patient protection and affordable care act could expand coverage for gender dysphoria

continued on page 3Volume 26, Number 2, December 2013

Billing for and Appealing Denials of Inpatient Hospital Services ..................... 1

Chair’s Column ........................ 2

Section News ......................... 25

Patient Protection and Affordable Care Act Could Expand Coverage for Gender Dysphoria ............ 26

Waiver for State Innovation: A Call for Increased Success or a Projected Failure? ............ 32

The Other Exchanges: Private Exchanges and Healthcare Reform ................. 46

Section Calendar .......Back Cover

BILLING FOR AND APPEALING DENIALS OF INPATIENT HOSPITAL SERVICESWhere have we been? Where are we now? What does the future hold?

Jessica L. Gustafson, Esq. Abby Pendleton, Esq. The Health Law Partners, P.C. Southfield, MI

Over the past eight years, hospitals’ submission of short stay inpatient claims has been subject to progressively-increasing scrutiny, predominantly due to the high error rate identified by Com-prehensive Error Rate Testing (“CERT”) contractors related to the setting of care as well as the aggressive auditing efforts of recovery auditors (previously named Recovery Audit Contractors (“RACs”) and more recently by Medicare Admin-istrative Contractors (“MACs”). This article examines the requirements for inpatient admissions versus outpatient hospitalizations and the corresponding reimbursement implications, as well as the history of the Centers for Medicare & Medicaid Services (“CMS”) recovery audit program, its focus on Part A inpatient hospital claims, and its effect on inpatient claim denials and appeals. This article also describes recent changes to federal regulations and CMS policy related to billing for inpatient admissions and inpatient claim appeals, which will impact hos-pitals’ decisions regarding whether to admit patients as “inpatients” and potentially impact reimbursement.

BackgroundReimbursement for Medicare Part A and Part B Claims

In order to appreciate the ratio-nale supporting the heightened scrutiny of inpatient hospital claims, one must consider the differences in CMS reimbursement for Medicare Part A and Part B claims. Generally speaking, the CMS Fee-for-Service (“FFS”) program provides hospital insurance (Medicare Part A) and supplementary medical insurance (Medicare Part B) to eligible benefi-ciaries. Medicare Part A provides coverage for inpatient hospital ser-vices.1 Medicare Part B provides coverage for “medical and other health services” that are not covered by Part A, including outpatient services.2 CMS excludes from coverage (under both Medicare Part A and Part B) items or services that are “not reason-able and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a mal-formed body member.”3 This exclusion includes services provided in an inap-propriate setting.4

For many hospitals (i.e., those compensated via the prospective pay-ment system (“PPS”)), reimbursement

TH

EHEALTHLAWYER

IN THIS ISSUE

2 The Health Lawyer Volume 26, Number 2, December 2013

As I write my Chair’s column over Veterans’ Day weekend, I am reminded of the multiple challenges confronting our service men and women. Not only must they over-come obstacles on the battlefield, but many continue to experience ongoing hurdles once they return home. One of the biggest challenges our veterans often face includes

finding adequate, effective healthcare, especially for mental health issues and substance use disorders. The National Institute on Drug Abuse (“NIDA”)1 reports that substance abuse by returning veterans is on the rise, with alcohol abuse being the most prevalent problem. A recent study of soldiers screened after returning from Iraq noted that 27 percent met criteria for alcohol abuse, with few receiving referral for screening or treatment. NIDA also notes that mental illness among military per-sonnel is a major concern, and is often accompanied by drug and alcohol abuse.2 This is an area that one of the newest groups to the Health Law Section, the Substance Use Disorders Task Force, has been working to address.

The Task Force was originally created by the ABA in 1990 as the Special Committee on the Drug Crisis to address problems and policies regarding illegal drug use. The group became an ABA Standing Committee, focus-ing its efforts on programs and policies that offer long term solutions to the nation’s drug problems. Topics included discrimination against individuals in treatment or recovery, alternatives to incarceration, treatment ser-vices for drug dependent persons in the criminal justice system, and drug courts, as well as education, prevention and treatment programs especially for children and young people. In 2012, the group moved to the Health Law Section and became a Section Task Force. In addi-tion to the Task Force members, the group works closely with an advisory board comprised of individuals who are experts in the field of substance abuse and recovery and in the criminal justice system.

There are more than 100 members of the Task Force including its leadership team.* Membership is open to all members of the Health Law Section, particularly those with an interest in legal issues related to substance use

Chair’s Corner

continued on page 51

The Health Lawyer (ISSN: 0736-3443) is published by the American Bar Association Health Law Section, 321 N. Clark Street, Chicago, IL 60654-7598. Address corrections should be sent to the American Bar Association, c/o Member Records.

Requests for permission to reproduce any material from The Health Lawyer should be addressed in writing to the editor.

The opinions expressed are those of the authors and shall not be construed to represent the policies or positions of the American Bar Association and the ABA Health Law Section.

Copyright © 2013 American Bar Association.

2013-2014 Officers and Council of the ABA Health Law Section are as follows:

ChairKathleen Scully-Hayes

Social Security AdministrationBaldwin, MD

866/613-3960 [email protected]

Chair-ElectMichael E. ClarkDuane Morris, LLP

Houston, TX713/402-3905

[email protected]

Vice ChairWilliam W. Horton

Johnston Barton Proctor & Rose, LLP

Birmingham, AL205/458-9413

[email protected]

SecretaryC. Joyce Hall

Watkins & EagerJackson, MS

601/[email protected]

Financial OfficerAlexandra Hien McCombs

ConcentraAddison, TX972/364-8241

[email protected]

Immediate Past ChairDavid L. Douglass

Sheppard MullinWashington, DC

202/218-0000ddouglass@

sheppardmullin.com

Young Lawyer Division LiaisonMatthew R. Fisher

Mirick, O’Connell, DeMallie & Lougee, LLPWorcester, MA508/929-1648

[email protected]

Board of Governors LiaisonWilliam Thomas Coplin, Jr.

William Thomas Coplin, Jr.Demopolis, AL334/289-3880

[email protected]

Section DirectorWanda Workman

American Bar Association321 N. Clark Street

Chicago, IL 60654-7598T: 312/988-5548 F: 312/[email protected]

The Health Lawyer EditorMarla Durben Hirsch

Potomac, Maryland 301/299-6155

[email protected]

Gregory L. PembertonIce Miller

Indianapolis, IN 317/236-2313

[email protected]

J. A. (Tony) Patterson, Jr.Northwest Healthcare Corporation

Kalispell, MT406/751-4175

[email protected]

Section Delegates to the House of Delegates

Michelle ApodacaWaller Law Firm

Austin, TX512/328-9300

michelle.apodaca@ wallerlaw.com

Denise GlassFulbright & Jaworski LLP

Dallas, TX214/855-8063

[email protected]

Eugene M. HolmesProskauer Rose LLPWashington, DC


Charles M. KeyUT Medical Group, Inc.

Memphis, TN 901/866-8029

[email protected]

John H. McEniry IVmediStat Specialized Pharmacy Services

Foley, AL251/923-3011

[email protected]

Shannon H. SalimoneHolland & Knight LLP

Tallahassee, FL850/425-5642

[email protected]

Robyn S. ShapiroDrinker Biddle & Reath LLP

Milwaukee, WI414/221-6056

[email protected]

W. Thomas SmithUniversity of Florida/ College of Pharmacy

Gainesville, FL352/273-5657

[email protected]

Hilary H. YoungJoy & Young, LLP

Austin, TX512/330-0228

[email protected]

HEALTH LAWYERT

HE

the aba health law section

Council

1 Topics In Brief: Substance Abuse among the Military, Veterans and their families, April, 2011, nida.nih.gov. The National Institute on Drug Abuse is the federal focal point for research on drug abuse and addiction and is part of the National Institutes of Health (“NIH”), U.S. Department of Health and Human Services.

2 Id.

3Volume 26, Number 2, December 2013 The Health Lawyer

continued on page 4

for Medicare Part A claims is based on a predetermined rate-per-discharge, classified by Diagnosis Related Group (“DRG”). The DRG reimbursement rate is intended to provide payment in full to the hospital for its inpatient operating costs.5 Significantly, DRG reimbursement is not related to a patient’s length of stay in the hospital (i.e., a hospital receives the same DRG reimbursement regardless of whether the patient’s hospital course spans one day or spans several days). Because of this, a hospital receives more valuable reimbursement for inpatient admis-sions of shorter duration.

Conversely, hospitals are not reim-bursed according to a predetermined rate-per-discharge for outpatient ser-vices. Rather, CMS assigns all HCPCS codes6 for which Medicare Part B pay-ment may be made into groups known as Ambulatory Payment Clas-sifications (“APCs”). Hospitals may be paid for more than one APC dur-ing a hospital stay, depending on the services rendered.7 In most cases, CMS reimbursement for a Medicare Part A inpatient claim based on an assigned DRG is higher than the reimbursement for a Medicare Part B outpatient claim based on assigned APCs for the same care.8

CMS processes over one billion Medicare Part A and Part B claims each year.9 According to data compiled by the Department of Health and Human Services (“HHS”), during fiscal year 2011, approximately 8.6 percent of Medicare Part A and Part B claims resulted in improper payments.10 Of these, a significant percentage (i.e., over 20 percent) were found to be “improper payments,” not because the services rendered were medically unnecessary, but rather because the care was pro-vided in an inappropriate “setting” (i.e., inpatient versus outpatient). In other words, the claims most likely would have been approved (and would not have resulted in “improper payments”)

if billed as outpatient claims under Medicare Part B.11 The purported improper payment rate is particularly staggering for Part A inpatient hospital claims of short duration. With respect to claims submitted during fiscal year 2012 (during which time the Medicare FFS program was estimated to have an 8.5 percent error rate),12 CMS deter-mined that Part A claims for inpatient hospital stays spanning one day or less resulted in an improper payment rate of 36.1 percent. This improper payment rate declined to 13.2 percent for two-day hospital stays, 13.1 percent for three-day hospital stays, and eight per-cent for hospital stays spanning four days or more.13

Because of the robust reimburse-ment hospitals receive for short stay inpatient hospital claims, hospitals’ sub-mission of Medicare Part A inpatient claims (particularly for one-to-two day hospital stays) has been subject to intense and progressively increasing audit scrutiny.14 Notably, when a CMS contractor denies a Medicare Part A claim for inpatient hospital services because it finds that care was provided in an inappropriate “setting” (i.e., the inpatient “setting” rather than the out-patient “setting”), the contractor does not adjust the claim to provide cover-age for the services rendered as if the care were provided in the appropriate “setting.” Rather, the claim is fully denied and the hospital does not receive any reimbursement whatsoever for the care provided.

Historically, following an inap-propriate “setting” denial, CMS has allowed hospitals to re-bill the Part A claim under Medicare Part B, but only for “ancillary services” – not emergency department (“ED”) ser-vices, observation services or surgical procedures – and only if timely filing regulations were satisfied,15 a policy that has been described by industry stakeholders as CMS’ “Payment Denial Policy.”16 Given the practical

effects of the timely filing limitations, in practice the CMS Payment Denial Policy has totally denied hospitals reimbursement for services rendered, a result particularly troubling given that in many cases the recovery audi-tors (as well as MACs and qualified independent contractors (“QICs”))17 acknowledge that the care rendered was appropriate (i.e., the specific interventions provided were reason-able and medically necessary). Prior to March 13, 2013, following an inap-propriate “setting” denial, hospitals were able to pursue appropriate reim-bursement through the five-stage Medicare appeals process. CMS has abandoned its absolute Payment Denial Policy; however, given the contents of the 2014 Inpatient Pro-spective Payment System (“IPPS”) Final Rule (the “2014 IPPS Final Rule”), which was effective October 1, 2013, it is unclear whether hospi-tals will be afforded the opportunity in the future to receive complete reimbursement for medically neces-sary care provided in the event that they receive denials based on an inap-propriate “setting.”18

Statutory, Regulatory and CMS Policy Standards for Billing of Inpatient Admissions and Outpatient Services

In order to avoid Part A inpa-tient claim denials based on the “setting” of care, hospitals must rely on applicable provisions of the Social Security Act, implementing regula-tions and CMS policy setting forth the criteria for appropriate billing of inpatient admissions and outpatient or outpatient observation services. The applicable authorities are often found by hospitals to be vague, over-lapping and inconsistently applied by auditors and appellate review entities, creating challenges for hospitals attempting to remain in compliance with CMS requirements and avoid Medicare Part A claim denials.

Billing for and Appealing Denials of Inpatient Hospital Servicescontinued from page 1



Inpatient

Medicare Part A provides bene-fits for “hospital, related post-hospital, home health services and hospice care” to those meeting certain require-ments19 and covers “inpatient hospital services.” The term “inpatient hospi-tal services” is defined to mean the following items and services furnished by a hospital to an inpatient of the hospital:

1) bed and board;

2) such nursing services and other related services, such as the use of hospital facilities and such medical social services as are ordinarily fur-nished by the hospital for the care and treatment of inpatients, and such drugs, biologicals, supplies, appli-ances, and equipment, for use in the hospital, as are ordinarily furnished by such hospital for the care and treat-ment of inpatients; and

3) such other diagnostic or ther-apeutic items or services, furnished by the hospital or by others under arrangements with them made by the hospital, as are ordinarily furnished to inpatients either by such hospital or by others under such arrangements.20

Clearly, services meeting the defi-nition of “inpatient hospital services” can be provided to hospital outpatients as well as to inpatients. Therefore, in determining whether an inpatient admission is medically necessary, it is essential to focus on the status of the patient as an inpatient or an outpa-tient, rather than to focus on the services provided.

Neither the Social Security Act nor applicable implementing regula-tions define the term “inpatient.”21 CMS has defined the term “inpatient” in the Medicare Benefit Policy Man-ual (CMS Publication 100-02), Chapter 1, Section 10:

An inpatient is a person who has been admitted to a hospital for bed

occupancy for purposes of receiv-ing inpatient hospital services. Generally, a patient is considered an inpatient if formally admitted as an inpatient with the expecta-tion that he or she will remain at least overnight and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a hospital bed overnight.

The physician or other practitioner responsible for a patient’s care at the hospital is also responsible for deciding whether the patient should be admitted as an inpa-tient. Physicians should use a 24-hour period as a benchmark, i.e., they should order admission for patients who are expected to need hospital care for 24 hours or more, and treat other patients on an outpatient basis. However, the decision to admit a patient is a complex medical judgment which can be made only after the physi-cian has considered a number of factors, including the patient’s medical history and current med-ical needs, the types of facilities available to inpatients and to outpatients, the hospital’s by-laws and admissions policies, and the relative appropriateness of treat-ment in each setting. Factors to be considered when making the decision to admit include such things as:

• The severity of the signs and symptoms exhibited by the patient;

• The medical predictability of something adverse happening to the patient;

• The need for diagnostic studies that appropriately are outpatient services (i.e., their performance does not ordinarily require the patient to remain at the hospital

for 24 hours or more) to assist in assessing whether the patient should be admitted; and

• The availability of diagnostic procedures at the time when and at the location where the patient presents.

Admissions of particular patients are not covered or noncovered solely on the basis of the length of time the patient actually spends in the hospital… .22

This definition of “inpatient” is arguably vague and circular. Conse-quently, one of the key factors in determining whether an inpatient admission is medically necessary has been the 24-hour benchmark (i.e., the admitting physician’s clinical judg-ment that a patient will require 24 hours or more of inpatient hospital ser-vices). The importance of the 24-hour benchmark is highlighted by CMS cri-teria governing minor surgeries23 and “Inpatient Only” procedures,24 each based in part on the admitting physi-cian’s expectation that a patient will, or will not, require 24 hours or more of “inpatient hospital services.”25 How-ever, the Medicare Benefit Policy Manual is also clear that admissions of patients are not covered or noncov-ered solely on the basis of the length of time the patient spends in the hospi-tal. Accordingly, historically there has been no presumption of coverage for inpatient admissions satisfying the 24-hour benchmark.

Intended to provide guidance to medical reviewers of Medicare Part A inpatient hospital claims, the Medi-care Program Integrity Manual (CMS Publication 100-08), Chapter 6, Sec-tion 6.5.2 describes appropriate inpatient admissions as follows:

The beneficiary must demon-strate signs and/or symptoms severe enough to warrant the need for medical care and must receive services of such intensity


continued on page 6

that they can be furnished safely and effectively only on an inpa-tient basis… .

Inpatient care rather than outpa-tient care is required only if the beneficiary’s medical condition, safety, or health would be signifi-cantly and directly threatened if care was provided in a less inten-sive setting… . See Pub. 100-02, chapter 1, §10 for further detail on what constitutes an appropri-ate inpatient admission.26

Similar language is present in the Medicare Quality Improvement Organization Manual.27 In many audit-related cases, CMS contractors argue that the Medicare Program Integrity Manual and Medicare Quality Improvement Organization Manual provisions cited herein ought to be applied over the criteria set forth in the Medicare Benefit Policy Manual to determine the appropriateness of an inpatient admis-sion.28 The contractors in essence focus their retrospective analysis on the specific services provided during the hospital stay, rather than on the appropriateness of the inpatient admission at the time the decision to admit was made.29

However, as noted by the Medicare Appeals Council, the foremost criteria to apply in considering whether an inpatient admission is medically nec-essary (i.e., whether inpatient status is appropriate) are those criteria set forth in the Medicare Benefit Policy Manual (CMS Publication 100-02), Chapter 1, Section 10.30 As acknowl-edged by the Medicare Appeals Council, additional CMS Internet-Only Manual provisions, including those in the Medicare Program Integ-rity Manual and Medicare Quality Improvement Organization Manual, are “of secondary importance, and their contents…overlap with the pro-visions in section 10, Chapter 1, of the MBPM.”31 Of note, the Medicare Program Integrity Manual (CMS Publication 100-08), Chapter 6, Sec-tion 6.5.2 specifically instructs

medical reviewers to consider the cri-teria set forth in the Medicare Benefit Policy Manual.

Outpatient

Medicare Part B provides cover-age for “medical and other health services,” including outpatient ser-vices,32 and excludes items or services that are “not reasonable and neces-sary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.”33

Federal regulations define the term “outpatient” as follows:

Outpatient means a person who has not been admitted as an inpa-tient but who is registered on the hospital or CAH records as an out-patient and receives services (rather than supplies alone) directly from the hospital or CAH.34

Outpatient hospital services include diagnostic services and “other services that aid the physician in the treatment of the patient.”35 Observa-tion services are one type of outpatient hospital service. The Medicare Benefit Policy Manual (CMS Publication 100-02), Chapter 6, Section 20.6 defines “outpatient observation services” as follows:

Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treat-ment as hospital inpatients or if they are able to be discharged from the hospital. Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admis-sion or discharge.

Observation services are covered only when provided by the order of a physician or another

individual authorized by State licensure law and hospital staff bylaws to admit patients to the hospital or to order outpatient tests. In the majority of cases, the decision whether to discharge a patient from the hospital follow-ing resolution of the reason for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours. In only rare and exceptional cases do reason-able and necessary outpatient observation services span more than 48 hours… .36

Highlighting the imprecision of CMS’ guidelines, observation ser-vices, as defined in the Medicare Benefit Policy Manual (i.e., “short term treatment, assessment and reas-sessment”) also satisfy the statutory, regulatory and CMS policy definitions of “inpatient hospital services” (i.e., diagnostic and therapeutic services ordinarily provided to inpatients). Note that some CMS contractors37 have expressly acknowledged that in many facilities, there is no distinction between the actual services provided to hospital inpatients and to hospital outpatients receiving observation ser-vices, and the distinction is one of billing category, rather than of inten-sity of services provided.38

Where Have We Been?The RAC Demonstration Program

Medicare Part A short stay inpa-tient hospital claims scrutiny gained momentum beginning with the RAC demonstration program.39 The sub-stantial majority (i.e., over 84 percent) of overpayments identified during the RAC demonstration program were based on denials of Medicare Part A inpatient hospital claims.40 Forty-one percent of the overpayment findings related to Medicare Part A inpatient hospital claims resulted from “the ser-vice being rendered in a medically unnecessary setting… . These are



situations where the beneficiary needed care but did not need to be admitted to the hospital to receive that care.”41

Deviating from its historic Pay-ment Denial Policy, during the RAC demonstration program CMS permit-ted hospitals receiving denials based on the “setting” of services to resubmit Medicare Part B outpatient claims in place of the denied Medicare Part A inpatient claims, irrespective of Medicare’s timely claim submission require-ments.42 However, hospitals were limited to re-billing only the outpa-tient ancillary services provided (and not the full range of outpatient ser-vices rendered), thus providing relatively anemic relief to hospitals.43

In order to receive more com-p le te re imbur sement fo r the reasonable and medically necessary care provided, hospitals were limited to pursuing relief through the five-stage Medicare appeals process.44 In many cases, hospitals were success-ful.45 However, in those instances where hospitals were unsuccessful in convincing Administrative Law Judges (“ALJs”) that payment for the services rendered ought to be made under Medicare Part A, some ALJs issued “partially favorable” decisions, ordering the MACs to work with hos-pitals to allow submission of Medicare Part B claims for the full range of ser-vices provided, including, but not limited to, observation services.

CMS took issue with these deci-sions and pursued what became the landmark case of In the case of O’Connor Hospital (decided February 1, 2010) to the Medicare Appeals Coun-cil.46 In this case, a RAC denied a claim for a short stay inpatient hospital admission for the reason that inpatient hospital services were not medically necessary. However, the RAC found that outpatient observation services would have been medically necessary for the care of the beneficiary. Despite

this finding, the RAC denied the claim entirely and did not provide credit for any of the medically necessary services provided. The hospital appealed, and at the ALJ stage of appeal the ALJ issued a “partially favorable” decision. Specifically, the ALJ upheld the denial of Medicare coverage for inpatient hospital services but found that the “observation and underlying care are warranted.” Citing CMS manuals (the provisions of which remain in effect as of the publication date of this article – at a minimum with respect to hospital admissions prior to October 1, 2013),47 the Medicare Appeals Council found that the ALJ did not err as a matter of law in rendering the partially favorable decision. The Medicare Appeals Council directed the AdQIC48 to pro-cess the ALJ’s partially favorable decision and process a claim for outpa-tient observation services. Although Medicare Appeals Council decisions do not have precedential value, the analysis contained within the O’Connor Hospital decision provided support for many partially favorable decisions throughout the RAC dem-onstration program and into the permanent recovery audit program, where ALJs and the Medicare Appeals Council ordered reimburse-ment as if an appellant hospital had submitted a Part B claim for the hospital care provided (including observation services).49

The Permanent Recovery Audit Program

Pursuant to the recovery audit Statement of Work, the mission of the recovery audit program is “to reduce Medicare improper payments through the efficient detection and collection of overpayments, the iden-tification of underpayments, and the implementation of actions that will prevent future improper payments.”50 “Improper payments” are defined to mean, “collectively…overpayments and underpayments.”51 In their

attempts to identify, detect and reduce “improper payments,” recovery auditors participating in the perma-nent recovery audit program52 have maintained a continued focus on inpa-tient hospital claims. In fact, the top issue audited by each RAC nationwide is whether hospitals have provided services in the correct “setting.”53

Consistent with CMS’ Payment Denial Policy, recovery auditors have fully denied claims in situations where the recovery auditors deter-mined that care was provided in an inappropriate “setting.” It should be noted that this result is inconsistent with the recovery auditors’ obliga-tions under the recovery auditors’ Statement of Work.54 Despite a con-tract with CMS to the contrary, the recovery auditors have fully denied Part A claims for inpatient hospital services, and have not granted Part B reimbursement for services rendered as if the claims originally were billed as outpatient claims.55 Arguably, the recovery auditors’ effectuation of the CMS Payment Denial Policy has resulted in a windfall to CMS and to the recovery auditors. A hospital pro-vides medically necessary care; the recovery auditor denies the Medicare Part A claim alleging that the medi-cally necessary care was provided in an inappropriate “setting”; CMS recoups the entire Part A payment; the recovery auditor receives a con-tingency fee (between 9 and 12.5 percent)56 based on the entire Part A payment; and the hospital forfeits all compensation for the services rendered.

Contrary to its position during the RAC demonstration program, CMS declined to extend its waiver of the timely filing requirements for re-billing Part B ancillary services in the perma-nent recovery audit program. In most instances, recovery auditors do not issue overpayment determinations within the one year timeframe for timely filing.


continued on page 8

Therefore, prior to March 13, 2013, re-billing under Part B was not an option in most cases following a recovery auditor denial.57 In order to receive reimbursement for medically necessary services rendered following an inappro-priate “setting” denial, hospitals had no option other than to pursue relief through the Medicare appeals process.58 According to data maintained by the American Hospital Association (“AHA”), hospitals have experienced a 72 percent success rate in the Medicare appeals process,59 supporting the hos-pitals’ position that recovery auditors’ findings are often incorrect.

Similar to the way in which recovery auditors review Medicare Part A inpatient claims, MACs at the first stage of the Medicare appeals process and QICs at the second stage of appeal60 historically have not issued “partially favorable” determina-tions or even considered hospitals’ alternative requests for reimburse-ment under Medicare Part B. In contrast, prior to March 13, 2013, cit-ing to federal regulations and the numerous Medicare Internet-Only Manual provisions addressing this issue cited herein,61 many ALJs found, and the Medicare Appeals Council consistently ordered (in at least 16 published cases dating back to 2005),62 that where a Part A claim for inpatient hospital services is denied, Part B payment is nonetheless avail-able for reasonable and medically necessary items or services provided.

CMS publicly disagreed with these ALJs’ and the Medicare Appeals Council’s interpretations of the regulations and published Medi-care guidance.63 However, recognizing that its contractors must effectuate ALJ and Medicare Appeals Council decisions, on July 13, 2012, CMS issued a memorandum to its MACs instructing them how to carry out partially favorable ALJ and Medicare Appeals Council decisions.64

On March 13, 2013, CMS changed course by publishing CMS

Ruling 1455-R (the “Ruling”), which in part reversed CMS’ longstanding Payment Denial Policy. However, the Ruling also limited the scope of ALJ review, ruling that ALJs may no longer order reimbursement under Part B as an offset against a finding of overpay-ment under Part A.65 This position was maintained by CMS in the 2014 IPPS Final Rule.66

Recovery Audit Pre-payment Review Demonstration

On November 15, 2011, CMS announced its recovery audit pre-pay-ment review demonstration aimed to “strengthen Medicare by eliminating fraud, waste, and abuse.”67 The recov-ery audit pre-payment review demonstration began on August 27, 2012 in 11 states altogether: the seven states with high populations of fraud and error-prone providers (California, Florida, Illinois, Louisiana, Michigan, New York and Texas) and four states with a high volume of short-stay inpatient hospitalizations (Missouri, North Carolina, Ohio and Pennsylva-nia). The recovery audit pre-payment review demonstration is scheduled to last three years, ending on August 26, 2015.68 Under the pre-payment review demonstration, recovery auditors are authorized to review claims before they are paid to ensure that hospitals com-ply with Medicare payment rules.69

Hospitals may find that the recovery audit pre-payment review demonstration creates administra-tive burdens. The recovery audit pre-payment review demonstration is not intended to replace MAC pre-payment review of Medicare Part A inpatient hospital claims, and such reviews will continue; however, CMS notes that “contractors will coordi-nate review areas to not duplicate effort.”70 Additionally, CMS indicates that “for now, limits on pre-payment and post-payment reviews won’t typi-cally exceed current post-payment ADR limits,”71 which raises questions as to how “typical” the “atypical” situ-ation of exceeding post-payment

ADR limits could become (a result particularly troubling to hospitals that have seen the approved ADR limits increase significantly over time).72 This auditing is in addition to all other audit programs (e.g., CERT audits, post-payment recovery audits, MAC audits, Supplemental Medical Review Contractor (“SMRC”) audits, Med-icaid audits, etc.), further burdening hospitals across the country.

Where Are We Now? Billing for and Appealing Inpatient Hospital Claims After March 13, 2013

On March 13, 2013, CMS con-currently issued its Ruling73 and a proposed rule (the “Part B Inpatient Billing Proposed Rule”)74 to revise Medicare Part B billing policies in the event of Part A inpatient claim deni-als based on the medical necessity of an inpatient admission. While the Ruling and Part B Inpatient Billing Proposed Rule purport to provide hos-pitals with a mechanism to receive reimbursement for services rendered in the event of a Medicare Part A inpa-tient claim denial, both the Ruling and Part B Inpatient Billing Proposed Rule were limited, providing an incomplete solution for hospitals.

CMS Ruling 1455-R

The Ruling was intended to serve as interim guidance effective until CMS finalized its Part B Inpatient Billing Proposed Rule and was made applicable to denials issued (1) while the Ruling was in effect; (2) prior to the effective date of the Ruling where appeal rights had not expired; and (3) prior to the effective date of the Rul-ing for which an appeal was pending.

The Ruling reiterated CMS’ posi-tion that ALJ and Medicare Appeals Council decisions allowing Part B reimbursement for services rendered as an offset against a Part A overpay-ment were contrary to CMS policy. However, the Ruling acknowledged that CMS was “acquiescing” to such


ALJ and Medicare Appeals Council decisions.75 Under the Ruling, when a Part A claim for inpatient hospital services is denied as medically unnec-essary, hospitals are permitted to rebill under Medicare Part B as follows:

• The hospital may submit a Part B inpatient claim for services that would have been payable had the patient originally been treated as an outpatient rather than admitted as inpatient. While permissible billing extends beyond “ancillary services,” under the Ruling the hospital may not bill for services deemed to require an outpatient status (e.g., emer-gency department (“ED”) visits and outpatient observation services).76 Excluding services “requiring an outpatient status,” such as outpa-tient observation services, from permissible Part B rebilling marks a significant departure from services permitted to be rebilled by many ALJs and the Medicare Appeals Council in the previous appeals environment.77

• The hospital may submit a Part B outpatient claim for medically nec-essary services furnished during the three-day payment window prior to the original inpatient admission, including ED visits and outpatient observation services.78

Under the Ruling, Part B billing is not available in situations involv-ing a hospital’s own determination that a service should have been billed under Part B based on a self-audit or utilization review determination.79

In order to submit a claim for reimbursement under Part B, a hospi-tal is required to either withdraw any pending Part A appeal or await a final appeal decision.80 The Office of Medi-care Hearings and Appeals posted on its website instructions for withdraw-ing a Request for ALJ hearing under the Ruling.81 Under the Ruling, a hospital has 180 days from the date of

the dismissal of appeal previously submitted or most recent unfavorable Part A appeals determination (as applicable) to bill under Part B.82

Prior to publication of the Rul-ing, many ALJs remanded cases to the QIC stage of appeal with orders for the QIC to consider whether the hos-pitals were entitled to reimbursement under Part B in cases where a Part A inpatient hospital claim was denied as medically unnecessary. Under the Ruling, these cases were ordered to be returned to the ALJ and adjudicated according to the new scope of review defined by the Ruling.83

In particular, the Ruling prohibits ALJs from ordering reimbursement under Part B as an offset against a find-ing of overpayment under Part A. ALJs are permitted only to decide if the Part A claim was medically neces-sary.84 This portion of the Ruling is particularly problematic, raising ques-tions as to whether CMS has authority via a ruling (and not formal regulation through notice-and-comment rule-making) to strip an ALJ of jurisdiction to consider the issues before him or her. Although CMS framed this position as a “clarification” of its longstanding policy, arguably the Ruling changed or restricted (rather than clarified) ALJs’ scope of review, rendering CMS’ posi-tion on this issue unsupportable as a matter of law.85 However, barring federal court intervention, ALJs and the Medi-care Appeals Council likely will abide by the Ruling’s provisions.

Proposed Rule for Part B Inpatient Billing in Hospitals

On March 13, 2013 CMS also released its Part B Inpatient Billing Proposed Rule, intended to supersede the Ruling once finalized. The Part B Inpatient Billing Proposed Rule retained many provisions of the Rul-ing, including the right for hospitals to bill for a more complete range of services under Part B if a Part A claim

for inpatient hospital services is denied as medically unnecessary. However, under the Part B Inpatient Billing Proposed Rule, the circum-stances for billing under Part B were significantly narrowed. CMS acknowl-edged that provisions of the Part B Inpatient Billing Proposed Rule would “greatly limit the capacity in which a hospital could rebill.”86

The most limiting (and the most troubling, from the hospitals’ perspec-tive) portion of the Part B Inpatient Billing Proposed Rule was CMS’ posi-tion that Part B claims may only be filed within one year from the date of service, irrespective of any subsequent audit determination or appeal pur-sued.87 Under the Part B Inpatient Billing Proposed Rule, if an audit determination is not made within one year from the date of service (which will be the circumstance in most audit determinations outside of pre-pay-ment review), a hospital would not be able to avail itself of Part B inpatient billing if a Part A claim is denied as medically unnecessary. CMS would treat the billing as an original claim, not as an adjustment88 (contrary to the analyses included as part of many of the Medicare Appeals Council deci-sions cited herein). This provision essentially nullifies the ability of hospi-tals to be appropriately compensated for medically necessary care provided.

