[Source: "Update: IRS 'Community Benefit' Compliance Check" by Michael Peregrine et al.]
The community benefit standard serves as the principal standard under which most modern-day hospitals derive their tax-exempt status under Code § 501(c)(3).
The community benefit standard was not adopted by federal legislation but, rather, was adopted by the IRS primarily in a 1969 revenue ruling (Rev. Rul. 69-545, discussed below). Satisfaction of the Revenue Ruling 69-545 community benefit standard depends on a demonstration of appropriate facts including, but not limited to, whether the hospital: (1) operates a full-time emergency room that provides treatment regardless of patients' ability to pay; (2) provides non-emergency services to all individuals who are able to pay, including Medicare (and later Medicaid) beneficiaries; (3) has an open medical staff; (4) has a board of directors composed of independent civic leaders drawn from the community; and (5) uses any operational surplus to further the hospital's exempt purposes by improving the quality of patient care and advancing the hospital's medical training, education, and research programs. Outside of Revenue Ruling 69-545, the IRS has identified the following additional factors as evidence of community benefit (1) creation of a new provider of healthcare services; (2) expansion of community health resources; (3) improvement of treatment modalities; (4) reduction in healthcare costs; and (5) improvement in patient convenience and access to physicians. See, e.g., General Counsel Memorandum 39862 (November 21, 1991). The above lists should not be interpreted as being exhaustive, as many other factors could be used to demonstrate community benefit as well.
Notably, the community benefit standard set forth in Revenue Ruling 69-545 imposes no charity care requirements on a tax-exempt hospital other than in an emergency room setting. To the contrary, the ruling specifically recognizes as tax-exempt a hospital that referred all nonemergent charity care cases to the nearby public hospital. This 1969 IRS position with respect to the treatment of non-emergent charity care patients (which is binding precedent on the IRS), however, is in stark contrast to the more recent IRS position taken in Field Service Advice (FSA) 200110030 (February 5, 2001) (which is not precedential). In FSA 200110030 the IRS instructed its agents that when reviewing the tax-exempt status of a hospital, the agents should look critically at the amount of charity care the hospital actually provided. The FSA directs the IRS agents to ask fourteen questions when reviewing the tax-exempt status of a hospital. These questions include: (1) does the hospital have a specific, written plan or policy to provide free or low-cost healthcare services to the poor or indigent; (2) under what circumstances might the hospital deviate (or has the hospital deviated) from its stated policies to provide free or low-cost healthcare services to the poor or indigent; (3) what directives or instructions does the hospital provide to ambulance services about bringing poor or indigent patients to its emergency room; and (4) what documents or agreements does the hospital require poor or indigent patients to sign before receiving care?
This article addresses the IRS's Compliance Questionnaire (read more)
* * * * * * *
[Source: "Current Perspectives on Healthcare GovernanceA Roundtable Discussion Among Experts: Part II", AHLA]
Excerpt:
Mr. Silverman: Mr. Griffith, we see increased scrutiny at the federal level, from Congress and the IRS, focusing on the tax-exempt status of nonprofit hospitals. Are those efforts raising the same kind of issues that are being pressed at the state levels of government?
Mr. Griffith: The proposals and questions have a number of similarities. The law at the federal level for nearly 40 years has been a community benefit standard. A hospital can qualify for exemption if it avoids a profits interest or unreasonable compensation for insiders and it is organized and operated in a manner that provides a benefit to a sufficiently broad segment of the community. Charity care is only one factor that the IRS considers, and it is not a requirement for federal tax exemption. The IRS looks for factors such as oversight from a community board, an open medical staff consistent with the size and nature of the facility, an emergency room open to all (or a needed specialty service), participation in government healthcare programs, charity care, certain medical research activities, community health outreach activities, medical education, contributions to community health organizations, and any other activity that can be demonstrated to be reasonably expected to improve the health of the community. Activities that improve the quality of healthcare, improve access or availability of healthcare, or contain the costs (without compromising quality) of healthcare provide a community benefit.
Mr. Silverman: The IRS seems to have taken steps to enhance monitoring of hospitals.
