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Last week, the federal HHS Office of Inspector General (OIG) gave the greenlight to allow a virtual care company and pharmaceutical manufacturer to loan patients free smartphones, so the patients (which include Medicare beneficiaries) could use the smartphones to track their drug therapy adherence via a mobile digital health app. The OIG’s recent Advisory Opinion marks the sixth favorable telemedicine/digital health advisory opinion issued by OIG to date. This article describes the drug and digital health technology, outlines the proposed program for free smartphones, and explains why OIG issued a favorable advisory opinion.

The Digital Health Therapeutic Technology

The company requesting the advisory opinion is an affiliate of a global pharmaceutical manufacturer which developed a drug used as an adjunctive treatment for a specific disorder (note: OIG redacted the drug’s identifying information). According to the company, medication nonadherence is a problem in this specific patient population due to factors associated with the disorder itself.  The company provided clinical research articles demonstrating that medication nonadherence for these patients results in higher utilization of health care services and increased costs.

In addition, the FDA recently approved a digital therapeutics version of the drug, which consists of a tablet of the drug embedded with an ingestible sensor (an ingestion event marker or IEM).  When a patient ingests the drug, the IEM gives off a mild electrophysiological signal that is detected by a wearable sensor (a patch) on the patient’s abdomen. The patch records when the patient ingests the drug and records certain physiologic indicators of the patient’s rest patterns and activity. A third element of the digital health therapy is a smartphone app, which uses Bluetooth to wirelessly collect the information generated via the patch.

The app also allows patients to self-report information such as how well they rested and their current mood. All the information collected in the app is transmitted to a secure cloud-based server where the patient’s health care providers can remotely monitor and access that information through web-based portals.

The Proposed Arrangement

Under the arrangement, the company wanted to loan free smartphones to patients, including Medicare beneficiaries, who have been prescribed the drug. This way, the patients could enjoy the full functionality of the digital health therapy, even if they do not own a smartphone.

There were some important limitations on the program. The company would only loan the free smartphones to patients who: (1) have been prescribed the drug; (2) meet any applicable approval or other insurer requirements; (3) have an income level below a certain percentage of the Federal poverty level; (4) do not already own a device capable of supporting and using the app; and (5) are United States citizens.

The smartphones (refurbished iPhones or Android devices) have limited functionality and can only be used to operate the preloaded app and make domestic telephone calls. At the end of the 8-12 week drug therapy regimen, the company will retrieve the smartphone from the patient (or remotely disable it if not returned). The program will not be advertised directly to patients.  Instead, the company will educate prescribing doctors about the program, explaining how doctors could screen potential patient-applicants and enroll them in the program on behalf of their patients.

The Promotes Access to Care Exception

Even though the smartphone is locked, it remains something of value to patients because it can make domestic phone calls. Thus, it constitutes remuneration under both the Civil Monetary Penalties Law and the Anti-Kickback Statute. Yet, OIG concluded the arrangement satisfied the Promotes Access to Care Exception to “remuneration” under Social Security Act § 1128A(i)(6)(F) and 42 C.F.R. § 1003.110 (“Incentives given to individuals to promote the delivery of preventive care services where the delivery of such services is not tied (directly or indirectly) to the provision of other services reimbursed in whole or in part by Medicare or an applicable State health care program.”)

The OIG concluded the program satisfied the Access to Care Exception for the following five main reasons:

• The smartphone app was essential to the patient accessing the full scope of benefits of the digital health therapy, and loaning a smartphone to make that possible would improve patients’ ability to benefit from the drug.
• The program was unlikely to interfere with clinical decision making because only certain patients who met specific conditions (e.g., financial need, no pre-existing device) would be eligible for the free smartphone. Moreover, a doctor would likely prescribe the digital therapy drug based on its ability to transmit data via RPM technologies, not based on the fact the doctor’s patient could get a free smartphone for 8-12 weeks.
• The free smartphone itself would not likely lead to increased utilization or costs to Federal health care programs.
• The fact that the program would not be directly advertised to patients was an important safeguard against improper beneficiary influence or inducements.
• The limited smartphone functionality and 12-week duration were favorable elements, and OIG notably stated if the phone offered additional functionality (e.g., internet access), they might have reached a different conclusion on the proposed arrangement.

What it Means for Telemedicine & Digital Health Companies

OIG included its traditional disclaimer that the advisory opinion can only be relied upon by the specific company that requested it, and the opinion would be null if any material facts were not disclosed.  Companies offering similar digital health therapeutics or remote patient monitoring programs should closely review the opinion because it offers insight into the government’s view on how technology can promote access to care. Companies evaluating or developing similar programs offering free or discounted technology should carefully consider the safeguards enumerated in OIG’s analysis prior to launch.

Want to learn more?

Join us on February 13, 2019 for “Digital Health and the FDA: Top 5 Legal Issues to Understand.” Members of the American Telemedicine Association’s Business & Finance Group can attend the presentation via the membership portal.  Click here for more info.

For more information on telemedicine, telehealth, virtual care, remote patient monitoring, digital health, and other health innovations, including the team, publications, and representative experience, visit Foley’s Telemedicine & Digital Health Industry Team.

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On January 25, 2019, the Illinois Supreme Court handed down a key ruling that will make it significantly easier for consumers and workers to sue and recover damages for mere non-compliance with the requirements of the state’s Biometric Information Privacy Act, 740 ILCS 14/1 et seq. (BIPA or Act). In its highly anticipated decision in Rosenbach v. Six Flags Entertainment Corp., the state’s high court unanimously held that actual harm is not required to bring an actionable claim under BIPA, and that a violation of BIPA’s technical requirements alone can support a cause of action under the Act. Thus, an individual who merely alleges a technical violation of BIPA is sufficiently “aggrieved” under the Act—with statutory standing to sue for significant statutory damages and injunctive relief—even if that person suffered no actual injury or harm as a result of the violation.

The Illinois Supreme Court’s ruling comes as welcome news to plaintiffs’ attorneys, who will now have fewer impediments to pursue no-injury class action lawsuits under BIPA, which allows for recovery of statutory damages of up to $5,000 for each violation, and attorneys’ fees and costs.

What is BIPA?

When BIPA took effect in 2008, Illinois became the first state to enact a biometric privacy law regulating the collection, use, and storage of “biometric identifiers,”[1] such as fingerprints, voiceprints, iris or retina scans and scans of hand or face geometry, as well as other “biometric information” based on those identifiers to the extent used to identify an individual (collectively, “biometric data”). Although three other states have since passed similar laws, BIPA remains the only one that grants individuals a private right of action—the right to sue and seek damages or injunctive relief for statutory violations.