Notably, in the recovery audit program the recovery auditors are authorized to review claims within three years from the claims’ initial payment date.89 Recovery auditors are compensated on a contingency fee basis, based on the principal amount of overpayment collection (not the overpayment amount identified).90 Accordingly, the recovery auditors will be financially incentivized to review claims beyond one year from the date(s) of service, prohibiting hospitals from billing under Part B, maximizing the amount of collection



and therefore the amount of their contingency fees.

Deviating from the Ruling, the Part B Inpatient Billing Proposed Rule proposed to allow hospitals that discover inpatient hospital admissions to be medically unnecessary in the course of utilization reviews (i.e., “self-audits”) to rebill these claims under Part B. CMS anticipates that hospitals will increase “self-audits” and rebill under Part B, saving the Medicare pro-gram money by reducing the number of Part A claims. CMS also anticipates lower appeal volumes.91

2014 IPPS Final Rule

On August 2, 2013, CMS pub-lished its 2014 IPPS Final Rule, which, for the most part adopts the provisions of the Part B Inpatient Billing Proposed Rule without change.92 The 2014 IPPS Final Rule became effective on October 1, 2013.93

– Payable Part B Inpatient Services

Following a Part A claim denial for an unreasonable and unnecessary inpa-tient admission, like the Ruling and the Part B Inpatient Billing Proposed Rule, the 2014 IPPS Final Rule allows Part B inpatient rebilling, with certain speci-fied exclusions for services that “should only be furnished to hospital outpa-tients,” including observation services, outpatient diabetes self-management training (“DSMT”), and hospital out-patient visits (including ED visits).94 Consistent with the Ruling, to the extent that such services are provided to outpatients in the three-day (one-day for non-IPPS hospitals) payment window preceding inpatient admission, such services may be billed on a Part B outpatient claim.95 Therapy services are not excluded from Part B inpatient bill-ing under the 2014 IPPS Final Rule.96

– Self-Audits

The 2014 IPPS Final Rule upholds CMS’ proposal to allow Part B inpatient billing in the event that a hospital determines that an inpatient admis s ion was not medica l l y

necessary under Medicare’s utiliza-tion review requirements,97 even if this determination is made following a patient’s discharge from the hospi-tal (i.e., “self-audit”).98 Although it would seem that this provision of the 2014 IPPS Final Rule replaces the need for and use of “Condition Code 44,”99 from an operational standpoint if a hospital determines prior to a patient’s discharge that the patient’s status ought to be that of outpatient rather than inpatient and uses Con-dition Code 44 to effectuate this change, then the hospital will receive more prompt reimbursement for ser-vices rendered. In particular, under the 2014 IPPS Final Rule, if a hospi-tal determines that an inpatient admission was not medically neces-sary pursuant to a self-audit following a patient’s discharge, the following chronology applies:

• The hospital first submits a “no pay/provider liable” Part A claim.

• The hospital then awaits the Part A claim denial.

• Once the Part A claim denial is received, the hospital may submit its Part B inpatient claim.100

– Beneficiary Impact

CMS has acknowledged that the Part B inpatient billing policies for-mally adopted by the 2014 IPPS Final Rule ultimately may have an adverse financial impact on Medicare benefi-ciaries,101 a peculiar result given that one of the primary purposes CMS cites for abandoning its Payment Denial Policy and revising its inpa-tient admission criteria was the adverse financial impact on Medicare beneficiaries resulting from hospitals’ increased use of outpatient observa-tion services (rather than admitting beneficiaries as inpatients).102

Under the 2014 IPPS Final Rule, if a Part A inpatient admission is denied as not reasonable and medi-cally necessary, and a determination is made that the beneficiary is not financially liable under Section 1879

of the Social Security Act, the hospi-tal is required to refund any amounts paid by the beneficiary for the hospi-tal stay at issue (e.g., deductible and copayment amounts). However, if the hospital subsequently submits a Part B inpatient claim, the beneficiary is responsible for applicable deductible and copayment amounts associated with the Part B inpatient claim.103 It is CMS’ position that it “cannot… hold beneficiaries harmless for the financial responsibility related to Part B coinsurance and deductible for cov-ered claims.”104 As noted elsewhere herein, beneficiary financial liability is often higher for Part B claims than for Part A claims.105

Commenters raised concerns related to patients’ financial liability in cases where a patient had a three-day qualifying inpatient stay (and was thereafter transferred to a skilled nursing facility (“SNF”) for Part A services), and the inpatient stay was subsequently denied as not medically necessary.106 However, CMS attempted to resolve these concerns by noting that “the status of the beneficiaries themselves does not change from inpa-tient to outpatient under the Part B inpatient billing policy. Therefore, even if the admission itself is deter-mined to be not medically necessary under this policy, the beneficiary would still be considered a hospital inpatient for the duration of the stay – which, if it occurs for the appropriate duration, would comprise a ‘qualifying’ hospital stay for SNF benefit purposes so long as the care provided during the stay meets the broad definition of medical necessity… .”107

– Timely Filing Provisions

Over 300 commenters to the Part B Inpatient Billing Proposed Rule objected to the proposal that claims for Part B inpatient services be rejected as untimely if submitted later than one calendar year following the dates of service at issue. Just one com-menter supported the proposal.108 Despite this significant industry




backlash, CMS moved forward with the timely filing limitation, revised for the near-term as follows:

[W]e will permit hospitals to fol-low the Part B billing timeframes established in the Ruling after the effective date of this rule, provided (1) the Part A claim denial was one to which the Rul-ing originally applied; or (2) the Part A inpatient claims [sic] has a date of admission before October 1, 2013, and is denied after Sep-tember 30, 2013 on the grounds that although the medical care was reasonable and necessary, the inpatient admission was not.109

Therefore, claims for hospital admissions following the effective date of the 2014 IPPS Final Rule (i.e., October 1, 2013) are governed by the timely filing provisions of the regulations.

– Scope of Review

The 2014 IPPS Final Rule also upholds CMS’ proposal to limit adjudi-cators’ scope of review of a Part A claim for inpatient hospital services to the Part A claim (i.e., in this situation, the adjudicator is prohibited from ordering payment for items and ser-vices rendered under Part B).110 The 2014 IPPS Final Rule again describes its limitation as one of clarification, rather than a change in policy (i.e., “many commenters expressed concerns about CMS’ clarification of the scope of review of an appeals adjudicator during appeals of Part A inpatient admission claim denials in the context of Part B billing…”).111 In support of its limita-tion, CMS states that “[n]either the Medicare statute nor the Secretary’s implementing regulations grant ALJs or other adjudicators the authority to order equitable remedies.”112 In addi-tion, citing its “longstanding Medicare policy,”113 CMS declined to permit reopening and adjustment of Part A claims into Part B claims (which

would obviate the need for application of the timely-filing regulations) due to the present operational limitations of CMS.114

Impact on Hospitals

The one-year claims filing limita-tion, coupled with provisions of the 2014 IPPS Final Rule taking away an ALJ’s authority to consider whether Part B payment would be appropriate, puts hospitals in a difficult situa-tion. Hospitals that have provided clinically appropriate, medically nec-essary care will be forced to decide (1) whether to accept reduced payment for services rendered (provided that timely filing requirements are satis-fied); or (2) whether to pursue Part A reimbursement through the Medicare appeals process, thus possibly losing all reimbursement for services ren-dered. While the 2014 IPPS Final Rule offers some relief from CMS’ long-held Payment Denial Policy (pro-vided that timely filing requirements are satisfied), many in the hospital community find this relief insufficient, as it fails to ensure accurate reimburse-ment is made to hospitals for all of the medically necessary care provided.115

The 2014 Inpatient Prospective Payment System (“IPPS”) Final Rule

On May 10, 2013, CMS issued a proposed rule related to the Medicare Program; Hospital Inpatient Prospec-tive Payment Systems et seq. (the “2014 IPPS Proposed Rule”).116 The 2014 IPPS Proposed Rule included key revisions to CMS requirements related to inpatient hospital admis-sions. First, the 2014 IPPS Proposed Rule “clarified” CMS’ documentation requirements related to physician orders and certifications. In addition, the 2014 IPPS Proposed Rule proposed to create a time-based threshold (i.e., a 2 midnight length of stay) to estab-lish a presumption of medical necessity of inpatient status (or inpatient

“setting”) for Part A inpatient hospital claims.117 Generally speaking, many of the requirements set forth in this 2014 IPPS Proposed Rule were final-ized without revision as part of the 2014 IPPS Final Rule.118

Physician Orders

In its 2014 IPPS Final Rule, CMS finalized its proposal to formally require an admission order to initiate an inpatient hospitalization as a condi-tion of payment under Medicare Part A.119 Although as a practical matter hospitals historically have obtained practitioner orders to initiate inpatient hospital stays (and although it was CMS’ expectation that practitioners would complete such orders), it should be noted that inpatient admission orders were not explicitly required by previous regulations or prior CMS written guidance.120

Inpatient admission orders may be made by a physician or other prac-titioner meeting the following requirements: (1) the practitioner is licensed by the state to admit inpa-tients to hospitals; (2) the practitioner has been granted privileges by the hos-pital to admit inpatients to the facility; and (c) the practitioner has knowledge of the patient’s hospital course, plan of care, or condition at the time of admission.121 Many physicians or other practitioners may potentially meet this knowledge requirement, including the admitting physician of record (or a physician on call for him or her); pri-mary or covering hospitalists caring for the patient in the hospital; the patient’s primary care practitioner; a surgeon responsible for a major surgi-cal procedure on the patient (or a surgeon on call for him or her); an emergency or clinic practitioner car-ing for the patient at the point of admission; and other practitioners qualified to admit inpatients and actively treating the patient at the point of the admission decision.122 According to CMS, physician members


of the hospital’s utilization review com-mittee do not have direct responsibility for the care of patients while serving in that role and therefore do not meet the requisite knowledge requirement for purposes of completing the inpatient admission order. 123

Under the 2014 IPPS Final Rule, admission orders may be made verbally or in writing.124 Practitioners lacking the qualifications to admit patients may document verbal inpatient admission orders made by a qualified ordering practitioner, provided that the ordering practitioner is identified and the order is authenticated (signed, dated and timed) by either the ordering practi-tioner or by another practitioner with the requisite admitting qualifications prior to the patient’s discharge (unless state law or hospital bylaws require an earlier timeframe).125

In a departure from previous writ-ten CMS policy,126 the preamble of the 2014 IPPS Final Rule documents CMS’ desire that admission orders include the term “inpatient” to spec-ify hospital admissions “to or as an inpatient.”127 CMS subsequently soft-ened this position, and as part of sub-regulatory guidance published on September 5, 2013, CMS stated that a hospital admission order may meet the regulatory requirements even if the term “inpatient” is not included in the order, provided that the admit-ting physician’s intent to admit the patient to the hospital as an inpatient is clear and consistent with the medi-cal record. Specifically, pursuant to the September 5, 2013 sub-regulatory guidance, CMS stated the following:

Orders that specify admission to an inpatient unit (e.g., “Admit to 7W”, “Admit to ICU”), admission for a service that is typically pro-vided on an inpatient basis (“Admit to Medicine”), or admis-sion under the care of an admitting practitioner (“Admit to Dr. Smith”), and orders that do not specify beyond the word “Admit,” will be considered to specify

admission to an inpatient status provided that this interpretation is consistent with the remainder of the medical record.…128

Despite this change, it remains a “best practice” for practitioners ordering inpatient admission to include the term “inpatient” as part of their inpatient admission orders. If this terminology is not included, it is plausible that recov-ery auditors (with a financial incentive to deny) and MACs could take the position that interpreting an order as an inpatient admission order would be inconsistent with the remainder of the medical record.

With respect to admission orders, as finalized, 42 C.F.R. § 412.3 (a) reads as follows:

For purposes of payment under Medicare Part A, an individual is considered an inpatient of a hos-pital, including a critical access hospital, if formally admitted as an inpatient pursuant to an order for inpatient admission by a physician or other qualified practitioner in accordance with this section and §§ 482.24(c), 482.12(c) and 485.638(a)(4)(iii) of this chapter for a critical access hospital. This physician order must be present in the medical record and be sup-ported by the physician admission and progress notes, in order for the hospital to be paid for hospital inpatient services under Medicare Part A.…129

Physician Certifications

The 2014 IPPS Final Rule also creates a requirement that physicians complete certifications of medical necessity for all inpatient admissions as a condition of payment.130 Although commenters argued that CMS’ pro-posal to require certifications for all inpatient hospital admissions (and not just for extended hospital stays) is not supported by the legislative history of the statute and regulations,131 CMS ultimately found these arguments unpersuasive.

The certification statements must be signed and dated by the physician responsible for the inpatient admis-sion or by another physician with knowledge of the case132 and must be completed before a patient’s discharge from the hospital. In contrast to the requirements for inpatient admission orders, the certification may only be completed by the following practitio-ners: (1) an M.D. or D.O., (2) a dentist in certain circumstances, and (3) a doctor of podiatric medicine if his or her certification is consistent with the functions he or she is autho-rized to perform under state law.133 In contrast to the requirements govern-ing inpatient admission orders, a physician member of the utilization review committee who has reviewed the case may complete the certifica-tion statements.

With respect to certifications, as finalized, 42 C.F.R. § 424.13(a)(2) will require the following:

a) Content of certification and recertification. Certification begins with the order for inpatient admis-sion. Medicare Part A pays for inpatient hospital services (other than inpatient psychiatric facilities services) only if a physician certifies and recertifies the following:

1) That the services were pro-vided in accordance with § 412.3 of this chapter.

2) The reasons for either – i. Hospi ta l i za t ion o f the

patient for inpatient medical treatment or medically required inpatient diagnostic study; or

ii. Special or unusual services for cost outlier cases (under the prospective payment system set forth in subpart F of Part 412 of this chapter).

3) The est imated t ime the patient will need to remain in the hospital.134

4) The plans for posthospital care, if appropriate.135




The physician order is a required component of the certification136 and must be made at the time of a benefi-ciary’s admission to the hospital.137 The certification must be signed and documented in the medical record prior to the patient’s discharge.138

CMS states that it is “not finalizing new documentation requirements”139 with respect to certification statements. Although certification statements must be documented via a separate signed statement within the medical record, a specific form is not required to satisfy the certification requirements.140 Certi-fication statements may be present on any documentation within the patient file as long as the method chosen per-mits verification.141 In the absence of a specific certification form, CMS and its contractors will look for the requisite elements within the medical file (e.g., the inpatient order, diagnosis, plan, dis-charge planning instructions, etc.).142

Borrowing from language of pre-vious guidance materials, i.e., HCFA Ruling 93-1, in the 2014 IPPS Final Rule, CMS clarified that, although now required for payment, no pre-sumptive weight will be given to physician orders and certifications. Orders and certifications must be sup-ported by the admission notes and progress notes in order for a claim to be paid under Medicare Part A.143

Establishing the Medical Necessity of an Inpatient Admission

In addition to clarifying documen-tation requirements, in the 2014 IPPS Final Rule CMS finalized criteria to establish the medical necessity of an inpatient admission. by finalizing its proposal that an inpatient admission would be generally deemed appropriate and payment made under Medicare Part A when the physician expects a patient to require a stay that crosses at least 2 midnights and admits the patient to the hospital based on that expectation, or if the patient is

undergoing a procedure on the Inpatient-Only list.144 Note that the 2014 IPPS Final Rule does not include exceptions to this standard based on the intensity of services rendered: “[O]ur 2-midnight benchmark policy is not contingent on the level of care required,”145 even if an admission is made directly to a hospital’s intensive care unit or telemetry floor.146

The new “2-midnight rule” serves to provide clarity to physicians and other healthcare practitioners making decisions as to whether inpatient care (as opposed to outpatient care) is medically necessary. In an apparent contradiction to CMS’ preamble commentary related to the decision-making significance of the level of care required, by way of its sub-regulatory guidance published on November 4, 2013, CMS opened the door to create additional exceptions (other than procedures on the Inpa-tient-Only list) to its 2-midnight rule. Speci f ica l ly, CMS stated the following:

We recognize that there could be rare and unusual circumstances that we have not identified that justify inpatient admission absent an expectation of care spanning at least 2 midnights. As we continue to work with facilities and phy-sicians to identify such other situations, we reiterate that we expect these situations to be rare and unusual exceptions to the gen-eral rule. If any such additional situations are identified, we will include them in sub-regulatory instruction, and we will expect that in these situations the physician at the time of admission must explic-itly document the reason why the specific case requires inpatient care as opposed to hospital services in an outpatient status.147

CMS is instructing its MACs to deny such claims (where the admit-ting practitioner does not expect the

patient to require hospital care cross-ing 2 midnights), but such claims will be submitted to CMS’ Central Office for further review. “If CMS believes that such a stay warrants an inpatient admission, CMS will provide addi-tional subregulatory instruction and the Part A inpatient denial will be reversed during the administrative appeals process.”148

Medical Review

With respect to medical review, the IPPS Final Rule establishes two distinct, but related, medical review policies: a 2-midnight presumption and a 2-midnight benchmark.

– Presumption

“Under the 2-midnight presump-tion, inpatient hospital claims with lengths of stay greater than 2 mid-nights after the formal admission following the order will be presumed generally appropriate for Part A pay-ment and will not be the focus of medical review efforts absent evi-dence of systematic gaming, abuse or delays in the provision of care in an attempt to qualify for the 2-midnight presumption.”149 The physician order initiates the inpatient admission for purposes of applying the 2-midnight presumption.150

Note, however, the 2014 IPPS Final Rule is clear that inpatient hos-pital claims satisfying the 2-midnight presumption will still be assessed by medical review contractors in the fol-lowing circumstances: (1) to ensure the services provided were medically necessary; (2) to ensure that the hos-pitalization was medically necessary; (3) to validate provider coding and documentation; (4) when a CERT contractor is directed to review such claims; or (5) if directed by CMS or other entity to review such claims.151 In other words, although the medical review contractors will not focus medical review efforts on claims sat-isfying the 2-midnight presumption



for the purposes of determining whether inpatient status was appro-priate for the beneficiaries, the claims may nonetheless be reviewed to determine whether any of those five circumstances apply. The 2014 IPPS Final Rule states the following with respect to this point: “We note that it was not our intent to suggest that a 2-midnight stay was presumptive evi-dence that the stay at the hospital was necessary; rather, only that if the stay was necessary, it was appropriately provided as an inpatient stay… .[S]ome medical review is always necessary… .”152

– Benchmark

On the other hand, CMS’ medi-cal review contractors will direct its medical review focus on inpatient hospital admissions with lengths of stay crossing 1 midnight or less.153 With respect to the 2-midnight benchmark CMS states the following:

If the physician admits the bene-ficiary as an inpatient but the beneficiary is in the hospital for less than 2 midnights after the order is written, CMS and its medical review contractors will not presume that the inpatient hospital status was reasonable and necessary for payment pur-poses, but may instead evaluate the claim pursuant to the 2-mid-night benchmark. Medical review contactors will (a) evaluate the physician order for inpatient admission to the hospital, along with the other required elements of the physician certification, (b) the medical documentation sup-porting the expectation that care would span at least 2 midnights, and (c) the medical documenta-tion supporting a decision that it was reasonable and necessary to keep the patient at the hospital to receive such care, in order to determine whether payment under Part A is appropriate… .

[I]f it was reasonable for the phy-sician to expect the beneficiary to

require a stay lasting 2 midnights, and that expectation is docu-mented in the medical record, inpatient admission is generally appropriate, and payment may be made under Medicare Part A; this is regardless of whether the anticipated length of stay did not transpire due to unforeseen cir-cumstances such as beneficiary death or transfer (so long as the physician’s order and certification requirements are also met).”154

With respect to the 2-midnight benchmark, the ordering physician may consider time a beneficiary spent receiving outpatient services (includ-ing observation services, treatment in the ED and outpatient procedures) when determining whether the 2-midnight benchmark is met, justify-ing an inpatient admission.155 The 2014 IPPS Final Rule summarizes the application of the benchmark as follows:

Medical reviewers will consider the fact that the beneficiary was in the hospital for greater than 2 mid-nights following the onset of care when making the determination of whether the inpatient stay was rea-sonable and necessary. For those admissions in which the basis for the physician expectation of care surpassing 2 midnights is reasonable and well-documented, reviewers may apply the 2-midnight bench-mark to incorporate all time receiving care in the hospital.156

Given the opportunity to bill inpatient services under Part B, if a hospital stay does not cross 2 mid-nights (including a patient’s time spent receiving outpatient services), hospitals may choose to either utilize Condition Code 44 to change the patient’s status prior to discharge, or use the Part B billing option based on self-audit by the hospital’s Utilization Review committee – given that the claim has a higher likelihood to be reviewed by a medical review entity

and the inpatient admission will not be presumed to be medically neces-sary. The 2014 IPPS Final Rule states that “hospital stays expected to last less than 2 midnights are generally inappropriate for inpatient hospital admission and Part A payment absent rare and unusual circumstance to be further detailed in sub-regulatory instruction.”157

As noted by the regulatory lan-guage cited above, the 2-midnight benchmark places great emphasis on the physician’s documentation regard-ing his or her expectation of length of stay. Therefore, it is essential that all hospital physicians are educated regarding the importance of docu-mentation within the medical record.

CMS actuaries have estimated that its revised inpatient admission guidelines will result in a net increase to inpatient hospital claims submitted under Part A.158 In particular, citing to data from fiscal years 2009 to 2011, CMS actuaries estimated that approxi-mately 400,000 encounters would shift from outpatient to inpatient under the 2014 IPPS Proposed Rule, and 360,000 encounters would shift from inpatient to outpatient (resulting in a net shift of 40,000 encounters, result-ing in a 1.2 percent increase in IPPS expenditures).159 These estimates are somewhat counterintuitive, as CMS basically is shifting its 24-hour benchmark to support an inpatient admission to a 2 midnight threshold, which presumably would result in a net increase of outpatient claims rather than inpatient claims. As most beneficiaries are not discharged from the hospital in the middle of the night, in many instances the 2014 IPPS Final Rule would have the effect that many beneficiaries will require over 48 hours of hospital care before an inpatient admission would be pre-sumed to be medically necessary,160 a result clearly not anticipated by prior CMS guidance.



What Does The Future Hold?

Litigation161

On November 1, 2012, the AHA along with four health systems162 filed suit against Kathleen Sebelius, in her official capacity as Secretary of HHS (the “AHA Complaint”), challenging the “unlawful government practice” of “refusing to pay hospitals for hundreds of millions of dollars’ worth of care provided to patients, even though all agree that the care provided was rea-sonable and medically necessary.…”163 The AHA Complaint describes this policy as CMS’ “Payment Denial Pol-icy.”164 The AHA Complaint alleged that CMS’ Payment Denial Policy violated the Administrative Proce-dure Act, which generally prohibits any agency from acting in a manner not in accordance with law or in an arbitrary and capricious manner.

Following publication of the AHA’s first amended complaint in December 2012 (filed to add one additional plaintiff hospital to the action), the court issued a schedul-ing order, requiring CMS to make its first substantive filing by March 15, 2013.165 Rather than doing so, CMS instead abandoned its Pay-ment Denial Policy, and on March 13, 2013, concurrently issued its Ruling and Part B Inpatient Billing Proposed Rule, concluding that “under section 1832 of the [Social Security] Act, Medicare should pay” for reasonable and necessary ser-vices rendered.

As the Ruling and Part B Inpa-tient Billing Proposed Rule proved unpalatable to hospitals (given the anticipated incomplete reimburse-ment), the AHA filed a second amended complaint on April 19, 2013, arguing that application of the Ruling and Part B Inpatient Billing Proposed Rule would be unlawful as contrary to the Administrative

Procedure Act.166 CMS moved to dismiss the AHA’s second amended complaint, and the AHA answered.167

On October 28, 2013, CMS and the AHA submitted supplemental fil-ings.168 The Court has yet to rule on CMS’ Motion to Dismiss.

Medicare Audit Improvement Act of 2013, H.R. 1250, S. 1012

On March 19, 2013 and May 22, 2013 respectively, identical bills were introduced to the U.S. House of Rep-resentatives (H.R. 1250) and U.S. Senate (S. 1012), proposing legisla-tion known as the Medicare Audit Improvement Act of 2013. The pur-poses of this proposed legislation include “[t]o amend title XVIII of the Social Security Act to improve opera-tions of recovery auditors under the Medicare integrity program, to increase transparency and accuracy in audits conducted by contractors, and for other purposes.”

The primary function of this pro-posed legislation is to reduce the overwhelming administrative burden placed on hospitals subject to ever-increasing audits of inpatient hospital claims, in the context of the vast majority of claim denials being over-turned on appeal. Key provisions of this proposed legislation include the following:

• A requirement that the Secretary of HHS set a per-hospital limita-tion on the number of medical records MACs, recovery auditors, or CERT contractors may request per year for audit, taking into account both pre-payment and post-payment reviews.169 Note that this combined ADR limit would not apply to Zone Program Integrity Contractors (“ZPICs”). As noted above, presently there are limita-tions on the number of medical records recovery auditors may request as part of their auditing

activities; however, this limitation does not account for any other requests for documentation other contractors may issue to hospitals, and recovery auditors are autho-rized to exceed this ADR limit provided that CMS approves.170

• Requirements for mandatory terms and conditions of contracts by and between CMS and recov-ery auditors and by and between CMS and MACs, including the following: (A) penalties for failing to timely perform audits and/or communicate with audited hospi-tals; (2) penalties for overturned appeals; (3) post-payment and pre-payment review requirements – in particular, a requirement that the Secretary not approve the conduct of a post-payment or pre-payment medical necessity audit, unless such audit addresses a “widespread” pay-ment error rate and ceases when the payment error rate is no longer “widespread” (as defined by the leg-islation) taking into account appeals results; and (4) guidelines for pre-payment reviews.171 Under the current recovery audit program, medical necessity audits of inpa-tient hospital short stay claims may persist indefinitely, regardless of hospitals’ appeals success.172

• A requirement that certain recov-ery auditor performance metrics be publicized on the CMS recov-ery audit website, including audit rates, denials and appeals outcomes at each of the stages of appeal in the Medicare appeals process, as well as independent performance evaluations of the recovery audi-tors.173 At present, CMS publishes some of this information on its recovery audit website, but not all.174

• Categorizing all claims selected for audit by a recovery auditor or MAC to be “reopened,” permitting a hos-pital to re-submit a Part B claim against a finding of overpayment



under Part A, irrespective of timely filing regulations.175 Under the Ruling (remaining applicable to inpatient admissions prior to October 1, 2013), if a Part A claim is denied because a hospital stay is found not to be medically reasonable and nec-essary, but a Part B claim would have been payable, hospitals are permitted to rebill for the majority of services provided under Part B and the timely filing requirements are waived.176 However, under the 2014 IPPS Final Rule, CMS reinstated the timely fil-ing restriction for billing of Part B inpatient services to mandate that such claims be submitted within one year from the date of service (irre-spective as to whether a Part A claim was reopened and revised fol-lowing one year from the date of service).177

• Requiring a physician to validate medical necessity denials.178 Under the Recovery Audit Statement of Work presently in effect, each recov-ery auditor is required to employ one full-time equivalent contractor medi-cal director (“CMD”) (in particular, a Doctor of Medicine or Doctor of Osteopathy), who is required to serve as “a readily available source of medi-cal information to provide guidance in questionable claims review situa-tions.”179 The Statement of Work does not require the medical directors to be involved in rendering medical necessity denials (i.e., in fact, medical necessity determinations are required to be made by registered nurses); however, “If the provider requests to speak to the CMD regarding a claim(s) denial the Recovery Auditor shall ensure the CMD participates in the discussion.”180

• Granting administrative and judicial review of the Secretary’s compli-ance with the regulations and guidelines for reopening and revis-ing claims.181 Pursuant to regulations codified at 42 C.F.R. § 405.980 (b) (1)-(3), a contractor is permitted to reopen an initial determination (1) within one year for any reason;

(2) within four years from the date of initial determination or redeter-mination for good cause; or (3) at any time if there exists reliable evi-dence that the initial determination was procured by fraud or similar fault. During the RAC demonstration pro-gram, many hospitals successfully challenged overpayment findings made by RACs, arguing that the RACs failed to demonstrate “good cause” to reopen and revise claims. However, pursuant to 42 C.F.R. § 405.980 (b) (5), a contractor’s decision whether to reopen is bind-ing and not subject to appeal.182 Citing this portion of the regulations in In the case of Memorial Hospital of Long Beach (DAB July 23, 2008), the Medicare Appeals Council issued a decision finding an ALJ erred in bas-ing its favorable decision on the fact that the RAC improperly reopened the claim at issue. Although Medi-care Appeals Council cases are non-precedential, following publi-cation of this decision, ALJs no longer considered hospitals’ argu-ments that the RACs improperly reopened audited claims without having good cause for doing so. This portion of the Medicare Audit Improvement Act of 2013 would grant hospitals the ability to again challenge recovery auditors ’ reopening of claims.

While the bipartisan legislative effort to pass the Medicare Audit Improvement Act of 2013 has been lauded by industry stakeholders such as the AHA183 and the American Health Information Management Association,184 to no surprise it also has received criticism from the Medi-care auditing community. The American Coalition for Healthcare Claims Integrity (“ACHCI”), an organization whose founding mem-bers consist of “partners in critical accountability initiatives including the federal Recovery Audit Contrac-tor (RAC), Zone Program Integrity Contractor (ZPIC) and Medicaid I n t e g r i t y C o n t r a c t o r ( M I C )

programs,”185 released a statement in June 2013 arguing that recovery audi-tors are entities that have recovered significant monies for the Medicare Trust Funds “… at no cost to hospitals or the industry,” and the proposed legislation would undermine their efficacy.186 Given the countless resources dedicated to addressing the onslaught of record requests, appeals and other issues discussed herein as a result of the unprecedented audit activity, hospitals would certainly take issue with the claim that the recoveries have come “at no cost to hospitals.”

On June 25, 2013, the U.S. Sen-ate Finance Committee held hearings on the recovery audit program and heard from industry stakeholders, including hospital representatives and representatives from one of the recov-ery auditors (CGI Federal, Inc.).187 Although it is unknown whether the Medicare Audit Improvement Act of 2013 will be admitted into law, these U.S. Senate Finance Committee hearings gave healthcare providers a venue to discuss issues faced with recovery auditors outside of discus-sions with CMS representatives.

ConclusionThe regulatory, legal and opera-

tional landscape surrounding the billing of short stay inpatient hospi-tal claims and pursuing appeals of denials of such claims has evolved over time. Hospitals have dedicated countless resources to addressing the unprecedented audit activity target-ing short stay inpatient admission billings and likely will see little relief in the years to come. While the 2014 IPPS Final Rule arguably provides more clarity regarding CMS expec-tations with respect to inpatient hospital claims, auditing activity of short stay claims will continue, and hospitals will likely encounter new issues during the appeals process related to the regulatory changes (e.g., defending the admitting practitioner’s



expectation that a patient would require hospital care crossing 2 mid-nights, in the event the expected length of stay does not transpire, defending the services rendered as medically necessary rather than defending the “setting” of care in the case of stays meeting the 2-midnight presumption). In addition to continu-ing the dedication of financial resources to audits and appeals, it is anticipated that many hospitals will encounter a myriad of challenges, including training and educational challenges, when operationalizing the requirements contained within the 2014 IPPS Final Rule.

Healthcare attorneys represent-ing hospitals in these areas must be mindful of the evolving regulatory issues and interplay of the topics dis-cussed in this article. Legal counsel providing appeals support to their hospital clients must make efforts to comprehensively address all issues, including but not limited to making substantive arguments addressing the correct application of CMS inpatient billing requirements as well as making legal arguments that may be necessary to preserve certain rights if taking appeals to later stages of the appeals process. For example, this may involve including legal challenges to CMS’ position on rebilling as part of the appeal filings. Moreover, health-care legal counsel can assist hospitals operationalizing the new require-ments in a manner that provides guidance to best position the hospi-tals to withstand anticipated future auditing and pursue any necessary appeals.

Jessica L. Gustafson, Esq. and Abby Pendleton, Esq. are founding sharehold-ers with the healthcare law firm of The Health Law Partners, P.C. The firm repre-sents hospitals, physicians, and other healthcare providers and suppliers with respect to their healthcare legal needs. Ms. Gustafson and Ms. Pendleton co-lead the firm’s

Recovery Audit and Medicare appeals practice group, and specialize in a number of areas, including Medicare, Medicaid and other payer audit defense and appeals; healthcare regulatory matters; compliance; HIPAA privacy and security compliance matters; overpayment refunds; reimbursement and contracting matters; and payer de-participation matters. Ms. Gustafson can be reached at [email protected]. Ms. Pendleton can be reached at [email protected].