Mr. Griffith: Yes, with the mailing in 2006 of the community benefit questionnaires to hundreds of hospitals, the IRS served notice that it intends to become more active in monitoring how hospitals are satisfying the community benefit standard. Under the Republican leadership, Congress pushed the IRS to get results quickly and share them with Congress. It remains to be seen how much interest Sen. Baucus, Rep. Rangel, Rep. Stark, and other key Democrats will have in forcing the IRS’ hand on community benefit and other reviews of the nonprofit sector.
Mr. Silverman: There were hearings on Capitol Hill which focused on adherence by hospitals to the community benefit standard.
Mr. Griffith: Yes, that is correct. In part, the hearings were an outgrowth of allegations about billing and collection practices. Hearings were held before the Senate Finance Committee and the House Committee on Ways & Means. Those hearings focused on what hospitals do in return for their exemption, both in terms of adequacy of the current community benefit standard and in terms of what is being done by the IRS to enforce that standard. There has also been a fair amount of attention paid, at least in committee, to executive compensation, conflicts of interest, hospital pricing, and transparency in the governance of the nonprofit sector, including healthcare.
We have seen some reforms in the Pension Protection Act, such as the new prohibition on loans to certain insiders of supporting organizations (which would include many healthcare system parents), increases in potential excise taxes on management for approving excessive compensation packages, and mandated public disclosure of unrelated business income tax returns. We have also seen significant information gathering efforts, including the letters and information requests from Senator Grassley, the Government Accountability Office, and the Congressional Budget Office (the latter two both requested by Rep. Thomas) asking about various community benefit activities, joint ventures, and compensation practices. We may see more activity in this area in the new Congress, though the Democratic win in the mid-term elections may lead to a focus on other issues first in the new Congress, with more being done by the IRS and at the state level. For example, it is unclear as we have this discussion whether the Senate Finance Committee staff report that Senator. Grassley requested after the September 13, 2006 charity care and community benefit hearings will be completed or lead to specific legislation. I would note though that there are no guaranties the issue is going away, and on many points Senators Baucus and Grassley appeared to see eye to eye.
Mr. Silverman: Mr. Griffith, what advice would you give the General Counsel of a nonprofit hospital, and its management, in efforts to avoid and address the threats on the horizon?
Mr. Griffith: I think there are four key steps to consider. First, get your message out early and often. Let the community know about all of the good the hospital does. Second, look at ways to improve how you track and report community benefit. It has to become part of the culture that there are certain basic operational steps that need to be done daily. Third, reexamine your conflict of interest procedures. Independent directors and committees approving transactions can add significant protections. Fourth, take a close look at the role mission fulfillment plays, or should play, in executive compensation. Financial performance is important and supports the mission, but if mission also matters for executive compensation the program is more difficult to criticize.
Mr. Silverman: Mr. Levine, you wanted to make a last point?
Mr. Levine: Yes, I think that the trends we have been talking about are fueled by Congress’ continued focus on fraud and abuse recoveries from hospitals and other providers under the False Claims Act. The healthcare sector remains under the microscope. The role of the board in "good governance" has a much wider reach than was perhaps previously believed, and it is inextricably linked to compliance issues.
Saturday, September 8, 2007
Important governance issues for healthcare entities
[Source: "Current Perspectives on Healthcare GovernanceA Roundtable Discussion Among Experts: Part II", AHLA]
Excerpt:
Mr. Silverman: Mr. Schwartz, lets focus on today’s governance environment at the state level nationally. What are the most important governance issues you can suggest to a nonprofit board going forward, to steer the organization in ways that would negate, or lessen, negative impacts of any inclination by a state Attorney General to conduct inquiries of governance practices?
Mr. Schwartz: There are several points to make here. It is important to recognize that state Attorneys General take their obligation to oversee the activities of nonprofit organizations very seriously. If they are not convinced that the nonprofit organization’s board of directors/trustees is exercising effective oversight, they are much more likely to conduct their own oversight investigation. As a result, the elements that tend to reassure them that an AG compliance review is not necessary include an engaged, independent board of directors; appropriate board committee oversight over "red flag" issues, including executive compensation and perquisites, travel and entertainment costs, conflicts of interest and related party transactions, and "mission compliance." In addition, institutional transparency with respect to governance can avoid problems based on a misunderstanding of the facts. Moreover, where issues arise, but an organization’s board can demonstrate that it is on top of the problem and dealing properly with it, most state Attorneys General are inclined to rely on the board to do its job and not institute a full compliance review. Where, however, the board’s action does not give the Attorney General comfort that effective oversight has taken place, investigations are much more likely.
