Legal Update: 340B, Physician Compensation, and Recent Stark Developments

1. Legal Update: 340B, Physician Compensation, and Recent Stark Developments

Elizabeth S. Elson, Esq.
Jana Kolarik Anderson, Esq.
Alan H. Einhorn, Esq.

2. 340B Drug Pricing Program: Recent Developments

Elizabeth S. Elson, Esq.
Of Counsel, Foley & Lardner LLP
February 25, 2016

3. 340B Drug Pricing Program: Overview

• Federal drug pricing program
– Operated by the Office of Pharmacy Affairs (“OPA”) in the
Health Resources and Services Administration (“HRSA”).
• Drug manufacturers are required to provide significant
discounts to participating “covered entities” on covered
outpatient drugs provided to eligible “patients”
– Covered entities include health care providers such as FQHCs,
specialized clinics, and DSH hospitals (with DSH > 11.75%).
• Intended to provide financial relief to facilities that provide
care to the medically underserved.

4. ACA’s Impact on the 340B Drug Pricing Program

• Affordable Care Act expanded participation
to new covered entities:
– Children's hospitals with Medicare DSH > 11.75%;
– Freestanding cancer hospitals with
Medicare DSH > 11.75%;
– Critical access hospitals (CAHs);
– Rural referral centers with a Medicare DSH > 8%;
– Sole community hospitals with a
Medicare DSH > 8%.
• It also created increased program integrity efforts (e.g.,
annual recertification, increased auditing) and new
sanction authority for compliance violations.

5. Entity Eligibility

• Hospital outpatient departments
– Only those locations listed as a reimbursable center on the
hospital’s most recently filed Medicare cost report are
considered part of a covered entity hospital;
– Delays waiting for cost reports to be filed;
– Outpatient locations must meet Medicare provider-based
standards.
• Participation is limited to the covered entity, even if
it is part of a larger health system or entity.
• Physician groups are not covered entities.

6. Diversion of 340B Drugs

• Covered entities may not resell or otherwise
transfer medications purchased under the
340B Program to a person who is not a
“patient” of the covered entity.
• Definition of a 340B patient not defined in
statute, but set forth in HRSA guidance.

7. Proposed Omnibus Guidance

• Issued as interpretive guidance on August 28,
2015.
• Over 1,000 comments received.
• Enforceability may depend on consistency
with 340B statute and amount of deference
given to HHS/HRSA.
• Impact of orphan drug litigation.
• Potential to be applied by HRSA prior to
finalization.

8. Changes to Current Patient Definition

• Current Patient Definition:
– Based on covered entity’s relationship with the individual
(as evidenced by maintaining medical records), and its
responsibility for care (through employment, contractual,
or other arrangements with health care providers);
– Gray areas/flexibility to meet these standards.
• Proposed Changes
– Proposes more detailed/specific requirements;
– Would exclude some individuals currently treated as 340B
patients;
– Would introduce new complexity and administrative
burden;
– Consistent with the 340B statute?

9. Proposed 340B Patient Definition

• Patient eligibility determined on a per
prescription or per order basis and must meet
all of these criteria:
(1) The individual receives a health care service at a
covered entity site which is registered for the 340B
Program and listed on the public 340B Program
database;
– Removes support for referral arrangements for follow
up/specialty care outside the covered entity.

10. Proposed 340B Patient Definition (cont’d)

(2) The individual receives a health care service
from a health care provider employed by the
covered entity or who is an independent contractor
of the covered entity such that the covered entity
may bill for services on behalf of the provider;
– Privileges/Credentials not enough;
– New requirement that covered entity must be able to bill
for professional services.

11. Proposed 340B Patient Definition (cont’d)

(3) The individual receives a drug that is ordered or
prescribed by the covered entity provider as a result
of the service described in (2). The individual will
not be considered a patient of the covered entity if
the only health care received by the individual from
the covered entity is the infusion of a drug or the
dispensing of a drug;
– Necessary relationship between 340B drug ordered and
type of service received;
– Exclusion of infusion drugs.

12. Proposed 340B Patient Definition (cont’d)

(4) The individual receives a health care
service that is consistent with the covered
entity’s scope of grant, project or contract;
– Hospitals generally exempt;
– Consistent with current definition.