Endnotes1 See Sections 226, 1811 and 1812 of the Social

Security Act, 42 U.S.C. § 426, 42 U.S.C. § 1395c and 42 U.S.C. § 1395d (a) (1).

2 See Sections 1831 and 1832 of the Social Security Act, 42 U.S.C. § 1395j and 42 U.S.C. § 1395k.

3 See Section 1862 (A) (1) (a) of the Social Security Act, 42 U.S.C. § 1395y (a) (1) (A).

4 See e.g., the Medicare Program Integrity Manual (CMS Pub. 100-08), Ch. 13, § 13.5.1 defining “Reasonable and Necessary.” This portion of the Medicare Program Integrity Manual describes the circumstances under which an item or service is considered reason-able and necessary under Section 1862 (A) (1) (a) of the Social Security Act, and includes services “Furnished in a setting appropriate to the patient’s medical needs and condition.”

Although recovery auditors and MACs rou-tinely deny coverage for Part A inpatient hospital claims as medically unnecessary under Section 1862 (A) (1) (a) of the Social Security Act for the reason that the services were provided in an inappropriate setting (i.e., the inpatient setting rather than the out-patient setting), it is noteworthy that the

actual “setting” in many cases does not differ for inpatient hospital services and outpatient services. That is, many hospitals do not have an “outpatient observation” unit, and inpa-tients receive inpatient hospital services side by side with patients receiving outpatient and outpatient observation services.

5 See Section 1886 of the Social Security Act, 42 U.S.C. § 1395ww (a) (4) and Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 3, § 20.

6 HCPCS codes (Healthcare Common Procedure Coding System codes) represent medical services and procedures furnished by physicians and other healthcare professionals compr i s ing the Amer i can Med ica l Association’s Current Procedural Terminology (CPT-4) coding system, as well as products, supplies and services not included in the CPT-4 codes. See http://www.cms.gov/Medicare/Coding/MedHCPCSGenInfo/HCPCS_Coding_Questions.html (last accessed November 4, 2013.

7 See Section 1833 of the Social Security Act, 42 U.S.C. § 1395l and Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 4, § 10.2.

CMS has published a MLN Matters educa-tional document related to the Hospital Outpatient Prospective Payment System, available at https://www.cms.gov/Outreach-a n d - E d u c a t i o n / M e d i c a r e - L e a r n i n g - Network-MLN/MLNProducts/downloads/HospitalOutpaysysfctsht.pdf (last accessed November 4, 2013).

8 Patients’ financial obligations are often higher for claims submitted under Part B as opposed to claims submitted under Part A. Beneficiary financial liability under Medicare Part B includes not only Medicare Part B copay-ments but also may include the cost of self-administered drugs that are not covered under Part B and the cost of any necessary post-hospitalization skilled nursing facility (“SNF”) care (which requires a three day inpatient hospital admission prior to Part A coverage). On the other hand, under Medicare Part A beneficiaries are responsible for a one-time deductible for all inpatient hospital services provided during the first 60 days in a hospital of the benefit period. Therefore, an inpatient deductible does not necessarily apply to every hospitalization. Medicare Part A coin-surance applies after the 60th day in the hospital. See 78 Fed. Reg. at 27644.

See also, “Are You a Hospital Inpatient or Outpatient? If You Have Medicare – Ask!” available at www.medicare.gov/Pubs/pdf/ 11435.pdf (last accessed July 11, 2013).

9 Medicare Fee-for-Service, available at www.paymentaccuracy.gov/programs/medicare- fee-service (last accessed June 24, 2013).

10 Id.

11 Medicare Fee-for-Service 2011 Improper Payments Report at p. 20, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitor ing-Programs/CERT/Downloads/MedicareFFS2011CERTReport.pdf (last accessed June 24, 2013).

Jessica Gustafson

Abby Pendleton



12 Medicare Fee-for-Service, available at www.paymentaccuracy.gov/programs/medicare- fee-service (last accessed June 24, 2013).

13 See Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals et al., 78 Fed. Reg. 27486 at 27647 (May 10, 2013). It should be noted, however, that this data is premature and likely subject to change. The 2012 data reflects CERT find-ings, which may be appealed through the standard Medicare appeals process. The Medicare appeals process in most instances spans well over one year. It is unlikely that as of May 10, 2013 (the publication date of the proposed rule), final appeals determinations had been made with respect to many (if any) of these claims, to the extent that such claim denials were appealed.

14 The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, at Appendix F, p. 37and Appendix G, p. 38, available at http://www.cms.gov/Research-Statistics-Data- and-Systems/Monitoring-Programs/recovery-a u d i t - p r o g r a m / d o w n l o a d s / R A C EvaluationReport.pdf (last accessed June 28, 2013).

See also Medicare Fee for Service Quarterly Newsletters, available at http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery-Audit-Program/Current_Programs.html and http://www.cms.gov/Research-Statistics-Data- and-Systems/Monitoring-Programs/Recovery-Audit-Program/Recent_Updates.html (last accessed July 9, 2013).

15 The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, at p. 25 available at http://www.cms.gov/Research-Statistics-Data-a n d - S y s t e m s / M o n i t o r i n g - P r o g r a m s /r e c o v e r y - a u d i t - p r o g r a m / d o w n l o a d s /RACEvaluationReport.pdf.

16 See Complaint at 3, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed November 1, 2012).

17 After receiving an unfavorable claim determi-nation (i.e., a denial) from a Medicare contractor, hospitals may appeal through the five-stage Medicare appeals process, set forth at 42 C.F.R. Part 405 Subpart I:

• The first stage of appeal is called “Redetermination.” A R e q u e s t f o r Redetermination is filed with the Medicare Administrative Contractor (“MAC”).

• The second stage of appeal is called “Recons iderat ion .” A Reques t fo r Reconsideration is filed with a quality improvement organization (“QIC”).

• The th i rd s tage o f appea l i s an Administrative Law Judge (“ALJ”) hearing.

• The fourth stage of appeal is Medicare Appeals Council Review.

• The fifth and final stage of appeal is federal district court.

18 78 Fed. Reg. 16632 (March 18, 2013) and 78 Fed. Reg. 50496 et seq. (August 19, 2013).

19 Section 1811 of the Social Security Act, 42 U.S.C. § 1395c.

20 Section 1861 (b) of the Social Security Act,

42 U.S.C. §1395x (b). See also 42 C.F.R. § 409.10 and the Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 1 set-ting forth identical definitions of “inpatient hospital services.”

21 See Landers v. Leavitt, 545 F.3d 98 at 104 (2nd Cir. 2008), finding that “[n]either the statute nor any applicable regulation defines ‘inpatient,’” noting however, the Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10 sets forth CMS’ official interpreta-tion of the term.

Federal regulations related to state plans for medical or remedial care and services define inpatient as follows:

[A] patient who has been admitted to a medi-ca l ins t i tut ion a s an inpat ient on recommendation of a physician or dentist and who – (1) receives room, board and profes-sional services in the institution for a 24 hour period or longer, or (2) is expected by the institution to receive room, board and profes-sional services in the institution for a 24 hour period or longer even though it later develops that the patient dies, is discharged or is trans-ferred to another facility and does not actually stay in the institution for 24 hours.

42 C.F.R. § 440.2 (a).

Note that the Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10, setting forth CMS’ definition of “inpatient” as it relates to proper inpatient admissions closely follows the regulatory language set forth above.

22 Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1 is available at www.cms.gov/Regulat ions-and-Guidance/Guidance/Manuals/Downloads/bp102c01.pdf (last accessed November 4, 2013).

23 The Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10 also states the fol-lowing with respect to Minor Surgery or Other Treatment –

When patients with known diagnoses enter a hospital for a specific minor surgical procedure or other treatment that is expected to keep them in the hospital for only a few hours (less than 24), they are considered outpatients for coverage purposes regardless of: the hour they came to the hospital, whether they used a bed, and whether they remained in the hospi-tal past midnight. (Emphasis added).

Acknowledging the 24-hour benchmark, the above-cited manual provision applies to those situations where a patient presents to a hospi-tal at a late hour and where he or she will require the use of a bed overnight, but where the admitting physician has no clinical expec-tation that the beneficiary will require 24 hours or more of inpatient hospital services.

24 CMS has designated certain procedures as “Inpatient Only” procedures, mandating that certain HCPCS Codes will be paid only when provided in an inpatient setting. CMS designates such procedures as “Inpatient Only” due to the nature of the procedure, the need for at least 24 hours of postoperative recov-ery time or monitoring before a beneficiary can be safely discharged, or the underlying physical condition of beneficiaries undergoing such procedures. See generally, Medicare Claims Processing Manual (CMS-Pub. 100-04), Chapter 4, § 180.7 (Emphasis added).

25 As part of the 2014 IPPS Final Rule, CMS discusses the importance of the existing 24-hour benchmark:

• “Currently, a beneficiary’s length of stay may be a factor in determining whether he or she should be admitted as an inpatient to the hospital, but it is not the only factor for this determination. Our current manual instruc-tions state that, typically, the decision to admit a beneficiary as an inpatient should be made within 24 to 48 hours of observation care, and that expectation of an overnight stay may be a factor in the admission deci-sion (Section 20.6, Chapter 6 and Section 10, Chapter 1 of the MBPM). We state that physicians should use a 24-hour or overnight period as a benchmark, that is, they should order admission for patients who are expected to need hospital care for 24 hours or over-night, or more, and treat other patients on an outpatient basis… .” See 78 Fed. Reg. 50496, at 50907 (August 19, 2013).

• “Our previous guidance also provided for a 24-hour benchmark, instructing physicians that, in general, beneficiaries who need to stay at the hospital less than 24 hours should be treated as outpatients, while those requir-ing care greater than 24 hours may usually be treated as inpatients… . [W]e have con-sistently provided physicians with the aforementioned time-based admission framework to effectuate inpatient hospital admission decisions.” See 2014 IPPS Final Rule at p. 1811.

26 Medicare Program Integrity Manual (CMS Pub. 100-08), Ch. 6 available at http://www.c m s . g o v / R e g u l a t i o n s - a n d - G u i d a n c e /Guidance/Manuals/Downloads/pim83c06.pdf (last accessed November 4, 2013).

27 Pursuant to 42 C.F.R. § 476.71 (a) (6), QIOs are tasked to conduct reviews of hospital admissions and discharges. In providing guid-ance to QIOs conducting reviews of inpatient claims, the Medicare Quality Improvement Organization Manual (CMS Pub. 100-10), Ch. 4, § 4110, available at http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/qio110c04.pdf (last accessed November 4, 2013), employs similar language to that in the Medicare Program Integrity Manual (CMS Pub. 100-08), Ch. 6, § 6.5.2 and instructs the following:

Review of the medical record must indicate that inpatient hospital care was medically necessary, reasonable, and appropriate for the diagnosis and condition of the patient at any time during the stay. The patient must dem-onstrate signs and/or symptoms severe enough to warrant the need for medical care and must receive services of such intensity that they can be furnished safely and effectively only on an inpatient basis.

28 See e.g., In the case of Spokane Washington Hospital Co., LLC d/b/a Deaconess Hospital, M-12-1005 (DAB June 19, 2012) and In the case of King’s Daughters Medical Center, M-12-1231 (DAB June 26, 2012).

29 As part of the 2014 IPPS Final Rule, CMS highlights the importance of the admitting physician’s expectation that the beneficiary will require 24 hours or more of inpatient hos-pital services (rather than focusing on the specific interventions provided or “level of care”): “The crux of the medical decision is the



choice to keep the beneficiary at the hospital in order to receive services or reduce risk, or discharge the beneficiary home because they may be safely treated through intermittent out-patient visits or some other care… . Contrary to the commenters’ suggestion, we do not refer to ‘level of care’ in guidance regarding hospital inpatient admission decisions.” See 2014 IPPS Final Rule at p. 1811.

Notably, throughout its lengthy discussion of Part A inpatient admission criteria, the 2014 IPPS Final Rule does not cite the provisions of the Medicare Program Integrity Manual or Medicare Quality Improvement Organization Manual cited above related to the relative intensity of inpatient hospital services.

30 See Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1 available at www.cms.gov/Regulat ions-and-Guidance/Guidance/Manuals/Downloads/bp102c01.pdf (last accessed November 4, 2013).

31 In the case of Spokane Washington Hospital Co., LLC d/b/a Deaconess Hospital, M-12-1005 (DAB June 19, 2012) and In the case of King’s Daughters Medical Center, M-12-1231 (DAB June 26, 2012).

32 See Sections 1831 and 1832 of the Social Security Act, 42 U.S.C. § 1395j and 42 U.S.C. § 1395k.

33 See Section 1862 (A) (1) (a) of the Social Security Act, 42 U.S.C. § 1395y (a) (1) (A).

34 42 C.F.R. § 410.2. See also Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 6, § 20.2.

A CAH is a Critical Access Hospital. For more information regarding CAH facilities, see generally, https://cms.gov/Outreach-and-Education/Medicare-Learning-Network- MLN/MLNProducts/downloads/CritAccess Hospfctsht.pdf (last accessed November 4, 2013).

35 Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 6, § 20.

36 Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 6, § 20.6, available at www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c06.pdf (last accessed November 4, 2013).

Note also that pursuant to the Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 4, § 290.2.2, “general standing orders for observation services following all outpa-tient surgery are not recognized.”

37 See e.g., Novitas Solutions, LCD ID L27548, Acute Care: Inpatient, Observation and Treatment Room Services, which states “[a]lthough in many institutions there is no difference between the actual medical services provided in inpatient and outpatient observation set-tings, in such cases the designation still serves to assign patients to an appropriate billing category.”

See also Wisconsin Physicians Service Insurance Corporation, LCD ID L3222, Acute Inpatient Services versus Observation (Outpatient) Services, which states “[i]n many institutions there is no difference

between the actual medical services provided in inpatient and outpatient observation set-tings; in those cases the designation still serves to assign patients to an appropriate billing category.”

38 On the other hand, CMS stated as part of its 2014 IPPS Final Rule that “we do not believe that observation services and inpatient services are the same services.” See 78 Fed. Reg. at 50911.

In a seeming contradiction, as part of its 2014 IPPS Final Rule, CMS also cites the Office of Inspector General (“OIG”) report, OIG, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02-00040, July 2013), noting “the OIG found that the reasons for short inpatient stays and for outpatient observation stays were often the same… . [I]dentical beneficiaries may receive identical services as either inpatients or outpatients in different hospitals.” See 78 Fed. Reg. at 50945.

39 Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) directed the HHS to con-duct a three-year demonstration program using RACs. The demonstration program began in 2005 in the three states with the highest Medicare utilization: California, Florida and New York. In 2007, the program expanded to include Arizona, Massachusetts and South Carolina. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery-Audit-P r o g r a m / D o w n l o a d s / R e c o v e r y A u d i t Demonstration_vj508.pdf (last accessed June 28, 2013).

40 The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, at p. 15 available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/recovery-audit- program/downloads/RACEvaluationReport. pdf at Appendix E, p. 36 (last accessed November 4, 2013).

41 Id. at p. 18.42 See 42 C.F.R. § 424.44 and Medicare Claims

Processing Manual (CMS Pub. 100-04), Ch. 1, § 70.

43 The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, at p. 25 available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/recovery- audit-program/downloads/RACEvaluation Report.pdf. See also Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 6, § 10 (list-ing payable outpatient ancillary services).

44 See 42 C.F.R. Part 405, Subpart I, setting forth the five-stage Medicare appeals process.

45 As of March 9, 2010, CMS data reflected that 64.4 percent of appealed claims were decided in favor of the provider appellant. See The Medicare Recovery Audit Contractor (RAC) Program: Update to the Evaluation of the 3-Year Demonstration at p. 2, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/recovery- audit-program/downloads/DemoAppeals

Update61410.pdf (last accessed July 15, 2013).

This number may have increased over time, as the vast majority of claim denials were made in the final quarter of the RAC demonstration project and potentially had not received final appellate determinations at the time of publi-cation of CMS’ appeals update. See The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, at Appendix C, available at http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring- Programs/recovery-audit-program/downloads/RACEvaluationReport.pdf (last accessed July 15, 2013).

46 See In re: O’Connor Hosp., 2010 WL 425107 (DAB Feb. 1, 2010).

47 CMS guidance supporting the conclusion that Part B payment ought to be applied against a finding of Part A overpayment include the following:

Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10, available at http : / /www.cms.gov/Regulat ions-and-Guidance/Guidance/Manuals/Downloads/bp102c01.pdf (last accessed November 7, 2013). Pursuant to this manual provision, if a provider receives an overpayment under Part A, but covered services are provided, payment should be made for the covered services. Specifically, this Manual states:

If a patient receives items or services in excess of, or more expensive than, those for which payment can be made, payment is made only for the covered items or services or for only the appropriate prospective payment amount. This provision applies not only to inpatient services, but also to all hospital services under Parts A and B of the program. If the items or services were requested by the patient, the hospital may charge him the difference between the amount customarily charged for the services requested and the amount custom-arily charged for covered services. (Emphasis added).

Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 6, § 10, available at http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c06.pdf (last accessed November 7, 2013). Although this manual is often cited as evidence for CMS’ Payment Denial Policy, this manual provision clearly indicates that payment may be made under Part B for medically necessary services rendered when a Part A claim is denied as not reasonable and necessary.

Payment may be made under Part B for physi-cian services and for the nonphysician medical and other health services listed below when furnished by a participating hospital (either directly or under arrangements) to an inpatient of the hospital, but only if payment for these services cannot be made under Part A.

In PPS hospitals, this means that Part B pay-ment could be made for these services if:

…The admission was disapproved as not rea-sonable and necessary (and waiver of liability payment was not made)… .



Medicare Financial Management Manual (CMS Pub. 100-06), Ch. 3, § 170.1, avail-able at www.cms.gov/Regulations-and- Guidance/Guidance/Manuals/Downloads/fin106c03.pdf (last accessed November 7, 2013). This manual provision also supports the conclusion that Part B payments may be made if a Part A claim is denied. Specifically, this manual provision states that Part B pay-ments should be used as an offset when Part A services are denied:

Where the FI determines that a Part A over-payment has been made to a provider on behalf of a beneficiary, it shall ascertain whether the beneficiary is entitled to any Part B payment for the services in question (See Medicare Benefit Policy, Chapter 6.) If it appears that Part B benefits are payable, it shall arrange for billings under Part B. It shall use any Part B benefit as an offset against the Part A overpayment.

Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 3, § 50, available at www.c m s . g o v / R e g u l a t i o n s - a n d - G u i d a n c e /Guidance/Manuals/Downloads/clm104c03.pdf (last accessed November 7, 2013). This man-ual provision governs “Adjustment Bills.” Adjustment bills are “the most common mechanism for changing a previously accepted bill.” Pursuant to this Manual, CMS has indicated that:

If a provider fails to include a particular item or service on its initial bill, an adjustment bill(s) to include such an item(s) or service(s) is not permitted after the expiration of the time limi-tation for filing a claim. However, to the extent that an adjustment bill otherwise cor-rects or supplements information previously submitted on a timely claim about specified services or items furnished to a specified indi-vidual, it is subject to the rules governing administrative finality, rather than the time limitation for filing. (Emphasis added).

Thus, if a hospital submits an inpatient claim, which a RAC subsequently denies, and it is determined that an outpatient observation claim would be payable, then the hospital ought to be entitled to correct (and supple-ment) the claim it previously timely submitted in order to submit the claim as an outpatient claim under Part B. The time limitation for fil-ing a claim simply should not apply.

Also relevant are provisions of the Social Security Act, implementing regulations and CMS policy related to “reopenings.” Section 1869 (b) (1) (G) of the Social Security Act (42 U.S.C. § 1395ff (b) (1) (G)) specifically permits the Secretary to “reopen or revise any initial determination or reconsidered determi-nation… .”

Pursuant to 42 C.F.R. § 405.980 (the federal regulation governing reopenings):

(a) (1) General rules. A reopening is a reme-dial action taken to change a f inal determination or decision that resulted in either an overpayment or underpayment, even though the determination or decision was correct based on the evidence of record. That action may be taken by – (i) A contrac-tor to revise the initial determination or redetermination… .

(b) Time frames and requirements for reopening initial determinations and redeterminations

initiated by a contractor. A contractor may reopen an initial determination or redetermi-nation on its own motion – (5) at any time to effectuate a decision issued under the cover-age appeals process. (Emphasis added).

See also Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 34, available at www.c m s . g o v / R e g u l a t i o n s - a n d - G u i d a n c e /Guidance/Manuals/Downloads/clm104c34.pdf (last accessed November 7, 2013).

Significantly, pursuant to the federal regula-tions cited above, reopenings are designed to be “remedial” actions. In a situation where a CMS contractor reopens and revises (i.e., denies) an inpatient hospital claim as medi-cally unnecessary and finds that the claim would have been appropriately billed as an outpatient claim rather than as an inpatient claim and fails to compensate the hospital for the services provided, then the reopening has failed to “remedy” the improper payment, because the provider has failed to receive pay-ment for the reasonable and medically necessary services provided.

48 The Administrative QIC (“AdQIC”) serves as the clearinghouse for all Part A and Part B claim case files and ALJ decisions. See Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 29, § 330.3, available at www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/clm104c29.pdf (last accessed November 4, 2013).

49 Note that the analysis contained within In the case of O’Connor Hospital was not unprece-dented. The Medicare Appeals Council also found that a hospital is entitled to appropriate payment when Part A inpatient services are denied but Part B outpatient services are found to be medically necessary. In re: UMDNJ Univ. Hosp., 2005 WL 6290383 (DAB Mar. 14, 2005). Specifically, UMDNJ-University Hospital involved claims billed to Medicare Part A as inpatient hospital claims that were denied because they should have been billed to Medicare Part B as outpatient claims. After considering published Medicare policy guidance (see e.g., Medicare Intermediary Manual (CMS Pub. 13), Part III, Chapter 2, Section 3110; Medicare Intermediary Manual (CMS Pub. 13), Part III, Chapter 8, Section 3709), the Medicare Appeals Council concluded that the hospital was “due Part B payment for outpatient services rendered,” and directed the Intermediary to take any action necessary to process the claim under Part B rather than Part A.

50 See Statement of Work for the Recovery Audit Program (September 1, 2011), at p. 1 available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/090111RAC FinSOW.pdf (last accessed July 15, 2013).

51 Id. at pp. 2 and 6.52 Section 302 of the Tax Relief and Health

Care Act of 2006 made the RAC program permanent and required its expansion nation-wide by no later than 2010. See Section 1893 (h) of the Social Security Act, 42 U.S.C. § 1395ddd.

53 See Medicare Fee for Service National Recovery Audit Program (January 01, 2013 – March 31, 2013) Quarterly Newsletter, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/

Recovery-Audit -Program/Downloads / Medicare-FFS-Recovery-Audit-Program- 2nd-Qtr2013.pdf (last accessed July 15, 2013).

54 The Statement of Work for the Recovery Audit Program identifies two types of denials: (a) full denials and (b) partial denials.

• A “full denial” occurs when the RAC deter-mines that: (1) The submitted service was not reasonable and necessary and no other service (for that type of provider) would have been reasonable and necessary, or (2) no service was provided.

• On the other hand, a “partial denial” occurs when the RAC determines that: (1) the submitted service was not reasonable and necessary but a lower level service would have been reasonable and necessary; (2) the submitted service was up-coded; and/or (3) a payment rule was not applied (e.g. payment not reduced on multiple surgery cases).

See Statement of Work for the Recovery Audit Program (September 1, 2011), at p.28 available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery-Audit-Program/Downloads/0901 11RACFinSOW.pdf (last accessed July 15, 2013).

Based upon these descriptions, if an inpatient hospital claim is denied, but the reviewer deter-mines that an outpatient claim would have been payable, then a partial denial is appropriate. A full denial would be improper (i.e., a finding that “no other service… would have been reasonable and necessary” and/or “no service was provided” would not be supported).

Even more specifically, in its description of the adjustment process once overpayments are identified, the RAC Statement of Work states the following:

When partial adjustments to claims are neces-sary, the FI/Carrier/MAC/DME MAC shall downcode the claim whenever possible. The RAC will only be paid a contingency pay-ment on the difference between the original claim paid amount and the revised claim paid amount. Some examples include DRG valida-tions where a lower-weighted DRG is assigned, claim adjustments resulting in a lower payment amount, inpatient stays that should have been billed as outpatient… . If the system cannot currently accommodate this type of downcod-ing/adjustments, CMS will work with the system maintainers to create the necessary changes. This includes some medical necessity claims.Id. at page 36 (Emphasis added).

55 Of note, the recovery auditors’ failure to adjust claims denied based on inappropriate setting of care has resulted in an arguable fail-ure of the recovery auditors to achieve their intended purpose: “to reduce Medicare improper payments.” See Statement of Work for the Recovery Audit Program at p. 1. From the contractual standpoint, recovery auditors are tasked to identify (not create) improper payments, and the recovery auditors are spe-cifically charged to identify underpayments. Thus, there is an argument that in a case where a recovery auditor identifies an over-payment (but acknowledges that the service was medically necessary – albeit in a different “setting”), and coordinates recoupments of all monies paid to the hospital for the care ren-dered, failing to compensate the hospital for


the medically necessary services provided results in an underpayment. By merely turning an overpayment into an underpayment, the recovery auditor has not fulfilled its obligation under the Statement of Work because it has not reduced improper payments. It has merely identified, and then converted, one form of improper payment (overpayment) to another form of improper payment (underpayment).

56 See Solicitation Number RFP-CMS-2007-0022 (October 3, 2008), https://www.fbo.gov/index?s=opportunity&mode=form&id=5c8c7d4b00249ba579d4d77d64bd0aea&tab=core&_cview=1&cck=1&au=&ck= (last accessed July 15, 2013).

57 In an effort to attempt to address hospitals’ outcry related to the inability to receive appropriate compensation under Medicare Part B when a Part A claim was denied, on January 1, 2012, CMS initiated a “Part A to Part B Rebilling Demonstration.” This pro-gram permitted participating hospitals to re-bill for 90 percent of the Part B payment when a Medicare contractor (including a CERT auditor, MAC or recovery auditor) denied a Part A inpatient short stay claim as not reasonable and necessary due to the hos-pital’s billing for the wrong “setting.” The Part A to Part B Rebilling Demonstration was lim-ited to a representative sample of 380 volunteer hospitals. Patients were held harm-less with respect to changes in hospital coinsurance liability. Although initially generating excitement in the hospital com-munity, the demonstrat ion included drawbacks that were unpalatable to many hos-pitals, including, in particular, a mandated waiver of appeal rights. The Part A to Part B Rebilling Demonstration concluded on March 14, 2013, contemporaneously with the publi-cation of CMS Ruling 1455-R.

58 42 C.F.R. Part 405 Subpart I.

See http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/CERT/Par t_A_to_Par t_B_Rebi l l ing_Demonstration.html (last accessed July 3, 2013).

59 See Exploring the Impact of the RAC Program on Hospitals Nationwide, Results of AHA RACTRAC Survey, 1st Quarter 2013, June 4, 2013, available at http://www.aha.org/content/13/13q1ractracresults.pdf (last accessed July 15, 2013).

60 Prior to March 13, 2013, many ALJs had remanded cases back to the QIC stage of appeal, ordering that the QICs consider hos-pitals’ alternative request for relief under Medicare Part B. Despite the Remand Orders, in many cases the QICs have been reissuing the exact same decisions made in the first instance, failing to comply with the ALJ’s orders and refusing to address the Part B reim-bursement issue.

61 See supra, note lii. 62 In re: Missouri Baptist Hospital of Sullivan, No.

M-12-2368 (DAB Oct. 23, 2012); In re: Virtua-West Jersey Hosp., No. M-11-1291, 2012 WL 4294308 (DAB Aug. 1, 2012); In re: Providence Health Ctr., No. M-11-1462, 2012 WL 3805722 (DAB July 18, 2012); In

re: Cent. Iowa Hosp. Corp., No. M-12-1280, 2012 WL 3805727 (DAB July 18, 2012); In re: Providence Health Ctr., No. M-11-1217, 2012 WL 3780378 (DAB July 13, 2012); In re: Providence Health Ctr., No. M-12-809, 2012 WL 3637361 (DAB June 29, 2012); In re: St. Mary’s Med. Ctr., No. M-12-1428, 2012 WL 3303208 (DAB June 11, 2012); In re: Yale-New Haven Hosp., No. M-12 877, 2012 WL 3091657 (DAB May 24. 2012); In re: Indiana Univ. Health Methodist Hosp., No. M-12-872, 2012 WL 3262931 (DAB May 17, 2012); In re: Maine Gen. Med. Ctr., No. M-12 571, 2012 WL 2491654 (DAB May 11, 2012); In re: Maine Gen. Med. Ctr., No. M-12-719, 2012 WL 2491634 (DAB May 7, 2012); In re: Hendrick Med. Ctr., M-11-410, 2012 WL 2324891 (DAB Apr. 23, 2012); In re: Montefiore Med. Ctr., No. M-10-1121, 2011 WL 6960290 (DAB May 18, 2011); In re: Montefiore Med. Ctr., No. M-10-1171, 2011 WL 6960263 (DAB May 10, 2011); In re: O’Connor Hosp., 2010 WL 425107 (DAB Feb. 1, 2010); In re: UMDNJ Univ. Hosp., 2005 WL 6290383 (DAB Mar. 14, 2005).

Upon information and belief, there are no Medicare Appeals Council decisions pub-lished where the Medicare Appeals Council found that an appellant hospital was not enti-tled to Part B payment for reasonable and medically necessary care provided.

63 See e.g., Memorandum to All Fiscal Intermediaries (FIs), Carriers, and Part A and Part B Medicare Administrative Contractors (A/B MACs), “Administrative Law Judge Decisions,” (dated July 13, 2012), discussing partially favorable ALJ decisions which allowed reimbursement for outpatient obser-vation services): “In this circumstance, the ALJ’s order is in conflict with Chapter 6, sec-tions 10 and 20.6 of the Medicare Benefit Policy Manual (Publication 100-02) and Chapter 1, section 50.3 of the Medicare Claims Processing Manual (Publication 100-4).

See also, Ruling at 78 Fed. Reg. at 16615, stat-ing CMS’ policy that “[t]he ALJ and Medicare Appeals Council decisions providing payment for all reasonable and necessary Part B ser-vices under the circumstances previously described are contrary to CMS’ longstanding policies… .”

64 See Memorandum to All Fiscal Intermediaries (FIs), Carriers, and Part A and Part B Medicare Administrative Contractors (A/B MACs), “Administrat ive Law Judge Decisions,” (dated July 13, 2012).

65 78 Fed. Reg. 16614 (March 18, 2013).

66 See http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/FY-2014-IPPS-Final-Rule-Home-Page-Items/FY-2014-IPPS-Final-Rule-CMS-1599-F-Regulations.html?DLPage=1&DLSort=0&DLSortDir=ascending (last accessed August 7, 2013) and 78 Fed. Reg. 50496 et seq. (August 19, 2013).

67 www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/CERT/Demon strations.html (last accessed July 11, 2013).

68 Recovery Auditor Prepayment Review Demonstration Provider Outreach and Education, avai lable at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/CERT/Downloads/PrepayODFslides08082012.pdf (last accessed July 12, 2013).

69 www.cms.gov/Research-Statistics-Data-and-Systems/Monitor ing-Programs/CERT/Demonstrations.html (last accessed July 11, 2013).

70 Recovery Auditor Prepayment Review Demonstration Provider Outreach and Education, avai lable at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/CERT/Downloads/PrepayODFslides08082012.pdf (last accessed July 12, 2013).

71 Id. (Emphasis in original). ADRs are “Additional Documentation Requests.”

72 The maximum number of requests per 45 days effective November 2, 2010 was 300. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/ADRLimits2.pdf (last accessed July 16, 2013).

On March 15, 2012, the maximum number of requests per 45 days increased to 400. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/Providers_ADRLimit_Update-03-12.pdf (last accessed July 16, 2013).

However, providers with over $100 million in MS-DRG payments will have a cap of 600. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/April-2013-Provider-ADR-Limit-Update1.pdf (last accessed July 16, 2013).

73 78 Fed. Reg. 16614 (March 18, 2013).

74 78 Fed. Reg. 16632 (March 18, 2013).

75 78 Fed. Reg. at 16615, stating “CMS, through this Ruling, acquiesces to the approach taken in the aforementioned ALJ and Appeals Council decisions… .”

76 78 Fed. Reg. at 16615-16.

77 See e.g., In the case of O’Connor Hospital (decided February 1, 2010).

78 78 Fed. Reg. at 16615-16.