Mr. Silverman: Can you recommend for us the types of structures that nonprofit healthcare companies should strive to adopt to ensure more competent governance? Things that immediately come to mind are independent committees and internal controls.
Mr. Schwartz: Well, first and foremost, people count. Having a strong, independent board of directors made up of individuals with diverse skills and backgrounds is the most important factor in good governance. In addition, it is crucial to have appropriate committee structures and compliance programs in place. As you know, in California many large nonprofit organizations are now required to have audit committees made up of wholly independent persons (although California law excludes non-corporate entities such a trusts, hospitals, educational institutions, and religious and governmental entities). Similarly, given the current regulatory focus on executive compensation, perquisites and travel and entertainment, we also strongly recommend independent compensation committees. These committees should have written charters that make clear the extent of their responsibilities; they should have the authority to retain independent outside auditors and consultants; and they should be made up of individuals with sufficient background and financial skills to effectively carry out their responsibilities. Finally, it is important that there be adequate compliance programs and appropriate board oversight of the internal audit function.
Mr. Silverman: Ms. Cornell, from an in-house perspective, what are your thoughts about oversight duties by nonprofit governing bodies.
Ms. Cornell: Stuart, in my view, it is important to note that the board’s oversight of an organization’s compliance program is continuing to take a more central role in board governance obligations. Not only should boards have a structure in place to make sure the organization has an adequate compliance program, but boards must undertake responsibility to make sure the program is alive and well: an active working program. This standard was set in the 1996 decision by the Delaware Chancery Court in the Caremark International case. In that case, the court not only articulated the board’s fiduciary duty to ensure a compliance program is in place, but also noted that failure to reasonably oversee the compliance program could result in liability. At the end of last year, the Delaware Supreme Court in Stone v. Ritter confirmed Caremark and took it to another level, setting forth specific conditions for director oversight. That case, together with the tone set in DOJ’s recent guidelines in the McNulty Memorandum, which also confirms board obligations for compliance program oversight, should provide all of us with a heightened sense of this important governance obligation. DOJ’s latest memorandum, "Principles of Federal Prosecution of Business Organizations" was issued in December, 2006.
Mr. Silverman: Mr. Schwartz, back to you. We hear a lot about the need to guard against conflicts of interest. In your view, what best efforts can a nonprofit healthcare system make to lessen the chance of conflicts of interest arising in the decision-making process? Are there ways to promote independence in decision making?
Mr. Schwartz: Again, transparency and process constitute the first line of defense. Of course, every organization should have a written conflict of interest policy—for both board members and senior management—and detailed disclosure forms so that any potential related party transaction is identified in advance. Moreover, it is crucial that there be a process (preferably computerized) to monitor and insure that any related party transaction is identified in advance. Only in this way can organizations obtain the benefits of the "rebuttable presumption of reasonableness" under the Internal Revenue Code or comply with state statutes like California Corporations Code § 5233. In addition, it is important to recognize that non-financial conflicts of interest exist and, as a result, conflict of interest disclosure forms should be broad enough to cover such relationship conflicts as well. Without such a system, it is not possible to effectively identify and properly "vet" transactions which may create conflict issues.
Mr. Demetriou: The issue of dealing with "non-financial" conflicts of interest is especially difficult. In part there are no legal guidelines to define the scope of these conflicts and thus crafting policies and disclosure forms that will address prospective conflicts present challenges. If the applicable standard for a non-financial conflict is whether the judgment of a director might be impaired due to relationships with another director that are external to the corporation’s affairs, then exploration of possible conflicts could require a very intrusive questionnaire, and certain directors may not respond favorably to the inquires.
Mr. Levine: Nonetheless, the point about seemingly indirect or non-financial conflicts is an important one. A complete conflicts policy should reach: interests in adverse litigation; gifts and gratuities; outside activities ("conflicts of commitment"); nepotism; and use of confidential or proprietary information.
Excerpt:
Mr. Silverman: Mr. Schwartz, lets focus on today’s governance environment at the state level nationally. What are the most important governance issues you can suggest to a nonprofit board going forward, to steer the organization in ways that would negate, or lessen, negative impacts of any inclination by a state Attorney General to conduct inquiries of governance practices?
