Category: Physicians Practice

The United States Department of Justice issued a press release on March 9 announcing that the CEO of Palo Pinto General Hospital in Texas pled guilty to a scheme that defrauded commercial carriers by use of what is termed pass-through billing. Physician practices need to be aware of the risks posed by these schemes. 

Pass-through billing arrangements are typically pitched to clinics as a way to increase revenue, without increasing overhead. A contractor proposes to provide equipment and a technician to perform some ancillary service, whether it be a CLIA laboratory, sonogram testing, or some other well-patient test using the latest gadget or device. 

As the scheme entails, all you need do is order the test, let the contractor do the work on a machine you don’t own using personnel employed by the contract, and then your clinic is expected to bill for the service using your clinic NPI number. When the claim is paid, you both split the money. The contractor is paid as a 1099 independent contractor. 

There are multiple reasons this is illegal and fraudulent.

1. Pass-through billing is illegal, because the contractor, not your clinic, performed the service. In the Palo Pinto Hospital case, the hospital paid an outside CLIA lab to perform tests, but billed insurance as though the tests were performed by the hospital. 

2. Pass-through billing is fraudulent, because the actual cost of the service is the amount paid to the contractor, not the marked-up price listed in the HCFA 1500 claim form.

3. Pass-through billing violates Stark Law and the Anti-Kickback Statute. In Medicare, Medicaid and federal payer cases, the service will not meet the “ancillary services exception” or safe harbor. This is because the services were not performed by the clinic as part of its own in-office ancillary services, but instead by an independent contractor, yet the services were billed as if the clinic had performed the test. 

4. Pass-through billing is unethical. The American Medical Association takes the position that pass-through billing is unethical as set forth in Opinion 8.0321.  Physicians are not allowed to mark-up the costs of ancillary services performed by others. 

5. Pass-through billing violates your PPO contract. The Texas Medical Association website lists the provisions of various insurance manuals that are violated by pass-through billing. 

Furthermore, it’s very easy for insurance and government agencies to spot these schemes. Particularly in well-patient visits, insurance companies employ algorithms which detect spikes, or changes in utilization. A clinic may previously bill $200 for a well-patient exam, then suddenly the cost is $500.00.  This will trigger an audit. 

At first, you may simply be asked to provide a certificate.At this stage, the payer may assume that you actually own the equipment and employ the personnel. The first line of inquiry will be a request for certification, for example, a CLIA certificate, or other certification showing that you have the proper certification to perform the ancillary service. If you do not produce the requested certificate, payment will be recouped. 

But recoupment is the least drastic consequence.In most commercial insurance settings, recoupment will be the goal of the payer. The Palo Pinto criminal prosecution is somewhat rare, due to the size of the amounts charged. If you cannot pay the money back, you will not be paid on future claims until the amount is repaid. 

In government cases, fines and prosecution are more likely.  Under the False Claims Act, penalties of over $20,000.00 per claim may be assessed. The Anti-Kickback Statute is a criminal statute which may be invoked in appropriate cases. 

Pass-through billing is never a good idea. The trouble lies in the fact that certain exceptions and safe harbors for equipment leases, in-office ancillary services, and group practice exceptions appear similar. If you have any doubt, ask for the help of an experienced healthcare attorney. 

Martin Merritt is a health lawyer and healthcare litigator at Martin Merritt PLLC, and serves as the executive director of the Texas Health Lawyers Association as well as the board of directors of the Dallas Bar Association Health Law Section. He can be reached at Martin@martinmerritt.com.  

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Until recently, arrangements between physicians and commercial laboratories escaped federal anti-kickback rules because the arrangements did not involve government payers. But with passage of the Eliminating Kickbacks in Recovery Act of 2018 (EKRA), physicians will need to review their standing arrangements and ensure compliance.

EKRA is Section 8122 of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act), which was signed into law on October 24, 2018. EKRA establishes an all-payer anti-kickback prohibition that extends to arrangements with recovery homes, clinical laboratories, and clinical treatment facilities.