13. Proposed 340B Patient Definition (cont’d)

(5) The individual is classified as an
outpatient when the drug is ordered or
prescribed, as determined by status when
billed to payor;
– Elimination of ability to purchase 340B drugs for
discharged inpatients; reduction of contract pharmacy
purchases;
– Patient’s payor billing status critical; administratively
burdensome/challenging.

14. Proposed 340B Patient Definition (cont’d)

(6) The individual has a relationship with the
covered entity such that the covered entity
maintains access to auditable health care records
which demonstrate that the covered entity has a
provider-to-patient relationship, that the
responsibility for that care is with the covered
entity, and that each element of this patient
definition is met for each 340B drug;
– Generally consistent with current definition.

15. Recent Legislation: Bipartisan Budget Act of 2015 (“Section 603”)

• Budget bill enacted in November 2015 includes
language excluding certain hospital outpatient
departments (HOPDs) from Medicare OPPS;
– Applies to new facilities (grandfathering of facilities that
billed Medicare prior to the date of enactment); payment
change effective 1/1/17;
– Applies only to off-campus facilities;
– Does not apply to dedicated emergency departments.
• Goal is to promote “site neutral” payment – level
playing field with physician offices, ambulatory
surgery centers, etc.

16. Recent Legislation (cont’d)

• Legislation does not address 340B; arguably has no direct
impact;
– Off-campus facilities may still qualify as “provider-based”
and be included on hospital’s cost report.
• May in effect reduce scope of 340 Program if it leads to
fewer HOPDs.
• 340B eligibility of new HOPDs may depend on how
Section 603 is implemented by CMS (e.g., through
enrollment process, cost report, coding/modifier, other?)
– More likely to have adverse impact if implemented
through enrollment/cost report than through payment
modifier only.

17. MedPAC: Proposed Medicare Payment Cuts for 340B Drugs

• Another recent development was MedPAC’s
recommendation in January to cut Medicare Part B
rates by 10% for 340B drugs purchased by 340B
covered entity hospitals.
• Currently hospitals retain difference between 340B
acquisition price and Medicare payment rate.
• If approved by Congress, would result in significant
cut in 340B hospitals’ savings and operational
challenges in implementing.

18. Impending Changes in 2016: HHS Regulatory Agenda

• May 2016: HRSA to publish final rule on 340B
drug ceiling prices and penalties.
• May 2016: HRSA to publish proposed rule
establishing 340B administrative dispute
resolution process for disputes between covered
entities and drug manufacturers.
• September 2016: HRSA to publish final 340B
Omnibus Guidance.

19. Physician Compensation & FDA/DOJ Enforcement Actions Related to Oncology Drugs

Physician Compensation &
FDA/DOJ Enforcement
Actions Related to Oncology
Drugs
Jana Kolarik Anderson, Esq.
Partner, Foley & Lardner LLP
February 25, 2016

20. Physician Compensation – AKBS Safe Harbor & Stark Law Exception

Physician Compensation – AKBS Safe
Harbor & Stark Law Exception
• Anti-kickback Statute Employee Safe Harbor – Under the
federal anti-kickback statute, “remuneration” does not
include any amount paid by an employer to an employee,
who has a bona fide employment relationship with the
employer, for employment in the furnishing of any item or
service for which payment may be made in whole or in part
under Medicare, Medicaid or other Federal health care
programs. For purposes of paragraph (i) of this section, the
term employee has the same meaning as it does for purposes
of 26 U.S.C. 3121(d)(2). (42 CFR 1001.952(i))

21. Physician Compensation – AKBS Safe Harbor & Stark Law Exception (cont’d)

Physician Compensation – AKBS Safe Harbor &
Stark Law Exception (cont’d)
• Stark Law Employment Exception – Any amount paid by an
employer to a physician (or immediate family member) who has a
bona fide employment relationship with the employer for the
provision of services if the following conditions are met:
1)
2)
The employment is for identifiable services.
The amount of the remuneration under the employment is –
i. Consistent with the fair market value of the services; and
ii. Except as provided in paragraph (c)(4) of this section, is
not determined in a manner that takes into account
(directly or indirectly) the volume or value of any referrals
by the referring physician.