Mr. Schwartz: There are several points to make here. It is important to recognize that state Attorneys General take their obligation to oversee the activities of nonprofit organizations very seriously. If they are not convinced that the nonprofit organization’s board of directors/trustees is exercising effective oversight, they are much more likely to conduct their own oversight investigation. As a result, the elements that tend to reassure them that an AG compliance review is not necessary include an engaged, independent board of directors; appropriate board committee oversight over "red flag" issues, including executive compensation and perquisites, travel and entertainment costs, conflicts of interest and related party transactions, and "mission compliance." In addition, institutional transparency with respect to governance can avoid problems based on a misunderstanding of the facts. Moreover, where issues arise, but an organization’s board can demonstrate that it is on top of the problem and dealing properly with it, most state Attorneys General are inclined to rely on the board to do its job and not institute a full compliance review. Where, however, the board’s action does not give the Attorney General comfort that effective oversight has taken place, investigations are much more likely.
Mr. Silverman: Can you recommend for us the types of structures that nonprofit healthcare companies should strive to adopt to ensure more competent governance? Things that immediately come to mind are independent committees and internal controls.
Mr. Schwartz: Well, first and foremost, people count. Having a strong, independent board of directors made up of individuals with diverse skills and backgrounds is the most important factor in good governance. In addition, it is crucial to have appropriate committee structures and compliance programs in place. As you know, in California many large nonprofit organizations are now required to have audit committees made up of wholly independent persons (although California law excludes non-corporate entities such a trusts, hospitals, educational institutions, and religious and governmental entities). Similarly, given the current regulatory focus on executive compensation, perquisites and travel and entertainment, we also strongly recommend independent compensation committees. These committees should have written charters that make clear the extent of their responsibilities; they should have the authority to retain independent outside auditors and consultants; and they should be made up of individuals with sufficient background and financial skills to effectively carry out their responsibilities. Finally, it is important that there be adequate compliance programs and appropriate board oversight of the internal audit function.
Mr. Silverman: Ms. Cornell, from an in-house perspective, what are your thoughts about oversight duties by nonprofit governing bodies.
Ms. Cornell: Stuart, in my view, it is important to note that the board’s oversight of an organization’s compliance program is continuing to take a more central role in board governance obligations. Not only should boards have a structure in place to make sure the organization has an adequate compliance program, but boards must undertake responsibility to make sure the program is alive and well: an active working program. This standard was set in the 1996 decision by the Delaware Chancery Court in the Caremark International case. In that case, the court not only articulated the board’s fiduciary duty to ensure a compliance program is in place, but also noted that failure to reasonably oversee the compliance program could result in liability. At the end of last year, the Delaware Supreme Court in Stone v. Ritter confirmed Caremark and took it to another level, setting forth specific conditions for director oversight. That case, together with the tone set in DOJ’s recent guidelines in the McNulty Memorandum, which also confirms board obligations for compliance program oversight, should provide all of us with a heightened sense of this important governance obligation. DOJ’s latest memorandum, "Principles of Federal Prosecution of Business Organizations" was issued in December, 2006.
Mr. Silverman: Mr. Schwartz, back to you. We hear a lot about the need to guard against conflicts of interest. In your view, what best efforts can a nonprofit healthcare system make to lessen the chance of conflicts of interest arising in the decision-making process? Are there ways to promote independence in decision making?
Mr. Schwartz: Again, transparency and process constitute the first line of defense. Of course, every organization should have a written conflict of interest policy—for both board members and senior management—and detailed disclosure forms so that any potential related party transaction is identified in advance. Moreover, it is crucial that there be a process (preferably computerized) to monitor and insure that any related party transaction is identified in advance. Only in this way can organizations obtain the benefits of the "rebuttable presumption of reasonableness" under the Internal Revenue Code or comply with state statutes like California Corporations Code § 5233. In addition, it is important to recognize that non-financial conflicts of interest exist and, as a result, conflict of interest disclosure forms should be broad enough to cover such relationship conflicts as well. Without such a system, it is not possible to effectively identify and properly "vet" transactions which may create conflict issues.
