient use from reporting. In the proposed rule, however, CMS states that this exclusion is limited to written or electronic materials and does not include services or other items. CMS’s interpretation of the statutory exclusion for educational materials is unnecessarily restrictive, and as a result, Lilly expressed concerne that the continued availability of patient-centered programs and services (e.g., patient assistance programs or patient starter kits) would be jeopardized, with a potential negative impact on patient care.  

Accordingly, Lilly urged the final rule to (1) explicitly interpret the exclusion more broadly to encompass any materials, including programs, services, and items provided to covered recipients for the direct use or benefit of patients or (2) further clarify that such programs, services, and items do not need an express exclusion because they do not constitute transfers of value to covered recipients.  

The Definition of ‘Applicable Manufacturer’  

Lilly expressed concern with the definition of “applicable manufacturer” requiring tracking and reporting of payments outside the U.S. because such foreign affiliates are not preparing to report under the statute.  As a result, Lilly urged CMS to define the term to include only manufacturers operating in the U.S.  

Significant Paperwork Burden on Physicians 

AMA expressed its concern that the current proposed rule would impose a paperwork burden on all physicians who will need to maintain ongoing records of every activity they engage in so they are able to ensure accurate reporting, and that CMS  “greatly underestimated” the amount of time physicians will spend reviewing and challenging cumulative reports. 

Conclusion 

Ultimately, many of the speakers recognized the importance of physician industry relationships, but emphasized that transparency is necessary for patients, and hoped to achieve a reasonable and effective way of approaching it through the Sunshine Act.  

There was considerable amount of agreement amongst the participants which should help move the process along. 

After the hearing it was much clearer that creating rules to accurately guide the management, collection and reporting process is complex and it is no wonder it has taken this amount of time for CMS to come up with the final rule.  Collection of data will be complicated and implementation will be time consuming.  As Mark McClellan noted there are some days he misses being CMS administrator and others he doesn’t and this may be one of those days.

CMS Begins Penalizing Hospitals for Readmissions

Section 3025 of the Affordable Care Act (ACA) added section 1886(q) to the Social Security Act establishing the Hospital Readmissions Reduction Program, which requires the Centers for Medicare & Medicaid Services (CMS) to reduce payments to Inpatient Prospective Payment System (IPPS) hospitals with excess readmissions, effective for discharges beginning on October 1, 2012.   

CMS defined readmission as an admission to a subsection (d) hospital within 30 days of a discharge from the same or another subsection (d) hospital.   

“Almost one in five Medicare beneficiaries that leave a hospital end up being readmitted within 30 days,” said Janet Corrigan, PhD, MBA, president and CEO of NQF. “Those readmissions cost about $15 billion annually, and many have the potential to be prevented. These new measures help push us as a nation to address this serious problem.”  

Consequently, Kaiser Health News recently reported that starting in October, more than 2,000 hospitals — including some nationally recognized ones — will be penalized by CMS because many of their patients are readmitted soon after discharge.  “Together, these hospitals will forfeit about $280 million in Medicare funds over the next year as the government begins a wide-ranging push to start paying health care providers based on the quality of care they provide.” 

The significant penalties levied on hospitals underscore the need for more hospitals and health care providers to receive continuing medical education (CME) to improve their patient outcomes and reduce readmissions.  

Background 

In the FY 2012 IPPS final rule, CMS finalized the readmission measures for Acute Myocardial Infarction, (AMI) Heart Failure (HF) and Pneumonia (PN) and the calculation of the excess readmission ratio, which will then be used, in part, to calculate the readmission payment adjustment under the Hospital Readmissions Reduction Program.   

CMS finalized the calculation of a hospital’s excess readmission ratio for AMI, HF and PN, which is a measure of a hospital’s readmission performance compared to the national average for the hospital’s set of patients with that applicable condition.  As an example, if a hospital received the maximum penalty of 1 percent and it submitted a claim for $20,000 for a stay, Medicare would reimburse it $19,800. 

CMS established a policy of using the risk adjustment methodology endorsed by the National Quality Forum (NQF) for the readmissions measures for AMI, HF and PN to calculate the excess readmission ratios.  CMS did not take into account patients’ racial or socio-economic background. 

The excess readmission ratio includes adjustment for factors that are clinically relevant including patient demographic characteristics, comorbidities, and patient frailty.  Finally, CMS established a policy of using three years of discharge data and a minimum of 25 cases to calculate a hospital’s excess readmission ratio of each applicable condition.  For FY 2013, the excess readmission ratio is based on discharges occurring during the 3-year period of July 1, 2008 to June 30, 2011. 

Hospital Penalties 

The penalties will fall heaviest on hospitals in New Jersey, New York, the District of Columbia, Arkansas, Kentucky, Mississippi, Illinois and Massachusetts, a Kaiser Health News analysis of the records shows.  Hospitals that treat the most low-income patients will be hit particularly hard. 