79 78 Fed. Reg. at 16617.

80 78 Fed. Reg. at 16616.

81 www.hhs.gov/omha/Data/cms-ruling.pdf (last accessed July 16, 2013).

82 Id.

83 Id.

84 78 Fed. Reg. at 16617: “If a hospital submits an appeal of a determination that a Part A inpatient admission was not reasonable and necessary, the only issue before the adjudica-tor is the propriety of the Part A claim, not any issue regarding any potential Part B claim the provider has not yet submitted.”




85 The Administrative Procedure Act (“APA”) generally requires that when an agency pro-mulgates legislative rules, or rules made pursuant to congressionally delegated author-ity, the exercise of that authority is governed by the rulemaking procedures outlined in 5 U.S.C. § 553. Under this section of the APA, agencies are required to provide the public with adequate notice of a proposed legislative rule followed by a meaningful opportunity to comment on the rule’s content. “Legislative rules” are defined as those which usher in entirely new procedures for adjudication of claims, rather than merely clarifying long-standing practice. See Chaves County Home Health Service, Inc. v. Sullivan, 931 F.2d 914, 923 (D.C. Cir. 1991) (citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988). Given that the “long-standing practice” of ALJs and the Medicare Appeals Council (dat-ing back to 2005) was to determine whether Part B payment could be made in the event Part A payment was disallowed, CMS’ current position is clearly a change in policy.

Significantly, in the 2014 IPPS Final Rule, CMS acknowledges that adjudicators’ scope of review in the appeals process ought to be governed by notice and comment rule-making: “The Secretary exercises her authority to administer this administrative review scheme – which includes ALJs and other adjudicators – by pro-ceeding through notice-and-comment rulemaking. The scope of review in the appeals process, the limitations on decisions, and the authorities that bind adjudicators are set forth in regulation… .” See 78 Fed. Reg. at 50929. (Emphasis added).

86 78 Fed. Reg. at 16643.87 78 Fed. Reg. at 16640.88 Id.

89 Statement of Work for the Recovery Audit Program dated September 1, 2011 at page 9, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery-Audit -Program/Downloads / 090111RACFinSOW.pdf (last accessed March 15, 2013).

90 Id., at p. 48.91 78 Fed. Reg. at 16644.92 See www.cms.gov/Medicare/Medicare-Fee-

for-Service-Payment/AcuteInpatientPPS/FY-2014-IPPS-Final-Rule-Home-Page-Items/FY-2014-IPPS-Final-Rule-CMS-1599-F-Regulations.html?DLPage=1&DLSort=0&DLSortDir=ascending (last accessed August 7, 2013) and 78 Fed. Reg. 50496 et seq. (August 19, 2013).

93 Id.

94 78 Fed. Reg. at 50909.95 78 Fed. Reg. at 50910.96 Id.

97 78 Fed. Reg. at 50913: “We did not propose and are not finalizing a policy that would allow hospitals to bill Part B following an inpatient reasonable and necessary self-audit determina-tion that does not conform to the requirements for utilization review under the CoPs… . We believe that the CoP rules for beneficiary noti-fication and physician involvement in hospital utilization review decisions are important for maintaining beneficiary rights, consistent with

42 CFR 482.13… . We reiterate that hospitals must follow our policies requiring physician involvement and concurrence in hospital deci-sions regarding patient status and the medical necessity of hospital inpatient admission under the Condition Code 44 rules and the CoPs.”

98 Id.

99 The requirements of Condition Code 44 are set forth in the Medicare Claims Processing Manual (CMS Pub. 100-04), Ch. 1, § 50.3.2, available at www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c01.pdf (last accessed November 4, 2013):

In cases where a hospital or a CAH’s UR committee determines that an inpatient admission does not meet the hospital’s inpa-tient criteria, the hospital or CAH may change the beneficiary’s status from inpatient to outpatient and submit an outpatient claim (bill type 13x or 85x) for medically necessary Medicare Part B services that were furnished to the beneficiary, provided all of the follow-ing conditions are met:

1. The change in patient status from inpatient to outpatient is made prior to discharge or release, while the beneficiary is still a patient of the hospital;

2. The hospital has not submitted a claim to Medicare for the inpatient admission;

3. The practitioner responsible for the care of the patient and the UR committee concur with the decision; and

4. The concurrence of the practitioner responsible for the care of the patient and the UR committee is documented in the patient’s medical record… .

100 78 Fed. Reg. at 50914.101 78 Fed. Reg. at 50918 et seq.

102 See 78 Fed. Reg. at 50921. As part of its 2014 IPPS Proposed Rule, CMS reiterated its con-cerns related to hospitals’ provision of observation services for extended periods of time (concerns first communicated by way of letter to the AHA dated July 7, 2010, later echoed in the CY 2013 OPPS/ASC proposed rule (77 Fed. Reg. 45061, 45155 (July 30, 2012)) and final rule with comment period (77 Fed. Reg. 68210, 68426 (November 15, 2012)) and in the Part B Inpatient Billing Proposed Rule (78 Fed. Reg. 16632)).

The 2014 IPPS Proposed Rule states the fol-lowing in particular:

In recent years, the number of cases of Medicare beneficiaries receiving observation services for more than 48 hours, while still small, has increased from approximately 3 percent in 2006 to approximately 8 percent in 2011. This trend concerns us because of the potential financial impact in Medicare benefi-ciaries, and we have published educational materials for beneficiaries to inform them of their respective liabilities as a hospital outpa-tient or impatient. Beneficiaries who are treated for extended periods of time as hospi-tal outpatients receiving observation services may incur greater financial liability than they would if they were admitted as hospital inpa-tients… . 78 Fed. Reg. at 27644.

103 78 Fed. Reg. at 50918.

104 78 Fed. Reg. at 50919. Presently, the Office of Inspector General (“OIG”) is drafting guid-ance to hospitals related to hospitals’ obligations to attempt to collect payment.

105 See supra, note 8. 106 78 Fed. Reg. at 50921.107 Id.

108 78 Fed. Reg. at 50922. Issues raised by the commenters objecting to CMS’ proposal included that it was unlawful and fundamen-tally unfair to apply the timely-filing limitation in situations where a Medicare contractor denied the Part A claim based on the finding that the care provided was reason-able and medically necessary, but the inpatient admission was not.

109 78 Fed. Reg. at 50924.110 78 Fed. Reg. at 50928.111 Id. (Emphasis added).112 Id. Note however, that the 2014 IPPS Final

Rule does not point to any statutory or regula-tory authority which would prohibit adjudicators from issuing equitable remedies.

113 Presumably, by this statement, the “longstand-ing Medicare policy” CMS relies upon is its Payment Denial Policy, which arguably was unlawful for the reasons discussed herein and has been abandoned by CMS by way of its Ruling and subsequent rulemaking.

114 78 Fed. Reg. at 50926. “[T]he Medicare claims processing systems changes that would be required in order to implement those types of adjustments…are impossible for Medicare’s systems maintainers to implement and sus-tain… .”

115 In fact, following publication of the Ruling, the Part B Inpatient Billing Proposed Rule, and the 2014 IPPS Final Rule, the AHA issued statements articulating its intent to continue its lawsuit against CMS in an effort to obtain a federal court ruling in favor of hospitals ordering full reimbursement for medically necessary care rendered. See American Hospital Association, “Statement on Centers for Medicare & Medicaid Services’ Interim Ruling and Proposed Rule Revising its Position on Rebilling Claims Denied by Medicare Contractors, Including Recovery Audit Contractors,” dated March 14, 2013, available at www.aha.org/presscenter/pressrel/2013/130314-pr-rebilling.pdf (last accessed March 22, 2013).

See also AHA Special Bulletin: CMS Finalizes Rebilling Policy, August 5, 2013.

116 78 Fed. Reg. 27486 (May 10, 2013). 117 Id. at 27648. 118 78 Fed. Reg. 50496 et seq. (August 19, 2013),

available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/FY-2014-IPPS-Final-Rule-Home-Page-Items/FY-2014-IPPS-Final-Rule-CMS-1599-F-Regulations.html?DLPage=1&DLSort=0&DLSortDir=ascending (last accessed August 7, 2013).

On November 4, 2013, CMS published three sub-regulatory guidance documents related to the 2014 IPPS Final Rule. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medical-Review/


InpatientHospitalReviews.html. As part of these documents, CMS announced a six month delay in recovery audit medical review of inpatient hospital claims with admission dates on or after October 1, 2013 for the pur-pose of determining whether an inpatient status was appropriate. During this time (i.e., October 1, 2013 through March 31, 2014), MACs will conduct a pre-payment “Probe and Educate” program.

For many hospitals, a 10-claim sample of Part A inpatient hospital claims with hospital stays crossing less than 2 midnights will be reviewed. For larger hospitals, 25 claims will be reviewed. If the MAC identifies “moderate to significant concerns” with the hospital’s compliance with the 2014 IPPS Final Rule (defined to be 2 or more claim denials within a 10 claim sample or more than 3 claim denials within a 25 claim sample), the MAC will repeat its Probe and Educate medical review activities using another 10 or 25 claim sample. In addition to sending a detailed review results letter, the hos-pital will be offered a telephone call with the MAC to discuss the findings. The MAC will also provide the hospital with pertinent refer-ence materials related to the unfavorable claim determinations. If major concerns persist (defined to be 7 or more denials in a 10 claim sample or 14 or more denials in a 25 claim sam-ple), a third Probe and Educate medical review will take place, with an increased claim review volume of 100 to 250 claims. See www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/MedicalReview/Downloads/SelectingHospitalClaimsfor Admi s s ionsonora f t e rOctobe r1 s t2013 fo rRev iewForWebPos t ingCLEAN.pd f (last accessed November 6, 2013).

119 See 42 C.F.R. § 412.3. 120 CMS frames its position that inpatient admis-

sion orders are expressly a condition of Part A payment under the 2014 IPPS Final Rule as a “clarification.” However, it should be noted that prior to publication of the 2014 IPPS Final Rule, applicable regulations and CMS manuals did not expressly require an order to inpatient status:

• Pursuant to 42 C.F.R. § 482.24 (c) (the hos-pital CoP related to “Medical record services”), a medical record must “contain information to justify admission and contin-ued hospitalization… .”

• Pursuant to 42 C.F.R. § 482.24 (c) (4) (the hospital CoP related to “Medical record ser-vices”), the medical record must document all physicians’ orders. Similar requirements for critical access hospitals are codified at 42 C.F.R. § 485.638 (a) (4) (iii).

• Pursuant to 42 C.F.R. § 482.12 (c) (1) (i) (the hospital CoP related to “Governing body”), the hospital’s governing body must ensure that all patients are under the care of a doctor of medicine or osteopathy.

• Pursuant to 42 C.F.R. § 482.12 (c) (2) (the hospital CoP related to “Governing body”), the hospital’s governing body must ensure that patients are admitted to the hospital only on the recommendation of a licensed practitioner permitted by the state to admit patients to a hospital.

• The Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10 states that a patient be “formally admitted as an inpatient.” There is no express requirement that such admission come as a result of an inpatient order.

As part of the 2014 IPPS Proposed Rule, CMS acknowledged that the above-cited CoPs do not delineate an “inpatient admission order” as a req-uisite piece of documentation; however, CMS concluded that “it is an accepted standard of practice in hospitals and CAHs that such an order must be given before a patient can be admitted to a hospital or CAH. Similarly, the requirement that a patient is admitted as an inpa-tient “only on the recommendation of a physician or licensed practitioner permitted by the State to admit patients to a hospital” is under-stood to mean that patient is admitted by way of an inpatient admission order given by the practi-tioner responsible for the care of the patient, provided that the practitioner, either a physician or other licensed practitioner, has been authorized by the State and granted such privileges by the hospital to do so.” See 78 Fed. Reg. at 27646.

121 78 Fed. Reg. at 50942. See also Hospital Inpatient Admission Order and Certification sub-regulatory guidance, September 5, 2013, available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Downloads/IP-Certification-and-Order-09-05-13.pdf (last accessed November 5, 2013).

122 Hospital Inpatient Admission Order and Certification sub-regulatory guidance, September 5, 2013, available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/A c u t e I n p a t i e n t P P S / D o w n l o a d s / I P - Certification-and-Order-09-05-13.pdf (last accessed November 5, 2013).

123 Id.

124 78 Fed. Reg. at 50941.125 Hospital Inpatient Admission Order and

Certification sub-regulatory guidance, September 5, 2013, available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/A c u t e I n p a t i e n t P P S / D o w n l o a d s / I P - Certification-and-Order-09-05-13.pdf (last accessed November 5, 2013).

126 See July 2009 Update of the hospital Outpatient Prospective Payment System (OPPS), Transmittal 107, Change Request 6492, dated May 22, 2009 available at www.c m s . g o v / R e g u l a t i o n s - a n d - G u i d a n c e /Guidance/Transmittals/downloads/R107BP.pdf (last accessed November 5, 2013).

127 78 Fed. Reg. at 50942.128 Supra note 126. 129 42 C.F.R. § 412.3 (a) and 78 Fed. Reg. 50965. 130 42 C.F.R. § 424.11, 78 Fed. Reg. at 50969.131 See 78 Fed. Reg. at pp. 50938-50939, which

states the following:

[I]n the Social Security Amendments of 1967, Congress amended the statutory language from requiring physician certification of hospital inpatient services to requiring a physician certification only for “inpatient hospital services… which are furnished over a period of time.” Moreover, the commenters

cited congressional reports [i.e., S. Rep. No. 90-744, at 239 (1967), H.R. Rep. No. 90-544 at 149 (1967)] explaining this statutory change by stating that it “eliminate[d] the require-ment for hospital insurance payments that there be a physician’s certification of medical necessity with respect to admissions to hospi-tals which are neither psychiatric nor tuberculosis institutions” and that such a cer-tification is required “only in cases of hospital stays of extended duration.” The commenters suggested that the House report also explains the reason for the change, stating that “admis-sions to general hospitals are almost always medically necessary and the requirement for a physician’s certification of this fact results in largely unnecessary paperwork” (H.R. Rep. No. 90-544, at 38 (1967)… .

We do not agree that these arguments man-date the conclusion that the physician certification requiring only applies to long-stay cases. The statute does not define “over a period of time,” and further provides that “such certification shall be furnished only in such cases, and with such frequency, and accompanied by such supporting material… as may be provided by the regulations”… .

Section 424.13 of the regulations does not contain any length-of-time restrictions on the applicability of the certification requirement. Instead, §424.13(a) provides that Medicare Part A payment will be made for inpatient hospital services (other than inpatient psychi-atric services) if the physician certifies or recertifies “the need for continued hospitaliza-tion of the patient for medical treatment or medically required inpatient diagnostic study.” Therefore, in its implementing regulations, CMS interpreted the statute’s requirement of a physician certification for inpatient hospi-tals [sic] services furnished “over a period of time” to apply to all inpatient admissions. While this is not the only possible interpre-tation of the statute, we believe that it is a permissible one.

See also e.g., In the case of King’s Daughters Medical Center M-12-1231 (DAB June 26, 2012) finding “the physician in this case could not provide ‘reasons for continued hospitaliza-tion,’ because the beneficiary had just been admitted. Nor could the physician provide ‘reasons for special or unusual services for cost outlier cases.’ There is nothing in the record to indicate this was identified as a cost outlier case. Therefore, section 424.13 of the regula-tions does not apply here.”

132 Hospital Inpatient Admission Order and Certification sub-regulatory guidance, September 5, 2013, available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/A c u t e I n p a t i e n t P P S / D o w n l o a d s / I P - Certification-and-Order-09-05-13.pdf (last accessed November 5, 2013).

133 Id.

134 Note however, that by way of sub-regulatory guidance published November 4, 2013, CMS lessened its documentation requirements with respect to documentation of the estimated time the patient will need to remain in the hospital. In particular, CMS stated “this information may be inferred from the physician’s standard




medical documentation, such as his or her plan of care, treatment orders, and physician notes.” Frequently Asked Questions, 2 Midnight Inpatient Admission Guidance & Patient Status Reviews for Admission on or after October 1, 2013, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring- Programs/Medical-Review/Downloads/QAsforWebsitePosting_110413-v2-CLEAN.pdf (last accessed November 8, 2013).

It remains a “best practice” for hospitals to educate their physicians regarding documen-tation of the patient’s estimated length of hospital stay. It is plausible that recovery audi-tors or MACs would “infer” an estimated length of stay other than 2 midnights or more if an expectation is not expressly documented.

135 78 Fed. Reg. at 50969.136 78 Fed. Reg. at 50940, 50965.137 Id.

138 78 Fed. Reg. at 50969.139 Id. at 50940.140 Id.

141 Hospital Inpatient Admission Order and Certification sub-regulatory guidance, September 5, 2013, available at www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/ AcuteInpatientPPS/Downloads/IP-Certification- and-Order-09-05-13.pdf (last accessed November 5, 2013).

142 Id.

143 42 C.F.R. § 412.46 (b), 78 Fed. Reg. at 50965. 144 42 C.F.R. § 412.3 (e), 78 Fed. Reg. at 50965.145 78 Fed. Reg. at 50946.146 Frequently Asked Questions, 2 Midnight

Inpatient Admission Guidance & Patient Status Reviews for Admission on or after October 1, 2013, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medical-Review/Downloads/QAsforWebsitePosting_110413-v2-CLEAN.pdf (last accessed November 7, 2013).

147 Id.

148 Id.

149 78 Fed. Reg. at 50952. 150 78 Fed. Reg. at 50950.151 78 Fed. Reg. at 40949.152 78 Fed. Reg. at 50951. (Emphasis added).153 78 Fed. Reg. at 50950-50951.154 Id. Note that the 2014 IPPS Final Rule also

notes that hospitalizations where a patient departs against medical advice (“AMA”), or improves more rapidly than expected and such is documented, an inpatient admission may still be found to be medically necessary. See 78 Fed. Reg. at 50946.

155 78 Fed. Reg. at 50952.156 Id. Note the permissive language of this por-

tion of the 2014 IPPS Final Rule: the medical reviewer “may” apply the 2-midnight benchmark.

157 78 Fed. Reg. at 50946. The 2014 IPPS Final Rule indicates that “[w]e…believe the rule, as

finalized, provides for sufficient flexibility because of its basis in the physician’s expecta-tion of a 2-midnight stay. Such would include situations in which the beneficiary improves more rapidly than the physician’s reasonable, documented expectation.” Id.

158 But see, OIG, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02-00040, July 2013 at p. 15, finding “[o]ur results indicate that under the policies proposed in the NPRM, the number of short inpatient stays would be sig-nificantly reduced; however, the number of observation and long outpatient stays may not be reduced if outpatient nights are not counted towards the 2-night presumption.”

159 78 Fed. Reg. at 27649.160 As noted by some of the commenters to the

2014 IPPS Proposed Rule, a stay crossing just 2 midnights could range from 24 hours and 2 minutes up to 71 hours and 58 minutes.

161 See also Bagnall v. Sebelius, No. 11-1703 (D. Conn., filed November 3, 2011). This lawsuit was filed on behalf of seven Medicare benefi-ciaries (or their estates) on November 3, 2011 together with a motion for certification of a nationwide class. In essence, this case chal-lenges the use of “observation status,” arguing that such a billing category deprives beneficia-ries of their Part A coverage.

The AHA has filed a brief as amicus curiae in connection with this case, filed in support of neither party. The AHA amicus brief makes three primary arguments: (1) inpatient admission decisions should be based on the judgment of the treating physician; (2) federal auditors and prosecutors are improperly sec-ond-guessing the judgment of the treating physicians; and (3) overusing observation ser-vices may be the result of “misguided fraud prevention efforts.” See Brief of the American Hospital Association as Amicus Curiae in Support of Neither Party, available at www.aha.org/content/12/120427-aha-amici-brief.pdf (last accessed July 12, 2013).

On September 23, 2013, Bagnall v. Sebelius was dismissed for failure to state a claim. See www.medicareadvocacy.org/bagnall-v-sebelius- no-11-1703-d-conn-filed-november-3-2011.

162 See The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed November 1, 2012).

The AHA Complaint initially was filed by plaintiffs the AHA, Missouri Baptist Sullivan Hospital, Munson Medical Center, Lancaster General Hospital and Trinity Health Corporation. On December 13, 2012, the AHA Complaint was amended to include one additional plaintiff hospital, Dignity Health.

163 Complaint at 3, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C. filed November 1, 2012).

164 Id.

165 See generally, Second Amended Complaint at 15, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed April 17, 2013).

166 See generally, Second Amended Complaint, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed April 17, 2013).

167 See generally, Plaintiffs’ Opposition to Defendant’s Motion to Dismiss, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed June 27, 2013).

168 See generally, Defendant’s Supplemental Brief, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed October 28 , 2013) and P la in t i f f ’s Supplemental Brief, The American Hospital Association et al. v. Sebelius, Case No. 1:12-cv-1770 (D.D.C., filed October 28, 2013).

169 See Section 2 of the Medicare Audit Improvement Act of 2013.

170 Medicare Fee-for-Service Recovery Audit Program Additional Documentation Limits for Medicare providers (except suppliers and physicians), April 15, 2013, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/April-2013-Provider-ADR-Limit-Update1.pdf (last accessed June 24, 2013).


172 By way of Final Rule effective January 1, 2009, CMS mandated that non-random pre-payment complex medical reviews of providers and suppliers be terminated no later than one year from the initiation of the review, or when the provider’s or supplier’s error rate decreased by 70 percent from the initial error rate. See 73 Fed. Reg. 55753 (September 26, 2008). However, by way of Final Rule effective January 1, 2013, CMS eliminated the one-year timeframe for termi-nation of non-random prepayment complex medical reviews. See 77 Fed. Reg. 68891 (November 16, 2012).


174 www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Recent_Updates.html (last accessed June 24, 2013).


176 78 Fed. Reg. at 16615. 177 78 Fed. Reg. at 50914. 178 See Section 6 of the Medicare Audit

Improvement Act of 2013. 179 Statement of Work for the Recovery Audit

Program, September 2011, at p. 30, available at www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Recovery- Audit-Program/Downloads/090111RACF inSOW.pdf (last accessed June 25, 2013).

180 Id. at p. 23.181 See Section 7 of the Medicare Audit

Improvement Act of 2013. 182 Prior to January 8, 2010, a strong argument

could be made that following a Medicare con-tractor’s decision to reopen a claim, federal regulations required certain conditions to be met before the Medicare contractor was authorized to revise its initial determination (i.e., before the Medicare contractor was authorized to render a determination contrary to the initial determination originally made). Although 42 C.F.R. § 405.980 (a) (5) states


that a “contractor’s… decision on whether to reopen is final and not subject to appeal,” there were no corresponding federal regula-tions prohibiting appeal of a Medicare contractor’s revision of a claim.

Prior to January 8, 2010, 42 C.F.R. § 405.980 (b) stated that a contractor may “reopen and revise” an initial determination, provided that the conditions described herein were satisfied. Further, according to the Medicare Financial Management Manual (CMS Pub. 100-06), Chapter 3, Section 80.1 (reiterating the ver-biage of the regulations at that time), “[i]f an overpayment is determined based on a reopening outside of the above parameters, the FI or carrier will not recover the overpay-ment.” These provisions, read together, support the conclusion that CMS did not intend to allow unrestricted revisions of claim determinations if the conditions for reopening were not satisfied.

However, by way of Final Rule issued on December 9, 2009 (effective January 8, 2010), CMS issued a “technical correction” to the regulations as follows:

[W]e are removing the words “and revise” from the introductory clause of § 405.980(b). Subsections (c), (d), and (e) of § 405.980, which are analogous to subsection (b), in that they discuss reopening timeframes and requirements for determinations and decisions requested by a party or initiated by a QIC, ALJ, or the MAC, do not include the words “and revise” and we inadvertently included these words in subsection (b)… . With the revisions described above, the introductory clause of § 405.980(b) will read as follows: “A contractor may reopen an initial determina-tion or redetermination on its own motion.”

74 Fed. Reg. 65296 at 65313. Although In the case of Memorial Hospital of Long Beach (decided July 23, 2008), effectively removed the effectiveness of hospitals’ arguments to ALJs challenging RAC’s improper reopening of claims, the regulatory “technical correc-tion” effectively removed the argument that the regulations allowed challenges to an improper claim revision.

183 See letter from the American Hospital Association to Senator Blunt dated May 22,

2013, available at www.aha.org/advocacy- issues/letter/2013/130522-let-racblunt.pdf (last accessed June 24, 2013). See also Statement on S. 1012, The Medicare Audit Improvement Act, dated May 22, 2013, available at www.aha.org/presscenter/pressrel/2013/130522-pr-audit-act.pdf (last accessed June 24, 2013).

184 See Press Release from the American Health Management Information Association, dated March 19, 2013, available at www.ahima.org/downloads/pdfs/pr/press-releases/RAC%20Legislation-FINAL.pdf (last accessed June 24, 2013).

185 See “About Us,” available at www.proper payments.org/?page_id=5 (last accessed June 25, 2013).

186 See Statement from the ACHCI, dated June 3, 2013, available at www.properpayments.org/?p=748 (last accessed June 25, 2013).

187 www.finance.senate.gov/hearings/hearing/ ?id=7b79eddd-5056-a032-52de-e9f0d4ce8ed0 (last accessed July 16, 2013).


The Editorial Board provides expertise in specialized areas covered by the Section. Individual Board members were appointed by the Interest Group Chairs and Editor Marla Durben Hirsch. If you are interested in submitting an article to The Health Lawyer, you may contact one of the Editorial Board members or Ms. Hirsch. With the establishment of the Editorial Board, the Section strengthens its commitment to provide the highest quality analysis of topics in a timely manner.

Marla Durben Hirsch Potomac, Maryland


Lisa L. DahmSouth Texas College of Law

Houston, TXeHealth, Privacy & Security

Editorial Board Co-Chair 713/646-1873

[email protected]

Howard D. Bye-TorreStoel Rives LLP

Seattle, WA Employee Benefits & Executive

Compensation 206/386-7631

[email protected]

Marcelo N. Corpuz IIIWalgreens Health Services

Deerfield, ILBusiness and Transactions Editorial Board Co-Chair


Adrienne DresevicThe Health Law Partners

Southfield, MILiaison to the Publications Committee


Jason W. HancockHospital Corporation of America

Brentwood, TNHealth Care Facility Operations


David L. HaronFoley & Mansfield

Ferndale, MIHealthcare Fraud & Compliance


Bruce F. HowellSchwabe, Williamson & Wyatt, PC

Portland, ORLife Sciences


Lauren MackPolsinelli, PC Chicago, IL

Tax & Accounting 312/873-3667

[email protected]

Rakel M. MeirTufts Health PlanWatertown, MA

Managed Care and Insurance617/923-5841

[email protected]

Monica P. NavarroThomas M. Cooley Law School

Auburn Hills, MIPhysician Issues248/751-7800

[email protected]

C. Elizabeth O’KeeffeWyatt, Tarrant & Combs, LLP

Jackson, MSPublic Health & Policy


Leonard M. RosenbergGarfunkel Wild, PC

Great Neck, NYHealthcare Litigation & Risk Management


Felicia Y. SzeHooper, Lundy & Bookman, P.C.

San Francisco, CAPayment & Reimbursement


Edward VishnevetskyMunsch Hardt Kopf & Harr PC

Dallas, TXYoung Lawyers Division



Section news

Announcing Law Student Scholarship ProgramThe Health Law Section of the American Bar Association is pleased to announce a new scholarship program for law students interested in the health law field to attend the Annual Emerging Issues in Healthcare Law Conference.

February 26 – 28, 2014 Litchfield Park, AZ

Applicants must be members of the ABA and Health Law Section and attend an ABA-accredited law school.

The partial scholarships are intended for those who would not otherwise be able to attend the Conference and those who have not previously received financial assistance from the Section to attend it. The scholarship includes the Conference registration fee, up to $500 for airfare, and $150 per diem for up to three days to offset the cost of hotel and meals. There will be up to five scholarships awarded each year.

The deadline to submit the online application for a scholarship is December 31, 2013.

To apply, please visit ambar.org/emischolarship.

For more information, please contact Simeon Carson, Associate Director, at [email protected] or 312-988-5824.

15th Annual Conference on Emerging Issues in Healthcare Law

February 26 – March 1, 2014 The Wigwam Resort, Litchfield Park, AZ

You won’t want to miss this opportunity to hear about the most timely and important issues facing today’s healthcare attorney! In addition, this Conference is an excellent way to network with your colleagues, learn more about the ABA, and become more involved in Section activities.

The full Conference brochure is available to all Health Law Section members at ambar.org/EMI2014. In the meantime, if you have any questions please contact Nancy Voegtle, the Health Law Section’s Senior Meeting Planner, at [email protected].

We look forward to seeing you in February in Litchfield Park, AZ!

Stepping Up The Fight Against Cancer

The Health Law Section co-sponsored the Third Annual Advocacy for Cancer Patients Program, “Stepping Up The Fight Against Cancer” October 11, 2013 at the University of New Mexico Cancer Center in Albuquerque. The seminar, which provided continuing education credits for members of New Mexico’s medical and legal communities, brought in national experts to discuss topics associated with both cancer and the Patient Protection and Affordable Care Act (“PPACA”).

The list of presenters included:

• New Mexico Attorney General Gary King, who discussed enforcement of rights to healthcare;

• Dr. Barbara McAneny, Chief Executive Officer of New Mexico Oncology Hematology Consultants, Inc. and Chair-elect of the Board of Trustees of the American Medical Association and the New Mexico Cancer Center;

• Dr. Arap Wadih, Deputy Director of the UNM Cancer Center and Chief of the Division of Hematology/Oncology in the Department of Internal Medicine in the School of Medicine.

In addition, Pamelya Herndon, Executive Director of the Southwest Women’s Law Center, who discussed an individual’s rights under PPACA, noted, “It is illegal for health insurance companies to arbitrarily cancel individuals’ health insurance just because they are sick,” adding, “state insurance oversight departments will hold insurance companies accountable for rate increases.”

Also, Attorney Nathan Kottkamp, founder of National Healthcare Decision Day, discussed the importance of plan-ning a living will and discussing end-of-life plans with family. “Sit down at the dinner table tonight,” he advised. “It’s an uncomfortable conversation, but it works.” Such planning is an essential part of meeting the nation’s healthcare needs, Kottkamp said. Families without end-of-life plans face quality of life issues and agonize over whether or not they made the right choices.

The program was a huge success with over 60 participants. For more information, please visit www.listentoyourmom.org.


Nina Zhang, J.D. Los Angeles, CA

IntroductionIn the past year, transgender

issues and rights have come to the forefront in many areas. Chelsea Manning, a.k.a. Pfc. Bradley Manning announced shortly after her July 30, 2013 conviction for leaking classified documents that she would live as a female and would require treatment to become female. California Gover-nor Jerry Brown signed a bill this past summer allowing students in Califor-nia schools to compete on sports teams and use facilities, including restrooms, based on their gender identity.

Gender dysphoria, formerly known as gender identity disorder (“GID”), historically has not been covered by insurance. However, more states are beginning to require insur-ance coverage for this condition, major companies like Google Inc. are providing such benefits to be more inclusive in the workplace, and the Patient Protection and Affordable Care Act (“PPACA”) may expand this coverage even further.

Identification And Treatment Of Gender Dysphoria

Gender dysphoria is little under-stood, and its definition is constantly evolving. Shifting from the term “gender identity disorder,” the Diag-nostic and Statistical Manual of Mental Disorders, Fifth Edition (“DSM-V”) published by the Ameri-can Psychiatric Association, states that a marked incongruence between one’s experienced/expressed gender and assigned gender of at least six

months duration, as manifested by two or more of the following indica-tors, characterizes gender dysphoria:1

• A marked incongruence between one’s experienced/expressed gender and primary and/or secondary sex characteristics (or, in young adoles-cents, the anticipated secondary sex characteristics),

• A strong desire to be rid of one’s primary and/or secondary sex char-acteristics because of a marked incongruence with one’s experi-enced/expressed gender (or, in young adolescents, a desire to prevent the development of the anticipated secondary sex characteristics),

• A strong desire for the primary and/or secondary sex characteristics of the other gender,

• A strong desire to be of the other gender (or some alternative gender different from one’s assigned gender),

• A strong desire to be treated as the other gender (or some alternative gender different from one’s assigned gender),

• A strong conviction that one has the typical feelings and reactions of the other gender (or some alterna-tive gender different from one’s assigned gender).