The intent of Section 8122 is to address the opioid crisis and prevent patient brokering and kickbacks related to substance abuse treatment facilities. However, the express wording of the statute does not limit the statute’s application to clinical laboratory arrangements which deal with treatment facilities. This means that any commercial-only, clinical laboratory arrangement—whether structured as a small business investment, management arrangement (MSO), or personals services arrangement, such as a medical director agreement—is subject to the new law, which carries severe criminal penalties. 

Penalties under the new law include a $200,000 fine “per occurrence” and up to 10 years in prison. It is not clear what “per occurrence” means. In addition, the Department of Justice may seek forfeiture of assets accumulated through any criminal infraction. Thus, the monetary impact can be much higher than the actual fine.

As a result, physicians with such arrangements should look to experienced health law counsel to ensure that their arrangements meet an available safe harbor.  

Martin Merritt, JD, is the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP.

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Negotiating and reviewing contracts is probably one of the more unnerving task physicians face. That’s good! Your subconscious is sending you “danger” signals. You simply need to channel this emotion into action to protect yourself.

Sales representatives are very good at selling the benefits of their company’s product to you and your practice, with emphasis on how these benefits outweigh the cost. Essentially, the sales meeting is all about what happens if everything goes as planned. You should never agree to the deal as presented until you are provided a contract and understand the terms thoroughly. The contract spells out what happens when things go wrong. Keep the following in mind before you sign any contract.

Sales personnel will tell you anything to make a sale. 

That’s what they do. Watch for it and remember that the contract is what you are bound by. When you receive the contract, read it carefully to note where the contract deviates from the sales pitch and to determine which of three possible types of contracts you have been handed: “A”, “B” and “C”. “A” is very favorable to you. “B” is fair and balanced–so much so that you honestly can’t tell which side drafted it. “C” is only favorable to the seller. These are full of one-sided indemnity clauses, penalties, restrictive covenants, and other legal results which were never negotiated.

Under contract law, a contract is enforceable unless it is illegal or violates public policy. That means, “if you sign it, you are stuck with it, unless your lawyer can get you out.” There are consumer protection laws, but litigating them is very expensive. Retain a lawyer to review a contract before you sign it. After you sign it, all we can do is read it to you, and tell you what you have done to yourself. 

Do not be swayed by promises of cost savings.

For every business need, there is a solution that is cheaper, quicker, and has disaster written all over it. Large, well-capitalized companies often offer the best services or products but cost more than smaller competitors and are less likely to negotiate contracts. This leaves plenty of room for startups of all stripes to attempt to undercut the industry leader. Smaller companies may negotiate but are more likely to present a “C” contract, because they are undercapitalized and can’t afford liability when things go wrong. So, they write liability out of the contract.

Beta testing is code for “we don’t know what we are doing but are hoping for the best.”

Watch out for signs a startup or small vendor is trying their product to see if it works. It means they don’t really know and can’t really say if it works. This also means you are the test case. Ask for references and check them.     

Beware lockout provisions.

When you sign a contract for billing and EHR systems, in a very real sense, the vendor controls your access to the life blood of your practice. Many software as a service (SaaS) agreements often allow for a “lockout” if you don’t pay, for any reason. You must make sure that you have a right to your data in a usable form no matter why the contract is terminated. 

Keep bona fide purchasers in mind.

In many cases, you, the simple purchaser, may be asked to sign more than just an SaaS contract. The vendor may produce a finance contract, which is a type of negotiable instrument, called a “promissory note.”  Under the promissory note, you become not only a purchaser, but also a debtor, who promises to pay the payee the total obligation under the SaaS contract. This can have very negative consequences because you may be required to pay the note, even if the SaaS doesn’t work. Even if the SaaS vendor is the payee, the note will usually be sold to a bank or finance company unrelated to the vendor.  When that happens, the bank or finance company is considered a bona fide purchaser if it pays value to purchase the note without knowledge of any defenses or reasons why the note might not be owed, such as the product is defective. This means you still must pay the bona fide purchaser note even if the product failed, the same as if you had paid cash up front. Your only recourse is against the vendor. And that is where the “disclaimer of warranties” in a “C” contract will become a real problem.  