A total of 278 hospitals nationally will lose the maximum amount allowed under the health care law: 1 percent of their base Medicare reimbursements. Several of those are top-ranked institutions, including Hackensack University Medical Center in New Jersey, North Shore University Hospital in Manhasset, N.Y. and Beth Israel Deaconess Medical Center in Boston, a teaching hospital of Harvard Medical School.  

According to Medicare records, 1,933 hospitals will receive penalties less than 1 percent; the total number of hospitals receiving penalties is 2,211. Massachusetts General Hospital in Boston, which U.S. News last month ranked as the best hospital in the country, will lose 0.5 percent of its Medicare payments because of its readmission rates, the records show.  The smallest penalties are one hundredth of a percent, which 50 hospitals will receive. 

Gundersen Lutheran Health System in La Crosse, Wis., and Intermountain Medical Center in Murray, Utah, were among 1,156 hospitals where Medicare determined the readmission rates were acceptable. Those hospitals will not lose any money.  On average, the readmissions penalties were lightest on hospitals in Utah, South Dakota, Vermont, Wyoming and New Mexico, the analysis shows. Idaho was the only state where Medicare did not penalize any hospital.  

One of the problems with readmissions is that “hospitals have had little financial incentive to ensure patients get the care they need once they leave, and in fact they benefit financially when patients don’t recover and return for more treatment.”

Nearly 2 million Medicare beneficiaries are readmitted within 30 days of release each year, costing Medicare $17.5 billion in additional hospital bills.  CMS noted that readmissions alone cost $26 billion in a decade. The national average readmission rate has remained steady at slightly above 19 percent for several years, even as many hospitals have worked harder to lower theirs.   

CMS has been trying to help hospitals and community organizations by giving grants to help them coordinate patients’ care after they’re discharged.  Leaders at many hospitals say they are devoting increased attention to readmissions in concert with other changes created by the health law. 

Hospitals That Serve Poor Are Hit Harder than Others 

The penalties have been intensely debated.  Studies have found that African-Americans are more likely to be readmitted than other patients, leading some experts to be concerned that hospitals that treat many blacks will end up being unfairly punished. 

Some safety-net hospitals that treat large numbers of low-income patients tend to have higher readmission rates, which the hospitals attribute to the lack of access to doctors and medication these patients often experience after discharge.  

Kaiser’s analysis of the penalties shows that 76 percent of the hospitals that have a lot of low-income patients will lose Medicare funds in the fiscal year starting in October. Only 55 percent of the hospitals treating few poor patients are going to be penalized, the analysis shows.  The hospital industry has emphasized that poor patients are more likely to be readmitted, as they have a tougher time affording medications, often don’t have access to doctors for check-ups and can have difficulty securing transportation to get follow-up care.  Hospitals also have complained that many safety-net hospitals operate on tight margins. 

One hundred hospitals in the group with the most poor patients –12 percent – will receive the maximum penalty from CMS: a 1 percent decrease in their reimbursements starting in October. By contrast, only 47 hospitals, or 6 percent, in the group with the fewest poor patients will receive the maximum penalty, the data show.  Dr. John Lynch, chief medical officer at Barnes-Jewish Hospital in St. Louis, which is receiving the maximum penalty, noted that “Some of the hospitals that are going to pay penalties are not going to be able to afford these types of interventions,” who estimated the penalty would cost Barnes-Jewish $1 million. 

Kaiser’s analysis of the data show that 204 safety net hospitals overcame their patients’ challenges to minimize readmissions to a level that Medicare determined did not warrant any penalty. Among the hospitals with the fewest low-income patients, 379 avoided any penalty.  

Atul Grover, chief public policy officer for the Association of American Medical Colleges, called Medicare’s new penalties “a total disregard for underserved patients and the hospitals that care for them.”  Blair Childs, an executive at the Premier healthcare alliance of hospitals, said: “It’s really ironic that you penalize the hospitals that need the funds to manage a particularly difficult population.” 

Medicare disagreed, writing that “many safety-net providers and teaching hospitals do as well or better on the measures than hospitals without substantial numbers of patients of low socioeconomic status.”  Safety-net hospitals that are not being penalized include the University of Mississippi Medical Center in Jackson and Denver Health Medical Center in Colorado.  “We do not want to hold hospitals to different standards for the outcomes of their patients of low socioeconomic status,” CMS wrote in a regulation issued earlier this month.  The agency added:”"We do not want to mask potential disparities or minimize incentives to improve the outcomes of disadvantaged populations.” 

However, there are a number of aspects at Denver Health that are hard to replicate everywhere. Denver Health, Colorado’s biggest safety net system, includes a 477-bed hospital and eight community primary care clinics.  About a third of its patients are uninsured, another third are on Medicaid. The integrated system and low reimbursement rates create both a financial incentive and an opportunity to provide as much care as possible in the lower cost outpatient settings. 