In addition, the condition is asso-ciated with clinically significant distress or impairment in social, occu-pational, or other important areas of functioning, or with a significantly increased risk of suffering, such as dis-tress or disability.2

In children, the condition is characterized by a marked incongru-ence between one’s experienced/expressed gender and assigned gender, of at least six months’ duration, as manifested by a strong desire to be of

the other gender or an insistence that one is the other gender (or some alternative gender different from one’s assigned gender), and at least five of the following:

• In boys (assigned gender), a strong preference for cross-dressing or sim-ulating female attire; or in girls (assigned gender), a strong prefer-ence for wearing only typical masculine clothing and a strong resistance to the wearing of typical feminine clothing,

• A strong preference for cross-gen-der roles in make-believe play or fantasy play,

• A strong preference for the toys, games, or activities stereotypically used or engaged in by the other gender,

• A strong preference for playmates of the other gender,

• In boys (assigned gender), a strong rejection of typically masculine toys, games, and activities and a strong avoidance of rough-and-tumble play; or in girls (assigned gender), a strong rejection of typically femi-nine toys, games, and activities,

• A strong dislike of one’s sexual anatomy,

• A strong desire for the primary and/or secondary sex characteristics that match one’s experienced gender.3

In addition, the condition is asso-ciated with clinically significant distress or impairment in social, school, or other important areas of functioning.4

To treat gender dysphoria, doc-tors often follow the standards of care set forth by the World Professional Association for Transgender Health (“WPATH”). WPATH is an associa-tion of medical, surgical, and mental

PATIENT PROTECTION AND AFFORDABLE CARE ACT COULD EXPAND COVERAGE FOR GENDER DYSPHORIA



health professionals specializing in the understanding and treatment of gender dysphoria.5 WPATH intends these standards, also known as the Benjamin standards of care, to be flexi-ble clinical guidelines, rather than requirements.6

These standards prescribe: 1) hor-monal sex reassignment, 2) real life experience, where the individual undergoes a trial period of living full time in society as a member of the opposite sex, and finally 3) sex reassign-ment surgery, which includes surgery of the genitalia and/or breasts to alter the morphology to approximate the physi-cal appearance of the genetically other sex as well as nongenital sex reassign-ment surgery.7 The number and type of interventions applied and the order in which they take place may vary from person to person.8

In addition, the standards pre-scribe mental health treatment, recommending that mental health professionals:

• assess gender dysphoria,

• provide information regarding options for gender identity and expression and possible medical interventions,

• assess, diagnose, and discuss treat-ment options for coexisting mental health concerns,

• if applicable, assess eligibility, pre-pare and refer for hormone therapy,

• if applicable, assess eligibility, pre-pare and refer for surgery.9

An individual must have the recom-mendation of a licensed psychotherapist to obtain hormonal treatment.10 One referral from a qualified mental health professional is needed for breast/chest surgery.11 Two referrals from qualified mental health professionals who have independently assessed the patient are needed for genital surgery.12

Furthermore, these standards recommend that the gender dyspho-ria patient live at least 12 months full-time in the social role of the

genetically other sex before under-going surgery.13 The standards also recommend that patients undergo hor-mone therapy before undergoing genital surgery in order to gauge the patient’s degree of satisfaction with a permanent sex reassignment.14

Overview of PPACA and Treatment of Gender Dysphoria

PPACA’s expansion of insurance and antidiscrimination provisions may expand insurance coverage for the treatment of gender dysphoria in several ways.

PPACA prohibits group health plans and issuers in both the individual and group markets from basing eligibil-ity for coverage and providing coverage on health status-related factors.15 These factors are: health status, medical con-dition, claims experience, receipt of healthcare, medical history, genetic information, evidence of insurability, disability, and other health status-related factors determined appropriate by the Secretary of the Department of Health and Human Services (“HHS”).16 This provision, which is effective January 1, 2014, expands these nondiscrimination rules to individual health insurance policies.17 Under these rules, any benefit restrictions must be applied uniformly to all similarly situ-ated individuals and cannot be directed at any individual participants or ben-eficiaries based on a health factor.18

Based on these provisions, people who seek treatment for gender dyspho-ria may be able to receive coverage from their private insurers based on the identification of gender dysphoria as a “health factor.” For example, if a plan covers surgery, but not sex-reas-signment surgery, which many people require for their treatment of gender dysphoria, then the plan potentially violates PPACA.

In addition, PPACA requires essential health benefits to be covered in the individual and small group

markets.19 PPACA defines “essential health benefits” to include mental health services.20 So more patients covered by private insurance will have access to mental health services for anxiety and other issues related to gender dysphoria.21

Furthermore, PPACA has expanded eligibility for Medicaid and will require non-pregnant, non-elderly adults with incomes up to 133 per-cent of the federal poverty level to enroll in Medicaid’s benchmark plans, which cover mental health services.22

This means that more people receiving Medicaid can receive the mental health treatment recom-mended by WPATH for gender dysphoria, whether or not they ulti-mately decide to undergo hormone therapy or sex reassignment surgery.

The potential expansion of insur-ance coverage to gender dysphoria raises new enforcement issues in sev-eral areas. This article explores ways to address them.

Existing, Expanding Health Insurance Coverage

PPACA’s expansion of antidis-crimination provisions may expand insurance coverage for the treatment of gender dysphoria. Yet transgender-inclusive health plans are becoming increasingly common, as employers try to be more inclusive in the work-place. The Human Rights Campaign Corporate Equality Index of 2013, which evaluates the lesbian gay bisex-ual transgender (“LGBT”) workplace policies of Fortune 1000 and other large employers, found that 287 major employers reported coverage of basic medical services related to sex reassign-ment, an increase from 207 in 2012 and 85 in 2011.23 In addition, starting in 2014, CalPERS, the nation’s largest public health benefits fund, will include transgender transition-related care in its HMO and PPO plans.24


Some insurance carriers have available plans that do not exclude transgender-related care. They are: Aetna, Amerihealth, Anthem Blue Cross Blue Shield (“BCBS”), BCBS Massachusetts, BCBS Minnesota, BCBS Michigan, Cigna, Emblem-Health, HealthNet, HealthPartners, Independence Blue Cross, and Med-ica.25 However, as gender dysphoria becomes identified as a condition, federal law may require insurers to provide transition-related care.

Federal Enforcement Under the McCarran-Ferguson

Act of 1945, Congress reserved to itself the right to enact federal statutes that specifically relate to the business of insurance.26 The Health Insurance Portability and Accountability Act (“HIPAA”) is one of these statutes; it establishes minimum national stan-dards for private health insurance.27 PPACA expanded HIPAA’s federal health insurance standards to individ-ual policies.28 Title XXVII of the Public Health Service Act (“PHSA”) (42 U.S.C. § 300gg-4), Part 7 of the Employee Retirement Income Secu-rity Act (“ERISA”) (29 U.S.C. § 1182), and Chapter 100 of the Inter-nal Revenue Code (“IRC”) (26 U.S.C. § 9802) apply these federal health insurance standards to different types of health coverage.29

Public Health Service Act

PHSA regulates health insurance issuers and self-funded non-federal governmental group plans.30

For governmental plans, the Secre-tary of HHS is the primary enforcer.31 For health insurance issuers, states are the primary enforcers of private health insurance requirements.32 However, if the Secretary of HHS determines that a state has failed to substantially enforce a provision with respect to health insur-ance issuers in the state, the Secretary must enforce these provisions.33

To enforce the provisions, the Sec-retary of HHS may impose a civil monetary penalty on insurance issuers that fail to comply with the PHSA requirements.34 The maximum penalty is $100 per day for each individual with respect to which a failure occurs, but certain minimum penalty amounts may apply to a plan or employer if the viola-tion is not corrected within a specified period, or if a violation is considered to be more than de minimis.35 In determin-ing the amount of the penalty, the Secretary takes into account the enti-ty’s previous record of compliance with the PHSA provisions.36

However, if none of the entities knew that the violation existed, the Secretary cannot impose a penalty.37 If the violation was due to reasonable cause and not willful neglect, the Sec-retary will not impose a penalty if the violation is corrected within 30 days of discovery.38 Furthermore, entities found to violate the PHSA require-ments may challenge the penalty in a hearing subject to a decision by an administrative law judge.39 Following the hearing, entities may file an action for judicial review.40

Employee Retirement Income Security Act

ERISA regulates private-sector employee benefit plans and applies to group health plans, including self-insured plans offered by private-sector employers and health insurance issu-ers providing group health coverage.41

The Secretary of Labor may impose civil monetary penalties on the group health plans of employers that violate ERISA, but may not enforce ERISA’s requirements against health insurance issuers because PHSA already covers health insurance issuers.42

In addition, individuals can enforce federal standards under ERISA.

Under ERISA, individual partici-pants or beneficiaries of a plan can bring civil actions against both group

health plans and health insurance issuers. They can sue to recover bene-fits under the terms of the plan or enforce or clarify the plaintiff ’s rights under the terms of the plan.43

Participants, beneficiaries, and fiduciaries can bring a civil action to enjoin any act or practice which vio-lates ERISA or the terms of the plan, or to obtain “other appropriate equita-ble relief” from an ERISA violation.44 The Supreme Court of the United States has interpreted “other appro-priate equitable relief” to mean traditional equitable relief, such as injunctions, restitution, and specific performance.45

Internal Revenue Code

The group health provisions in Chapter 100 of the IRC apply to all group health plans, except govern-mental plans and health insurance issuers.46

Under the IRC, the Department of Treasury can enforce the group health plan requirements through the imposition of an excise tax.47 A group health plan that fails to comply with the pertinent requirements in the IRC may be subject to a tax of $100 for each day in the noncompliance period with respect to each individual to whom such failure relates.48 However, if plans do not correct a violation before a notice of examination for tax liability is sent to the employer, and these failures occur or continue during the period under examination, the penalty will be at least $2,500.49 Where violations are considered to be more than de minimis the amount will be at least $15,000.50

Gender Dysphoria as a Health Factor – Relevant Case Law

Ultimately, whether or not treat-ment for gender dysphoria becomes a requirement under the nondiscrimina-tion provisions of the new healthcare

Patient Protection and Affordable Care Act Could Expand Coveragecontinued from page 27



law depends on whether gender dys-phoria is considered a health factor, i.e. whether it is considered a medical condition. While no court has yet addressed the issue of whether gender dysphoria is a health factor under PPACA, courts have addressed the issue in similar situations.

Davidson v. Aetna Life & Casualty Insurance Co.

In a 1979 New York state case, an employee sought declaratory judg-ment that sex reassignment surgery was covered by her employee benefit plan, based on medical necessity.51 The plan stipulated:

Any of the listed expenses incurred in connection with cosmetic surgery will be considered covered medical expenses only if the cosmetic sur-gery is necessary for the repair of a non-occupational injury which occurs while the family member is covered for this benefit.52

The court held that surgical treat-ment is not cosmetic, but rather medically necessary, based on the evi-dence submitted that demonstrated that the surgery was imperative and necessary for the plaintiff to live a normal life and that the surgery was performed to correct a psychological defect, not to improve physical appearance.53

Mario v. P&C Food Markets, Inc.

In a Second Circuit case decided in 2002, an employee sued his employer for allegedly unlawfully denying him health insurance cover-age for gender reassignment surgeries that he had undergone, based on med-ical necessity.54 His health insurance plan, governed by ERISA, excluded coverage for services that were deemed not medically necessary.55

The court found that “medically necessary” refers to what is medically necessary for a particular patient, unless specified to the contrary.56 However, the plan administrator had conducted an investigation and con-cluded that the medical community

disagreed over whether gender dys-phoria was a legitimate illness, and it remained uncertain over the effi-cacy of reassignment surgery.57 Therefore, the court found that the plan administrator presented sufficient evidence to show that the treatment is not medically necessary in the usual case.58 Because the plaintiff failed to present evidence to show that his case is different from the usual case and medically necessary for him, the court found that his plan lawfully denied him coverage for the surgeries.59

O’Donnabhain v. Commissioner of Internal Revenue

The 2010 Tax Court case addressed whether treatment for gender dyspho-ria, then known as GID, is a deductible medical expense.60 The IRC allows deduction for medical care, which includes amounts paid for the diagnosis, cure, mitigation, treatment or preven-tion of disease, or for the purpose of affecting any structure or function of the body.61 In addition, the IRC excludes cosmetic surgery from the definition of deductible medical care:

The term “medical care” does not include cosmetic surgery or other similar procedures, unless the sur-gery or procedures is necessary to ameliorate a deformity arising from, or directly related to, a con-genital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.62

The court found that GID is a disease, after it determined that a dis-ease need not have a demonstrated organic or physiological origin in the individual.63 The court determined that GID is a disease based on 1) GID’s widely recognized status in diagnostic and psychiatric reference texts as a legitimate diagnosis, 2) the seriousness of the condition as described in learned treatises in evi-dence and as acknowledged by the three experts in the case, 3) the severity of petitioner’s impairment as found by the mental health profes-sionals who examined her, and 4) the

consensus in the U.S. Courts of Appeal that GID constitutes a serious medical need for purposes of the Eighth Amendment, which prohibits cruel and unusual punishment.64 The court found persuasive cases that held that GID poses a serious medical need for pur-poses of the Eighth Amendment.65

Furthermore, the court found that petitioner’s cross gender hormones and sex reassignment surgery to treat GID are not merely cosmetic procedures for these reasons: 1) GID patients take them to alleviate the distress and suffer-ing caused by GID, and 2) they have positive results in the opinion of many in the psychiatric profession.66 The court found that the procedures were an essential element of the treatment and that they would not have otherwise been undertaken for nonmedical rea-sons because of the risks, pain, and extensive rehabilitation associated with sex reassignment surgery, the stigma encountered by persons who change their gender role and appearance in society, and the desire of a genetic male to have his genitals removed.67

However, it found that breast augmentation surgery did not treat petitioner’s GID because of the breasts’ normalcy before surgery and because the petitioner failed to adhere to the Benjamin standards’ requirement to document breast-engendered anxiety to justify the surgery.68 Therefore, the court allowed deductions for hormone therapy and sex reassignment surgery, but not for breast augmentation surgery.69

State EnforcementIn spite of what federal law and

case law might require, states them-selves have other mechanisms to require care for the treatment of gender dysphoria: through anti-discrimination statutes and Medicaid.

Traditionally, states regulate health insurance matters.70 States are allowed to regulate health insurance more comprehensively than federal


law, so long as these requirements do not conflict with federal standards.71 California, Colorado, Delaware, Hawaii, Illinois, Iowa, Maine, Massa-chusetts, Minnesota, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, and Washington include gender identity in their anti-discrimination employment laws.72

Some states have enforced cover-age of gender dysphoria under their anti-discrimination laws. For example, the Oregon Equality Act of 2007 pro-hibits discrimination based on sexual orientation.73 In Esquivel v. Oregon, the state reached a settlement that it would eliminate policies excluding diagnoses pertaining to gender iden-tity, medication required for “sexual transformation,” and services related to a “sex change operation.”74 Further-more, in January 2013, the Oregon Insurance Division issued a bulletin clarifying that pursuant to the Oregon Equality Act of 2007, health insurance plans cannot discriminate against peo-ple on the basis that the treatment is for gender identity issues.75 In 2012, a Massachusett court granted an injunc-tion for the Department of Corrections to provide sex reassignment surgery to a prisoner to treat his gender dysphoria, in accordance with the Eighth Amend-ment prohibition against cruel and unusual punishment.76

Based on the settlement reached in Oregon and the court ruling in Massachusetts, states might find that exclusion of transition-related health-care violates their anti-discrimination laws.

In addition, while the current federal Medicaid statute does not exclude coverage of gender dysphoria, several states have dealt with the issue, which may be instructive. Alaska, Illinois, Iowa, Minnesota and Pennsylvania specifically exclude it.

However, at least one court has con-cluded that states cannot categorically

exclude sex-reassignment surgeries from Medicaid coverage.77 For exam-ple, in Pinneke v. Pressier, an Iowan court held that the federal Medicaid statute preempted Iowa’s statute that excluded coverage for sex reassign-ment surgery because Iowa’s statute does not consider medical judgment in excluding coverage.78 Furthermore, the court found that sex reassignment sur-gery was the only treatment suited for the patient.79 However, the right to coverage in Iowa is not absolute. In another case in Iowa, the court held that because members of the medical community disagreed over whether sex reassignment surgery would be necessary, denying coverage for sex reassignment surgery was reasonable in accordance with the federal Medic-aid Act.80

ConclusionThe passage of PPACA increases

the possibility that private insurers and Medicaid will be required to cover treatment for gender dysphoria. But whether gender dysphoria is a health factor requiring coverage is a question to be developed by the courts in the upcoming years. In the meantime, companies should keep an eye out for legal developments in this area. Moreover, insurers may wish to draft their health plan documents so that the Department of Labor, the Internal Revenue Service, and the Department of Health and Services, or individual participants and benefi-ciaries, do not bring civil actions against them for violating the nondis-crimination provisions of PPACA.

Nina Zhang, J.D. graduated from Loyola Law School, Los Angeles in May 2013 and is currently working in Los Angeles, California.

During law school, she interned for the United States Department of Labor, Employee Benefits Security Administration and was a tax law research assistant for Professor Katherine Pratt. She may be reached at [email protected].

Endnotes1 American Psychiatric Association. (2013).

Diagnostic and statistical manual of mental disor-ders (5th ed., text rev.). doi: 10.1176/appi.books.9780890423349.

2 Id. 3 Id. 4 Id. 5 www.wpath.org.6 E. Coleman et al., Standard of Care for the

Health of Transsexual, Transgender, and Gender-Nonconforming People, 13 Int’l J. Transgenderism 165, 166 (2011).

7 Id. at 171.8 Id.

9 Id. at 179. 10 Id. at 181. 11 Id. at 182.12 Id. at 183.13 Id. at 202.14 Id. 15 Patient Protection and Affordable Care Act,

H.R. 3590, 111th Cong. § 2705 (2010). 16 Id. These are not the same as the “essential

health benefits” that PPACA requires of every health insurance plan offered through an exchange.

17 Patient Protection and Affordable Care Act, H.R. 3590, 111th Cong. § 1253 (2010).

18 29 U.S.C. § 1182.19 45 C.F.R. 147.150(a).20 Id.

21 In addition, the Mental Health Parity Act requires that any financial requirement or quantitative treatment limitation that applies to mental health/substance use disorder bene-fits within a particular classification cannot be more restrictive than the predominant require-ment or limitation that applies to substantially all medical/surgical benefits within the same classification. See 29 C.F.R. 2590.712(c)(2).

22 Julie Stone, et.al., Cong. ReSeaRCh SeRv., R41210, M e d i C a i d a n d t h e S tat e ChildRen’S health inSuRanCe PRogRaM (ChiP) PRoviSionS in PPaCa: SuMMaRy and tiMeline (2010).

23 Human Rights Campaign, Corporate Equality Index 2013.

Patient Protection and Affordable Care Act Could Expand Coveragecontinued from page 29


24 w w w. h r c . o r g / m / b l o g / c a l p e r s - m a k e s - history-board-approves-trans-inclusive-health- coverage.

25 www.hrc .org / re sources /ent ry / f inding- insurance-for-transgender-related-healthcare.

26 15 u.S.C. § 1021(b).

27 P.L. 104-191, 110 Stat. 1936 (1996).

28 Patient Protection and Affordable Care Act, H.R. 3590, 111th Cong. § 1253 (2010).

29 JennifeR StaMan, Cong. ReSeaRCh SeRv., R41624, enfoRCeMent of PRivate health inSuRanCe MaRket RefoRMS undeR the Patient PRoteCtion and affoRdable CaRe aCt (2011).

30 42 U.S.C. § 300gg -21(a)(1).

31 Id.

32 42 U.S.C. § 300gg-22(a)(1).

33 42 U.S.C. § 300gg-22(a)(2).

34 42 U.S.C. § 300gg-22(b)(2)(a).

35 42 U.S.C. § 300gg-22(b)(2)(C)(i).

36 42 U.S.C. § 300gg-22(b)(2)(C)(ii).

37 42 U.S.C. § 300gg-22(b)(2)(C)(iii)(I).

38 42 U.S.C. § 300gg-22(b)(2)(C)(iii)(II).

39 42 U.S.C. § 300gg-22(b)(2)(D)(i).

40 42 U.S.C. § 300gg-22(b)(2)(E)(i).


42 29 U.S.C. § 1132(b)(3).

43 29 U.S.C. § 1132(a)(1)(B).

44 29 U.S.C. § 1132 (a)(3)(B).

45 See Mertens v. Hewitt Assoc., 508 U.S. 248, 255 (1993).


47 26 U.S.C. § 4980D.

48 26 U.S.C. § 4980D(b)(1).

49 26 U.S.C. § 4980 D(b)(3)(a).

50 26 U.S.C. § 4980 D(b)(3)(b).

51 Davidson v. Aetna Life & Cas. Ins. Co., 420 N.Y.S.2d 450, 451 (1979).

52 Id.

53 Id. at 453.

54 Mario v. P& C Food Markets, Inc., 313 F.3d 758, 764 (2002).

55 Id. at 762.

56 Id. at 765.

57 Id. at 766.

58 Id.

59 Id.

60 O’Donnavhain v. C.I.R., 134 T.C. 34, 76 (2010).

61 I.R.C. § 213(d)(1)(a).

62 I.R.C. § 213(d)(9)(a).

63 O’Donnabhain v. C.I.R., 134 T.C. 34, 56 (2010).64 Id. at 63. 65 Id. at 62. 66 Id. at 70. 67 Id. at 76. 68 Id. at 73. 69 Id. at 77. 70 JennifeR StaMan, Cong. ReSeaRCh SeRv.,

R41624, enfoRCeMent of PRivate health inSuRanCe MaRket RefoRMS undeR the Patient PRoteCtion and affoRdable CaRe aCt (2011).

71 Id.

72 www.aclu.org/maps/non-discrimination- laws-state-state-information-map.

73 www.cbs.state.or.us/ins/FAQs/genderIdentity-factSheet.pdf.

74 www.pqmonthly.com/lawsuit-settlement-leads-to-trans-inclusive-healthcare-for-ore-gon-state-employees/12518; Complaint, Esquivel v. Oregon (2011) (No. 11C17487), 2011 WL 2461142.

75 www.cbs.state.or.us/ins/FAQs/genderIdentity-factSheet.pdf.

76 Kosilek v. Spencer, 889 F.Supp.2d 190 (2012).77 See Pinneke v. Preisser, 623 F.2d 546, 549 (8th

Cir. 1980).78 Id. at 549. 79 Id. 80 Smith v. Rasumussen, 249 F.3d 755, 761 (8th

Cir. 2001).

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Kimberly S. Min, J.D. Saint Louis University School of Law Class of 2013 St. Louis, MO

IntroductionFrom 2000 to 2004, the number of

uninsured individuals grew by six mil-lion, and health insurance premiums rose by 60 percent.1 During the same period, profits for the top 17 U.S. health insurance companies rose 114 percent, whereas the profits of compa-nies in the S&P 5002 rose just five percent.3 More unpleasantly, unneces-sary costs now account for a significant proportion of healthcare spending.4 For example, in 2009 alone, out of $2.5 trillion total healthcare expendi-ture, $765 billion (30 percent of the total expenditure) went to unnecessary costs,5 including excessive administra-tive costs,6 inefficiently delivered services,7 unreasonably high prices,8 unnecessary services,9 fraud,10 and the costs of missed preventive care.11 Free market competition did not function to control healthcare costs, nor did state regulation.12 There has been a huge dis-pute over whether the malfunction was due to insufficient competition or insuf-ficient regulation.13 However, there also has been a growing consensus that the market needs some type of govern-mental intervention.14

In March 2010, the Patient Pro-tection and Affordable Care Act (“PPACA”) was signed into law by President Obama, signaling the start of nationwide healthcare reform. PPACA’s approach to reform is two-fold. On the one hand, PPACA pursues uniform reform at the national level.15 PPACA’s key provi-sions demonstrate its universal characteristics, for example, by man-dating that all Americans purchase health insurance coverage, by requir-ing all states to create an insurance

exchange (“exchange”), and by setting minimum quality and cost-control requirements for plans and insurers that participate in those exchanges.16 On the other hand, PPACA appears to give a great deal of deference to a diversity of state approaches.17 Although only a few provisions show such flexibility, the magnitude of those provisions reveals they are more than trivial. For instance, by requiring states to legislate their own exchange regulations, PPACA handed the centerpiece of reform to the states.18 Moreover, PPACA prescribes section 1332, the Waiver for State Innovation (now codified at 42 U.S.C. § 18052) (“1332 waiver”), allowing states to implement an alternative system of their choosing rather than an exchange and thus to not comply with many of PPACA’s key provisions.19 In fact, the White House’s Office of the Press Sec-retary made it clear that, as a matter of policy, PPACA is intended to delegate “a critical role” to the states so that they may “implement reform in the manner that works best for them.”20 However, the flexibility allowed under the 1332 waiver seems so extreme that it appears to make that provision inconsistent with the detailed prescription of national uniform requirements else-where in PPACA.

The Congressional Budget Office estimated that, over the next decade, PPACA will cost $1.083 trillion in order to make the healthcare industry more cost-efficient.21 Yet there is uncertainty as to whether the poten-tial of PPACA is benign or malignant. At a first glance, implementing a uni-form nationwide system will likely be cost-efficient not only in that unifor-mity will bring some administrative cost savings, but also in that states can learn from other states’ precedents and reduce costly trial and error. In that sense, the disadvantages of allowing diverse systems through the 1332 waiver provision seem clear. A state

would have fewer precedents than when it implements PPACA default requirements. Also, there would be particular risks of each state’s innova-tive system. If a state’s own innovative system fails, regardless of whether it was due to the innovative system’s flaws or due to the 1332 waiver provi-sion’s flaws, the federal and state governments would have to then spend additional billions of dollars to build an exchange in that state. Considering that the main purpose of PPACA is to make the healthcare system more cost-efficient, wasting redundant money should be avoided if possible.

This article seeks to examine whether providing a 1332 waiver is a viable policy. Part I reviews the key provisions of the 1332 waiver in the context of PPACA in an attempt to identify any intended goals and advan-tages of a 1332 waiver. Part II estimates the consequences of granting a 1332 waiver by looking at a case study of one state’s innovative system that is waiting for a 1332 waiver application – Vermont Single Payer System (“VSPS”). By examining the potential of VSPS, this article attempts to see whether a 1332 waiver can really achieve its intended goals and estimate the impact of allowing a different system from the PPACA’s default exchange. In Part III, some problems associated with a 1332 waiver are dis-cussed and analyzed whether they would affect a 1332 waiver’s ability to achieve its intended goals and advantages.

Part I: The Intended Goals of a 1332 Waiver

PPACA Overview

PPACA clearly aims to reduce the number of uninsured in the United States and make prices more reflective of the value that people are willing to pay for.22 PPACA seems to

WAIVER FOR STATE INNOVATION: A CALL FOR INCREASED SUCCESS OR A PROJECTED FAILURE?


consider providing affordable health insurance to the uninsured critical to controlling the cost of healthcare because the price of health treatments for the uninsured is significantly higher, and it unnecessarily increases the costs of healthcare industry in general.23 If the increased costs drive insurance prices above the affordable level for more people, it would subse-quently increase the number of the uninsured and perpetuate the vicious cycle of cost increase. To break that cycle, PPACA uses an exchange as its core mechanism.24 Hence, in order to reduce the number of uninsured, PPACA uses the following methods beginning in 2014: mandates an insur-ance purchase, provides money and marketplace to buy insurance, and lowers the bars to obtain insurance.25

First, PPACA mandates that most individuals must have health insurance or pay a tax penalty.26 Employers with at least 50 full-time employees are required to offer mini-mum health coverage to the full-time employees and their dependent chil-dren or pay a fine.27 PPACA provides financial assistance in the form of a premium tax credit for people with incomes between 100 percent and 400 percent of the federal poverty level (“FPL”),28 as well as to employ-ers with no more than 25 full-time employees, in order to encourage the purchase of insurance.29 States are to create an exchange (which is basi-cally an internet-based marketplace30) and provide individuals and small business employers with insurance plans of minimum quality.31

An exchange seeks to stimulate insurers’ competition by enabling con-sumers to make an informed decision in choosing insurance plans in the exchange’s market.32 To enhance con-sumers’ understanding of the available insurance plans, an exchange simplifies comparison of prices and benefits by categorizing benefit packages into five groups according to the actuarial value33 and allowing brokers to help people find suitable benefit packages.34

Because an exchange allows only the plans covering more than certain bene-fits, called “essential health benefits,” and only insurers with more than a cer-tain number of providers to enter into an exchange, a minimum quality of plans is guaranteed.35 Additionally, in order to cover people who cannot afford health insurance, PPACA gives states an option to expand previous Medicaid eligibility with federal money to all children, pregnant women, par-ents, and adults (who are under age 65 without dependent children) at an income below 133 percent of the FPL.36 Furthermore, in order to encom-pass people who are rejected by insurers because they already have developed health problems and need expensive medical treatment (known as pre-existing conditions), PPACA prohibits insurers from rejecting or requiring high premiums based on factors other than age, gender, and use of tobacco.37 PPACA also limits cost burdens on the insured by prohibiting insurers from sharing more than a certain amount of the cost with patients or from setting a maximum amount that insurers would pay over the course of each patient’s lifetime.38

While PPACA utilizes exchanges as the main mechanism to achieve its goal, it delegates the legislative author-ity to states with respect to regulating them.39 Moreover, beginning in 2017, PPACA allows states to forsake all aforementioned cost and quality con-trol mechanisms40 once they have an alternative system qualified under a 1332 waiver.41

1332 Waiver Overview

PPACA section 1332 provides that, beginning in 2017, states may apply for a 1332 waiver.42 A 1332 waiver allows states to forsake PPA-CA’s aforementioned requirements and to implement their own alterna-tive healthcare system with federal funding.43 A state seeking a 1332 waiver first must file an application with the Secretary of Health and Human Services (“HHS”) containing

evidence supporting its qualification for the waiver.44 The Secretary may deem an applying state qualified only if its alternative system covers as many benefits as those covered by PPACA’s essential health benefits plan,45 provides as many cost con-straints as PPACA provides,46 and covers as many people as does PPACA.47 Additionally, the applying state needs to submit a 10-year budget plan to prove that its alternative sys-tem would not increase the federal deficit.48

In 2012, the Secretaries of HHS and Treasury jointly issued the final rule for the 1332 waiver application process.49 According to the final rule, an applying state must enact legisla-tion authorizing its application for a 1332 waiver, hold public hearings and publish its application documents so that state residents have sufficient chance to review and comment on them.50 The application should con-tain actuarial and economic analyses supporting the conclusion that the state’s alternative system would meet the above qualifications, including the state’s demographical information and an explanation of the key assumptions and methodology used in estimating its qualification.51

Upon receipt of the complete application, the Secretaries of HHS and Treasury must begin joint review within 45 days and determine within 180 days whether to grant a waiver.52 Once a 1332 waiver is granted, the applying state does not need to comply with the following PPACA provisions: mandating individuals to buy health insurance or pay a tax penalty,53 demanding employers with at least 50 full-time employees offer their employ-ees health insurance or pay a fine,54 creating required exchanges,55 and pro-viding health insurance plans of minimum quality at affordable prices.56 Because the establishment of an exchange is waived, PPACA’s relevant regulations on participating insurers and insurance plans are all waived, as well.57 Nonetheless, the state will still



receive the premium tax credits and subsidies from the federal government just as if there were an established PPACA exchange, and it can use the funding to implement its alternative system, instead of distributing it to the insured.58 Moreover, PPACA section 1332 permits a state to coordinate other possible waiver requests under other federal health laws (i.e., federal Medicaid and CHIP)59 with a 1332 waiver application.60 Yet, in granting coordinated waiver requests, the Secretary cannot waive any non-healthcare federal law that is not within the Secretary’s authority.61 After receiving a waiver, the state must report annually how it is maintaining the 1332 waiver qualifications.62 Consider-ing the federal government’s financial support as well as the expedited and integrated review process (i.e., the lim-ited 225-day window for the review process and permission to combine waiver requests), a 1332 waiver seems intended to provide comprehensive support to states establishing innova-tive systems by allowing them to save time and cost in instituting reforms.

In sum, if a state obtains a 1332 waiver, it will be free from PPACA mandates and can implement its own alternative system with the federal government’s financial support. How-ever, in order to obtain a 1332 waiver, a state must prove that its alternative system can achieve at least equal, if not superior, results as PPACA’s default system in covering more peo-ple with a plan of minimum quality at a controlled price. Given that the ultimate goal of PPACA is to reduce the number of uninsured and make prices more reflective of the value that people are willing to pay for, sec-tion 1332 requires states to achieve PPACA’s main goal or exceed it in order to be free from PPACA man-date. Therefore, the purpose of a 1332 waiver is not just to give deference to a state’s sovereignty or diversity, but also to invite a better performing plan

by being more cost-effective and economically more advantageous. Moreover, a PPACA section 1332 waiver will likely have an effect of inducing states’ active participation in healthcare reform. Because many states have preexisting animosity toward PPACA,63 giving federal money while allowing them to imple-ment their own system by obtaining a 1332 waiver would attract those states to reform.