In conclusion, no matter how well the sales presentation might have gone, always remember these final words, “I need to see the contract before I decide,” and you are well on your way to successfully negotiating the entire transaction. 

Martin Merritt, JD, is the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP.

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Physicians Practice contributor Martin Merritt, JD, the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP, sat down with Angela Miller, CHC, CMC, a payer claim auditing specialist and founder and president of Medical Auditing Solutions, LLC, to discuss how to prepare and manage payer audits.

MM: Angela, what guidance can you provide to physician practice personnel in dealing with payer audits?

AM: First, providers need to understand the difference between an audit and prepayment additional documentation request (ADR).

An audit is post-payment review of the claim to determine compliance with any of a number of payer requirements. An ADR is a prepayment request and usually relates to high-dollar, frequently abused, or high-volume procedures. The ADR seeks chart notes and other documentation reflecting medical necessity, before the claim can be paid. An audit will have defined deadlines for response while an ADR will suspend altogether the deadlines for payment under many prompt-payment statutes. 

MM: What triggers an audit or ADR?

AM: Payers use algorithms to identify high-utilization practices, or those practices which stand out as either ordering more procedures than their peers, or those ordering more high-cost procedures than their peers. Although payers are careful to state that they do not interfere with medical judgment, if actual utilization trips an algorithm, payers have at their disposal a number of remedies, increasing in severity from least to most severe. First, payers may send a warning letter that utilization is higher than a provider’s peers. No action is taken, other than a warning to modify prescribing behavior. Second, payers may place a practice on pre-payment review where payment is withheld until documentation is provided supporting the claim. Third, a recoupment demand may be made for claims already paid. Fourth, network participation may be terminated. Fifth, a complaint to a licensing board may be made especially for out of network/balance billing. Finally, in only the most egregious cases, a criminal complaint may be filed with the FBI or state prosecutor.

MM: What is the first thing providers need to do when receiving an ADR or post pay audit request?

AM: First, make sure the person in charge of mail knows the importance of these documents. Time is critical. A failure to respond timely will result in denial or 100% failed audit. This can result in a provider being put on “prepayment audit” or “document hold,” under which no practice can survive for very long.

Second, make it easy for the auditor to review the materials provided. Documentation that is hard to read won’t be read. Transcribe any handwritten notes on a copy of the chart note. Gather all documents requested and organize them in the exact same way for each patient and claim. Review the packet for any missing documents. Some systems store test results and the physician electronic interpretation and notes in two different spots in the EHR. All documents and all clinical assessment of said documents must be provided.

What you want to avoid is antagonizing the auditor. This is the second most common mistake, second only to missing deadlines, that I see.  If the documents are disorganized, or illegible, you invite denials. 

MM: I know some audits are small and providers are tempted to cut a check and be done, do you have an opinion on this?

AM: Number one, never cut a check without thoroughly reviewing the claims data, verifying the reason for the overpayment. Payers can make mistakes just like providers–an example being not applying the correct policy based on date of service. Some audit results can be extrapolated. A recoupment involving 30 claims can sometimes be extrapolated over the entire universe of claims. 

Second, it may be a good investment to employ a healthcare attorney to draw up a settlement agreement which releases all recoupment claims, known or unknown, through the date of the payment. Of course, this would not apply if the recoupment is sought because the claim was paid twice, for example. But in larger recoupment payments, it is good to attempt to obtain a release to prevent future recoupment claims.

MM: Is it necessary to pull any of the payer policies and manuals when reviewing payer audits?

AM: That is the most important work that an auditing specialist can perform. It is important to look at the time period and the procedure codes being audited and pull all policies from the payer to cover all dates of service and all procedure codes in the audit sample. Practices are typically not equipped to do this kind of work. There are times when a payer audit will apply current policies to dates of service outside the current policy period. This can save thousands of dollars in recoupment claims.

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A non-compete agreement is a type of “restraint of trade,” which prevents a physician employee from leaving his employment and opening a competing clinic or joining an existing competing clinic. These agreements may also prevent soliciting the former employer’s patients or referral sources. 