Mr. Demetriou: The issue of dealing with "non-financial" conflicts of interest is especially difficult. In part there are no legal guidelines to define the scope of these conflicts and thus crafting policies and disclosure forms that will address prospective conflicts present challenges. If the applicable standard for a non-financial conflict is whether the judgment of a director might be impaired due to relationships with another director that are external to the corporation’s affairs, then exploration of possible conflicts could require a very intrusive questionnaire, and certain directors may not respond favorably to the inquires.
Mr. Levine: Nonetheless, the point about seemingly indirect or non-financial conflicts is an important one. A complete conflicts policy should reach: interests in adverse litigation; gifts and gratuities; outside activities ("conflicts of commitment"); nepotism; and use of confidential or proprietary information.
Document Retention/Destruction Policy Considerations for Healthcare Entities
[Source: "Current Perspectives on Healthcare Governance: A Roundtable Discussion Among Experts: Part I", AHLA]
Excerpt:
Mr. Silverman: Mr. Levine, what is the most important federal statute that addresses document destruction, and one to keep in mind when a company is designing and implementing its document retention policy?
Mr. Levine: In my view, it is 18 U.S.C § 1519, added to the criminal code by the Sarbanes-Oxley Act of 2002. Any knowing alteration or destruction of material in anticipation or contemplation of any kind of federal matter or proceeding could be obstruction under this law. A criminal investigation need not have started. Indeed, this statute does not require that there be any investigation at all. This covers any civil or administrative agency proceeding too. Moreover, under this statute, it is a crime if you destroy a document "in contemplation" of a possible federal proceeding. This is an incredibly broad statute, the reach of which has not yet been litigated.
Mr. Silverman: What advice would you give to a company to best design, and implement, a document retention policy?
Mr. Levine: Get a policy in place now, before a crisis erupts in the form of a serious internal investigation and/or government inquiry. Think about the substance of the policy, who the point person for document collection will be, how a "document hold" will actually be implemented, which offsite locations and agents with documents will be contacted, how employees will certify that a good faith search for responsive documents has been made, who in IT will be on the response team, and how employees will be trained about all of the above.
The basic parameters of a document integrity policy include the notion that destruction is not a crime when it is part of an ongoing, legitimate document retention/destruction policy – that's what the Supreme Court said in Arthur Andersen.
BUT the company must preserve material when it has reasonable grounds to believe a government inquiry will be coming OR when it learns of facts, which if known to government, would reasonably lead to government inquiry.
Also keep in mind that, of course, NEVER destroy materials for the purpose of having them unavailable for a government inquiry. Finally, remember that similar issues arise in civil matters. A court finding of "spoliation" of evidence can result in large financial sanctions and a jury being allowed to draw an adverse inference against the company.
Mr. Silverman: Ms. Cornell, do you have any thoughts to add to this from an in-house perspective?
Ms. Cornell: Yes, thanks, Stuart. Designing and rolling out a document retention policy in any company is a significant undertaking. Understanding the paper and electronic documents that are filed on site, are stored off site, and exist in electronic files and backup tapes for each and every department in the organization and then setting up schedules for appropriate document destruction (following contractual obligations and state/federal requirements) is a significant challenge. As Ron suggests, a company can destroy documents on an ongoing basis if it is following a legitimate policy. And honestly, companies are setting up these policies not only because of concerns about possible litigation and investigations, but also to reduce the significant costs to maintain and store the volumes of paper and electronic materials. However, to be a real legitimate process that will stand up under scrutiny there must be an ongoing process and commitment to clear out files. And the process must be alive; people must be accountable in the organization. Otherwise, despite best intentions, a decision to clean out files in the absence of a policy and ongoing practice, could be very problematic in the wrong place at the wrong time.
Excerpt:
Mr. Silverman: Mr. Levine, what is the most important federal statute that addresses document destruction, and one to keep in mind when a company is designing and implementing its document retention policy?
Mr. Levine: In my view, it is 18 U.S.C § 1519, added to the criminal code by the Sarbanes-Oxley Act of 2002. Any knowing alteration or destruction of material in anticipation or contemplation of any kind of federal matter or proceeding could be obstruction under this law. A criminal investigation need not have started. Indeed, this statute does not require that there be any investigation at all. This covers any civil or administrative agency proceeding too. Moreover, under this statute, it is a crime if you destroy a document "in contemplation" of a possible federal proceeding. This is an incredibly broad statute, the reach of which has not yet been litigated.
