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Health Care

January 2013

With the inauguration of President Barack Obama for a second term this month, it appears the implementation of the Patient Protection and Affordable Care Act will continue. Our panel of experts from Northern and Southern California discuss the law's impact on the health care practices in California. They are John Chesley and Ryan Murr of Ropes & Gray; Jill Gordon of Nixon Peabody; Cary Miller of ADR Services Inc.; and Jeremy Miller of Miller Health Law Group. The roundtable was moderated by California Lawyer and reported by Krishanna DeRita of Barkley Court Reporters.

Moderator: How is the Affordable Care Act (ACA) impacting hospital and physician relationships?

J. Miller: The whole health care payment and delivery system is in the process of reorganizing itself, and the biggest players are hospitals and doctors. The ACA is impacting how doctors and hospitals collaborate in order to improve quality and reduce costs. This collaboration is taking many forms, from contracts to co-managed hospital departments, ACOs [accountable care organizations], and foundation models where the hospital has a great deal of control over the physicians' practice. Doctors and hospitals really need each other now. Hospitals can't afford inefficient or ineffective care, while many physicians want greater financial security, and help with adopting new technologies and meeting increasing compliance burdens.

Gordon: In the big picture of health care reform we are seeing the industrialization of the market. Small providers really go away. Bigger hospital systems that are integrating horizontally on the one side, and doctors on the other are trying to gain mass in order to create a more sophisticated infrastructure around IT and to manage costs and collect data, as well as trying to deal with the response to payment reforms and the reductions in reimbursement. They are trying to look more like Kaiser and address the whole patient on both the payment and care side.

Chesley: That can be a very painful process, but one that has captured the attention of the industry because it represents a makeover of a health plan into an integrated delivery system through the acquisition of hospitals and physicians. A headline example is our client West Penn Allegheny Health System's acquisition by the insurer Highmark. It's been through litigation, and it is a great bellwether of the difficulties we face in achieving these integrations.

In this market I see an enormous amount of activity in the establishment of new medical foundations as a quasi-employment model. The ACA is driving these relationships, and driving hospitals together that are looking at their market positions in relationship to physicians. Hospital systems may feel forced together because one of them has an adequate physician control base through medical foundations, while the other may not but is impacted by a strong multi-specialty physician group with many hundreds of physicians in the marketplace, whether it's through one of the organized delivery systems such as Kaiser or a stand-alone multi-specialty group.

Gordon: There's a tension between the ACA wanting to aggregate providers because the bigger, population-management focused entity can streamline quality and reduce cost, but all that provider aggregation creates antitrust concerns for the commercial payers when they look at contracting. Simultaneously, for the commercial payers to get their premium cost down they really need to work with the providers in managing as large a pool of beneficiaries as possible. So on the one hand commercial payers are saying, "Don't get too big because you have too much negotiation strength. On the other hand, we need you to handle a huge swath of people to get cost down." As we move from a fee-for-service model into a more risk-based model of care, the transition is very uneasy. No one is sure how to do it right, and as a result a lot of providers will have pretty significant financial issues.

C. Miller: As a former litigator and now a neutral, we've observed over the years great stresses and tensions and competition between physicians, hospitals, and various systems. That has led to a lot of litigation and arbitrations. It's too early to tell what the ACA is going to bring as far as litigation, but I'm seeing more cooperation as doctors and groups are trying to figure things out. There's more of a shared interest than there used to be in the last ten years or so. Whether that continues, it's hard to tell, but I've seen that, notwithstanding the cases you mentioned.

Gordon: Down in the trenches, there's a mix of cooperation currently. Some fields are very cooperative and everyone is on the same page culturally. They think it's the right thing to do and they are coming together. But at the same time, I see a lot of transactions where parties are coming together because they feel they have to in order to survive, and those are not happy transactions because they wouldn't have done it voluntarily.

There's also strain and tension around non-competes and carving out who can do what and where. We spend a lot of time on that. If you come together in certain ways, what do you do on the edges and who else you decide to play with is becoming very, very hard.

Murr: Another element of the ACA that may affect the hospital-patient relationship is the creation of a pathway for biosimilars - generic versions of biologic drugs. There's never been a regulatory pathway in the U.S. for biosimilars, which include some of our most expensive drugs, including cancer therapies. When the first biosimilars are approved, it will be interesting to see how they are adopted by physicians; the biosimilars are not identical to the existing biologic, which is done for patent reasons. There will be pressure from the hospital formulary to put the biosimilars in the formulary, but the physician may have a reluctance to move the patient to a drug that is biologically similar, but not identical. Biosimilars have the potential to bring down the cost of care, but there will likely be some tension between the hospital formulary and the physicians on how they get administered.

Moderator: Is the hospital-physician relationship in flux?