BIPA does not prohibit the collection or purchase of biometric data. Instead, BIPA provides standards of conduct for private entities (including employers) collecting and maintaining such data, and also places several restrictions and affirmative obligations, including the following:

1. Notice and Consent. BIPA prohibits any company from collecting biometric data until it:
   1. informs the person (or their legally authorized representative) in writing if their biometric data is being collected or stored, and the specific purpose and length of time for which that data is being collected, stored, and used; and also
   2. obtains a written release executed by the person or representative permitting them to do so.
2. Written Policy. Entities must develop and adhere to a written policy, made available to the public, establishing a retention schedule and guidelines for permanently destroying the biometric data when the initial purpose for collecting them has been satisfied or within three years of the individual’s interaction with the entity, whichever occurs first.
3. Standard of Care. Companies should use a “reasonable standard of care” within their industry, and in a manner that is the same as or more protective than the manner in which the business stores, transmits and protects other confidential and sensitive information.
4. Disclosures to Third Parties. BIPA forbids the sale, lease, or profit from the biometric data and prohibits its disclosure except in narrow circumstances (such as with the person’s consent).

Unlike the two other states that have enacted biometric privacy laws, BIPA is the only one that creates a private right of action for any person “aggrieved” by a violation of the Act – meaning that individuals have the right to personally sue and seek statutory remedies based on an entity’s infringement of BIPA’s requirements. As noted above, non-compliance results in steep damages, including the greater of actual damages or liquidated damages of $1,000 for each negligent violation, and $5,000 for each intentional or reckless violation.

Due to the increasingly popular use of biometric data and the potentially significant liquidated  damages offered by the statute, the number of BIPA class action claims filed against companies for their allegedly improper collection of biometric data has ballooned in recent years. Plaintiffs in these cases have generally fallen into two categories: (1) employees of companies that allegedly utilize biometric data, such as fingerprints, for time keeping or physical security purposes; and (2) customers of companies that use biometric data to enhance the consumer experience.

Facts of the Case

The Rosenbach plaintiff fell into this second group. The plaintiff—on behalf of her minor son, a customer of Six Flags—sued Six Flags after her son registered for a season pass at the amusement park. Six Flags allegedly captured the thumbprints of season pass holders to facilitate entry into the park and limit loss from the unauthorized use of passes by non-pass-holders. In her suit against Six Flags, the plaintiff alleged that Six Flags violated BIPA by capturing her son’s thumbprint without first providing written notice, obtaining written consent, and publishing a policy explaining how her son’s thumbprint would be used, retained, and destroyed. She alleged no actual harm beyond the violation of BIPA’s requirements.

Procedural History

Following a motion to dismiss by Six Flags, two questions were certified for interlocutory appeal to the Second District Appellate Court. Both turned on whether an individual is “aggrieved” under BIPA, and thus potentially eligible for statutory remedies, when the only injury alleged is that the defendant collected the plaintiff’s biometric data without providing the required disclosures and obtaining the plaintiff’s written consent as required by the Act.

The Second District Appellate Court answered this question in the negative, holding that a claim is not sufficient if the defendant merely violated a technical requirement of the Act, and that a plaintiff must allege actual harm in order be deemed “aggrieved by a violation” of BIPA.

The Illinois Supreme Court’s Decision

Upon further appeal, the Illinois Supreme Court reversed. Although the plaintiff was not able to prove that her son’s biometric data was stolen or misused, a unanimous court ruled that the plaintiff is “aggrieved” under BIPA even in the absence of an allegation of actual injury caused by the statutory violation.

In reaching its decision, the court first looked to the legislative intent, explaining that the Act vests in individuals and customers the right to control their biometric data by requiring notice before collection and giving them the power to say no by withholding consent. The court viewed these procedural protections as particularly critical in our digital world because technology permits the wholesale collection and storage of an individual’s unique biometric identifiers—identifiers that cannot be changed if compromised. To this point, the court stated that “[w]hen a private entity fails to adhere to the statutory procedures…the right of the individual to maintain [his or] her biometric privacy vanishes into thin air. The precise harm the Illinois legislature sought to prevent is then realized. This is no mere ‘technicality.’ The injury is real and significant.”

The court also showed little patience for employers and businesses that misuse biometric data. According to the chief justice of the court: “[c]ompliance should not be difficult; whatever expenses a business might incur to meet the law’s requirements are likely to be insignificant compared to the substantial and irreversible harm that could result if biometric identifiers and information are not properly safeguarded.”

Looking Ahead

For the past decade, BIPA has become a heavily litigated piece of legislation that has involved class action lawsuits for high-profile companies. BIPA impacts a variety of entities (inclusive of, but not limited to, hospitals, providers, and pharmaceutical and device companies, as well as employers that utilize biometric time clocks to record employees working hours or use biometrics for security or identity verification) and many continue to seek guidance on the interpretation of BIPA and how to effectively comply with it. Questions remain as to the applicability of BIPA in many fields, and how entities may operate so as to ensure compliance with same in such instances of uncertainty.

To avoid exposure to lawsuits under BIPA, any entity with Illinois employees or that operates in Illinois and collects, stores or uses biometric identifiers or information, whether that of its employees or its customers, guests, visitors, they must ensure that they adopt and implement written policies and procedures regarding their collection, retention, disclosure and destruction of this data to ensure that they are sufficient to comply with the strict standards and requirements of BIPA. Having these policies by themselves, however, is not enough. It is critical that entities, especially in an employer/employee context, provide notice to individuals that their biometric information is being collected, stored, and/or used. For employers, this can be part of the onboarding process, where a signed affirmation of receipt of the notice can be made a condition of employment. Doing so will help secure a strong defense to any claim that an employee lacked adequate BIPA notice. Developing policies and procedures that place individuals on notice of an entity’s collection/storage and use of biometric information is especially critical in light of the new precedent set by the Illinois Supreme Court which opens the doors for more than 200 pending similar cases filed under the statute that accuse other businesses, including hotels and research entities, of violating BIPA for collecting biometric data without the accompanying disclosures or written consent. In addition, entities that do, or will have a need to, possess biometric data should immediately take steps to evaluate their need for collecting such information, and assess whether there is an alternative way to accomplish business objectives without possessing this data. If it is determined that biometric identifiers must be used, entities should have a clear understanding of how their biometric software works. Organizations should consider agreements with third-party vendors outlining the vendor’s responsibilities that at least certifies the vendor will comply with all applicable laws, and that the vendor will not disclose the information to third parties without written consent.

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[1] This term does not include signatures, photographs, physical descriptions or biological materials used for medical or scientific purposes.