“We also are a hospital that is often at full capacity,” Dr. Thomas MacKenzie of Denver Health says, “so we certainly have an incentive when we’re busting at the seams…to make sure patients aren’t readmitted unnecessarily.”  Denver Health was also an early adopter of electronic medical records. MacKenzie says easy sharing of patient information between the hospital and clinics effectively keeps admissions down. It also helps those recently discharged get priority in scheduling follow-up appointments, putting them at the head of what can be long wait lists at community clinics. 

But experts say some hospitalizations are simply unavoidable.  “My view is that in the current state of the American health-care system, a 30-day readmission is not a hospital metric, a 30-day readmission rate is a health system metric,” said Dr. P.J. Brennan.

Brennan, the chief medical officer for the University of Pennsylvania Health System, said hospitals are trying to keep their arms around patients after discharge, but a patient’s personal finances, health literacy and access to primary care are beyond the control of any individual institution. 

“No patient should be readmitted within seven days. Seven days is something that every hospital ought to be able to take care of,” Brennan said. “At some point, other factors begin to impact.” 

Moving Forward 

The maximum penalty for readmissions will increase after this year, to 2 percent of regular payments starting in October 2013 and then to 3 percent the following year. This year, the $280 million in penalties comprise about 0.3 percent of the total amount hospitals are paid by Medicare.  CMS will also soon penalize or reward hospitals based on how well they adhere to basic standards of care and how patients rated their experiences.  Overall, Medicare has decided to penalize around two-thirds of the hospitals whose readmission rates it evaluated. 

The implementation of penalties for hospital readmissions underscores the need for additional training and education of healthcare providers at hospitals.  Continuing medical education (CME) can address many of these issues and help healthcare providers attain their goals in ensuring patients with the measured conditions are not readmitted. 

 

Interagency Pain Research Coordinating Committee (IPRCC) Inaugural Meeting

The interagency pain research coordinating committee (IPRCC) recently held its inaugural meeting at the National Institutes of Health (NIH).  The group, created by the Department of Health and Human Services (HHS), serves as a federal advisory committee and was formed as part of the 2010 Patient Protection and Affordable Care Act (PPACA) to enhance research efforts and promote collaboration across the government. 

“We have a remarkable collection of members, bringing an extraordinary range of views and perspectives on pain,” said NINDS director Dr. Story Landis, who chaired the meeting. “Congress is looking to us to work together to coordinate the federal government’s pain research effort.” 

IPRCC consists of 7 federal members and 12 non-federal members (6 from scientific/medical communities; 6 from public/stakeholder groups). 

“The burden of pain in the 21st century is enormous,” said NIH director Dr. Francis Collins, in welcoming remarks. “Reducing this burden is going to take a lot of work, research and coordination. We hope to gain from your expertise and to expand our focus of pain research through effective partnerships. This group will help in propelling pain research forward.” 

Collins also gave the group its charge from the Affordable Care Act. IPRCC will develop a summary of pain care research advances supported or conducted by the federal government and identify critical gaps in basic and clinical pain research. 

Committee member Dr. Sean Mackey of Stanford University provided an overview of the Institute of Medicine’s 2011 report, Relieving Pain in America: A Blueprint for Transforming Prevention, Care, Education and Research. 

“NIH has already implemented a number of the IOM’s recommendations,” said Landis, giving an update on NIH’s response to the report: 

• NINDS plans to establish an office to support all activities of the NIH Pain Consortium and the IPRCC. (NINDS is lead IC for NIH’s pain research.)
• The NIH Pain Consortium—which promotes research collaboration across ICs—has organized or funded a number of pain disorder conferences to identify gaps and opportunities and has established new trans-NIH working groups on chronic pain.
• NIH recently established an NIH-FDA leadership council to improve regulatory science and the drug development pipeline.
• NIH supports a wide range of interdisciplinary pain research efforts and currently supports longitudinal studies on a number of chronic pain conditions. 

In addition to this work, Catherine Bushnell, Ph.D., an internationally recognized pain and neuroscience researcher, was recently been appointed scientific director of a new research program focusing on the role of the brain in perceiving, modifying, and managing pain.  Based in the National Center for Complementary and Alternative Medicine (NCCAM), part of the National Institutes of Health, this collaborative effort will complement basic science and clinical research efforts of other ongoing intramural neuroscience, imaging, and mental and behavioral health research programs. 

“Dr. Bushnell’s work has profoundly changed the ways in which we understand and study this very important problem,” said NCCAM Director Josephine P. Briggs, M.D. “Under her leadership, this program will continue to work toward the development of better ways to safely and more effectively treat chronic pain, and advance research on the intersection and integration of pharmacological and non-pharmacological approaches.” 

Research projects will include investigating the role of the brain in pain processing and control, and how factors such as emotion, attention, environment, and genetics affect pain perception. The program will also explore how chronic pain produces changes in the brain that can modify how the brain reacts to pain medications like opioids. 

“Dr. Bushnell is a pioneer in the field of pain research, and NIH is extremely fortunate to have her leading this research program,” said Michael Gottesman, deputy director for intramural research. “She and her team will add a novel and important component to NIH’s overall intramural neuroscience research community.”