Mr. Silverman: What advice would you give to a company to best design, and implement, a document retention policy?
Mr. Levine: Get a policy in place now, before a crisis erupts in the form of a serious internal investigation and/or government inquiry. Think about the substance of the policy, who the point person for document collection will be, how a "document hold" will actually be implemented, which offsite locations and agents with documents will be contacted, how employees will certify that a good faith search for responsive documents has been made, who in IT will be on the response team, and how employees will be trained about all of the above.
The basic parameters of a document integrity policy include the notion that destruction is not a crime when it is part of an ongoing, legitimate document retention/destruction policy – that's what the Supreme Court said in Arthur Andersen.
BUT the company must preserve material when it has reasonable grounds to believe a government inquiry will be coming OR when it learns of facts, which if known to government, would reasonably lead to government inquiry.
Also keep in mind that, of course, NEVER destroy materials for the purpose of having them unavailable for a government inquiry. Finally, remember that similar issues arise in civil matters. A court finding of "spoliation" of evidence can result in large financial sanctions and a jury being allowed to draw an adverse inference against the company.
Mr. Silverman: Ms. Cornell, do you have any thoughts to add to this from an in-house perspective?
Ms. Cornell: Yes, thanks, Stuart. Designing and rolling out a document retention policy in any company is a significant undertaking. Understanding the paper and electronic documents that are filed on site, are stored off site, and exist in electronic files and backup tapes for each and every department in the organization and then setting up schedules for appropriate document destruction (following contractual obligations and state/federal requirements) is a significant challenge. As Ron suggests, a company can destroy documents on an ongoing basis if it is following a legitimate policy. And honestly, companies are setting up these policies not only because of concerns about possible litigation and investigations, but also to reduce the significant costs to maintain and store the volumes of paper and electronic materials. However, to be a real legitimate process that will stand up under scrutiny there must be an ongoing process and commitment to clear out files. And the process must be alive; people must be accountable in the organization. Otherwise, despite best intentions, a decision to clean out files in the absence of a policy and ongoing practice, could be very problematic in the wrong place at the wrong time.
Important considerations regarding federal prosecution of healthcare entities
[Source: "Current Perspectives on Healthcare Governance: A Roundtable Discussion Among Experts: Part I", AHLA]
Some Department of Justice policies for pursuing criminal charges:
Prior criminal history, rogue employee or pervasive institutional conduct, severity of conduct and victim impact, adequacy of compliance programs, remedial efforts and disciplinary sanctions, self-disclosure and cooperation with the government. These factors are explained in the 2003 DOJ "Thompson Memo" about which there has been much controversy. (That memo can be found at: www.usdoj.gov/dag/cftf/corporate_guidelines.htm.)
Common federal statutes employed:
The conspiracy, mail fraud and wire fraud (under U.S.C. §§ 1341 and 1343), and bank fraud statutes are all old standbys for federal prosecutors. That said, the healthcare fraud statute (18 U.S.C. § 1347), the criminal Health Insurance Portability and Accountability Act disclosure statute (42 U.S.C. § 1320d-6), and the honest services fraud statute (18 U.S.C. § 1346) are apt to be increasingly used.
Criminal violations also can jeopardize tax-exempt status under what is called the "illegality doctrine." Most notably for healthcare organizations, the IRS has used that doctrine (in Couns. Mem. 39,862, Nov. 21, 1991) to warn hospitals that violating the Anti-Kickback Statute is an activity inconsistent with charitable purposes and jeopardizes Section 501(c)(3) tax-exempt status.
What is the most important federal statute that addresses document destruction, and one to keep in mind when a company is designing and implementing its document retention policy? Probably, 18 U.S.C § 1519, added to the criminal code by the Sarbanes-Oxley Act of 2002. Any knowing alteration or destruction of material in anticipation or contemplation of any kind of federal matter or proceeding could be obstruction under this law. A criminal investigation need not have started. Indeed, this statute does not require that there be any investigation at all. This covers any civil or administrative agency proceeding too. Moreover, under this statute, it is a crime if you destroy a document "in contemplation" of a possible federal proceeding. This is an incredibly broad statute, the reach of which has not yet been litigated.