22. Physician Compensation – AKBS Safe Harbor & Stark Law Exception (cont’d)

Physician Compensation – AKBS Safe Harbor &
Stark Law Exception (cont’d)
3) The remuneration is provided under an
agreement that would be commercially
reasonable even if no referrals were made to
the employer.
4) Paragraph (c)(2)(ii) of this section does not
prohibit payment of remuneration in the form
of a productivity bonus based on services
performed personally by the physician (or
immediate family member of the physician).
(42 CFR 411.357(c))

23. Physician Compensation – Stark Law Cases

• Recent Cases – United States ex. rel. Drakeford v. Tuomey (4th
Cir. 2012) and United States v. Halifax Hosp. Med. Ctr. (M.D.
Fla. 2013), and United States ex rel. Parikh et al. v. Citizens
Medical Center (S.D. Tex. 2015) – have shown the
government’s interest in Stark Law enforcement actions
against hospital-physician compensation arrangements.
– Tuomey had a jury verdict of $237 million, which was eventually
lowered to $72,406,860 when Tuomey was acquired by another health
system.
– Halifax settled for $85 million.
• In Tuomey and Halifax, a Department of Justice (DOJ)
valuation expert took the position in litigation that physician
arrangements involving departments that “lose” money are
commercially unreasonable (without offering any statutory or
regulatory basis for the position).

24. Physician Compensation – Stark Law Cases

• In Halifax, the district court entered partial summary
judgment after finding that the productivity bonuses
paid to six (6) employed oncologists varied based on
the volume of DHS referrals and, therefore, were
inconsistent with the requirements of the
employment exception.
• The Halifax-employed oncologists were eligible for
productivity bonuses that were paid from a pool
composed of 15% of the operating margin of the
hospital’s oncology program.

25. Physician Compensation – Stark Law Cases (cont’d)

• The Halifax court held that because the bonus pool
included revenues from DHS services that were not
personally performed by the oncologists, the amount of
the bonus pool was based in part on the volume or value
of the employed oncologists’ referrals to Halifax.
• In Citizens Medical Center, the settlement was for $21.75
million, related to allegations that the hospital paid
several cardiologists compensation that exceed fair
market value (doubling their income despite the
practice’s losses) and paid bonuses to emergency room
physician that improperly took into account the value of
their cardiology referrals.

26. New OIG Litigation Team

• In Summer 2015, representatives from the U.S.
Department of Health and Human Services’ Office of
Inspector General (OIG) announced the creation of
an OIG litigation team that will focus specifically on
civil monetary penalties (e.g., resulting from kickback
arrangements) and exclusion cases.
• The understood focus of that team will be physicians
and practices which have, for the most part, been
ignored in anti-kickback enforcement actions
brought by the OIG.

27. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs

• There has been a series of DOJ/FDA enforcement actions from 2013
through 2015 related to adulterated/counterfeit oncology drugs.
• The cases related to drugs – ordered from various foreign sources, including companies in Canada,
Great Britain, Pakistan, India and Turkey that were not licensed to
distribute drugs into the United States,
– that were not FDA approved, and
– that did not bear appropriate labeling (e.g., ”Rx Only” or the National
Drug Code/NDC numbers).
• As such, the drugs were not lawful to sell/buy in the United States
or bill to the Federal health care programs.
• The actions were brought against pharmacies, drug distributors and
their owners and physicians.

28. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs (cont’d)

The FDA/DOJ joint enforcement cases were civil and criminal cases with criminal
conspiracy to import merchandise contrary to law and health care fraud counts.
Some examples of settlements included –
1.
February 24, 2015 settlement –
• Prabhjit Purewal, M.D. agreed to pay $550,000 to the United States to
settle allegations that he defrauded Medicare, Tricare and Medicaid by
billing these pubic insurers for chemotherapy drugs that the FDA had not
approved for use.
• Dr. Purewal purchased the drugs from Warwick Healthcare Solutions (aka
Richard’s Pharma), administered the drugs to his patients and improperly
sought and received reimbursement for the drugs from the Federal health
care programs.
• Warwick, a former UK-based drug distributor, did not have a license to
distribute drugs in the U.S., and many of the drugs Dr. Purewal purchased
from Warwick were not FDA approved.

29. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs (cont’d)

2.
February 21, 2014 –
• Alvarado Medical Plaza Pharmacy, Inc. was sentenced to repay
Medicare over $1 million and to pay a $10,000 fine following its
conviction of federal health care fraud for billing Medicare for
unapproved oncology drugs.
• The pharmacy admitted that between May 2010 and June 2011, it
ordered $752,688 of prescription oncology drugs from Quality
Specialty Products (QSP) in Canada.
• The drugs ordered from QSP were unapproved versions of drugs
sold in the U.S. as Avastin, Eloxatin, Gemzar, Neupogen, Rituxin,
Taxotere and Zometa, which were shipped from Canada to the
defendant in San Diego.

30. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs (cont’d)

2.
February 21, 2014 – (cont.)
• The pharmacy further admitted that it was aware that the drugs were not
intended for sale in the U.S. because –
(a) the packaging and shipping documents indicated that the drugs
were shipped to the office from outside the U.S.;
(b) many of the invoices identified the origin of the drugs and intended
markets as countries other than the United States;
(c) the labels did not bear the “RX only“ language required by the FDA;
(d) the labels did not bear the National Drug Code/NDC numbers found
on the labels of drugs intended for the U.S. market;
(e) many of the labels had information in foreign languages;
(f) the drugs were purchased at a substantial discount; and
(g) the packing slips indicated that the drugs came from Canada.
• The pharmacy admitted that it supplied the oncology drugs purchased
from QSP to doctors, pre-mixed in infusion bags, without advising the
doctors that the drugs came from abroad and were not approved for use
in the U.S.

31. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs - (cont’d)

3.
2013 –
• In February 2013, Martin Bean III pled guilty to conspiring to import
unapproved foreign oncology drugs and sell them to doctors
throughout the U.S.
• In September 2013, Bean was sentenced to 24 months in custody,
forfeited his Jaguar XJ he purchased with the proceeds of the scheme
and paid restitution of $19,270 to one of the victims of the scheme.
• Bean admitted that between 2005 and 2011, he operated a business
from his residence in Boca Raton, FL that sold over $7 million of
prescription oncology drugs to doctors throughout the U.S.
• Bean ordered the drugs from various foreign sources including
companies in Pakistan, India and Turkey, and directed the drugs to be
shipped in bulk directly to Oberlin Medical Supply in San Diego.
• Bean did business as GlobalRxStore, and marketed the drugs via an
internet website and through “blast faxes” to doctors’ offices.

32. FDA/DOJ Enforcement – Adulterated/Counterfeit Oncology Drugs - (cont’d)

3.
2013 – (cont.)
• GlobalRxStore operated a call center in Winnipeg, Canada, where
orders from doctors in the U.S. were accepted.
• Bean admitted that GlobalRxStore’s website falsely stated that it
was lawful to import drugs from abroad and that such drugs could
be sold and used in the U.S.
• Bean also admitted that he falsely advised doctors that
GlobalRxStore’s association with Oberlin Medical Supply somehow
made his conduct legitimate.
• The drugs sold included drugs marketed in the U.S. under the
names Gemzar, Taxotere, Zometa, and Kytril.
• Bean admitted he received $865,000 in proceeds from the sale of
these unapproved foreign oncology drugs.

33. The Recent Stark Law Changes

Alan H. Einhorn, Esq.
Of Counsel, Foley & Lardner LLP
February 25, 2016

34. Stark Basics

• This past October, CMS issued a Final Rule that resulted in the first
major changes in the Stark regulations in more than 5 years.
• Stark prohibits physicians from making referrals (i) for Medicarecovered “designated health services” (including inpatient and
outpatient hospital services) (ii) to an entity with which the physician
or a family member has a financial relationship--UNLESS a specific
Stark exception applies.
• An otherwise prohibited referral must fully satisfy all elements of a
Stark exception, or the entity receiving the referral is prohibited from
submitting a bill for the referred item or service; i.e., Stark is a “strict
liability” statute (no “bad intent” need be proven).
• Stark penalties include: denial of payment, refund of payment,
imposition of a $15,000 per service civil monetary penalty for knowing
violations, and potential False Claims Act exposure and Federal Health
Program exclusion.

35. The Changes (only pertinent changes will be discussed here)

• To help accommodate Stark to shifts in health care
delivery brought about by health care delivery and
payment reform; and to reduce burdens on
providers to comply with certain technical Stark
requirements.
• Two new Stark exceptions added (effective 1/1/16).
• Important modifications (effective 1/1/16) and
clarifications made, relating to existing
requirements.