Chesley: The autonomous physician model is in its last decade. The change will be driven in part by bundled payments. We've experienced it a lot with various forms of capitation, performance-based compensation. It's been very incremental, but if the payment is intended to cover the pharmaceutical component, for instance, that will drive this movement towards any number of branches being torn off and making it a single path to the conclusion of what's the most cost-effective purchasing arrangement. Those arrangements in turn will be fostered by the aggregation of the purchasing power of the physicians and the hospitals coming together. It's that collective purchasing power that will drive, as much as anything, this convergence of physicians and hospitals under common control.

J. Miller: I'm not convinced that private practice will go away entirely because there are too many physicians for the hospital systems to absorb. They want to bring in selected physicians and groups, and not every doctor in the community. Come 2014, with 32 million or so newly insured Americans, there will be a greater demand for physician services. Advocate Health in Illinois has a very interesting non-acquisition model that allows community physicians to be aligned and integrated with Advocate for quality and efficiency purposes, while still maintaining their legal independence.

Gordon: I agree it's a blend where a lot of the deals in California, and even outside of it, are with hospitals trying to create an affiliation that captures both physicians that work closely with them and a broader integration model of looser ties with independent practices. It will be too hard to work in independent practice and comply with all of the regulatory requirements as well as have the IT infrastructure to really capture enough reimbursement. We are moving entirely into a system of proving top quality, and at the same time, cost savings, in order to get paid. As an independent, you don't have the wherewithal to do that. So there will be smaller groups and some independents, but they will be heavily tied to one or more hospital systems.

C. Miller: There's a large health system in Southern California that is associated with a large medical group through the foundation model. It also has a large number of community doctors who have come in through an independent practice association (IPA). The integration with the medical group through the foundation model is strong. It's a win-win. The integration with the independent physicians is healthy, but presents a lot of challenges for the reasons you've mentioned. Five years or ten years from now the independent physicians will likely be aligned more strongly in the system.

Moderator: Are you seeing a higher level of interest in fraud and waste as a result of the implementation of the ACA?

C. Miller: I don't know if it's a result of the ACA, but I'm seeing a much higher level of interest in preventing health care fraud. From a hospital standpoint, which has been my primary focus, the proactive organizations have very active audit committees that attempt to identify exposures as early as possible. Unfortunately, there are many hospitals that are not as proactive and are at a higher risk of government scrutiny.

J. Miller: The FBI estimates that 3 to 10 percent of the nation's total health care dollars are lost to fraud. That's $80 billion to $270 billion per year. Hospitals are usually on top of compliance issues. They require valuations to demonstrate fair market value and are often very tight with medical director fees and other payments to doctors. At the same time, physicians are under severe financial pressure. As a result, some physicians look to make money from aggressive billing and from those to whom they make referrals or order goods and services, such as surgery centers, DME suppliers, and pharmaceutical companies. This can lead to serious fraud and abuse problems. One of the announced priorities under the ACA is to move away from a "pay and chase" system, which is inefficient, to one of preventing the fraud from occurring in the first place. And the ACA has provided federal enforcement officials with increased funding and legal tools to achieve these goals. There is also increased anti-fraud enforcement by the Medi-Cal program and private insurance companies.

Chesley: I haven't seen much enforcement by the state of the anti-kickback laws and the ownership referral. There's been a lot of activity around the Recovery Audit Contractor (RAC) audits, which are here to stay. They seem to be very popular with the federal government, and now there's almost a routine internal process that deals with the RAC audit in some hospital systems. They take the findings that the auditors have given them, and after challenging them, they implement changes. So like it or not, that initiative, which is very much waste driven, is causing change in behavior.

J. Miller: Until recently, the federal government seemed to believe that the Stark law was too complicated to enforce. But in the past few years the government has been routinely prosecuting hospitals for what seem to be only technical violations of the law, such as the failure to have all parties sign an agreement or the inadvertent expiration of the agreement. The government has obtained huge settlements from hospitals for alleged Stark violations.

Gordon: Providers are really concerned about Stark violations and it's driving a tremendous amount of voluntary disclosure for often ridiculous types of technical violations - for example, a missing signature on a document. That process has really changed the way you think about diligence as a lawyer. In transactions, we now have conversations about how the target has to go through voluntary disclosure to potentially clean up things before we close. As lawyers it causes us to be more circumspect about what to look at because it could have a pretty significant impact on the parties.

Fraud abuse rules haven't changed, so when we structure relationships, particularly when you are talking about incentive payments for physicians from hospitals, it becomes extremely difficult for lawyers to structure things in a compliant way. Our clients are shocked because they're trying to fulfill the ACA policy reform objectives and yet they're told you can't do it because Stark and anti-kickback hasn't changed. We end up having to structure sometimes very inefficient arrangements for compliance purposes.