Some Department of Justice policies for pursuing criminal charges:
Prior criminal history, rogue employee or pervasive institutional conduct, severity of conduct and victim impact, adequacy of compliance programs, remedial efforts and disciplinary sanctions, self-disclosure and cooperation with the government. These factors are explained in the 2003 DOJ "Thompson Memo" about which there has been much controversy. (That memo can be found at: www.usdoj.gov/dag/cftf/corporate_guidelines.htm.)
Common federal statutes employed:
The conspiracy, mail fraud and wire fraud (under U.S.C. §§ 1341 and 1343), and bank fraud statutes are all old standbys for federal prosecutors. That said, the healthcare fraud statute (18 U.S.C. § 1347), the criminal Health Insurance Portability and Accountability Act disclosure statute (42 U.S.C. § 1320d-6), and the honest services fraud statute (18 U.S.C. § 1346) are apt to be increasingly used.
Criminal violations also can jeopardize tax-exempt status under what is called the "illegality doctrine." Most notably for healthcare organizations, the IRS has used that doctrine (in Couns. Mem. 39,862, Nov. 21, 1991) to warn hospitals that violating the Anti-Kickback Statute is an activity inconsistent with charitable purposes and jeopardizes Section 501(c)(3) tax-exempt status.
What is the most important federal statute that addresses document destruction, and one to keep in mind when a company is designing and implementing its document retention policy? Probably, 18 U.S.C § 1519, added to the criminal code by the Sarbanes-Oxley Act of 2002. Any knowing alteration or destruction of material in anticipation or contemplation of any kind of federal matter or proceeding could be obstruction under this law. A criminal investigation need not have started. Indeed, this statute does not require that there be any investigation at all. This covers any civil or administrative agency proceeding too. Moreover, under this statute, it is a crime if you destroy a document "in contemplation" of a possible federal proceeding. This is an incredibly broad statute, the reach of which has not yet been litigated.
Important issues to consider when representing nonprofit healthcare clients
Counsel should be current on:
- developments in state charitable trust law, including guidance from the state Attorney General on matters of governance and fiduciary duty;
- federal tax law developments and IRS announcements concerning executive compensation, conflicts of interest, and excess benefit transactions;
- guidance from rating agencies concerning governance for tax exempt bond issuers;
- general developments in the standard of care for directors among nonprofit institutions that are peers of the lawyer's clients; and
- billing and collection practices
For further readings on important considerations in representing nonprofit healthcare clients, see "Current Perspectives on Healthcare Governance: A Roundtable Discussion Among Experts: Part I"
Joint Commission Clarifies Rule Prohibiting Retaliation For Reporting Quality Concerns
[Source: Health Law Weekly, September 7, 2007]
The Joint Commission announced September 6 a revised accreditation participation requirement that explicitly provides that physicians and medical staff may report quality of care concerns with the knowledge that the hospital is prohibited from taking any retaliatory action.
Although the previous requirement referred to general hospital staff, it was always intended that physicians and medical staff be included as part of “Good Faith Participation” in the accreditation policy, the Joint Commission said in a press release.
Under the revised requirement, accredited hospitals must educate staff and medical staff that they can report quality concerns to the Joint Commission and inform them that no retaliatory disciplinary action will be taken by the hospital as a result.
The revised requirement is effective January 1, 2008.
Read the Joint Commission’s press release.
The Joint Commission announced September 6 a revised accreditation participation requirement that explicitly provides that physicians and medical staff may report quality of care concerns with the knowledge that the hospital is prohibited from taking any retaliatory action.
Although the previous requirement referred to general hospital staff, it was always intended that physicians and medical staff be included as part of “Good Faith Participation” in the accreditation policy, the Joint Commission said in a press release.
Under the revised requirement, accredited hospitals must educate staff and medical staff that they can report quality concerns to the Joint Commission and inform them that no retaliatory disciplinary action will be taken by the hospital as a result.
The revised requirement is effective January 1, 2008.
Read the Joint Commission’s press release.
U.S. Court In Massachusetts Certifies RICO Class Action Against Two Companies On Charges Of Fraudulently Marking Up Drug Prices
[Source: Health Lawyers Weekly, September 7, 2007]
The U.S. District Court for the District of Massachusetts certified as a class action August 27 a lawsuit brought on behalf of individual consumers and health plans claiming that McKesson Corporation (McKesson) and First DataBank, Inc. (FDB) violated the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as California state law, by engaging in a scheme to fraudulently “mark up” the average wholesale price (AWP) for numerous prescription drugs.