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On January 31, 2019, the United States Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) announced a proposed rule, which would eliminate certain drug rebates and encourage direct discounts for federal beneficiaries.  Specifically, the rule would:

• Eliminate Anti-Kickback Statute (AKS) safe harbor protection for rebates paid by drug manufacturers to pharmacy benefit managers (PBMs), Medicare Part D plans and Medicaid managed care plans,
• Create a new safe harbor for drug discounts offered to patients at the point of sale, and
• Create a new safe harbor for PBM fees charged to drug manufacturers.[1]

The proposed rule has the potential to cause significant disruption to the status quo of the drug supply chain. PBMs interact and affect all stakeholders throughout the prescription drug supply chain and markets, including prescription drug benefit plans (e.g., Medicare Part D plans, Medicaid managed care plans and commercial plans, including employer-sponsored plans), pharmaceutical manufacturers and pharmacies. PBMs’ role is to help these plans manage cost and drug utilization by negotiating with manufacturers and pharmacies to facilitate beneficiary access to appropriate medications, while managing the costs to the plan.

HHS Secretary, Alex Azar, stated that “[t]his proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need.” The Trump administration believes that eliminating the AKS discount safe harbor protection for rebates based on list prices of drugs will reduce incentives for drug manufacturers to increase list prices and result in out-of-pocket savings for federal beneficiaries. This approach assumes that the estimated 26 to 30 percent of drug list price attributed to rebates that are provided to Medicare Part D plans, Medicaid managed care plans and PBMs will be passed on directly to patients to alleviate their out-of-pocket costs.

The proposed rule is part of a larger Trump administration initiative to tackle drug cost and spending through a variety of policy and legislative initiatives, including enhanced government negotiation of discounts for Medicare-covered drugs, prohibiting pharmacy gag clauses, adopting real-time benefit access, drug re-importation and facilitating generic and biosimilar competition against brand drugs.[2]

The proposed rule will be open to public comment for 60 days following its publication in the Federal Register.

What Does the Discount Safe Harbor Currently Allow?

Currently, the AKS discount safe harbor allows drug manufacturers to pay rebates to PBMs with protection against enforcement actions for AKS violations when the conditions set forth in the safe harbor are met.[3] The discount safe harbor has been relied upon, for example, to permit a PBM to exclusively cover a manufacturer’s product or favor a product through prescription benefit plan design, such as via inclusion of a drug on the plan formulary or via providing lower co-pays to plan beneficiaries.[4]  If made final, the proposed rule would, among other things, eliminate drug manufacturers’ and PBMs’ ability to rely on the safe harbor for rebate arrangements.

The crux of the HHS proposed rule would add language to the AKS discount safe harbor (42 CFR § 1001.952(h)) that would specifically exclude rebates offered by drug manufacturers to PBMs, Medicare Part D plans and Medicaid managed care plans from protection under the AKS safe harbor. The change would exclude (i) any rebates or price concessions required by law (e.g. state Medicaid rebates or Medicaid “best price” rules), and (ii) rebates paid by manufacturers to pharmacies, physicians, drug wholesalers or hospitals.   If finalized, this portion of the proposed rule would go into effect for plan year 2020.

The proposed rule also creates two new AKS safe harbors. The first new safe harbor protects discounts offered by drug manufacturers at the point of sale provided that the discount is fixed, set in advance, paid directly to the pharmacy, and the discount is reflected in the patient’s out-of-pocket cost.  The second new safe harbor protects fee arrangements between PBMs and drug manufacturers provided that there is a written contract that lists all the services provided by the PBM, payment is fixed and not based on percentage sales, price, volume or value, and that the PBM provides a written disclosure of the services to each health plan.  Under the proposed rule, each of the new AKS safe harbors would go into effect 60 days following the publication of the final rule.

Response to the Proposed Rule

Critics of the proposed rule, including the Pharmaceutical Care Management Association (PCMA), which represents the interests of PBMs, claim that there is evidence to support the notion that rebates offered to PBMs, Part D plans and Medicaid managed care plans and protected under the current AKS safe harbor are working to reduce drug prices,  PCMA expressed concern that the Trump administration’s proposed rule lacks a viable alternative for PBMs to negotiate on behalf of beneficiaries, which could result in increased drug costs, higher premiums, and elevated out-of-pocket costs for federal beneficiaries and ultimately adversely impact beneficiaries’ access to affordable prescription drugs.[5]

We will continue to monitor and report on developments related to the proposed rule.

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[1] Department of Health and Human Services. Office of Inspector General, RIN 0936-AA08, Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees (January 31, 2019).  https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-01026.pdf. It is expected to be published in the Federal Register on February 6, 2019.

[2] See Department of Health and Human Services. American Patients First. (May 2018).  https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf.

[3] See 42 CFR 1001.952(h).

[4] See http://www.modernhealthcare.com/article/20180719/NEWS/180719882.

[5] See Pharmaceutical Care Management Association.  PCMA Statement on Administration’s Prescription Drug Rebate Proposed Rule. (January 31, 2019). https://www.pcmanet.org/pcma-statement-on-the-administrations-prescription-drug-rebate-proposed-rule/.

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On January 9, 2019, the American Telemedicine Association (ATA) issued a policy comment letter to the U.S. Drug Enforcement Administration (DEA), advocating for provider-friendly changes to federal controlled substance prescribing rules. Note: the firm’s Telemedicine & Digital Health Industry Team participated in the ATA’s special workgroup to develop the recommendations.

The letter offers recommendations for DEA’s forthcoming Ryan Haight Act special registration regulation to allow psychiatrists and physicians to prescribe controlled substances via telemedicine without the need for an in-person exam. The special registration is one of the seven “practice of telemedicine” exceptions under the Ryan Haight Act, but to date it has not been activated.

The ATA’s recommendations follow the President’s signing into law the Special Registration for Telemedicine Act of 2018, part of the larger SUPPORT for Patients and Communities Act. The law requires the DEA to promulgate final regulations specifying: (a) the limited circumstances in which a special registration under this subsection may be issued; and (b) the procedure for obtaining a special registration under this subsection.  The law sets a deadline of October 24, 2019 for promulgation of these new regulations.

To Congress’ credit, the final version of the SUPPORT Act notably changed a clause contained in one of the initial drafts. The draft bill originally required the DEA to issue interim final regulations. Had that version been signed into law, the DEA would have been directed to simply publish the rule with an arbitrary specified effective date, without a “first draft” in the form of a proposed rule and without considering public comment in response to a proposed (which is exactly what happened 10 years ago when DEA published interim final regulations implementing the Ryan Haight Act on April 13, 2009). Fortunately, the final version of the bill signed into law instead sets a one-year deadline for DEA to promulgate final regulations. And the law affords DEA ample time to issue proposed rules, allow a 60 or 90-day period for the public to submit comments, and then promulgate the final regulations after considering those comments.