Part II: Estimated Consequences of a 1332 Waiver

Seven States Consider Taking the Plunge

However, what a 1332 waiver intends to bring about and what would result are two different stories. So far, seven states – Delaware, Illinois, Minnesota, Montana, New York, Pennsylvania, and Vermont – have expressed their intentions to or have been preparing to apply for a 1332 waiver, and they have all chosen a single-payer system as their alterna-tive to a PPACA exchange.64 While it is possible that different alternative systems will be presented in the future, so far a single-payer system seems to be the most likely candidate for a 1332 waiver. A “single-payer system” refers to a system where a government agent or its designated entity (“single entity”) provides health insurance, funded by tax money and covering all residents with the same benefit coverage.65 The sin-gle entity collects money from all insured persons and pays it to all pro-viders, without being engaged in providing medical items or services.66 The ultimate goal of the system is to insure all people and simplify insur-ance plans, payment rates, and payment routes for “greater cost control.”67 The system also increases patients ’ access to healthcare

providers like hospitals, privately practicing doctors, and others; because all providers would have con-tracts with the single entity, patients would no longer have to limit their choice of providers to those within their insurance provider network (this system is also called a “no barrier network”).68

Case Study: Vermont

As noted below, VSPS is a good candidate for examining 1332 waivers. However, this article acknowledges that there may be a limitation to using VSPS as a general example of single-payer systems in estimating the consequences of granting a 1332 waiver for the following reasons. Because Ver-mont is the fifth-smallest state in geographical size in the United States,69 it may be easier for Vermont to main-tain one unified healthcare system without market segments. A relatively larger number of people living there are already insured,70 and Vermont may need less effort and costs to encompass the entire state residence under the sys-tem. Moreover, Vermont obtained a waiver in 2005 under section 1115 of Title XIX of Social Security Act71 and has been operating a single payment process for Medicaid, called the Primary Care Case Management program (“PCCM”).72 Furthermore, Vermont may use one streamlined payment sys-tem for both Medicaid and Medicare because it is coordinating with the Center for Medicare & Medicaid Innovation (“Innovation Center”73) to expand PCCM to cover Medicare beneficiaries who are also eligible for Medicaid.74 For these reasons, Vermont may successfully implement a single-payer system for all state residents easier than other states. Nonetheless, this arti-cle uses a case study of VSPS since Vermont has made the most progress towards pursuing a 1332 waiver by enacting it into law and has presented a blueprint of the detailed operation of its single-payer system.75

Waiver for State Innovation: A Call for Increased Success or a Projected Failure?continued from page 33



VSPS’s Merits on a 1332 Waiver Application

VSPS will likely meet three of the requirements for a 1332 waiver: to pro-vide benefit coverage as generous as PPACA’s essential health benefit plan,76 to provide as many cost con-straints as PPACA,77 and to cover as many people as would PPACA’s sys tem.78 However, meeting the requirement to have a neutral impact on the federal deficit may be an issue.79

Benefits Coverage

PPACA mandates that all insur-ance plans include an “essential health benefits” (“EHB”) package without defining what an EHB package is.80 PPACA requires the Secretary to fur-ther define the term, specifying that the scope of EHB must be that of a “typical employer plan”81 and enumer-ates ten essential health benefits that should be included in an EHB pack-age, which are:82

1) ambulatory patient services,

2) emergency services,

3) hospitalization,

4) maternity and newborn care,

5) mental health and substance use disorder services, including behav-ioral health treatment,

6) prescription drugs,

7) rehabilitative and habilitative services and devices,

8) laboratory services,

9) preventive and wellness services and chronic disease management, and

10) pediatric services, including oral and vision care.

In 2013, the Secretary of HHS issued the final rule to provide a defi-nition of EHB.83 Basically, the final rule did not add any other definite benefits to the above essential benefit list, nor clarify the scope of a typical employer plan in defining EHB.84 Instead, it simply required EHB to

cover at least all of the above ten benefits and gave states flexibility to supplement any lacking benefits of the above ten essential benefits by setting a EHB-benchmark plan from the following four plan types:85 the largest health plan in any of the three largest in the state’s small group mar-ket; any of the largest three employee health benefit plan options offered in the state;86 any of the largest three national Federal Employees Health Benefits Program (“FEHBP”) plans;87 and the plan of the largest insured commercial non-Medicaid enroll-ment offered by a health maintenance organization (“HMO”) in the state.88 However, states are not required to cover exactly the same benefits as those provided by their EHP-bench-mark plan.

In light of the benefits offered in Vermont’s legislative document outlin-ing its plan, VSPS seems to cover all of the above ten benefits.89 (see Table).

PPACA Minimum Benefits Requirements VSPS Coverage92

1) Ambulatory patient services• Necessary transportation for health services for disabled and indigent

persons (extends the requirement to the indigent)

• Medical equipment, appliance, and assistive technology

2) Emergency services Emergency care services and emergency transportation (adds transportation services)

3) Hospitalization Inpatient and outpatient health services and professional health services by licensed healthcare professionals

4) Maternity and newborn care Inpatient and outpatient health services and professional health services by licensed healthcare professionals

5) Mental, behavioral health and substance use disorder services, including behavioral health treatment

• Mental health services

• Inpatient and outpatient health services and professional health services by licensed healthcare professionals

6) Prescription drugs Prescription drugs

7) Rehabilitative and habilitative services and devices

• Inpatient and outpatient rehabilitative care (adds hospitalization)

• Medical equipment, appliance, and assistive technology

8) Laboratory services Laboratory services

9) Preventive and wellness services and chronic disease management

• Child and adult immunizations and preventive care

• Chronic care

10) Pediatric services, including oral and vision care

• Inpatient and outpatient health services and professional health services by licensed healthcare professionals

• Child and adult dental and vision care (expands to adults)

Table: VSPS coverage comparison to PPACA’s minimum benefits requirements


Moreover, VSPS seems to go beyond what is required because VSPS also covers additional benefits, including health education, hospice care, home health care, acupuncture, and adult day care.90 In particular, one of the benefits that VSPS provides is “inpa-tient and outpatient health services” and “inpatient and outpatient profes-sional health services by licensed health care professionals,”91 and if they are read broadly, all possible medical treatments would be included in VSPS. For these reasons, VSPS likely covers all of the above ten essential benefits, regardless of what the coverage of Vermont’s EHB-benchmark plan is. As a result, VSPS’s benefit coverage will likely meet the 1332 waiver requirement of being more generous than PPACA minimum coverage.

Cost-sharing Protections

PPACA provides cost constraints by placing an out-of-pocket limit equal to the current legal limit on the Health Savings Account (“HSA”).93 It also prohibits insurers from setting a limit on the dollar value of benefits that a patient receives for a year or for his or her lifetime.94 Moreover, PPACA provides an annual deductible limit for group health plans to $2,000 in the case of covering singles and $4,000 in the case of covering fami-lies.95 Further, PPACA requires an insurance plan to cover at least 60 per-cent of the actual billing amount for the covered benefits because the larg-est cost burden on patients allowed under the bronze plan is 40 percent.96

VSPS would provide more cost-sharing protections than PPACA requires because it eliminates all pre-mium, copay, co-insurance, and any other cost-sharing,97 and it covers 90 percent of the actual billing amount as to the covered benefits.98 In con-trast, patients in a PPACA exchange may pay out-of-pocket up to $5,950/single or $11,900/family annually.99

Furthermore, VSPS pays 90 percent of the actual billing amount as to the covered benefits, whereas a plan under PPACA may pay as little as 60 percent of the actual billing amount if the actuarial values of the plans are compared. Moreover, VSPS exempts payroll tax contributions completely for people with incomes under 200 percent of the FPL,100 whereas PPACA only provides assistance for part of the cost of maintaining health insurance in the form of a premium tax credit for people with income levels between 100 percent and 400 percent of the FPL. Therefore, VSPS’s cost-sharing protection for patients will likely meet the 1332 waiver requirement of provid-ing as many cost-sharing protections as PPACA.

The Number of Enrollees

To increase the number of insured, PPACA requires most individuals to have health insurance101 and provides federal subsidies or premium tax cred-its for people with income levels between 100 percent and 400 percent of the FPL to assist such purchase.102 Nevertheless, some healthy individuals may decide to remain uninsured and pay a tax penalty if paying the tax penalty is cheaper than buying health insurance.103

VSPS takes a more flexible approach in that there is no individ-ual mandate. All Vermonters are automatically enrolled in VSPS but they can opt out freely without any penalty.104 Nonetheless, most Ver-monters are unlikely to opt out from VSPS because there is no financial incentive to do so. For example, for those who are currently covered by employment-based insurance, even when they opt out from VSPS, they are still obligated to pay the portion of payroll tax that contributes towards VSPS.105 Consequently, they will dou-ble-pay insurance fees.106 As for those who are unemployed, VSPS will cover them at no cost (i.e., there is

no premium, copay, or coinsurance) because VSPS uses payroll tax fund-ing.107 So for those who are currently covered by private insurance, opting out would not give them any advan-tage because in VSPS private insurers are prohibited from covering the ben-efits provided by VSPS and can sell only supplementary insurance.108 Therefore, opting out from VSPS would mean foregoing basic health-care coverage no matter how cheap private insurance would be. These reasons to maintain VSPS enrollment seem to be stronger incentives than PPACA’s premium tax credit and tax penalty. Thus, VSPS would likely meet a 1332 waiver requirement of covering as many people as PPACA.

Neutrality on the Federal Deficit

What may keep VSPS from obtaining a 1332 waiver is the require-ment of having a neutral impact on the federal deficit. As noted above, VSPS is designed to be financed through payroll tax contributions109 and does not rely on any premiums, copay, co-insurance, or other cost-sharing mechanism.110 Moreover, it generously excludes workers with incomes lower than 200 percent of the FPL from such payroll tax liability.111 Furthermore, because payroll tax is the source of funding, VSPS gives free rides to the unemployed. Although Vermont will likely save a significant amount of money once the VSPS is successfully implemented, the savings from reform would come after years of substantial spending in the form of a large upfront investment. Consider-ing Vermont’s budget deficit of $150 million in 2011,112 this funding plan seems impracticable.

However, because this problem is not inherent in VSPS, it can be to a large extent addressed by modifying the funding plan. One suggestion is to add other categories of tax so that people whose earnings are not based on employment can also contribute to



funding VSPS, such as an income tax contribution for the self-employed, or a property tax contribution for the unemployed.113 Otherwise, collecting a small premium, copay, or co-insurance at a graduated rate from every individ-ual enrolled in VSPS or imposing a special tax on tobacco may offer other solutions to ease the funding problem.

Utility of VSPS

As seen above, VSPS will likely better achieve the goals of PPACA. More interestingly, the utility of VSPS seems to outweigh that of PPACA because it even mitigates some problems caused by PPACA, including so-called Medicaid Churn-ing, adverse selection, unpaid bills, and potential for fraud and abuse.

Medicaid Churning

“Medicaid Churning” means “fre-quent changes back and forth, in and out of Medicaid.”114 In most cases, eli-gibility changes from public insurance to private insurance imply changes in provider, covered benefits, insurance payment rate, and the like.115 Medicaid Churning may lower quality of medi-cal care because of poor transfer of patient information or discontinuity in care.116 Although Medicaid Churning has been a concern even before the advent of PPACA, PPACA would give rise to further problems in addi-tion to the pre-existing adverse impact of Medicaid Churning on medical care.117 PPACA splits the eligibility for an exchange and for Medicaid at the income level of 133 percent of the FPL and mandates that many of those who churn out of Medicaid must go into an exchange118 and vice-versa.119 Without PPACA, people had to enroll in and out of Medicaid pro-gram alone, but now it would become twice as burdensome to enroll people in and out of two programs simultane-ously.120 Moreover, PPACA adds one more layer of administrative cost by providing premium tax credits to people with incomes between 133 percent and 400 percent of the FPL, intended to assist them in buying

plans in an exchange.121 Since most of the people who churn out of Medic-aid likely fall within this range, their eligibility changes should be trans-ferred to the Department of Treasury to process premium tax credits;122 thus, it would become three times as burdensome to have changes in eligi-bility when PPACA is applied.

This may be a serious problem threatening PPACA’s success as a whole.123 The uninsured population with incomes between 133 percent and 400 percent of the FPL is PPA-CA’s main target, in which it aims to decrease uninsured status; if the Med-icaid Churners feel that the frequent changes in plans, provider, and bene-fits are burdensome and that enrolling in and out each time is annoying, they may “simply stop signing up for insurance” at all.124 To deal with PPA-CA’s Medicaid Churning problems there have been some suggestions, such as matching provider networks and benefit coverage between Medicaid and the exchange plans.125 However, requir-ing such conformity from private insurers may be difficult in light of their lukewarm response to exchange participation.126

The impact of Medicaid Churn-ing would be reduced in VSPS because its providers and benefits would not fail to cover those offered by Medicaid. In VSPS, the Medicaid program will continue to exist sepa-rately and Vermont will continue to see Medicaid Churning.127 Nonethe-less, Medicaid Churning would be less of a problem because in VSPS all Ver-mont providers will have a contract with the system – therefore, there would be an overlap between Medicaid providers and VSPS providers.128 Addi-tionally, Vermont is considering the establishment of a single administrative body to process all claims and billing using the same rate, payment methods, and claim payment adjudication rules for VSPS and the Medicaid program.129 If they can implement such a unified administrative body, VSPS will likely mitigate to a great degree the Medicaid

Churning problem that would be caused by PPACA.

Adverse Selection

Another potential serious problem is adverse selection in PPACA exchanges. “Adverse selection” refers to the tendency that people who are more likely ill are more likely to buy insur-ance, and such tendency drives up costs and premiums if a larger number of ill people, compared to those who are healthy, participate in the pools of any insurance plan.130 If adverse selection occurs in an exchange, increased pre-miums and cost-sharing would subsequently cause those who are unlikely to become ill to drop out from an exchange and choose more afford-able alternatives, such as buying insurance outside an exchange or sim-ply staying uninsured. Moreover, PPACA prohibits insurers from exclud-ing enrollment applicants based on their pre-existing conditions.131 There-fore, it will become easier for people to wait until they get ill to purchase insurance, allowing adverse selection to more easily occur. This is a serious problem of PPACA because exchanges are the centerpiece of reform; if the exchanges wither, PPACA’s ultimate success would be threatened, as well.132

There have been attempts to address adverse selection in a PPACA exchange.133 For example, California requires the insurers to provide plans in all five categories of actuarial cov-erage rates (bronze, silver, gold, platinum, and catastrophic) if they wish to participate in the exchange at all.134 Due to adverse selection, the costs of lower actuarial value plans will likely decrease but those of higher actuarial value plans would increase. Hence, operating plans at lower and higher actuarial values together will help insurers even out decreased and increased costs in dif-ferent plans’ risk pools. In the same sense, Utah requires the insurers to combine risk pools of all of their plans, both inside and outside of the exchanges, to mitigate decreased costs



in the outer-exchange-market with increased costs in the exchanges if healthy people in the exchanges move out of them due to adverse selec-tion.135 Despite these protections, because states cannot eliminate the insurance market outside of the exchanges, the healthier would always have the option to drop out from the exchanges due to the increased costs driven by adverse selection.

Meanwhile, in VSPS private insurers are prohibited from covering items and services that VSPS cov-ers.136 Since VSPS provides a broad scope of primary care, if people wish to opt out of VSPS, they would for-sake primary care coverage and carry only a supplementary plan from a pri-vate insurer.137 Therefore, VSPS will likely mitigate the adverse selection problem that PPACA may have.

Unpaid Bills

PPACA mandates people to buy an insurance plan and states to estab-lish an exchange that may help to reduce healthcare costs by promoting competition among the insurers. However, it does not provide any pol-icy that would directly address the issue of unpaid bills. Meanwhile, VSPS covers all state residents with a broad range of benefits at an actuarial value of 90 percent. Therefore, even if there still are patients who do not pay their bills, the majority portion of the bills would be reimbursed by VSPS, so fewer bills will remain unpaid.

Fraud and Abuse

Finally yet importantly, there exists the problem of fraud and abuse in the current healthcare system. Sev-eral laws enacted prior to PPACA aim to prevent, detect and reduce fraud and abuse.138 PPACA expands the government’s ability to fight fraud and abuse through several provisions, including suspension of payments in the case of suspicious Medicare and

Medicaid claims in order to allow more time for screening and strengthening federal authority to prosecute cases of fraud in order to deter future lawbreak-ers.139 Despite these efforts, fraud and abuse may increase under PPACA, since PPACA creates additional administra-tive layers in the healthcare system (i.e., the exchange administration, premium tax credits administration, etc.),140 and detecting fraud and abuse is arguably more difficult in complex administra-tive processes.

In contrast, VSPS creates a cen-tralized database where all claims and reimbursements are recorded by indi-vidual doctors.141 Because using a centralized database would have sim-pler administrative processes than coordinating with several layers of systems, fraud and abuse detection may be easier. Moreover, VSPS’s uni-fied database would enable it to detect fraud cases using “phantom patients” more easily because no patient would have two primary care physicians at the same time. VSPS can also use the unified database in developing provider profiles and trace providers’ practice patterns over time.142 With such profiles, fraudulent behavior would be more easily identi-fiable because it makes it easier to note an extraordinary practice pat-tern by a provider, and provides the practice patterns of local peers for comparison.143 Therefore, VSPS may decrease fraud and abuse more effec-tively than PPACA.

Problems with VSPS

Although VSPS has various advantages, it also has some problems. The most critical may be the ability to provide incentives to ensure that all of the healthcare stakeholders, specifically private insurers and pro-viders, are willing to participate in implementing VSPS.

In VSPS, private insurers are pro-hibited from covering the benefits

provided by VSPS and can sell only supplementary insurance.144 VSPS provides a broad scope of coverage that encompasses and possibly exceeds almost all basic healthcare.145 All state residents will likely enroll in VSPS without opting out.146 For these reasons, the population needs supple-mentary insurance, and less healthy people in particular will likely buy private insurers’ supplementary insur-ance. Since having disproportionately larger numbers of less healthy people will drive cost increases, as discussed above, private insurers may not want to participate in the Vermont market. In fact, whether they can sustain their businesses with such a high-risk pool is a serious concern. On this matter, Vermont anticipates that Vermont private insurers would not be offended by VSPS’s progressive approach because they still run busi-nesses in Vermont where there have been several progressive healthcare reforms previously, including imple-mentation of guaranteed-issue, community rating, and the Blueprint program.147 If no private insurer pro-vides supplementary insurance, VSPS may need to consider expanding its coverage to offer such insurance. Since those who need supplementary insurance likely need more expensive medical treatments, the cost of VSPS would increase. However, Vermont cannot simply let those who need supplementary insurance go unin-sured, because uninsured care treatment will also increase Vermont’s financial burden. Therefore, balanc-ing the interests of VSPS and private insurers seems critical to successful implementation of VSPS.

Moreover, in VSPS the payment rate to providers will be decided through an annual negotiation between VSPS and the provider rep-resentatives. Although any issues regarding antitrust violations may be addressed under state antitrust immu-nity,148 VSPS’s disproportionately



larger bargaining power may be prob-lematic. Having all state residents enrolled in its system will give VSPS much leverage in the negotiation, possibly lowering the payment rates below the current level. It is possible that significantly reduced unpaid bills and increased patient volume in VSPS could balance and offset the lowered rates. However, it seems unavoidable that providers’ profit margins over their labor costs will decrease, which may make them feel underpaid and lead to lower quality of care, or cause some providers to leave Vermont. Vermont is already suffering from a shortage of primary care physicians.149 After VSPS is implemented, such a shortage could be worsened since patient access to providers would be increased150 as the elimination of net-work barriers and copayments lessen the financial burden on patients (which is a likely factor discouraging patients from visiting a provider). Where the demand exceeds supply, the price can never become cheap. If the current provider shortage is not addressed or is worsened, it will ulti-mately impede VSPS in achieving its planned cost-saving level.

Part III: Problems with a 1332 Waiver

As seen above, an alternative sys-tem like VSPS would likely achieve what PPACA primarily aims to achieve and even surpass it. In other words, a 1332 waiver seems to be able to achieve what it intends to accom-plish, bringing out the best results from reform. Although VSPS may have some issues in satisfying the waiver requirements of being neutral to the federal budget, this issue can be addressed by modifications.

However, there is some concern that a 1332 waiver provision contains two inherent flaws that would seriously frustrate the purpose of providing the waiver.151 The failure of a 1332 waiver would mean a big loss of federal and state money. In addition, if the flaws in

the 1332 waiver provisions are so seri-ous that any innovative system would ultimately fail, it would be a threat to PPACA’s success in saving costs. Therefore, those flaws should be addressed before the provision goes in effect.

Timing of a 1332 Waiver

In the same legislative document that Vermont outlines its plan of applying for a 1332 waiver as soon as applications become available, it also provides its plan to build an exchange,152 even though a 1332 waiver is to get permission to replace an exchange with VSPS. Such para-doxical behavior is due to the fact that the 1332 waiver provision goes in effect after 2017, but states are required to establish an exchange by 2014.153 In fact, there are some admin-istrative difficulties in making the effective date earlier.154 In granting a 1332 waiver, the federal government may want to have the real outcomes from other states’ exchange operations available in order to assess whether an innovative system meets the waiver requirements.155 In addition, a 1332 waiver gives premium tax credits equal to the amount that the state would have received if it had had an exchange, and the premium tax credits are determined based on the fair market price of silver level plans in an exchange.156 Thus, the federal government may have diffi-culties in estimating the amount of premium tax credits that the state would have received in the absence of existing data.157

However, some administrative dif-ficulties in assessing the amount of premium tax credits can be lessened if the federal government postpones dis-tributing such subsidies by a couple of years for states which obtain a 1332 waiver, or gives certain upfront subsi-dies and assesses any difference at the year end. PPACA’s two current approaches, (1) not allowing states to build their alternative systems until 2017 and (2) giving huge subsidies to states building an exchange early may

pose a risk of a new type of waste. As seen above, an exchange is not a necessary infrastructure for VSPS. It seems that Vermont came up with a plan to spend money on an exchange, which will be ultimately dismantled or unnecessary, only to utilize a part of money left over from the exchange subsidy.158 The ultimate goal of both PPACA and a 1332 waiver is to reduce costs by saving wasted money, yet here, PPACA seems to create a new way to waste money, encouraging states to establish a system that they plan to abandon.159 To address this problem, a bill was introduced by Senator Ron Wyden (D-OR) and Senator Scott Brown (R-MA) to advance the effective date of a 1332 waiver from 2017 to 2014.160 President Obama also expressed his support for such an amendment.161 Nevertheless, even before the bill was presented in the House, it disappeared from the Congressional agenda due to partisan conflict on the bill.162

ERISA Preemption

Although VSPS intends to cover the entire state’s residents with the same benefit coverage, VSPS will likely allow employees to keep their current plans if those are self-funded Employer-Sponsored Benefit Plans (“EBPs”).163 Under that situation, the employees who choose to continue their EBPs will be required to pay not only the contributions to their own EBPs, but also the payroll tax contri-butions to VSPS solely for other people’s insurance cost.164 The exact amount of the payroll tax increase is not yet decided; Vermont predicts that 9.4 percent of a payroll tax would be contributed to VSPS in 2016.165 Ver-mont acknowledges that the amount of a tax increase may be large enough to encourage employers to eliminate their EBPs or leave Vermont.166

In the case where VSPS creates incentives for employers to terminate their EBPs, VSPS may be preempted under the Employee Retirement Income Security Act (“ERISA”).167 If



there had been no EBPs, there would be no ERISA preemption issue. How-ever, because the way VSPS is managed will likely cause some exist-ing EBPs to be terminated, it may trigger ERISA preemption. ERISA preempts all state laws that “relate to” EBPs.168 The Supreme Court, in N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., et al,169 said that “relates to” means “a connection with or reference to” EBPs, which would be met if a state law sub-stantially interferes with EBPs’ benefit structure or plan administration.170 The Court also implied that an “exor-bitant” state tax that leaves consumers no real choice may violate ERISA.171

Moreover, the Fourth Circuit Court’s opinion in Retail Industry Leaders Association v. Fielder may be interpreted as favorable for finding VSPS as an ERISA violation.172 In that case, a Maryland law mandated Wal-Mart’s EBP either to increase contributions of at least eight percent of the total payroll to their EBP or pay that amount to the state.173 The Fourth Circuit held that the state law violated ERISA because it left no real option but to restructure the EBP.174 Similarly, VSPS may be viewed as a state mandate, leaving no real option for employers but to restructure their EBPs if a tax increase becomes so bur-densome that it would be virtually impractical for employers to provide EBPs. Vermont hopes that a court would consider its payroll tax increase for VSPS as a state’s exercise of tra-ditional taxing power, not an EBP mandate. However, as there is no precedent, it is uncertain how a court would address this issue.175

On the other hand, if employers with EBPs leave Vermont, their employees may also relocate them-selves out of Vermont following the employers. Whether VSPS causes employers to leave Vermont or is pre-empted by ERISA for influencing employers to terminate their EBPs,

the number of the healthy people covered by VSPS may be decreased as a result. EBPs generally represent the population that is healthy enough to work. If Vermont’s demography com-prises of larger number of less-healthy people, the costs of VSPS would be increased.176 In 2011, approximately 300,000 of 500,000 Vermont residents (62.4 percent) were covered by employment-based insurance.177 Among them, the number of the employers with EBPs may be small because only very large employers provide EBPs. However, since they are large employers, the actual num-ber of affected employees may be large, and the impact of paying dou-ble contributions may also be serious enough to affect the successful imple-mentation of VSPS.

PPACA intends a 1332 waiver to be comprehensive and gives the Sec-retary of HHS authority to administer other coordinated waiver requests in a 1332 application if those waivers are also necessary in implementing and applying a state’s innovative sys-tem.178 However, PPACA section 1332 expressly limits such coordina-tion to be allowed only for those waivers available under the federal health laws.179 This does not include a waiver under other federal law, namely, ERISA.180 If ERISA preemp-tion is triggered, then even if states’ alternative systems are allowed under a 1332 waiver, they may not affect the portion of their domestic insur-ance market that accounts for EBPs. To address this issue, Senator Dennis Kucinich (D-OH) introduced a bill proposing that at the same time a 1332 waiver is granted, a waiver of ERISA preemption would be auto-matically granted.181 The House of Representatives passed this bill in March 2010.182 To maximize the impact of reform, this amendment should be in full effect before a 1332 waiver becomes available.

ConclusionAssuming that VSPS is what a

1332 waiver would allow as an alter-native to an exchange, a 1332 waiver is a necessary provision to maximize the cost-saving results of reform. VSPS could decrease the number of uninsured more dramatically and pro-vide more comprehensive coverage at lower cost. In addition, VSPS seems to have the potential to address some problems that a PPACA exchange would have. Although there are some problems with VSPS, those can be addressed by carefully crafted state legislation and regulation, as well as backup plans. However, a 1332 waiver may also pose a serious risk of another billion-dollar conundrum due to its own flaws. If the Secretary of HHS grants a 1332 waiver acknowl-edging these flaws, it could be the same as making states build a system knowing they may not succeed. It is also true that there is a great deal of uncertainty as to whether ERISA pre-emption would be triggered or whether states would be engaged in a new type of waste. However, address-ing those flaws after the provision goes in effect may be too late because a line of states seeking to apply for it as soon as possible is already forming.

Kimberly S. Min, J.D., 2013, Saint Louis University School of Law, Dean’s Scholar, Concentration in Health Law and

Business Transactional Law, Irvin and Maggie Dagen Fellowship Recipient; B.A., 2002, Ewha Womans University, Dean’s List. She was admitted to the Illinois Bar in 2013. The author would thank Professor Thomas Greaney for teaching his valuable insights in Health Law, as well as Professor Kim Morse and Professor Margaret McDermott for their guidance for scholastic research and writ-ing. She would like to thank her husband and two children for their endless support



during her law school years. She can be reached at [email protected] or [email protected].

Endnotes1 veRMont foR Single PayeR, http://www.

vermontforsinglepayer.org/single_payer_101 (citing Kaiser Family Foundation, The Uninsured and Their Access to Health Care, faCt Sheet # 1402-07 1, (Nov. 2005), www.kff.org/uninsured/upload/The-Uninsured-and-Their-Access-to-Health-Care-Oct-2004.pdf).

2 The S&P 500 is a stock market index com-piled by analysts and economists at Standard & Poor’s and is comprised of the 500 largest American companies by market capitalization value. Definition of S&P 500, inveStoPedia, www.investopedia.com/terms/s/sp500.asp# axzz2AMPDE0ul.

3 veRMont foR Single PayeR, supra note 1 (cit-ing Britt, R. Health Insurers Getting Bigger Cut of Medical Dollars, inveStoR’S buSineSS daily (Oct. 15, 2004), http://investors.com/breaking news.asp?juornalid=23544168&brk=1).

4 Pierre L. Young, Robert S. Saunders, and LeighAnne Olsen, eds, Institute of Medicine, The Healthcare Imperative: Lowering Costs and Improving Outcomes Workshop Series Summary, http://www.iom.edu/Reports/2011/~/media/Files/widget/VSRT/healthcare-waste.swf (fol-low the infographic to the third page).

5 Id. (follow the infographic to the second page).

6 Id. (click “Excessive Administrative Cost”) (cost $190 billion, including duplicative costs to administer insurance and unproductive documentation).

7 Id. (click “Inefficiently Delivered Services”) (cost $130 billion, including medical errors, uncoordinated care, and inefficient operations).

8 Id. (click “Prices That Are Too High”) (cost $105 billion, including product prices beyond competitive levels and excessive variation in service prices).

9 Id. (click “Unnecessary Services”) (cost $210 billion, including services used too frequently, defensive medicine, and unnecessary use of high-cost services).

10 Id. (click “Fraud”) (cost $75 billion, including fraudulent claims in Medicare and Medicaid, and insufficient investment in detection from public and private payers).

11 Id. (click “Missed Prevention Opportunities”) (cost $55 billion, including poor delivery of clinical preventive services).

12 Thomas L. Greaney, The Affordable Care Act and Competition Policy: Antidote or Placebo?, 89 oR. l. Rev. 811, 811-12 (2011); see gener-ally Bruce C. Vladeck and Thomas Rice, Market Failure and The Failure of Discourse: Facing Up to The Power of Sellers, health aff. 2009; 28(5)(2009):1305-15 (2009), http://content.healthaffairs.org/content/28/5/1305.full.pdf+html (explaining the reasons for the failure of American healthcare cost-control and suggesting several ways for improvement); see also Len M. Nicols, Paul B. Ginsburg, Robert A. Berenson, Jon Christianson, and Robert E. Hurley, Are Market Forces Strong Enough To Deliver Efficient Health Care Systems? Confidence Is Waning, health aff. 23, no.2 (2004): 8-21 (2004), http://content.healthaffairs.org/content/23/2/8.full.html (arguing the failure of cost-control in the cur-rent healthcare market and explaining the factors relevant to improve the efficiency of the health system).

13 See generally Bruce et al., supra note 12; see also Len et al., supra note 12.

14 Id. 15 healthCaRe.gov, www.healthcare.gov/law/

full/ (last visited Sept. 18, 2013); Kaiser Family Foundation, Summary of New Health Reform Law (April 15, 2011), www.kff.org/healthreform/upload/8061.pdf; Theda Skocpol and Lawrence R. Jacobs, Bending Toward Universal Health Care, the n.y. tiMeS, June 28, 2010, http://campaignstops.blogs.nytimes.com/2012/06/28/bending-historys-arc-toward-universal-health-care/ (reporting that the Supreme Court’s upholding of PPACA is a historical “bending toward universal health care”); Robert E. Moffit, Ph.D, Revitalizing Federalism: The High Road Back to Health Care Independence, the heRitage foundation (June 30, 2010), www.heritage.org/research/reports/2010/06/revitalizing-federalism-the-high-road-back-to-health-care-independence (arguing that PPACA’s nationwide require-ments amount to a direct threat to federalism); Is Obama health care plan an attack on federal-ism?, the oRange County RegiSteR, www.ocregister.com/video/?videoId=207681000001&lineupId=&play=now (describing PPACA as an attack on federalism).

16 See Kaiser Family Foundation, supra note 15;

Mallory Jensen, Note, Is ERISA Preemption Superfluous In The New Age Of Health Care Reform?, 2011 ColuM. buS. l. Rev. 464, 496 (2011) (introducing PPACA’s key provisions).