New England Carpenters Health Benefits Fund v. First DataBank Inc., No. 05-11148-PBS (D. Mass. Aug. 27, 2007).
Read article here
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Notes:
Under Part B, Medicare pays providers for up to 80% of the "allowable cost" of physician-injected drugs. The remaining 20% is paid by the Medicare beneficiary as a "co-payment."
"Allowable cost" was defined by regulations until 1998 as the lesser of a drug's estimated actual acquisition cost or a drug's average wholesale price (AWP). See 42 C.F.R. § 405.517. On January 1, 1998, in response to a directive in the Balanced Budget Act of 1997, the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid Services) amended 42 C.F.R. § 405.517 to redefine the allowable cost as the lower of the actual Medicare billing or 95% of the AWP. Traditionally, AWP is derived from industry sources compiling wholesale drug prices as supplied by manufacturers. No independent verification of the actual AWP was undertaken by Medicare or by the index's publishers.
Thus, by increasing the reported amount of the drug price in sales transactions, a manufacture could increase the AWP for its drug. An increase in AWP creates an increase in the "allowable cost" and, consequently, the reimbursement rate to providers. Providers continue to pay for the drug at low cost while receiving inflated reimbursements. This increased profit or "spread" is a windfall for the provider and creates tremendous incentive to prescribe and administer products from the manufacturer with the most inflated AWP. Manufacturers, recognizing this market advantage tailor their promotional programs to alert providers to this potential, hence the term "marketing the spread."
Since most private sources of healthcare funding—third party payors, including insurers, HMOs, and health plans—have reimbursement structures that also rely on benchmark pricing such as AWP, the marketing against the spread scheme is just as effective when marketing to providers reimbursed by private payors as when marketing to providers reimbursed by the government.
[Source: "Marketing the Spread - What it is and What Are Payors Doing About it?" by Gerald Lawrence]
The U.S. District Court for the District of Massachusetts certified as a class action August 27 a lawsuit brought on behalf of individual consumers and health plans claiming that McKesson Corporation (McKesson) and First DataBank, Inc. (FDB) violated the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as California state law, by engaging in a scheme to fraudulently “mark up” the average wholesale price (AWP) for numerous prescription drugs.
New England Carpenters Health Benefits Fund v. First DataBank Inc., No. 05-11148-PBS (D. Mass. Aug. 27, 2007).
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Notes:
Under Part B, Medicare pays providers for up to 80% of the "allowable cost" of physician-injected drugs. The remaining 20% is paid by the Medicare beneficiary as a "co-payment."
"Allowable cost" was defined by regulations until 1998 as the lesser of a drug's estimated actual acquisition cost or a drug's average wholesale price (AWP). See 42 C.F.R. § 405.517. On January 1, 1998, in response to a directive in the Balanced Budget Act of 1997, the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid Services) amended 42 C.F.R. § 405.517 to redefine the allowable cost as the lower of the actual Medicare billing or 95% of the AWP. Traditionally, AWP is derived from industry sources compiling wholesale drug prices as supplied by manufacturers. No independent verification of the actual AWP was undertaken by Medicare or by the index's publishers.
Thus, by increasing the reported amount of the drug price in sales transactions, a manufacture could increase the AWP for its drug. An increase in AWP creates an increase in the "allowable cost" and, consequently, the reimbursement rate to providers. Providers continue to pay for the drug at low cost while receiving inflated reimbursements. This increased profit or "spread" is a windfall for the provider and creates tremendous incentive to prescribe and administer products from the manufacturer with the most inflated AWP. Manufacturers, recognizing this market advantage tailor their promotional programs to alert providers to this potential, hence the term "marketing the spread."
Since most private sources of healthcare funding—third party payors, including insurers, HMOs, and health plans—have reimbursement structures that also rely on benchmark pricing such as AWP, the marketing against the spread scheme is just as effective when marketing to providers reimbursed by private payors as when marketing to providers reimbursed by the government.
[Source: "Marketing the Spread - What it is and What Are Payors Doing About it?" by Gerald Lawrence]
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