Murr: It will be interesting to see how the economics of the ACA affect this overall. The drug companies have more patients, but also some squeezed profit margins and it will be interesting to see what the reaction is in the marketplace and how people deal with that. But from a regulatory perspective, this is something that pharmaceutical and medical device industries have looked at for a long time and have worked very hard to keep their sales force on the straight and narrow.

J. Miller: Ryan [Murr], are you surprised that a number of drug and device companies, which have access to the best legal talent, continue to pay enormous fines for things like paying kickbacks and improper marketing practices?

C. Miller: Stresses to providers extend beyond fraud and waste. Hospitals get dinged for large amounts of penalties that they have, for instance, too many readmissions. One client had a penalty of approximately $150,000 for excessive readmissions in one particular department, but a lot of that was by design because it wanted the patient to come back for appropriate and necessary follow up. This is an example of "no good deed goes unpunished." So beyond fraud or waste, built into the ACA are ways that providers are put under tremendous pressure to avoid significant penalties.

Murr: To answer your question, Jeremy [Miller], certainly there have been examples that cross the line in terms of illegal conduct, but there are also many examples of overzealous prosecution. The companies that I work with do make an effort to ensure they have the right tone at the top and they are creating proper controls and procedures.

C. Miller: Not just in that area, but also providers. In my neck of the woods, we had the Alvarado prosecutions that were endless, resulting in nothing but a lot of attorneys fees.

Moderator: What are you seeing John [Chesley]?

Chesley: There's been very healthy attention to internal compliance programs for a long time. It's one thing to keep your own house to your own standard of cleanliness, whatever that might be, but when somebody else is coming in to look at everything sometimes with a handheld magnifier, a lot of things can show up. What may have been acceptable institutional practice might well raise the concern of a prosecutor or investigator and consequently a risk-adverse buyer. Due diligence brings these imperfections out in the open. Good compliance becomes a cost of doing deals.

Moderator: What impact is Affordable Care Act having on health care upstream from the point of care, such as pharmaceutical companies and drug makers?

Murr: The main impact will be in 2014 when you have 30 million more lives covered by insurance and you have reimbursement from the pharmaceutical companies totaling somewhere between $60 and $80 billion for 2020. A medical device tax also kicks in starting in 2013 that is 2.3 percent of the sales of the revenue of the devices. The pharmaceutical and drug manufacturers will see increased pressure on prices. A bright spot might be the personalized medical space where drugs are more targeted and where the economics may still be attractive. There are others who think that price pressure under the ACA will ultimately mean that drugs targeting small markets will come under fire due to their very high costs. Some cases have six figure costs annually for the treatments. With a capitated reimbursement model and move away from fee-for-service, there will be a move towards increased use of drugs that might not necessarily be best-in-class, but are more cost effective and from the providers' perspective.

Gordon: I've just seen a couple of deals from big suppliers of devices and supplies working with large hospital systems on pricing arrangements that just aren't volume discounts, but actually built around helping to design protocols for cost savings and improved quality. So companies that traditionally were just suppliers are changing how they perceive themselves and are trying to add value in the system.

Murr: That's also true of how pharmaceutical companies are selling their drugs. It's not just on safety and efficacy, but fitting into the overall cost structure for the insurer. That's also factoring into buyers and licensees' business development discussions and transactions where buyers look at potential new drugs not just for safety and efficacy, but also how they fit into this new pricing and reimbursement scheme.

J. Miller: While all drugs have to be proven safe and effective, increasingly there will be a third hurdle - a cost-benefit analysis. Physicians and patients want access to the newest drugs for illnesses such as coronary diseases and cancer. But there are a lot of examples where drugs that have been around for many years are just as effective and at a much lower cost. Also, can we continue to pay for hugely expensive new drugs that may only extend life for a few months? As a society we are going to have to deal with this financial reality.

Murr: If you have a drug that's 10 percent more effective but costs 50 percent more, is that something that will be covered? Historically there will be interest in developing a drug for cancer, for example, that was 10 percent more effective than existing treatments, but that might be a harder sell now if you aren't able to get that covered. If you can find patient subsets or genotypes that may respond particularly well, that may be a different case. However, if there is not a patient population that you know will respond at a higher rate, it's uncertain it would ultimately be a successful drug.

Chesley: There are group purchasing organizations that hospitals have been participating in for several decades now, but under the pressures of the ACA and just general consolidation, there are a couple of examples of health systems that are pooling purchasing power of independent health systems. For example, in Kentucky and Missouri, a consortium of four independent health systems with $7 billion in revenue is using that clout for purchasing. What legal issues, antitrust and otherwise, that flexing that muscle will bring to bear remains to be seen. The margins are under severe pressure, and if these mega group purchasing organizations do succeed, it will only increase that pressure.

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