17 Jawahar L Mehta, How the Patient Protection and Affordable Care Act (PPACA) Supports Federalism, J foRenSiC ReS. vol. 3 iSSue 6 1000e 107 (2012), www.omicsonline.org/2157-7145/2157-7145-3-e107.pdf (arguing that PPACA, rather than encroaching federalism, actually augments the federalist spirit); Thomas L. Greaney, Regulating To Promote Competition In Designing Health Insurance Exchanges, 20-SPg kan. J.l. & Pub. Pol’y 237, 238 (Spring 2011) (arguing that PPACA leaves much to the discretion of the states); Katherine Hayes and Sara Rosenbaum, Waivers for State Innovation, health RefoRM gPS (Mar. 21, 2011), http://healthreformgps.org/resources/waivers-for-state-innovation/ (explaining that PPACA “empower[s] states” to deviate from the federal mandates).

18 Greaney, supra note 17, at 237-38 (explaining that PPACA designs exchanges to be “the centerpiece” in supervising reform and dele-gates their operations to states).

19 42 U.S.C. § 18052 (2010); Hayes et al., supra note 17.

20 offiCe of the PReSS SeCRetaRy, the affo Rdable CaRe aCt: SuPPo Rting innovation, eMPoweRing StateS (Feb. 28, 2011), available at www.whitehouse.gov/the-p r e s s - o f f i c e / 2 0 1 1 / 0 2 / 2 8 / f a c t - s h e e t - affordable-care-act-supporting-innovation-empowering-states.

21 Health Care Reform: CBO Releases New Cost Estimates For Obama’s Affordable Care Act, huffington PoSt (March 15, 2012, 3:21 PM), www.huffingtonpost.com/2012/03/15/health-care-reform_n_1347327.html.

22 Kaiser Family Foundation, supra note 15; Jensen, supra note 16, at 494 (citing Reform Overview: Summary of the Health Reform Legislation, health RefoRM gPS, http://healthreformgps.org/summary-of-the-legisla-tion/); see Kaiser Family Foundation, The Uninsured: Key Facts About Americans Without Health Insurance (Oct., 2011), www.kff.org/uninsured/upload/7451-07.pdf; The Network for Public Health Law, Applicability Of Patient Protection And Affordable Care Act To Substance Use Disorder Treatment (Oct. 2011), www. networkforphl.org/_asset/18h1yj/ACA-and-SUD-TreatmentFINAL2.pdf.

23 Young et al., supra note 4.24 Greaney, supra note 17, at 237-38 (arguing

that an exchange is one of the main mecha-nisms that PPACA designed to control cost by promoting competition; therefore, PPACA provides the extensive regulatory regimen mandating exchanges to undertake multiple functions: to organize markets, certify qualifi-cations to enter, evaluate performance, structure market competition, and regulate benefit options); Emily Berry, Health Insurance Exchanges Will Promote Competition, aMed-newS.CoM (Nov. 7, 2011), www.ama-assn.org/amednews/2011/11/07/bisb1107.htm.

25 Kaiser Family Foundation, supra note 15; Jensen, supra note 16, at 494; Kaiser Family Foundation, supra note 23.

26 Kaiser Family Foundation, supra note 15, at 1; Blue Cross & Blue Shield of Rhode Island,


Mrs. Min’s paper was chosen as a runner up in the 2012 – 2013 ABA Health Law Section’s Student Writing Competition. We would like to thank the judges for this year’s competition:

Lauren D. Goldberg, Garfunkel Wild, PC, Hackensack, NJ (Chair)

John D. Blum, Loyola University, Chicago School of Law, Chicago, IL

Lisa L. Dahm, South Texas College of Law, Houston, TX

Marla Durben Hirsch, Editor, The Health Lawyer, Potomac, MD

Kari Loeser, Genentech, Inc., South San Francisco, CA

Robert R. Nelson, Avera Health, Sioux Falls, SD

Robert L. Schwartz, University of New Mexico School of Law, Albuquerque, NM

Charity Scott, Georgia State Univesity College of Law, Atlanta, GA

The writing competition is open to all current law students. Contact Wanda Workman at wanda.workman@ americanbar.org for information on the 2013 – 2014 competition.


Federal Healthcare Reform: Patient Protection And Affordable Care Act, Individual Mandate & Subsidy, https://bcbsri.com/BCBSRIWeb/pdf/Individual_Mandate_Fact_Sheet.pdf (last visited on Sept.18, 2013). (The amount of tax penalty in 2014 is the greater of $95 or 1 per-cent of taxable income; $325 or 2 percent of taxable income in 2015; $695 or 2.5 percent of taxable income in 2016. Individuals who are incarcerated or illegally present in the United States, who have religious reasons, who have a coverage gap of less than three months, who cannot afford coverage, or who are members of Indian tribes will be exempted from the mandate).

27 29 U.S.C. §§ 218a-b, 4980H; Kaiser Family Foundation, supra note 15, at 1 (If an employer does not provide or pay the cost of a coverage and has at least one full-time employee who receives a premium tax credit at an exchange, then a penalty of $2,000 is imposed for each full-time employee after excluding the first 30 employees. If an employer provides coverage but has more than one full-time employee who receives a premium tax credit, then a penalty of the lesser of $3,000 per employee receiving pre-mium tax credit or $2,000 for each full-time employee after excluding the first 30 is imposed. An employer with more than 200 employees must automatically provide cover-age to a new employee but give a chance to opt out. No penalty applies to employers with less than 50 full-time employees); Blue Cross & Blue Shield of Rhode Island, Federal Healthcare Reform: Patient Protection And Affordable Care Act, Employer Mandate, h t t p s : / / b c b s r i . c o m / B C B S R I We b / p d f /Employer_Mandate_Fact_Sheet.pdf (last vis-ited on Sept. 18, 2013); see The Network for Public Health Law, supra note 23, at 2.

28 26 U.S.C. § 36B; Kaiser Family Foundation, supra note 15, at 2 (Beginning in 2014, a pre-mium tax credit will be provided equal to the cost of the second cheapest silver plan in the area and provided at a graduated rate increased corresponding to the income increase. However, a premium tax credit is limited to 2 percent of income for people in income levels between 100-133 percent FPL; 3-4 percent of income for people in income levels between 133-150 percent FPL; 4-6.3 percent of income for people in income levels between 150-200 percent FPL; 6.3-8.05 per-cent of income for people in income levels between 200-250 percent FPL; 8.05-9.5 per-cent of income for people in income levels between 250-300 percent; and 9.5 percent of income for people in income levels between 300-400 percent FPL). The Network for Public Health Law, supra note 23, at 2.

29 26 U.S.C. § 45R; Kaiser Family Foundation, supra note 15, at 3 (For years 2010 through 2013, a tax credit is up to 35 percent of the employer’s contribution if the employer’s con-tribution is more than 50 percent of the total premium cost or 50 percent of a benchmark premium; employers with not more than 10 employees whose average wages are less than $25,000 may receive a full tax credit; Tax-exempted employers also receive a tax credit up to 25 percent of the employer’s contribution toward employees’ health insurance premium).

30 An exchange is often compared to an inter-net-price-comparison site such as Travelers or Expedia.com, where consumers can easily shop for the most cost-effective goods consid-ering their needs.

31 42 U.S.C. § 18031(b)(1); see Greaney, supra note 17, at 237, 239 (saying that PPACA’s exchange is to serve the uninsured either for financial reasons or for their pre-existing health conditions; and there are two types of exchange, one for individuals and the other for small business employers).

32 Rachel Brand, Setting up Health Insurance Exchanges is One of the Big, Early Tasks for Lawmakers: Online Marketplace, national ConfeRenCe of State legiSlatuReS (Oct./Nov. 2010), www.ncsl.org/issues-research/health/facing-the-future-setting-up-health-insurance-ex.aspx; Health Insurance Reform: Frequently Asked Questions (FAQs): Health Insurance Exchange and SHOP, National Associations of Realtors, www.realtor.org/small_business_health_coverage.nsf/Pages/health_ref_faq_exchange?OpenDocument; Sarah Kliff, Building a better health insurance exchange, the waShington PoSt (March 12, 2012 5:03PM), www.washingtonpost.com/blogs/ezra-klein/post/building-a-better-health-insurance-exchange/2012/03/12/gIQA3tez7R _blog.html; Brandon Glenn, ‘Expedia for health insurance’ sees big potential in insurance exchanges, MedCitynewS (Nov. 15, 2011 12:53pm), www.medcitynews.com/2011/11/expedia-for-health-insurance-sees-big-potential- in-insurance-exchanges.

33 42 U.S.C. §§ 18022(d) & (e) (In an exchange plans should be categorized in one of the five following groups according to their actuarial value: bronze level with 60 percent actuarial value, silver level with 70 percent, gold level with 80 percent, platinum level with 90 per-cent, or a catastrophic plan covering only serious medical emergencies); Patient Protection and Affordable Care Act: Standards Related to Essential Benefits, Actuarial Value, and Accreditation, 78 Fed. Reg. 12,834, 12,840 (April 26, 2013) (codi-fied at 45 C.F.R. § 156), available at www.regulations.gov/#!documentDetail;D=HHS_FRDOC_0001-0483 (Actuarial value is defined as the percentage paid by a health plan of the total allowed costs of benefits).

34 Application, Review, and Reporting Process for Waivers for State Innovation, 77 Fed. Reg. 11,700, 11,700 (April 27, 2012) (codified at 45 C.F.R. § 155), available at www.regulations. gov/#!documentDetai l ;D=CMS-2010- 0241-0038.

35 See 42 U.S.C. §§ 300gg-6(a), 18022(a)(2) & (3); The Network for Public Health Law, supra note 23, at 2; Katherine Jett Hayes, Essential Benefits, health RefoRM gPS (Jan. 12, 2012), www.healthreformgps.org/resources/essential-benefits/.

36 42 U.S.C. § 1396a(a)(10)(A)(VIII) (2012); Kaiser Family Foundation, supra note 15, at 2; Healthcare Reform: 2014 Medicaid Expansion Overview, hida goveRnMent affaiRS (Oct. 2012), www.hida.org/App_Themes/Member/docs/Healthcare%20reform/HCR%20-%20Medicaid%20Slides.pdf; The Network for

Public Health Law, supra note 23, at 2. 37 42 U.S.C. § 18001; 45 C.F.R. § 152.2 (2012);

Greaney, supra note 17, at 237-38 (explaining that the limits on underwriting is to increase the number of uninsured); Timothy Stoltzfus Jost, Health Insurance Exchanges And The Affordable Care Act: Key Policy Issues, the CoMMonwealth fund (July 2010), www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2010/Jul/1426_Jost_hlt_insurance_exchanges_ACA.pdf.

38 42 U.S.C. § 300gg-11; see Kaiser Family Foundation, supra note 15, at 6.

39 Greaney, Supra note 17, at 237-38; offiCe of the PReSS SeCRetaRy, supra note 20; Cf. 42 U.S.C. § 18041(c) (States’ flexibility in build-ing an exchange is limited because the federal government will step in to establish an exchange if a state fails to create one by 2014).

40 Medicaid expansion requirement can be waived under a different waiver, § 1115 Title of the Social Security Act.

41 42 U.S.C. § 18052; Katherine Hayes and Sara Rosenbaum, Waivers for State Innovation, health RefoRM gPS (March 21, 2011), www.healthreformgps.org/resources/waivers- for-state-innovation/.

42 Id. 43 Id.

44 Id.

45 § 18052(b)(1)(A) (“provide coverage that is at least as comprehensive as the coverage defined in section 18022(b) of this title and offered through Exchanges established under this title...”).

46 § 18052(b)(1)(B) (“provide coverage and cost sharing protections against excessive out-of-pocket spending that are at least as affordable as the provisions of this title would provide”); see also § 18022(c)(3) (defining that “the term ‘cost-sharing’ includes deductibles, coinsur-ance, copayments, or similar charges; and any other expenditure required of an insured indi-vidual which is a qualified medical expense...”).

47 § 18052(b)(1)(C) (“provide coverage to at least a comparable number of its residents as the provisions of this title would provide”).

48 § 18052(a)(1)(B)(ii) & (b)(1)(D) (“…appli-cation shall…contain…a 10-year budget plan for such plan that is budget neutral for the Federal Government”…[so that it] “will not increase the Federal deficit”).

49 77 Fed. Reg. 11,700 supra note 37. 50 Id.

51 § 18052; 77 Fed. Reg. 11,700 supra note 37; Hayes, supra note 35.

52 Id.

53 26 U.S.C. §§ 5001A(a), 1501(b). 54 29 U.S.C. §§ 218a-b, 4980H, 1513(c)(7);

Kaiser Family Foundation, supra note 15. 55 42 U.S.C. §§ 18031(b)(1). 56 42 U.S.C. §§ 300gg-6(a), 18022(a)(2) & (3),

18052; 78 Fed. Reg. 12834, supra note 33; Hayes, supra note 35.




57 Id.

58 Id.

59 inSuRekidSnow.gov, www.insurekidsnow.gov/chip/ (CHIP stands for Children’s Health Insurance Program. CHIP is a health insur-ance program for children under 20 and run by each state. The concept of CHIP is basi-cally similar to Medicaid, but CHIP is available only for children and covers a broader range of family incomes).

60 Id.; Hayes, supra note 35 (introducing that Congress intended to respect state diversity and flexibility; therefore, the HHS Secretary is required to coordinate the process to review a 1332 waiver and any possible waivers together at the same time).

61 42 U.S.C. § 18052; 77 Fed. Reg. 11,700 supra note 37.

62 Id.

63 Rick Newman, Why the Fight Against Obamacare Will Continue, uSnewS (June 28, 2012), www.usnews.com/news/blogs/rick-new-man/2012/06/28/why-the-fight-against- obamacare-will-continue (reporting that twenty-seven states separately or jointly filed the lawsuit against PPACA and only sixteen states and the District of Columbia have taken some steps to establish a state-based exchange although the “deadline for establishing exchanges” is the first day of 2014); u.S. gov’t aCCountability offiCe, gao-13-601, Patient PRoteCtion and affoRdable CaRe aCt: StatuS of CMS effoRtS to eStabliSh fedeRally faCilitated health inSuRanCe exChangeS (June 2013) (reporting that 34 states have decided not to operate a state-based exchange for 2014 and that CMS will establish federally facilitated exchanges in those states), available at www.gao.gov/assets/660/655291.pdf.

64 Ellen Barrosse, Coming Soon From Obamacare: A Single-Payer Nightmare For Delaware, foRbeS (Oct. 4, 2012 5:08pm), www.forbes.com/sites/realspin/2012/10/04/coming-soon-from-obamacare-a-single-payer-nightmare-for-delaware / ( report ing that Delaware introduced its single-payer bill on June 14, 2012); PhySiCianS foR a national health PRogRaM illinoiS, www.pnhpillinois.org/; health CaRe foR all MinneSota, http://muhcc.org/sites/default/file/MUHCC%20Survey%20Responses%20-%20short.pdf); Zaid Jilani, Montana Gov. Brian Schweitzer Will seek Health Care Law Waiver To Establish Single Payer In His State (Sept. 29, 2011 at 1:20PM), thinkPRogReSS health, http://thinkprogress.org/health/2011/09/29/332031/montana-governor-waiver-for-single-payer/ ?mobile=nc; Single Payer Advocates Says Medicare for All Remains the Solution in Light of US Supreme Court Ruling, Single PayeR/MediCaRe-foR-all in new yoRk State, the gRaSSRootS in aCtion (June 28, 2012), http://singlepayernewyork.org/ (reporting New York State introduced a single-payer bill on June 28, 2012); PhySiCianS foR a national health PRogRaM, Pennsylvania Democrats Unanimously Endorse Single Payer Senate Bill 400 and House Bill 1660, www.pnhp.org/news/2010/february/pennsylvania-democrats-unanimously-endorse-single-payer-senate-bill-400-and-house; veRMont foR Single PayeR, supra note 1.

65 William C. Hsiao, Anna Gosline Knight, Steven Kappel and Nicolae Done, What Other States Can Learn Form Vermont’s Bold Experiment: Embracing A Single-Payer Health Care Financing System, health aff vol. 30 no. 7 1232-1241 (July 2011), available at h t tp : / / content .hea l tha f f a i r s .o rg /con-tent/30/7/1232.full?sid=84e643e1-d82c- 4fbc-b6d1-cc8eeb508513.

66 health RefoRM gloSSaRy, kaiSeR faMily RefoRM SouRCe, available at www.healthreform. kff.org/en/health-reform-glossary.aspx#s.

67 See generally William C. Hsiao, Steven Kappel, and Jonathan Gruber, Act 128 Health System Reform Design: Achieving Affordable Universal Health Care in Vermont (Feb. 17, 2011).

68 Id. 69 Vermont State Profile, woRld to MaP, www.

mapsofworld.com/usa/states/vermont/vermont- state-profile.html (last visited on Sept. 18, 2013).

70 Paul Fronstin, Ph.D., Employee Benefit Research Inst., Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2012 Current Population Survey, eMPloyee benefit ReSeaRCh inStitute no. 376, 1, 21 (Sept. 2012), available at www.ebri.org/pdf/briefspdf/EBRI_IB_09-2012_No376_Sources.pdf (according to Figure 20 on page 21, from 2009 to 2011, the percent of unin-sured in Vermont is 10.5 percent which was the third smallest percentage after Hawaii’s 8.8 percent and Minnesota’s 10.3 percent).

71 Jocelyn Guyer, Medicaid and the Uninsured: Vermont’s Global Commitment Waiver: Implications For the Medicaid Program, kaiSeR faMily foundation (April 2006), www.kff.org/medicaid/upload/7493.pdf (explaining that the waiver lasts for five years and Vermont renewed the waiver for another five years, which expires in 2015. Under the Medicaid waiver, Vermont receives federal Medicaid matching funds of $4.7 billion.

72 Kristin Peterson, Note, State Medicaid Agencies as Single Payer: An Innovative Approach to Medicaid Expansion Obligations Under The Patient Protection and Affordable Care Act, 21 annalS of health l. advanCe diReCtive 35, 41-2 (2011) (explaining that PCCM has direct contracts with primary care providers; Medicaid beneficiaries are assigned to them, and they are paid basically on a fee-for-service basis as well as a small amount of fixed capita-tion payment).

73 See general ly CMS.gov, CenteRS fo R MediCaRe & MediCaid SeRviCeS, www.cms.gov/; see also CMS innovation CenteR, www.innovation.cms.gov (The Centers for Medicare & Medicaid Services (“CMS”) is the federal agency which administers Medicare, Medicaid, and the state CHIP. PPACA created a branch called “the Center for Medicare & Medicaid Innovation” under CMS to “support the development and testing of innovative health care payment and service delivery models” for Medicare, Medicaid, and the state CHIP. For this reason, the Center for Medicare & Medicaid Innovation is com-monly called the Innovation Center or “CMS Innovation,” not “CMMI”).

74 Sarah Wehrwein, Dual Eligibles: Proposed Cost Saving Changes and Integration of Care Models, aba health eSouRCe, Volume 3 No. 7 (March 2012), www.americanbar.org/

newsletter/publications/aba_health_esource_home/aba_health_law_esource_0312_wehr wein.html (explaining that Vermont has been selected for integrating Medicare and Medicaid systems to cover dual eligible Medicare-Medicaid beneficiaries); Peterson, supra note 72, at 47.

75 H. 202, 2011-2012 Legis. Sess. (Vt. 2011) (codified at 18 V.S.A. § 9371).

76 § 18052(b)(1)(A). 77 § 18052(b)(1)(B). 78 42 U.S.C. § 18052(b)(1)(C). 79 77 Fed. Reg. 11,700 supra note 37. 80 42 U.S.C. § 18022(a) (“In this title, the term

‘essential health benefits package’ means ... coverage that provides for the essential health benefits defined by the Secretary ... limits cost-sharing for such coverage ... provides either the bronze, silver, gold, or platinum level of cover-age ... .”); see also 42 U.S.C. § 300gg-6(a) & 26 U.S.C. § 5001A(a).

81 Id.; Center for Consumer Information and Insurance Oversight, Essential Health Benefits Bulletin 1, 3 (Dec. 16, 2011), www.cciio.cms.gov/resources/files/Files2/12162011/essential_health_benefits_bulletin.pdf; Katherine Jett Hayes, Essential Benefits, health RefoRM gPS (Jan. 12, 2012), www.healthreformgps.org/resources/essential-benefits/ ; Kate Greenwood, Tara Adams Ragone, and John V. Jacobi, Implementing the Essential Health Benefits Requirement in New Jersey: Decision Points and Policy Issues, Seton hall CenteR foR health & PhaRMaCeutiCal law & PoliCy, www.cshp.rutgers.edu/Downloads/ 9540.pdf.

82 Id. 83 78 Fed. Reg. 12,834 supra note 33.84 Id, at 12,867 (codified at 45 C.F.R. § 156.115). 85 Id.86 Id, at 12,872 (According to the final rule, the

largest plan in Vermont’s small group market is the Vermont Health Plan LLC, CDHP- HMO).

87 Id (The largest Dental and Vision Plan Options are MetLife’s Federal Dental Plan-High and BCBS Association’s FEP Blue Vision-High).

88 Id, at 12,866-7 (codified at 45 C.F.R. §§ 156.100, 156.110, 156.115); see Essential Health Benefits Bulletin supra note 81, at 9 (In prescribing the methods of supplementing any required cov-erage, the final rule adopted the approach that the Center for Consumer Information and Insurance Oversight suggested in its EHB Bulletin, issued in 2011. According to the Bulletin, there are some benchmark plans that states may refer to in determining the scope of their EHB plan, such as any of the largest plans in the state’s small group market, the largest state employee health benefit plans, the largest FEHBP plans, and the plan of the largest HMO in the state); see also CenteRS foR MediCaRe & MediCaid SeRviCeS, www.cciio.cms.gov/ (last visited on Nov. 23, 2012) (The Center for Consumer Information and Insurance Oversight (“CCIIO”) is a sub-department of the Centers for Medicare & Medicaid Services (“CMS”) and CMS’ web-site introduces CCIIO as an organization


assisting to implement many provisions of PPACA).

89 Vt. H. 80, 2011-2012 Legis. Sess. § 1803(b) (Vt. 2011).

90 Id. § 1803. 91 Id. § 1803(b)(2). 92 Vt. H. 80 § 1803(b)(1).93 42 U.S.C. § 18052(b)(1)(B); Kaiser Family

Foundation, supra note 15, at 5; see health RefoRM gloSSaRy, kaiSeR faMily RefoRM SouRCe, Health Savings Account, www.healthreform.kff.org/health-reform-glossary.aspx?source=QL#h (defining health savings accounts as savings accounts made for health-care expenditure, which are tax-exempt to the extent of $5,950 for singles and $11,900 for families in 2010); see also hSa CenteR.CoM, www.hsacenter.com/2012limits.html (The HSA legal limit was $6,050 sin-gle/$12,100 family in 2012, is $6,250 single/$12,500 family in 2013 and will be $6,350 single/$12,700 family in 2014. The limits are reduced for people with income lower than 400 percent of the FPL.).

94 42 U.S.C. § 300gg-11; see Kaiser Family Foundation, supra note 15, at 6.

95 42 U.S.C. § 18022(c)(2); see 78 Fed. Reg. 12834, supra note 33 (interpreting that these maximum deductibles and out-of-pocket lim-its do not apply to grandfathered plans that existed before PPACA and that the deduct-ible limits apply only to small group market plans and not to self-insured or large group plans).

96 42 U.S.C. §§ 18022(d) & (e); Kaiser Family Foundation, supra note 15, at 5.

97 Vt. H. 80 § 1803(e). 98 Hsiao et al., supra note 67, at 7, 153 (saying

that a single-payer system is designed to pro-vide cost-sharing protection equal to PPACA’s “platinum” package and that eliminating premi-ums is possible mainly because VSPS uses payroll tax funding rather than premium funding).

99 42 U.S.C. § 18052(b)(1)(B); Kaiser Family Foundation, supra note 15, at 5; Health Savings Account, supra note 93.

100 Hsiao et al., supra note 67, at 12. 101 Blue Cross & Blue Shield of Rhode Island, supra

note 26, at 1 (Individuals who are incarcerated or illegally present in the United States, who have religious reasons, who have a coverage gap of less than three months, who cannot afford coverage, or who are members of Indian tribes are exempted from the mandate).

102 Kaiser Family Foundation, supra note 15, at 2; Blue Cross & Blue Shield of Rhode Island, supra note 26, at 3.

103 Hsiao et al., supra note 67, at Executive Summary xvi (estimating that approximately 31,000 people would remain uninsured in 2016 if PPACA were implemented in Vermont); see also The Implications of Health Reform for U.S. Charity Care programs: Policy Considerations, inStitute foR health PoliCy, http://bipartisanpolicy.org/blog/2011/03/health-reform-flexibility-and-wyden-brown-waiver-state-innovation (saying that there

will be some people who may opt out of the mandate and face resulting penalties).

104 Vt. H. 80 § 1824(a)(1); Hsiao et al., supra note 67, at 10.

105 Vt. H. 80, supra note 89; MvP health CaRe, Self-Funded Employers/Brokers – Single Payer, (July 29, 2011), www.mvphealthcare.com/vt-single-payer/self-insured-employer-broker-single- payer.html.

106 See Part III of this article, ERISA Preemption.107 Hsiao et al., supra note 67, at 7, 153 (saying

that eliminating premiums is possible mainly because VSPS uses payroll tax funding rather than premium funding).

108 Id, at 34. 109 Hsiao et al., supra note 67, at 10, 75. 110 Vt. H. 80 § 1803(e).111 Hsiao et al., supra note 67, at 137. 112 Jessica Marcy, Vermont Edges Toward Single

Payer Health Care, kaiSeR health newS (Oct. 02, 2011), www.kaiserhealthnews.org/stories/2011/october/02/vermont-single-payer-health-care.aspx.

113 Vt. H. 80 § 9487(a) (Vermont legislation seems to acknowledge this problem as it empowers the VSPS entity to implement the measures to correct VSPS’s budget shortfall, including an increase in premium).

114 Benjamin D. Sommers and Sara Rosenbaum, Issues In Health Reform: How Changes In Eligibility May Move Millions Back and Forth Between Medicaid And Insurance Exchanges, health aff 228, 228 (Feb. 2011), www. content.healthaffairs.org/content/30/2/228.full; Matthew Buettgens, Austin Nichols, and Stan Dorn, Churning Under the ACA and State Policy Options for Mitigation, uRban inStitute (June 2012), www.urban.org/UploadedPDF/412587-Churning-Under-the-ACA-and-State-Policy-Options-for-Mitigation.pdf.

115 Id.116 Id.117 Sommers et al., supra note 114, at 233. 118 Blue Cross & Blue Shield of Rhode Island,

supra note 26, at 1. 119 Sommers et al., supra note 114, at 233. 120 Id, at 228, 233. 121 Id, at 228. 122 Id. 123 Id, at 232. 124 Id. 125 Id, at 234. 126 Center on Budget and Policy Priorities, Status

o f S ta t e Hea l t h In surance Exchange Implementation (Nov. 19, 2012), www.cbpp.org/files/CBPP-Analysis-on-the-Status-of-State-Exchange-Implementation.pdf; Debra Miller, NJ Governor’s Veto Leaves States with Health Insurance Exchange Authority at Thirteen, knowledge CenteR, the CounCil of State goveRnMentS (May 11, 2012, 10:50AM), www.knowledgecenter.csg.org/kc/

content/nj-governors-veto-leaves-states- health-insurance-exchange-authority-thirteen.

127 Hsiao et al., supra note 67, at 14-6, 131 (pro-posing that Vermont should keep the Medicaid program separate from VSPS to uti-lize the remaining federal funds to build VSPS but the payment system should be integrated for efficiency under 42 U.S.C §§ 1315a, 1395b-1, 1395kk, 1395jjj; some Medicaid pro-grams, offering less comprehensive coverage will be upgraded to the single-payer’s standard benefit package but many of Medicaid benefi-ciaries will not experience any changes in their coverage).

128 Id, at 141-42, 158-62. 129 Id, at 34-6, 131-32; see Vt. H. 80, supra note

89 (mentioning single payer reimbursement to providers and recovering costs from federal funds if the patient is a Medicaid beneficiary).

130 Sharon Silow-Carroll, Diana Rodin, Tom Dehner, and Jaimie Bern, States in Action Archive Health Insurance Exchanges: State Roles in Selecting Health Plans and Avoiding Adverse Selection, the CoMMonwealth fund (February/March, 2011), www.commonwealth fund.org/Newsletters/States-in-Action/2011/Mar/February-March-2011/Feature/Feature.aspx; Timothy S. Jost, Health Insurance Exchanges and the Affordable care Act: Eight Difficult Issues, the CoMMonwealth fund (Sept. 30, 2010), www.commonwealthfund.org/Publications/Fund-Reports/2010/Sep/Health-Insurance-Exchanges-and-the-Affordable-Care-Act.aspx.

131 42 U.S.C. § 18001; 45 C.F.R. § 152.2.132 Silow-Carroll et al., supra note 130. 133 Id. 134 Id. 135 Id. 136 Vt. H. 80, supra note 89; Hsiao et al., supra

note 67, at 34. 137 Hsiao et al., supra note 67, at 34 (explaining

that private insurers’ involvement will be lim-ited to supplementary insurance plans).

138 42 U.S.C. § 1395nn (The Stark Law), 42 U.S.C §§ 1320a-7b(b) (The Anti-kickback Law), and 31 U.S.C. §§ 87729-33 (The False Claims Act).

139 Silow-Carroll et al., supra note 130. 140 Hsiao et al., supra note 67, at 47. 141 Id. 142 Id. 143 Id, at 47-8. 144 Id, at 34. 145 See Table.146 See Part II of this article, VSPS’s Merits on a

1332 Waiver.147 Hsiao et al., supra note 67, at 25. 148 Parker v. Brown, 317 U.S. 341, 352 (1943)

(holding that state authority acting pursuant to a clearly expressed state policy is immune from federal antitrust lawsuits); see also FTC v. Ticor Title Ins. Co., 504 U.S. 621, 633 (1992).



149 Hsiao et al., supra note 67, at 27 (discussing the PCP shortage for Medicare and Medicaid beneficiaries and for rural areas); Kaiser Family Foundation, Vermont: Health Professional Shortage Areas, StatehealthfaCtS.oRg, /www.statehealthfacts .org/prof i le ind. j sp?cat =8&sub=156&rgn=47 (showing that, in 2012, there were 27 areas designated as pri-mary care provider shortage areas, and 22 areas as mental health provider shortage areas in Vermont).

150 Hsiao et al., supra note 67, at 8 (predicting the current provider shortage in Vermont will worsen as patients will increase under VSPS).

151 SCottbRown.gov, Brown, Wyden Introduce Bill to Move Up Date for Health Care Law’s State Waiver Provision (Nov. 18, 2010), www.scottbrown.senate.gov/public/index.cfm/n e w s ? I D = 0 f 4 2 2 e 4 c - f 8 a 8 - 4 2 8 3 - 8 d 3 f -4f4b8ac28777; Meredith Hughes, Health Reform Flexibility and the Wyden-Brown Waiver for State Innovation, biPaRtiSan PoliCy CenteR (Mar. 4, 2011), http://bipartisan policy.org/blog/2011/03/health-reform-flexibility- and-wyden-brown-waiver-state-innovation; Heys et al., supra note 17 (introducing a legisla-tive movement to amend the 1332 waiver provision to make the effective date begins in 2014); Ken Terry, Healthcare Reform: Wyden-Brown Bill is a Trojan Horse, CbSnewS.CoM (Nov. 22, 2012, 1:20PM), www.cbsnews.com/8301-505123_162-43842129/healthcare-reform-wyden-brown-bill-is-a-trojan-horse/; Donna Smith, Turn, Turn, Turn – A Season for Healthcare Policy, Mike & fRiendS blog (Mar. 1, 2011, 5:16PM), www.michaelmoore.com/words/mike-friends-blog/turn-turn-turn; Hsiao et al., supra note 67, at 8-12 (explaining ERISA as a potential legal constraint in implementing the VSPS); Jensen, supra note 16, at 508-15.

152 Vt. H. 80, supra note 89. 153 42 U.S.C. § 18052; 45 C.F.R. § 156; Heys et

al., supra note 17 (introducing that January 1, 2017 is the date when the 1332 waiver provi-sion goes in effect); Kaiser Family Foundation, supra note 15, at 6 (explaining that the

provision requiring states to establish an exchange goes in effect in 2014); see also Leavitt Group, Major Provisions: Exchange Summary, www.healthreformupdates.com/MajorProvisions/Exchanges.aspx.

154 Hsiao et al., supra note 67, at 149 (saying that the federal government may wish to see how states run their exchanges to have parameters in granting a 1332 waiver as to exchange ben-efit coverage, cost sharing protection, and the number of enrollees).