The recommendations are designed to strike a balance between the country’s great need for additional behavioral health resources, commonly accepted clinical practices, the evolving landscape of telemedicine technologies, and DEA’s charge to protect the safety and wellbeing of citizens via drug diversion. The letter proposes five key recommendations:

1. Update the current DEA registration process to specify distinctions between traditional and telemedicine prescribing privileges.
2. Allow both sites and prescribers to register for telemedicine.
3. Allow for a public comment period within the one-year timeline for special registration activation.
4. Ensure that telemedicine special registration is not restricted to any single discipline.
5. Allow telemedicine prescribers to apply for DEA registration numbers in multiple states at once.

The ATA letter notes: “The telemedicine community has long advocated for activation of special registration to relieve the regulatory impasse that confronts many telehealth prescribers.  Activation of the special registration provision will not only allow additional prescribers to use telemedicine to combat the opioid crisis, but also provide the broad range of medical disciplines an avenue to expand access to quality care.”

We will continue to monitor progress of the DEA special registration and other developments on the Ryan Haight Act, so please check back for updates.

For more information on telemedicine, telehealth, virtual care and other health innovations, including the team, publications, and other materials, visit Foley’s Telemedicine & Digital Health Industry Team.

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The U.S. Department of Health and Human Services (DHHS) recently released Health Industry Cybersecurity Practices: Managing Threats and Protecting Patients (HICP). DHHS states that the purpose of the HICP is to:

1. Raise awareness of cybersecurity;
2. Provide vetted cybersecurity practices;
3. Move organizations towards consistency in mitigating cybersecurity threats to the sector;
4. Aid health care and public health organizations to develop meaningful cybersecurity objectives and outcomes.

The HICP discusses five current threats: (i) e-mail phishing attacks; (ii) ransomware attacks; (iii) loss or theft of equipment or data; (iv) insider, accidental, or intentional data loss; and (v) attacks against connected medical devices that may affect patient safety. The HICP then discusses ten cybersecurity practices to mitigate those threats. In addition to the HICP, DHHS released two technical volumes – one for small health care organizations and another for medium and large health care organizations – and various resources and templates. The technical volumes aim to provide practical guidance to health care organizations on implementing the ten cybersecurity practices. For example, the technical volumes provide a list of the specific policies that health care organizations should have to mitigate the risk of cyberattacks, as well as the specific information that should be captured in the inventory of IT assets maintained by an organization.

Note that although compliance with this cybersecurity guidance (and similar government guidance that has been previously released) is voluntary, courts and others may look to the guidance as setting the standard for “reasonable security” in the health care industry. Therefore, health care organizations should review their current cybersecurity practices against those outlined in the guidance and consider how to address any identified gaps.

DHHS is also expected to release a Cybersecurity Practices Assessments Toolkit, intended to help organizations prioritize their cyber threats and develop an action plan. The Toolkit is still under development but DHHS states an advance copy can be obtained by contacting CISA405d@hhs.gov​.

The HICP and related resources are available here.

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On December 11, 2018, U.S. EPA Acting Administrator Andrew Wheeler signed a new hazardous waste pharmaceutical rule. The final rule retains a proposed requirement, opposed by industry, that prescription pharmaceuticals sent from health care facilities to reverse distributors first be considered “disposed of,” regulated as solid waste and evaluated for hazardous classification at the health care facility. This rule will impose significant new obligations on health care providers, including pharmacies and long-term care providers, as well as forward and reverse distributors of pharmaceuticals.

Decades of Policy

In the 1980s and 1990s, U.S. EPA took the position in policy memoranda that pharmaceuticals in the reverse distribution chain were “not considered wastes until a determination has been made to discard them.” That approach worked well for health care providers, who frequently relied on reverse distributors to determine whether their unused prescription and over-the-counter medications could be credited/reused/reclaimed or should be discarded. Under the George W. Bush Administration, U.S. EPA proposed to classify returned pharmaceuticals as “universal waste” entitled to relaxed management standards, but never finalized that rulemaking after concerns were raised regarding the potential diversion of narcotics and other medications regulated by the Drug Enforcement Agency (DEA). The Obama Administration proposed the current rule in September 2015, offering an entirely new set of management standards for unused pharmaceuticals. In the subsequent three years, a number of industry participants met with U.S. EPA as well as the Office of Management and Budget regarding the scope of the rule.

The New Approach

In the December 11th publication of the final rule, U.S. EPA expressed its concern that many industry participants have come to disregard the intent behind the agency’s prior guidance, and erroneously believed that it was a blanket statement that no pharmaceuticals going through reverse distribution were considered solid waste. As a result, the final rule treats prescription pharmaceuticals—but not non-prescription pharmaceuticals—as having been “discarded” by a pharmacy, hospital, or other health care provider when it decides to ship the potentially creditable material to a reverse distributor. Upon being “discarded,” those pharmaceuticals become solid waste, triggering management obligations under the Resource Conservation and Restoration Act (RCRA) for pharmaceuticals that are characteristically toxic, or that meet the definition of certain “listed” wastes, such as P and U listed acutely hazardous substances. In order to accommodate the unique market arrangements for pharmaceuticals, EPA’s final rule establishes an industry-specific set of requirements for prescription pharmaceuticals under RCRA.  With regard to non-prescription pharmaceuticals, EPA took a different approach and will continue to allow health care providers to ship potentially reusable and reclaimable over-the-counter drugs and dietary supplements as recyclable materials outside the RCRA waste regime to reverse distributors, where the actual decision to reuse/reclaim or discard the material will be made.

The pharmaceutical waste management standards found in the new 40 C.F.R. Part 266, Subpart P establish requirements for health care facilities (a term broadly defined to include hospitals, clinics, pharmacies, and long-term care facilities) as well as logistics providers known as “reverse distributors.” The final rule requires health care facilities that dispose of prescription pharmaceuticals to register with U.S. EPA, and to separate listed or characteristically hazardous (toxic, flammable, reactive, or corrosive) pharmaceuticals from unlisted, non-hazardous pharmaceuticals. Health care facilities will need to adopt training programs for staff to comply with the rule, and will need to dispose of hazardous pharmaceuticals within one year of their being determined to be a waste. The rule also creates an exemption from certain existing requirements for containers of medications that would be considered acutely hazardous when made a waste, such as Coumadin, so that facilities no longer have to tally the weight of Coumadin packaging and consider it acutely hazardous waste.

Notable changes from the proposal applicable to reverse distributors include:

• Authorization to accumulate hazardous waste pharmaceuticals for up to 180 days, rather than 90 days as proposed
• An exemption for managing materials subject to recall or a litigation hold
• Authorization to complete the initial sorting process within 30 days, rather than 21 days as proposed

The final rule includes four other significant elements. It bans the practice of flushing hazardous waste medications down the toilet (sewering). The rule exempts Food and Drug Administration-approved nicotine replacement therapies, such as patches and gum, from hazardous waste disposal requirements. The rule also exempts from regulation medications collected during drug take-back programs and events, placing them within the Congressionally-created household hazardous waste exemption. Finally, the rule eliminates the dual regulation of hazardous waste pharmaceuticals under RCRA if they are also regulated by the DEA as controlled substances.