36. The New Exceptions – Recruitment of Non-Physician Practitioners (NPPs)

The New Exceptions – Recruitment of NonPhysician Practitioners (NPPs)
• Exception for remuneration (i) from a hospital, FQHC, RHC (ii) to a
physician or physician organization (iii) to assist in the recruitment of a
non-physician practitioner in the geographic area served by the hospital,
FQHC or RHC.
• Intent--facilitate access to primary care and mental health services.
• Exception includes elements designed to ensure that the remuneration is:
– utilized for primary care or mental health services;
– limited in both amount (50% of comp, signing bonus and benefits paid to NPP, which
must be FMV) and duration (not to exceed first 2 years of NPP hire).
• Physician/PO and NPP must have compensation arrangement (can be
employment or contract).
• Remuneration must be for bona fide recruits (NPP from outside
geographic area and not employed by employer).
• Exception may only be used by hospital, FQHC or RHC once every 3 years
for same referring physician.

37. The New Exceptions – Time-Share Arrangements

• Exception for time-share arrangements involving physician
use of another’s premises, equipment, personnel, items,
supplies, and/or services.
• Allows use on a limited or as-needed basis. Need not comply
with pre-existing Stark exceptions for office space and/or
equipment leases (i.e. space, equipment need not be used
exclusively during use period). Elements include:
– arrangement is between (i) physician and (ii) hospital or physician
organization (the physician cannot be an owner, employee or
contractor of the PO);
– arrangement must be set out in writing, signed by the parties, and
must specify the premises, equipment, personnel, items, supplies, and
services covered by the arrangement;

38. The New Exceptions – Time-Share Arrangements (cont’d)

– applicable premises, equipment, etc. must be used predominantly to
provide E&M services to patients and on the same schedule;
– applicable equipment must be located in the same building where
E&M services are furnished, and cannot include advanced imaging,
radiation therapy, or clinical or pathology equipment (except for CLIAwaived tests);
– arrangement can’t be conditioned on referrals;
– comp must be set in advance, FMV, and not determined in manner
that takes into account V or V of referrals or other business between
the parties, OR using a formula based on (i) percent of revenue
attributable to the services provided, or (ii) per-unit of service fees
that are not time-based if reflecting services provided to patients
referred by grantor to grantee of the time-share;
– arrangement can’t convey a leasehold interest.

39. Modifications – Holdovers

• Final Rule modifies current Stark “holdover” language in
several Stark exceptions.
• Current language permits parties to compliant
arrangements of at least one year to continue the
arrangements for six months following expiration,
without violating Stark—if the terms and conditions of
the arrangement are not changed.
• The modification in the Final Rule allows holdovers to
continue for an indefinite period, PROVIDED the
underlying arrangements continue to satisfy an
applicable Stark exception for the duration of the
holdover period.

40. Modifications – Signatures

• Final Rule extends time-frame to obtain signatures to
an arrangement for “advertent” failures.
• Under pre-existing rule,
– if failure to obtain required signatures was “advertent”,
parties required to obtain signatures within 30 days
following effective date of the arrangement;
– if failure to obtain signatures was inadvertent, “grace”
period was 90 days.
• Under Final Rule, 90 days to comply with signature
requirement, whether failure to obtain signature
earlier was “advertent” or “inadvertent”.

41. Modifications – Signatures (cont’d)

• NOTE: to utilize the grace period, all other
elements of a relevant Stark exception must be
satisfied by the time the arrangement takes
effect, including the requirement that the
underlying arrangement be in writing at the time
the arrangement takes effect.
• An entity may only make use of the grace period
with respect to the same referring physician once
every three years.

42. Clarifications

• Among the more significant “products” of the Final
Rule (and the lead-up to the Rule) are statements
made by CMS which “clarify” CMS’ pre-existing
interpretation of certain terms.
• “In Writing”.
– The requirement that arrangements must be “in writing”
to satisfy a Stark exception, does NOT mean that the
arrangement must be memorialized in a written contract.
The “in writing” requirement can be satisfied by a
collection of documents that reflect a course of conduct
between the parties (i.e., agreement to the arrangement
before referrals began).

43. Clarifications –

• “At Least One Year”.
• The requirement that arrangements have a term of
at least one year does NOT mean that a written
agreement must be in place that includes an explicit
provision containing a one-year (or greater) term.
• An arrangement can satisfy the one-year
requirement if the parties can demonstrate that it in
fact lasted for one year or, if terminated during the
first year, the parties did not enter into a new
arrangement for the same space, equipment or
services during the first year.

44. Questions?