155 Id.; see 42 U.S.C. § 18052 & 45 C.F.R. § 156. 156 Kaiser Family Foundation, supra note 15, at 2;

see 42 U.S.C. § 18052 & 45 C.F.R. § 156. 157 Hsiao et al., supra note 67, at 14. 158 Ezra Klein, Have Scott Brown and Ron Wyden

figured out the way forward on health care?, The waShington PoSt (Nov. 18, 2010 12:11PM), http://voices.washingtonpost.com/ezra-klein/2010/11/have_scott_brown_and_ron_ wyden.html (saying that it is a waste of time and money to set up a federal structure that states don’t plan to use).

159 Id.

160 Empower ing S ta t e s t o Innova te Ac t , PolitiCo, www.politico.com/static/PPM 169_empowering_states_to_innovate_v2. html; Hughes, supra note 151; Jensen, supra note 16, at 521.

161 offiCe of the PReSS SeCRetaRy, supra note 20; SCottbRown.gov, supra note 151; Hughes, supra note 151.

162 Matt Dobias, State-based health bill losses speed, PolitiCo (Sept. 7, 2011 11:17PM), www.politico.com/news/stories/0911/62854.html.

163 health inSuRanCe gloSSaRy, health inSuRanCe.oRg, available at www.health insurance.org/glossary/ (EBPs are health insur-ance provided by an employer).

164 Vt. H. 80, supra note 89; MvP health CaRe, supra note 105.

165 Id.

166 Id.

167 The Employee Retirement Income Security Act (1974); Hsiao et al., supra note 67, at 8-12; Jensen, supra note 16, at 523-24.

168 See generally Peter D. Jacobson, The Role of ERISA Preempt ion in Heal th Reform: Opportunities and Limits, geoRgetown univeRSity o’neill inStitute, www.law.georgetown.edu/oneillinstitute/national-health- law/legal-solutions-in-health-reform/Papers/ERISA.pdf; Hsiao et al., supra note 67, at 8.

169 N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., et al., 514 U.S. 645 (1995).

170 Id.; Hsiao et al., supra note 67, at 8.171 Id.; Hsiao et al., supra note 67, at 9.172 Retail Industry Leaders Association v. Fielder,

475 F.3d 180 (4th Cir. 2007).173 Id.; Hsiao et al., supra note 67, at 9 (citing

Butler, P., ERISA Implications for State Health Care Access Initiatives: Impact of the Maryland ‘Fair Share’ Act Court Decision, national aCadeMy fo R State health PoliCy: PoRtland, Me (2006)).

174 Id.

175 Id.

176 See Part II of this article, Adverse Selection.177 Fronstin, supra note 70, at 20-1. 178 42 U.S.C § 18052; 45 C.F.R. 152. 179 Id. 180 Hsiao et al., supra note 70, at 8-12; Jensen,

supra note 16, at 523-24. 181 Amendment to H.R. 3590, Offered by Mr.

Kucinich of Ohio, July 15, 2009; Jensen, supra note 16, at 509; Smith, supra note 151.

182 J.C. Grant, Health Care Reform: Who Voted for and Against HR 3590?, yahoo ContRibutoR netwoRk (March 22, 2010), http://voices.yahoo.com/health-care-reform-voted-against-hr-3590-5693378.html?cat=75.

Health Law Section Offers Publishing Opportunities The Health Law Section is always interested in publishing material from our members and others. We strive to produce

top quality, relevant and interesting articles, books, toolkits, and the like for the health law bar. Opportunities include:The Health Lawyer – This prestigious national magazine is the flagship publication of the Section. For more than 30 years

The Health Lawyer has covered cutting edge, topical and timely health law-related issues that not only spark discussion but also provide practical advice and help readers in their daily work. A full index of topics covered can be found at The Health Lawyer webpage (http://www.americanbar.org/publications/health_lawyer_home.html). For more information or to receive our Publication Guidelines, contact Marla Durben Hirsch, Esq., Editor at [email protected] or at 301/299-6155.

ABA Health eSource – Our electronic monthly newsletter is a perfect place to find and publish succinct, timely arti-cles. Generally the articles for this monthly publication are not as long as the articles in The Health Lawyer but are every bit as important. Simeon Carson is the staff person in charge of the ABA Health eSource and can be reached at 312/988-5824 or at [email protected].

Practical Guide Series – Do you have a good idea for a single topic book? Contact Simeon Carson to discuss your book project. Generally these are soft covered books of 200 to 300 pages. Simeon can be reached at 312/988-5824 or at [email protected].


David M. Dirr, Esq. Dressman Benzinger LaVelle psc Crestview Hills, KY

Many people are aware of the recent rollout of the public health insurance exchanges in each state because they have deservedly been a popular topic of public discourse in recent months. But fewer people are aware of the assortment of private health insurance exchanges that have been popping up across the country at the same time. The recent surge of private exchanges is due to the con-vergence of government intervention in the healthcare industry through the Patient Protection and Affordable Care Act (“PPACA”) and the market forces brought about by employers’ and individuals’ demands for more affordable health insurance.

The appeal of private exchanges comes from their ability to provide a variety of options to employers and individuals to meet their obligations under PPACA while at the same time reducing their health insurance expenditures. For employers, private exchanges offer defined contribution plans that allow employers to meet their upcoming mandate to provide healthcare insurance to their employ-ees, but cap employers’ expenses at predetermined amounts each year. For individuals, private exchanges can offer a one-stop shop for individual insurance and supplemental insurance products while allowing individuals to reap the financial benefits to which they would be entitled if they obtained insurance through a public exchange. Of course, the operators of private exchanges, and those employers that provide insurance through them, are subject to a myriad of federal laws and regulations – old and new. This article will explain what pri-vate exchanges are, why they are quickly becoming popular, and how current and forthcoming laws and regulations will affect them.

What are Health Insurance Exchanges?

In general terms, health insurance exchanges are online marketplaces for the purchase of health insurance. Con-sumers can log onto the website of an exchange to compare multiple health insurance plans and purchase the plans that best fit their health insurance needs. Health insurance exchanges predate the passage of PPACA, but PPACA propelled the concept to prominence.1 The crafters of PPACA latched onto the idea of the exchanges as vehicles to increase competition in the insurance industry, and thus drive down the cost of premiums, while at the same time encouraging insurers to increase the quality of their products. In other words, in theory, when con-sumers can compare the insurance plans available to them in one place, they will tend to gravitate towards the least expensive and highest quality health insurance plans. And, as con-sumers gravitate towards the best quality insurance plans, insurers will feel pressure to increase the quality of the plans so as to continue to com-pete in the marketplace.

Health insurance exchanges vary widely, but they can be broken down into two broad categories: public and private. Although private exchanges are older, public exchanges have garnered the most attention under PPACA as a result of the noisy debate over their funding. The public exchanges offer health insurance plans to individuals and small busi-nesses.2 PPACA required each state to have a public exchange operational by October 1, 2013, and the insur-ance plans on those exchanges must begin covering people on January 1, 2014.3 State governments had three options for how to run the exchange in their states.4 First, a state could choose to run its own exchange,

which would entitle it to federal funds to assist in the setup. Sixteen states and the District of Columbia took this option.5 Second, a state could choose to run the exchange in partnership with the federal govern-ment. Seven states took this option, but some of these states may transi-tion to an entirely state-run exchange in future years.6 The final default option was for the federal government to run the exchange in the state.7

Regardless of who is running the public exchange in each state, these exchanges are more than virtual stores for health insurance — they are tools of the federal government to implement the goals of PPACA. As has been widely published, starting in 2014 most Americans will have to be enrolled in a health insurance pro-gram or potentially face a fine in the form of a tax, depending on their income.8 Consequently, most people who do not receive health insurance through their employer or a govern-ment program will have to purchase it. But those people with incomes less than 400 percent of the federal pov-erty level will be eligible for federal premium subsidies to offset the cost of insurance, and some of those people will be eligible for the Medicaid pro-gram in their state.9 Likewise, some small businesses that want to volun-tarily provide health insurance to their employees (employers with fewer than 50 full-time employees do not have to provide insurance under PPACA) may be eligible for govern-ment subsidies if they purchase health insurance for their employees through the exchanges.10 As a result, the exchanges will be the place that these people and small businesses will need to go, not only to buy health insur-ance but also to determine if they are eligible for subsidies or government healthcare programs.

THE OTHER EXCHANGES: PRIVATE EXCHANGES AND HEALTHCARE REFORM



Public Versus Private Exchanges

As opposed to public exchanges, which are managed by a public entity, private exchanges are run by private individuals or companies, often bro-kers or insurers. The primary purpose of private and public exchanges is the same — to offer an online platform through which people can compare and purchase health insurance prod-ucts.11 Private exchanges fall into three general categories. The first category is group market private exchanges.12 These exchanges sell group health insurance to employers for their employees. Employers that wish to offer group health insurance through a private exchange direct their employ-ees to visit the private exchange’s website where the employees can choose from a set of plans that their employer selected. The employee’s options typically range from plans that require little contribution from the employee, but offer fewer benefits, to plans that require large employee con-tributions but offer generous benefits.13 The portion of the group health plan paid by the employer will be tax free for the employee.14

The second type of private exchanges offer individual plans to employees that are subsidized by their employers.15 Most employers and employees will not find this type of pri-vate exchange arrangement attractive because the employers’ contributions will not be tax free for the employee and such an arrangement may not ful-fill the employer’s mandate to provide coverage under PPACA.16 But this arrangement is still a viable and increasingly popular one for employers that offer health insurance to retir-ees.17 If an employer chooses to use this option for its retired employees, the employer will contribute to a Health Reimbursement Account (“HRA”), which the retiree can use to purchase an individual health insur-ance plan on the private exchange. The contributions to retirees’ HRAs are tax free.18 If a retiree wishes to

purchase a plan whose cost exceeds the contribution of the employer, the retiree will have to pay the difference. The retiree cannot use the HRA funds to purchase insurance on a public exchange and still receive federal premium subsidies.19

The last category of private exchanges is exchanges that sell plans to individuals who are not receiving health insurance or subsidies through their employers.20 These private exchanges essentially perform the same function as the public exchanges. As discussed below, many people believed that these individual private exchanges would disappear because they would lose their customer base to public exchanges, but the final regulations covering public exchanges allow the private exchanges to continue to exist through partnerships with public exchanges.21

Federal Laws Governing Private Exchanges

A variety of federal laws apply to private exchanges. The specific rules applicable to a private exchange depend on its structure, the customers it serves, and the types of plans it offers. But most private exchanges, whether catering to individuals or employers, will need to have policies in place to address their legal privacy and security obligations under the Health Insurance Portability and Accountability Act (“HIPAA”).22 HIPAA is aimed at safe-guarding the privacy of individuals’ protected health information (“PHI”). The law is applicable to providers, health plans, and clearinghouses (termed “covered entities”), and the entities with which they interact that access and/or use their patients’ PHI on the covered entity’s behalf (termed “business associates”).23 As a general matter, HIPAA achieves its privacy goals by regulating the use or disclosure of PHI and by giving patients certain notice and access rights.24

Whether a private exchange is a covered entity or a business associate

under HIPAA depends on its structure and the functions it performs. If the laws of the state in which the private exchange operates requires it to be licensed as a health insurance issuer as defined by HIPAA, then the private exchange falls under the definition of a health plan and is a covered entity under HIPAA.25 A private exchange could also be a business associate of one of the health plans that sells an insurance product on the exchange if the health plan wishes for the exchange to “create or receive PHI” on the health plan’s behalf from peo-ple purchasing insurance through the exchange.26 In that case, the exchange will have to enter into a business associate agreement in which the exchange will agree to safeguard PHI from misuse and only use it for the purposes for which the health plan contracted.27 If a private exchange is deemed a covered entity or a business associate, it must abide by the appli-cable patient protections in the HIPAA Privacy Rule and HIPAA Security Rule.

In addition to data privacy provi-sions, group plans offered on a private health exchange are also subject to the HIPAA nondiscrimination rules for eligibility and benefits.28 These rules prevent a health plan from dis-criminating on the basis of a health factor, such as a medical condition, genetic information, or disability, although many of these rules, such as the prohibition against denying coverage based upon a preexisting condition, are now incorporated in PPACA.29 Additionally, those run-ning private exchanges should also be aware that HIPAA only preempts state privacy laws to the extent that those laws have less exacting stan-dards than HIPAA. For example, the privacy laws of many states protect a boarder range of information than HIPAA.30 To the extent that a state has stiffer privacy requirements than those prescribed by HIPAA, compa-nies running private exchanges will have to comply with those laws.


Of course, all private exchanges will also need to comply with PPACA, but the level of regulation under PPACA will vary widely depending on the customers that the private exchange serves. As explained below, private exchanges that work with public exchanges to offer indi-vidual plans to people who have no assistance from their employers will be the most regulated.

Private Exchanges for Individuals

In the regulations implementing the rules for exchanges, the Depart-ment of Health and Human Services (“HHS”) created a path by which pri-vate exchanges can offer individual health insurance plans that will qual-ify the buyers for federal tax breaks. Under the regulations, states that run their own exchanges can determine whether the public exchange will work with other “web-based entities” (a.k.a. private exchanges) to offer health insurance plans.31 If the state exchange chooses to work with private exchanges, each private exchange will have to first enter into a formal agreement to work with the public exchange, and its employees will have to undergo training with the public exchange staff.32

If a private exchange wants to work with a public exchange to offer individual health insurance plans that qualify for government subsidies, the plans it sells must be qualified health plans (“QHPs”).33 Each state defines QHPs differently because the federal government sets minimum require-ments but allows the states to impose stricter requirements in some areas.34 The federal minimum requirements, primarily set forth in regulations found in 45 C.F.R. Part 156, Subpart C, are extensive. The regulations cover issues such as premiums, con-sumer notices, and network adequacy standards.

Q H P s o f f e r e d o n p u b l i c exchanges, or the private exchanges that work with them, are categorized by bronze, silver, gold, or platinum coverage levels.35 The metal levels differ based upon the amount of cost-sharing the plans offer. Thus bronze plans typically cost the least, but offer the least coverage. Platinum plans typically cost the most, but offer the most generous benefits. All plans of any metal level in the individual mar-ket must offer Essential Health Benefits, which are patient healthcare services that the plans must cover.36 Private exchanges that choose to work with public exchanges must offer at least one silver plan and one gold plan.37

The regulations also dictate how the websites of private exchanges working with public exchanges must be set up.38 First, the private exchange website must direct new users to regis-ter with the public exchange before using the private exchange website.39 As part of the registration process, the consumer will learn if he or she is eli-gible for any federal subsidies or could be covered by the Medicaid or Medi-care programs. The private exchange website must also permit consumers to view all QHPs that are offered on the public state exchange, not just the ones offered by the private exchange.40 The private exchange website must provide standardized information to compare QHPs by cri-teria such as premiums or benefits, and it must offer guidance to consum-ers to help them pick the best plan.41

Although these regulations may seem onerous, private exchanges that plan to offer individual plans likely cannot survive unless they work with the public exchange in their states because most people buying individ-ual plans will want to access their government subsidy if they are eligi-ble for it. Furthermore, these private exchanges will need to distinguish

themselves from public exchanges in ways that encourage individuals to use their websites instead of the public exchanges’ websites. Private exchanges may be able to increase their appeal by offering products and services not offered on the public exchanges or by making their websites more user-friendly. These private exchanges aimed at individuals will likely have to be creative to be successful.

Private Exchanges Working with Employers

Although private exchanges that sell group plans or individual plans to employees with subsidies from their employers are less regulated under PPACA, employers that work with these private exchanges will expect the exchanges to ensure that they are complying with the requirements of all applicable federal and state laws. Perhaps not surprisingly, the most voluminous law with which employers will have to comply is PPACA. As has been widely publicized, starting in 2015 many employers will have to offer health insurance to their employ-ees or else pay a fee. Specifically, beginning in 2015, the law will assess an annual fine of $2,000 per employee, excluding the first 30 employees, on employers with 50 or more employees that do not offer health insurance to 95 percent of their full-time employees and dependent children if one of their full-time employees is eligible for a premium subsidy through the public exchanges.42 In July 2013, the Obama Administration delayed the imple-mentation of the employer mandate from 2014 to 2015 to give employers more time to prepare.43

Large employers who do offer health insurance to 95 percent of their full-time employees may still face a fee if the coverage they offer does not provide minimum value or the premium of the lowest-cost health plan for employee-only coverage is not affordable, and any of their

The Other Exchanges: Private Exchanges and Healthcare Reformcontinued from page 47



employees opt out of the employer coverage to receive federal premium subsidies through the exchanges.44 Federal premium subsidies through the public exchanges are available to employees who earn less than 400 percent of the federal poverty level.45

The fee to the employer is $3,000 per employee who receives a federal premium subsidy through a public exchange, but the total penalty cannot exceed the employer’s total penalty if it had not offered insurance at all.46 To be considered to provide minimum value and to be affordable, health insurance plans offered by employ-ers must meet two requirements. First, the plans must not cover less than 60 percent of costs, and sec-ond, an employee’s contribution to the employer’s plan cannot cost greater than 9.5 percent of household income.47 Employers that choose to provide health insurance through private exchanges will depend on the exchanges to ensure that all of the plans that they offer provide minimum value and are affordable under the law. Obviously, no employer wants to go through the administrative burden of offering health insurance to its employees only to be hit with a pen-alty because an employee turns down coverage and is able to receive a fed-eral premium subsidy through a public exchange.

Private exchanges working with employers will also need to be cogni-zant of employers’ responsibilities under the Employee Retirement Income Security Act (“ERISA”).48 For employers who elect to use a pri-vate exchange and manage their healthcare benefits through a defined contribution program, there will likely be enough employer involve-ment that the plan will be subject to ERISA. ERISA is a complex statutory scheme designed to regulate employee benefit plans. The law defines “benefit plans” as pension plans – such as 401(k) and retirement plans – as well as welfare plans, which include the healthcare benefits employers often

provide for employees.49 Employees who participate in health benefit plans through a private exchange may be entitled to certain rights under ERISA, including the right to disclo-sure of plan information, a timely and fair process for benefit claims, and the continuation of group coverage after losing coverage.50

How will Private Exchanges be Successful?

The success of private exchanges will depend on how well they can help employers and individuals fulfill their obligations under PPACA in an affordable and convenient manner. For a private exchange that wishes to cater to individuals, the exchange will have to partner with the public exchange in its state so that individu-als earning less than 400 percent of the federal poverty level will be eligi-ble for subsidies to purchase insurance through the private exchange.

The demand for private exchanges for individuals likely depends in part on how many employers decide to offer insurance to their employees. Some have speculated that many employers could decide that their bot-tom line will be more profitable if they drop health insurance for their employees and just pay the tax penal-ties, or if they avoid the penalties by hiring only part-time employees.51 If that prediction comes to fruition, there will be a much greater market for individual insurance. Addition-ally, the recent delay of the employer mandate means that in 2014 most individuals will be required to have insurance or pay a tax, but large employ-ers will not be required to provide insurance until 2015.52 Consequently, even if some large employers ultimately decide to provide insurance to their employees for the first time in 2015, there will be a year in which more indi-viduals will be looking for individual insurance plans. Furthermore, employees who are young and healthy might find more affordable insurance through an

exchange, even if their employer-sponsored plan meets the minimum value and affordability requirements of PPACA.53

Surveys have shown that there is potentially a large market for private exchanges that wish to target employ-ers. In one recent survey, 56 percent of employers surveyed indicated that they are considering a private exchange as a way to provide health insurance benefits to employees.54 Some have predicted that participation in private exchanges could approach public exchange enrollment by 2017.55 Pri-vate exchanges have been especially attractive to companies that are seek-ing to cap their contributions to retirees’ health insurance. Employers can simply determine a contribution level for their retirees’ HRAs, direct the employees to the website of the private exchange, and contract with the exchange to do the rest. By con-tracting with private exchanges to do most of the work, employers can save themselves many administrative responsibilities and costs. Given these benefits, it is not surprising that several prominent companies, including IBM and Time Warner, moved their retirees to private exchanges in 2013.56

After ensuring that their opera-tions and products meet all legal and administrative requirements, the most successful private exchanges, whether they target employers or individuals, will be the ones that offer the most convenience and the best customer ser-vice.57 Each private exchange should strive to be a one-stop shop of health insurance products.58 This means that exchanges should have a variety of dif-ferent insurance plans and a variety of add-on insurance products to go with those plans.59

Allowing individuals to choose from a wide array of plans can benefit everyone. Employees benefit because they have a plan tailored to their needs rather than a one-size-fits-all group plan. Employers can also benefit if employees choose wisely and do not


buy more coverage than they need. Of course, navigating all of the options available in the online insurance mar-ketplace can be daunting for a person of any age, and it is likely especially so for retirees. More choices only benefit the employer and the employees if the employees can actually choose the plans that are best for them, which is why recommendation technology and customer service will be crucial to the success of a private exchange. Conse-quently, the private exchanges’ websites need to have easy-to-use technology that recommends the best plans to individuals based on each individu-al’s unique needs. The success of a private exchange likely depends as much on the level of service it pro-vides as the quality of insurance products that it offers.

The FutureThe health insurance market and

the laws and regulations that govern it will likely continue to rapidly change over the coming years, but conditions are ripe for private exchanges to play an important role in the marketplace. Not all private exchanges will be suc-cessful, but those exchanges that can adapt quickly to laws and consumer demands will position themselves to be successful for the long term.

David M. Dirr is a member of the healthcare, medical malpractice, and civil litigation practice groups at Dressman Benzinger LaVelle

psc. He is licensed to practice in state and federal courts in Ohio, Kentucky, and Indiana. He primarily represents clients in administrative appeals and litigation involving a wide array of healthcare-related issues including Medicare and Medicaid reimbursement, the anti- kickback law, and the Stark law. He can be reached at [email protected].

Endnotes1 At the time of the passage of PPACA, a few

exchanges were already operating, including the most prominent, the Massachusetts Health Connector, which is operated by an independent Massachusetts state agency and was a product of the health reform law passed during Mitt Romney’s tenure as governor.

2 The exchanges for small business owners are referred to as Small Business Health Options Program (“SHOP”) Marketplaces. SHOP Marketplaces will be open to small businesses with 50 or fewer full-time employees. See 45 C.F.R. § 155.20 (2013). On Nov. 27, 2013, the Obama Administration announced a one-year delay in this program. Enrollment will now begin in November 2014.

3 45 C.F.R. § 155.105 (2013). 4 kaiSeR faMily foundation, eStabliShing

health inSuRanCe MaRketPlaCeS: an oveRview of State effoRtS (May 2, 2013), www.kff .org/health-reform/issue-brief /establishing-health-insurance-exchanges-an-overview-of.

5 The 16 states are: California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington. See id.

6 The seven states are: Arkansas, Delaware, Iowa, Illinois, Michigan, New Hampshire, and West Virginia. See id.

7 The states with federally run exchanges are Alabama, Alaska, Arizona, Florida, Georgia, Indiana , Kansas , Loui s iana , Maine , Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin, and Wyoming. Utah is running its own Small Business Health Options Program exchange and the federal government is running the exchange for the individual market. See id.

8 26 U.S.C. § 5000A. There are some limited exceptions to this mandate, including an exception for people with very low incomes, a hardship exception, and a stringent exception for some religious objectors.

9 42 U.S.C. § 18071. Eligibility for subsidies depends on income and family size. As an example, an individual with an income from $11,490 to $45,960 will be eligible for a fed-eral premium subsidy. The federal premium subsidies are advanced tax credits. This means that an individual can use the credit at the time the individual purchases insurance through the exchange. If the amount of advance credit payments for the year is less than the annual tax refund due to the individ-ual, the individual will receive the difference when he or she files a federal income tax return. If an individual’s advance tax credits for the year are more than the amount of the individual’s refund, the individual must repay the excess advance payments with his or her tax return. In addition, some people will be eligible for lower out-of-pocket costs, such as

co-pays and deductibles, if they purchase sil-ver plans through the exchanges. For a full listing of available subsidies based on income and family size, visit www.healthcare.gov.

10 45 C.F.R. § 155.710 (2013). To be eligible for a tax credit up to 50 percent of its premium costs, the employer must have less than 25 full-time employees who have salaries of less than $50,000, and the employer must pay at least half of its employees’ premiums. 26 U.S.C. § 45R (2013).

11 To see an example of a private exchange, visit www.hcentive.com/private-health-insurance-exchange.html. To visit an example of a public exchange, visit https://www.ohiex.com/.

12 alan Cohen & ChRiStoPheR CondeluCi, liazon, PRivate health inSuRan Ce exChangeS: what aRe they and what MakeS theM SuCCeSSful? 6 (2013), www.liazon. com/wp-content/uploads/2013/02/Private_ Exchange _White_Paper.pdf.

13 Id. 14 US Department of Labor, Technical Release

2013-03, available at www.dol.gov/ebsa/ newsroom/tr13-03.html.

15 Cohen, supra note 12, at 7. 16 US Department of Labor, Technical Release

2013-03, available at www.dol.gov/ebsa/ newsroom/tr13-03.html.

17 Id. 18 Id. 19 Id.

20 Cohen, supra note 12, at 7. 21 Id. at 8. 22 Health Insurance Portability and Accountability

Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936.

23 45 C.F.R. § 160.103.24 See 45 C.F.R. § 160, Subpart E.25 See 45 C.F.R. § 160.103. 26 45 C.F.R. § 164.502(e)(1)(i). 27 HHS offers a model business associate con-

tract on its website: www.hhs.gov/ocr/privacy/hipaa/ understanding/coveredentities/contract prov.html.

28 45 C.F.R. § 146.121.29 29 C.F.R. § 2590.702.30 See, for example, the California privacy laws

available at http://oag.ca.gov/privacy/privacy-laws.

31 77 Fed. Reg. 18334 (March 27, 2012); 45 C.F.R. § 155.220.

32 45 C.F.R. § 155.220(d). 33 Id. 34 See, e.g., Sally MCCaRty and Max faRRiS,

the State health RefoRM aSSiStanCe netwoRk, aCa iMPliCationS foR State netwoRk adequaCy (auguSt 2013), www.rwjf.org/content/dam/farm/reports/issue_briefs/2013/rwjf407486.

The Other Exchanges: Private Exchanges and Healthcare Reformcontinued from page 49


35 42 U.S.C. § 18022 (2013).

36 42 U.S.C. § 18022(b) (2013).

37 42 U.S.C. § 18021 (2013).

38 45 C.F.R. § 155.220(c).

39 Id.

40 Id.

41 Id.

42 IRC § 4980H. PPACA defines full time to be 30 hours or more a week. To determine if it is a large employer, the employer must add its full-time employees to its full-time equivalent employees. Full-time equivalent employees are calculated by taking the total number of hours worked by part-time employees and dividing by 120.

43 Jeffery Young, Obamacare Employer Mandate Delayed for One Year, the huffington PoSt, July 3, 2013, available at www.huffingtonpost.com/2013/07/02/obamacare-employer-mandate_n_3536695.html.

44 See 78 Fed. Reg. 219 (Jan. 2, 2013); IRC § 4980H.

45 42 U.S.C. § 18071.

46 IRC § 4980H.

47 See 78 Fed. Reg. 219 (Jan. 2, 2013); IRC § 4980H. Because employers will have diffi-culty determining an employee’s household income, the Internal Revenue Service created a safe harbor of 9.5 percent of an employee’s wages on the employee’s W-2.

48 Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829.

49 29 C.F.R. § 2510.3-1, et seq.

50 See 29 C.F.R. § 2560.503-1, et seq.

51 Kevin Drum, Will Obamacare Spell the End of Employer Insurance, MotheR JoneS, Dec. 7, 2011, available at www.motherjones.com/kevin-drum/2011/12/will-obamacare-spell-end- employer-insurance; Laura Heller, Obamacare Is Turning Walmart Workers Into Temps, foRbeS, June 14, 2013, available at www.forbes.com/sites/lauraheller/2013/06/14/ obamacare -is-turning-walmart-workers-into-temps/.

52 Christopher Weaver, Health-Law Penalty Delay Clouds Individual Mandate, wall StReet JouRnal, July 4, 2013, available at www.online.wsj.com/article/SB10001424 12788732426 0204578584161462651662.html.

53 Jonathan Block and Rich Daly, Perils Ahead, ModeRn healthCaRe, July 8, 2013, at 7.

54 Bruce Japsen, Insurers Flock to Private Exchanges While States Grapple with Obamacare Marketplace, foRbeS, April 15, 2013, available at www.forbes.com/sites/brucejapsen/ 2013/ 04/15/insurers-flock-to-private-exchanges- while-states-grapple-with-obamacare-market-place/.

55 RiChaRd biRhanzel, SCott bRown, & JoShua taubeR, aCCentuRe, aRe you Ready? PRivate health inSuRanCe exChangeS aRe looMing (2013), available at www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Are-You-Ready-Private-Health-Insurance-Exchanges-Are-Looming.pdf.

56 Jim Gallagher, Employee Health Coverage Moves to Private Exchanges, St. louiS PoSt-diSPatCh, Sept. 29, 2013.

57 akShay kaPuR et al., booz & Co., the eMeRgenCe of PRivate health inSuRanCe exChangeS, (2012), http://www.booz.com/media/file/BoozCo-Emergence-Private-Health-Insurance-Exchanges.pdf.

58 Cohen, supra note 12, at 4. 59 Id. at 4-5.

disorders, including healthcare reform and parity, public policy and its impact on the criminal justice system, and legislation. The mission of the Task Force is to develop and foster attorney and public participation in innovative pro-grams to address substance use disorders, including programs in healthcare, mental health, alternative medicine, educa-tion, family dynamics, business and the justice system, and to examine the effects of substance use disorders upon soci-ety, the practice of law and the character of the American system of justice.

The Task Force has been very active since joining the Health Law Section. It sponsored a plenary program at the February 2013 EMI conference entitled Our Nation’s Veter-ans Courts and Criminal Justice System: A Public Health Policy Approach, which highlighted the challenges faced by veter-ans seeking treatment. The Task Force also sponsored a breakout session entitled Prescription Drug Abuse: Prevalence and Policy Solutions. Subsequent to EMI, the Task Force championed passage of ABA Resolution 101 by the ABA House of Delegates, which supports the rights of all Amer-icans, and particularly our nation’s veterans, to access

adequate mental health and substance use disorder treat-ment services and coverage as required to be made available under federal and state law.

The Task Force will sponsor a webinar on December 13, 2013 to discuss the recently published final rule imple-menting the Mental Health Parity and Addiction Equity Act (“MHPAEA”) (45 C.F.R. Parts 146 and 147, Novem-ber 8, 2013), which ensures that health plans’ features are not more restrictive for mental health/substance abuse dis-orders benefits than they are for medical/surgical benefits. If you are interested in the work of the Task Force on Sub-stance Use Disorders and would like to become involved, please contact Naomi Shicly, Program Specialist, at [email protected].

Kathye

* It is with deep regret that we inform you of the passing of Ed Jurith, the chair of the Task Force, on November 10, 2013. To celebrate his life with us, please see this article from the White House at www.whitehouse.gov/blog/2013/11/12/remembering-our-colleague-ed-jurith.

Chair’s Corner continued from page 2

REMINDER:

ABA Health Law Section members can access past issues of The Health Lawyer on

the Section’s website. To access back issues and The Health Lawyer’s full index, go to

www.americanbar.org/publications/health_lawyer_home.html.

321 N. Clark Street Chicago, IL 60654-7598

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Volume 26, Number 2, December 2013

SECTION CALENDARFor more information on any of these programs, call the Section at 312/988-5532

or visit the Section website at www.americanbar.org/health

December 5, 2013Ethics for Healthcare AttorneysWebinar

December 9-10, 2013Washington Health Law SummitWashington, DCIn-Person

December 12, 2013Stark Law BasicsWebinar

January 13, 2014Legal Issues Cancer Patients Face and How to be an AdvocateWebinar

February 6, 2014False Claims Act FundamentalsWebinar

February 26-March 1, 2014Emerging Issues in Healthcare Law ConferenceLitchfield Park, AZIn-Person

March 6, 2014Healthcare Antitrust FundamentalsWebinar

April 3, 2014Fundamentals of Medicare and MedicaidWebinar

May 8, 2014Anti-Kickback Law BasicsWebinar

June 5, 2014HIPAA & HITECH Act FundamentalsWebinar

June 12-13, 2014Physicians Legal Issues ConferenceChicago, ILIn-Person

June 18-19, 2014Leadership MeetingDenver, COIn-Person

August 7, 2014Fundamentals of Tax Issues for Healthcare OrganizationsWebinar

patient protection and affordable care act could expand coverage for gender dysphoria

Documents

inpatient admissions

hospital insurance medicare

inpatient claim denials

inpatient claim appeals

inpatient hospital services

cms reimbursement

health services

outpatient services