Why This Matters to the Health Care Industry

The final rule fundamentally changes U.S. EPA’s long-held position on the point at which a pharmaceutical product is considered a solid waste under RCRA. That change will create significant regulatory uncertainty, and potential liability, for entities in the pharmaceutical distribution chain that suddenly find themselves evaluating compliance with the new rule. While Acting Administrator Wheeler signed the rule on December 11, 2018, the rule will not become effective until 6 months after it is published in the Federal Register. The rule may also be subject to petitions for reconsideration, or to challenge in the Court of Appeals for the D.C. Circuit.

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Last week, a federal district court held that the Secretary of the Department of Health and Human Services (HHS) exceeded his authority when he reduced Medicare outpatient prospective payment system (OPPS) reimbursement to hospitals for most separately payable drugs purchased under the 340B program by almost 30%. The court—hearing the case for the second time after the first lawsuit was dismissed for being premature—decided that it now had subject matter jurisdiction because a claim for payment had been presented. On the merits, the court sided with the plaintiffs, holding that the Secretary of HHS’ authority to “adjust” reimbursement rates does not justify “basic and fundamental changes” to the OPPS reimbursement methodology for separately payable drugs.

The court’s ruling represents a significant victory for the plaintiffs and for 340B hospitals, and could tee up further challenges to CMS’ OPPS rules, including challenges to controversial Medicare site-neutrality payment adjustments. However, 340B hospitals will need to wait to determine what financial relief is available to them. Notably, the court granted the plaintiff’s request for a permanent injunction but determined that it could not decide on how the injunction would be implemented, or on what other relief (including financial restitution) the plaintiffs were entitled to, until it receives further briefing from the parties.  The court was skittish about creating “a quagmire that may be impossible to navigate,” in part because the 340B cuts at issue were implemented in a budget neutral manner, meaning the reductions in payment for affected 340B drugs increased payments for other services and to non-340B hospitals under the Medicare OPPS.  As a result, relief under consideration by the court could include payment adjustments for all OPPS providers.

The court’s order requests supplemental briefing on the appropriate remedy within 30 days, and directs the parties to provide response briefs within 14 days after the supplemental briefs are filed.  A future ruling will determine what consequences the court’s order will have, and may line up further appeals of the court’s decision to the D.C. Circuit Court.

Further Exhaustion of Remedies Would Be Futile, Says the Court

As a threshold issue, the court’s rejection of the procedural arguments raised by HHS against review represents a considerable victory for plaintiffs. As in the first round of litigation, the government asserted that plaintiffs were not entitled to bring their claims in court because they had not exhausted their administrative remedies as required by 42 U.S.C. § 405(g).  This time the district court did not agree that the claim was barred.

The court first observed that plaintiffs had meaningfully changed their position by having presented a claim for benefits, thereby meeting the jurisdictional first element of Section 405(g).  The court then reasoned that it could waive the second element—that the administrative remedies prescribed by the Secretary be exhausted—because it was “readily apparent” that requiring exhaustion in this case would be futile. The court found it particularly persuasive that the case raised purely legal questions and there was no reason to believe HHS would change its mind because it had already considered and rejected plaintiffs’ legal arguments in notice-and-comment proceedings related to the revisions to the regulations.  As the court additionally observed, HHS also did not dispute that “no administrative review body would even have authority to alter or deviate” from the final rule’s requirement, making the futility of pursuing administrative remedies especially clear.

Medicare Statute Cannot Foreclose Judicial Review of Ultra Vires Claim

The government additionally argued that specific provisions in the Medicare statute precluded judicial review of the OPPS rate adjustment for 340B drugs. The court declined to resolve the conflict in statutory interpretation between the parties on this point. Instead, it relied on the principle that the Medicare statute’s preclusion of judicial review could extend “no further than the Secretary’s statutory authority to make” the adjustments under review.  As the Court explained, case law in the D.C. Circuit makes clear that judicial review under the Administrative Procedure Act is available even in the face of statutes precluding such review when an agency acts ultra vires, or in excess of its statutory authority.  Characterizing ultra vires review as a narrow exception that allows otherwise unchallengeable agency action to be reviewed when it represents a patent violation of agency authority, the Court turned to an analysis on the merits with the understanding that a substantive finding that the Secretary plainly exceeded his statutory authority would mean that the court was not precluded from judicial review.

“Adjustment” Authority Is Not Plenary Power to Change Rates

The crux of the argument on the merits was whether the Secretary’s statutory authority to “adjust” the benchmark drug reimbursement rate of average sales price (ASP) plus 6% granted him the authority to reduce the rate for 340B drugs to ASP minus 22.5%.  The specific “adjustment” was chosen based on MedPAC estimates of acquisition costs to hospitals for 340B drugs.  The court dismissed the Secretary’s argument that his adjustment sought to mimic an alternative statutory reimbursement formula based on acquisition costs; in the court’s view, “the statutory scheme is clear that if the Secretary does not have [the necessary] data” to base reimbursement on acquisition costs, “he must calculate reimbursement rates by reference to the drugs’ average sales price.”

The bottom line for the court was that “the rate reduction’s magnitude and its wide applicability inexorably lead to the conclusion that the Secretary fundamentally altered the statutory scheme established by Congress” and thereby exceeded his “adjustment” authority.

Congress Gets the Final Word on Policy

Both the litigation and CMS’ OPPS cuts were initiated in the context of ongoing disputes about the scope and future of the 340B program.  In its decision, the court acknowledged that HHS has expressed policy concerns around the 340B program and payment for 340B drugs, including the agency’s belief that large profit margins for hospitals on 340B drugs contributed to unnecessary utilization, that rising prices for certain drugs have unfairly increased cost sharing for Medicare beneficiaries, and that it is “inappropriate for Medicare to subsidize other activities through Medicare payments for separately payable drugs.”  Ultimately, however, these arguments held no sway for the court, which wrote that “Congress could very well have chosen to treat Medicare reimbursements for 340B drugs differently than reimbursements for other separately payable drugs, but it did not do so.”  Noting that the Secretary had the option to either collect the necessary data to set payment rates based on acquisition costs or to raise his policy disagreement with Congress, the court criticized what it viewed as an attempt to “end-run Congress’s clear mandate.”

What’s Next?

Both 340B and non-340B hospitals should carefully monitor how these remedies are applied, as the relief has the potential to redistribute billions of dollars in revenue among Medicare-participating hospitals.  The court’s ruling is likely to also affect the additional cuts CMS for 340B hospitals that CMS has included in the 2019 OPPS, and could increase pressure on Congress to address the 340B Program through legislation. Once the court’s ruling on relief is issued, the decision may be appealed to the United States Court of Appeals for the District of Columbia.

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Justice Reed O’Connor’s recent decision, Texas et al. v. U.S. et al., No. 4:18-cv-00167-O (E.D. Tex. Dec. 14, 2018), to strike down the entire Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010) (the ACA) as unconstitutional not only threatens to dismantle health coverage for millions of Americans and protections for people with pre-existing conditions, but the decision could also invalidate the Biologics Price Competition and Innovation Act (BPCIA) of 2009, which was included in the ACA. The decision concludes that ACA provisions are not severable, thus the entire ACA is unconstitutional, which would include the BCPIA.

The BPCIA created an approval pathway for FDA to approve biosimilars. Under the BPCIA, an innovator biologic enjoys 12 years of market exclusivity upon FDA approval. After such time and upon demonstration that a biological product is highly similar to the reference product despite minor differences in clinically inactive components; has an acceptable toxicity profile as determined by animal studies; and the requisite safety, purity, and potency for one (1) or more appropriate conditions of use for which the reference product is licensed; and a determination that the biological product is Interchangeable with the reference product, a biosimilar applicant may be accorded one year of market exclusivity from date of first licensure of the reference product.

Should appellate courts uphold Judge O’Connor’s decision, the BCPIA may have to be reauthorized.  Although there would be tremendous pressure for Congress to reenact the BPCIA because the BPCIA has the potential to create savings in the billions of dollars for Medicare alone, a second look at the BPCIA would almost certainly result in renewed debate regarding its more controversial aspects and lobbying efforts by industry and consumer protection groups alike. Central to the discussion would be innovator incentives and the appropriateness of according a pioneer biologic sponsor 12 years or market exclusivity upon approval by the FDA. As recently as 2016, the Price Relief, Innovation, and Competition for Essential Drugs (PRICED) Act was introduced in the U.S. House of Representatives (H.R. 5573) and Senate (S. 3094), which, if enacted, would have reduced the exclusivity period for pioneer biologics from 12 years to seven years.

On appeal, a reviewing court could choose to uphold O’Connor’s holding that the individual mandate of the ACA is unconstitutional while reversing the sweeping move made by O’Connor’s inseverability ruling, which resulted in invalidating the ACA in its entirety. In essence, on appeal, one option for a reviewing court would be to sever the unconstitutional aspects of the ACA while preserving the features of the ACA that do not raise constitutional issues. Key to a severability analysis is whether Congress would have enacted BPCIA absent the other aspects of the ACA. The provision’s procedural history, which evidences passage of the BPCIA without extensive hearings, suggests that Congress would have passed the BPCIA as a standalone bill. Indeed, at the time of its passage, there was strong bipartisan support for the BPCIA, which remains true today. When challenged, Republican congressman have consistently stated that their attempts at dismantling the ACA through legislative efforts would include salvaging the BPCIA.

In the modern era of passing multi-purpose legislation, severability is a key judicial tool to avoid re-litigating constitutional components of unconstitutional bills. The difficulty with this severability approach is that multi-purpose legislation is often a reflection of several rounds of protracted negotiations between both sides of the political aisle. In other words, the final legislation may be a “package deal” reflecting accommodation of various stakeholders with tradeoffs resulting in provisions that are important – perhaps critically so – to different legislators and their constituencies.   The legislative history of a bill may or may not accurately reflect whether a bill, in the form in which it was passed, would have been passed absent the other titles within a single bill. Nonetheless, where there is, as there is here, brief yet relatively uncontroversial history and continued bipartisan support for constitutional aspects of an otherwise unconstitutional bill, courts are well within their rights and powers to preserve the constitutional aspects of a bill, such as in the case of the BPCIA in the context of the larger ACA. In doing so, courts could, should the ACA be held unconstitutional in part, avoid a costly shutdown of the biosimilar approval process while the BPCIA is re-assessed, re-debated, and ultimately reauthorized.

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As noted in previous Health Care Law Today blog posts, we have seen an uptick in private equity recapitalization transactions in orthopedics. We expect this trend to continue, and to pick up pace, as the economy remains robust and the appetite for the most lucrative physician practices increases. When coupled with an increasing maturation of orthopedic practices, the volume of deals is almost certain to increase.

This expected transactional volume likely means increased competition for the larger practices and, thus, larger deals. Competition translates into higher multiples on projected cash flows and higher prices. With this will come increasing scrutiny on issues that have the potential to hamper post-deal cash flows. Orthopedics is one of the few such specialties that lends itself to ancillary income, through ownership of ambulatory surgery, imaging, physical therapy, and durable medical equipment (DME), not to mention arrangements with hospitals involving medical directorships, co-management, etc. These arrangements, while beneficial, also carry regulatory risks that any sophisticated investor will want to understand in an effort to manage downside pressure on post-closing cash flows.

Following is a brief discussion of some common areas that anyone engaged in these transactions should investigate.

Anti-Kickback Issues

The Federal Anti-Kickback Statute (AKS) makes it illegal to knowingly and willfully offer, pay, solicit or receive remuneration, in cash or in kind, in order to induce or reward the referral of business reimbursable under the Federal healthcare programs (e.g., Medicare and Medicaid). The most common AKS risk attendant to orthopedic deals is often found in ambulatory surgery center (ASC) investments by the group or its physicians. We often see private equity investors take substantial stakes in ASCs owned by practices or physicians, thus making the AKS risk something relevant to those investors. In this regard, it is worth noting that the ASC investments generally do not implicate the Stark Law (discussed below) because ASCs are not providing items or services that are considered “designated health services” (DHS) subject to the Stark Law.

Due its breadth, the AKS has a number of “safe harbor” regulations that provide investors with protection from the ambit of the statute so long as the arrangements are structured to meet certain regulatory requirements. These requirements focus on issues such as the types of investors (e.g., physicians or hospitals), whether or not the ASC is an extension of a physician investor’s practice, whether or not the physician borrowed money from the ASC or his or her fellow investors to acquire the investment interest, etc. Complying with the requirements is often uncomplicated, but it is worth noting that the failure to meet one or more requirements, thus failing to meet safe harbor protection, does not render the arrangement illegal but, rather, subject to a more in-depth analysis to determine its risk of being investigated and potentially prosecuted/sanctioned.

Common diligence issues often involve the following questions:

• Was the physician granted his or her interest in exchange for future referrals?
• Did the physician pay for his or her interest and, if so, was the payment equivalent to the fair market value of such interest?
• Did anyone loan the physician the money to acquire the interest, and, if so, whom?
• Is the physician’s return proportional to his or her percentage ownership interest in the ASC?
• Does the physician regularly perform procedures that are performed in an ASC, and, if so, what percentage of the physician’s ASC cases are performed in the ASC under consideration?
• Under what circumstances must the physician sell or surrender his or her ownership interest in the ASC?
• Is the ASC owned individually by physicians or by a group practice and, if so, are there any owners of the group who do not use the ASC?
• Does the ASC bill “out of network,” and, if so, are the ASC’s billing and collection practices compliant with relevant state law regarding commercial insurance billing?
• What sort of arrangements does the ASC have with anesthesia providers, for example do the anesthesiologists bill for their own professional fees or have they subcontracted their services through the ASC or the group, which then bills for them?
• If the anesthesiologists are subcontracted through the ASC or group, are the fees paid to the anesthesiologists consistent with fair market value?
• Where the current physician owners are reducing their investment percentage in favor of a private equity investor, is there an earn-out that is arguably based on the volume or value of future business referred by such physicians?

Answers to the above questions, as well as a host of others, will help frame any issues that may be present with respect to an ASC investment in connection with a recapitalization transaction.

Other ASC risks can be present with respect to relationships the group may have with local hospitals through medical directorships, on-call arrangements, co-management agreements and other ancillary arrangements involving imaging services or physical therapy. The problems that are often encountered in these arrangements are those that involve the failure to pay fair market compensation in connection with services provided by the physicians, or the provision of unnecessary or duplicative services.

In addition, the past decade saw the advent of the formation of medical device resellers by physicians. Physicians have formed companies to buy so-called “physician preference items,” such as screws, pins, spinal devices, partial or whole replacement joints, etc., from the manufacturer and then re-sell them to the hospital. If not structured properly, these transactions can present AKS risks and have come under scrutiny by the United States Senate Finance Committee (which has jurisdiction over the Federal health care programs) and certain hospital purchasers.

Other issues can arise in the event the group has sold a service line, such as physical therapy or imaging, to an independent service provider that has embedded itself in the practice, often through co-location, and is providing the practice with the same services the practice previously provided to itself.  These arrangements can raise issues of whether or not the purchase price paid to the physician group was for a legitimate, freestanding business or simply for the captive referrals of the group, to be enjoyed by the service provider.

Stark Law Issues

The Stark Law is a federal anti-referral statute that prohibits certain referrals by a physician of DHS to any entity with which the physician has a financial relationship whether through ownership of the entity or a compensation arrangement with the entity. The entity is also prohibited from billing Medicare or, in some cases, Medicaid for such referrals.  This broad prohibition, however, has a number of exceptions that allow for such referrals so long as the exception is fully met. The most common DHS, in the context of orthopedics, are imaging services, physical therapy services, DME, and orthotics.

The Stark Law is of concern to investors because a physician’s referrals for DHS to his or her own group practice can implicate the law, specifically when the practice owns and bills for services such as imaging, physical therapy, DME and orthotics.  Violations of the Stark Law can render referrals to the practice illegal and can negate the practice’s billings to Medicare and Medicaid (because they are not payable if billed in violation of the Stark Law), requiring repayment to the Centers for Medicare & Medicaid Services (CMS) along with possible penalties and fines. In addition, the practice can find itself in violation of the Federal False Claims or Civil Monetary Penalties Acts, which carry their own fairly harsh penalties.

To avoid these penalties, and to determine whether or not the group under consideration is at risk for violations of the Stark Law, one must work their way through a number of issues. The in-office ancillary services exception protects referrals of most ancillaries (excepting most DME) within a group practice, regardless of whether the referral comes from an owner or an employed/contracted physician.  However, in order to take advantage of this exception, the group must meet all of the components of Stark’s definition of “group practice,” including its rules on how the group may compensate its physicians. Because of the potentially disastrous consequences of a group not meeting the definition of “group practice” and thereby not being able to use the in-office ancillary services exception, we often advise that referrals by bona fide employed, non-owner physicians, meet the “employment exception,” and that referrals from independent contractor physicians meet the exception for personal service arrangements. Note that the requirements of the definition of “group practice” and the various exceptions are well beyond the scope of this discussion, but should be discussed, in depth, with counsel knowledgeable with them.

The foregoing pertains to referrals for ancillaries within the group; however, because orthopedic physicians often perform cases in a hospital setting, it is also important to review arrangements the group has with any of its hospital partners. This is primarily because inpatient and outpatient hospital services referred by physicians and billed to Medicare are also considered DHS under the Stark Law. Since the Stark Law considers a “compensation arrangement” to be a direct or indirect financial relationship implicating the Stark Law, common arrangements between orthopedic physicians or their groups and a hospital can create a “direct compensation arrangement” or “indirect compensation arrangement” between a referring doctor and the hospital. Thus, arrangements such as space or equipment rental arrangements, medical directorships, on-call arrangements, co-management arrangements, and joint ventures between a hospital and a group (or its physicians) involving imaging, physical therapy or DME can implicate the Stark Law with respect to referrals by the group or its physicians. Often there are exceptions that can be used to protect the arrangements, but the analysis can be complicated, especially as to whether compensation paid by a group to one of its physicians creates an “indirect compensation arrangement” with a hospital.

Billing and Coding Issues

It is common (and highly recommended) for acquirers to undertake audits of the coding and billing practices of acquired groups. Persistent mistakes in coding and the billing of procedures or services can affect the quality of a practice’s earnings, to say nothing of invoking compliance risks which may not otherwise surface until after the deal has closed. Common errors in orthopedic practices can include billing for physician assistants, i.e., billing their services as “incident to” the physician service without the proper supervision, and incorrect levels of supervision over in-office ancillary services such as imaging or physical therapy. We often recommend that a practice consider its own billing and coding audit before pricing the deal to ensure against surprises after a letter of intent is signed, at which point the parties are likely to find themselves engaged in discussions regarding price concessions.

Summary

The likely volume of orthopedic deals has the potential to create pricing competition resulting in robust multiples. This pricing environment will put pressure on the review of potential legal risks. Groups and investors considering a transaction are well advised to work through the above issues to confirm the quality of the group’s earnings and avoid unpleasant surprises following the close of any transaction.

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The Centers for Medicare and Medicaid Services (CMS) issued a final rule (the Rule) on December 21, 2018, which reshapes the Medicare Shared Savings Program (MSSP).  Termed “Pathways to Success,” the Rule, among other things,

• Redesigns the options for participation in the MSSP,
• Requires accelerated movement to downside risk,
• Is designed to increase savings for the Medicare program

The Rule also allows greater flexibility for accountable care organizations (ACOs) in the areas of new beneficiary incentives, telehealth services, and choice of beneficiary assignment methodology, all as established in the Bipartisan Budget Act of 2018.

The Rule follows the proposed rule issued in August of 2018 and reflects CMS’ responses to comments received by CMS on such proposal.

In announcing the Rule, CMS indicated there will be a one-time start date of July 1, 2019 for new applicants.  That start date allows continuation by ACOs who had elected to continue their current agreements and provides an opportunity for new and currently participating ACOs to apply for the reshaped MSSP.  Such applicants must file a non-binding Notice of Intent to Apply between January 2, 2019 and January 18, 2019, with application submission dates thereafter still to be determined.  There will also be opportunities to commence participation on January 1, 2020 and annually thereafter.

The MSSP has been the most utilized alternative payment program with some 560 ACOs and more than 10.5 million beneficiaries involved.  CMS believes the provisions of the Rule will be a Pathway to Success by promoting accountability, flexibility and beneficiary engagement in the MSSP.  Given that few ACOs have been willing to commit to downside risk models, it will be interesting to observe how participation in the MSSP is affected by the Rule.  If participation drops significantly, CMS will need to consider use of more mandatory downside risk models if it is serious about moving the health care payment and delivery systems to full accountable, value-based care.

The More Significant Changes to the MSSP in the Rule Include:

• Establishment of two tracks for participation by ACOs – Basic and Enhanced. The current MSSP has three tracks, as well as a Track 1+.  Under the Rule, ACOs are eligible for participation in one of two tracks, Basic and Enhanced, for an agreement period of five years.  All ACOs are expected to transition over time to the Enhanced track.  Those characterized as “low revenue ACOs” or “high revenue ACOs inexperienced in performance-based risk initiatives” may enter under the Basic track’s glide path, that starts with up-side only but moves to downside risk.  Eligible high revenue ACOs must transition more quickly to downside risk.  Low revenue ACOs with prior experience in performance-based risk initiatives also are required to transition to risk more quickly.
  • The Basic track begins as an up-side model but has a glide path to higher levels of risk, with only the highest level of risk qualifying as an Advanced Alternative Payment Model under MACRA. The Basic track allows eligible ACOs a one-sided model for only two years (though ACOs which previously participated in Track 1 would be restricted to one year and low revenue ACOs not identified as re-entering ACOs would be eligible for up to three years).  There is progressively higher risk in years three through five.  In the upside only levels of the Basic track, ACOs could receive 40% of shared savings based on meeting quality targets, after achieving a minimum savings rate.  With downside risk in the higher levels, ACOs could share up to 50% of the shared savings.  The transition to higher risk levels would be automatic, but ACOs could elect to move up to higher levels of risk more quickly.
  • The Enhanced track is based on the current Track 3, which offers more flexibility and higher potential rewards for ACOs that agree to take on higher levels of risk.
• July 1, 2019 Start Date. As noted above, the Rule includes a one-time start date of July 1, 2019 to facilitate transitions to the re-designed MSSP.  For those starting on July 1, 2019 the six-month period from July 1, 2019 through December 31, 2019 will have a methodology for financial and quality performance during that period.  Also, CMS is removing the required “sit-out” period after termination, which allows ACOs currently in a three-year agreement to voluntarily terminate their participation agreement effective June 30, 2019 and enter a new agreement as of July 1, 2019 under the Basic track (if eligible) or the Enhanced track, in either case without a required period of non-participation in the MSSP.
• Modification to Repayment Mechanism for Two-Sided Model ACOs. CMS seeks to reduce the burden of the repayment mechanism in the Rule.  Those taking downside risk in the Basic track or participating in the Enhanced track may have a lower repayment mechanism set based on a percentage of the ACO’s participants’ Medicare Part A and B revenue, with annual recalculations of the amount that must be guaranteed.  The Rule also sets a higher threshold that must be met before CMS will require an ACO to increase the repayment mechanism amount.  The Rule also reduces the time the repayment mechanism must be in effect from 24 to 12 months after termination.
• Changes to Benchmarking, Incorporating Regional Benchmarks for all Agreement Periods. The Rule includes revised benchmarking utilizing regional Medicare Fee-for-Service expenditures in establishing the ACOs historical cost benchmarks, rather than waiting until the start of the second (and subsequent) years.  The Rule also uses a blend of regional and national growth rates based on Medicare FFS expenditures, with increased weight on the national component, in setting cost benchmark trends and updates.
• Reduced Opportunities for Gaming. The Rule includes a number of provisions that help ensure program integrity by reducing opportunities for gaming.  Among such revisions are: using past participation in performance-based risk Medicare initiatives by the ACO legal entity as well as by its ACO participants to determine MSSP participation options; monitoring financial performance and permitting termination of ACOs with years of poor financial performance; modifying application criteria to allow consideration of the ACOs financial and quality performance standards in prior agreement periods; and holding ACOs responsible for pro-rated shared losses in voluntarily terminated arrangements.
• Regulatory Flexibility in Annual Choice of Beneficiary Assignment Method. Following the Bipartisan Budget Act of 2018, ACOs participating in Basic or Enhanced tracks are afforded the flexibility to elect prospective or preliminary prospective alignment with retrospective reconciliation of beneficiaries to the ACO.  Such election may be changed for each subsequent performance year.
• Expanded use of Telehealth in Downside Risk Arrangements. Beginning January 1, 2020, eligible physicians and practitioners in certain ACOs participating in downside risk tracks or levels will be entitled to payment for telehealth services furnished to prospectively assigned beneficiaries, irrespective of whether geographic limitations are met.
• Expanded Use of SNF 3-Day Acute Stay Waiver Eligibility. ACOs in the Basic or Enhanced tracks will be eligible to apply for a SNF 3-day rule waiver, irrespective of their choice of prospective assignment or preliminary prospective assignment with retrospective reconciliation.  In addition, critical access hospitals and other small rural hospitals operating under a swing-bed agreement are eligible to partner with certain ACOs as SNF affiliates for purposes of the SNF 3-day rule waiver.
• Beneficiary Incentive Programs. ACOs under certain downside models will have the opportunity to operate a beneficiary incentive program.  As permitted under the Bipartisan Budget Act of 2018, an ACO approved to operate a beneficiary incentive program may provide up to a $20 incentive payment to assigned beneficiaries for each qualifying primary care service the beneficiary receives from certain ACO professionals, or from a FQHC or Rural Health Clinic.  Also certain vouchers are considered to be in-kind or services that may be provided to beneficiaries under certain circumstances.
• Beneficiary Notification. The Rule strengthens beneficiary notification.  It requires an ACO to ensure beneficiaries receive notices of: ACO providers/supplies that are participating in the MSSP, a beneficiary’s opportunity to decline claims data sharing, and a beneficiary’s ability to identify and change identification of the primary care professional of the beneficiary for purposes of voluntary alignment.

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