Historically, physician non-compete agreements were considered unlawful, against public policy, and unenforceable. California Business and Professions Code § 16600 has been held to prevent enforcement of many such contracts altogether. Other states, such as Texas (Tex. Bus. & Com. Code 15.50), have passed statutes that permit reasonable non-compete contracts as long as they are limited in time, scope, and geography and have a buyout clause. For example, a non-compete agreement may be legal if it is restricted to 18 months in a 25-mile radius, limited to the type of work previously performed, and allows the physician to buy out of it for a set price. That much is settled. 

However, several state legislatures have begun passing Citizen Participation Acts or anti-SLAPP statutes. How these anti-SLAPP statues work is explained by Olivia Zimmerman Miller, JD, an associate of Weil, Gotshal & Manges LLP in Dallas, Texas. in her September 2017 online report:

“[The Texas Citizens Participation Act (TCPA)] is Texas’s version of an anti-SLAPP statute. “SLAPP” stands for “Strategic Lawsuit Against Public Participation” and is a lawsuit designed to chill protected speech by intimidating and censoring critics, often those who have spoken out against a government entity or on an issue of public interest, by requiring them to spend money to defend against a meritless suit. Anti-SLAPP legislation, enacted by over half of the states, protects persons who exercise their expression rights from such retaliatory lawsuits.” 

One of the rights protected by anti-SLAPP statutes is the right of “Freedom of Association,” which protects an individual’s right to join or leave groups voluntarily, the right of the group to take collective action in the interests of its members, and the right of an association to define its membership. These statutes were never meant to affect non-compete agreements, but literally written, these anti-SLAPP statues may do just that. 

In Elite Auto Body v. Autocraft, No. 03-15-00064 (Tex.App. Austin 5/5/2017), the Austin court held that the anti-SLAPP statute is strong enough to prevent enforcement of certain aspects of non-compete statutes.  This is true, even though the Texas legislature did not have this outcome in mind when it passed the TCPA.

The take-away is simply this: whether you are the employer seeking to enforce a non-compete or an employee threatened with the application of a non-compete, there may be additional statutory defenses under the anti-SLAPP statutes in over half the states. 

Therefore, it is important to retain counsel knowledgeable in this newly developing line of case law. 

Martin Merritt, JD, is the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP. 

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On May 27, Texas Governor Greg Abbott signed legislation, putting an end to the battle between the Texas Medical Board and companies wishing to expand the availability of telemedicine in Texas.  As I predicted in a 2015 Physicians Practice article, “Texas Medical Board Unplugs Telemedicine for Some.” the Medical board wasn’t so much wrong, but more on the wrong side of history and larger financial interests. 

Telemedicine clearly offers a less expensive alternative to a traditional doctor’s visit, but also a potentially lower quality of care.  Don’t be confused. The Texas Medical Board didn’t lose the debate whether a doctor visit on a cell phone can deliver the same quality of care as a face-to-face encounter.  It can’t. The Texas Medical Board lost the battle over physician autonomy. 

One concern might be, if a patient can see a doctor via telemedicine then the doctor could be anywhere; Texas, California, or in any country where people can talk to Americans fluently.  But that’s not the problem. State medical boards usually are able to limit the practice of medicine to doctors licensed in the patient’s state.   

The concern is over the question, “who employs to doctor on the other end of the telemedicine visit?”  If the telemedicine doctor does not need to work in a traditional office, a few minutes from the patient’s home, the doctor could be employed by anyone, under any number of nightmarish, but economically efficient corporate conditions. And if that is true, how does the physician on main street stay in business?

That’s what worried the Texas Medical Board.  And for good reason, if what happened to pharmacies is any example. There was a time when prescription medications were always dispensed by licensed local pharmacist.  But the need for a pharmacist/patient encounter declines, when the patient is receiving the same medication, month after month, without any problems that might require a pharmacist. In fact, the pharmacist could just “mail it in,” literally, if not figuratively.   And mail-order pharmacies were born.  

But if there is no need for a pharmacy on main street, there is no need for a pharmacy at all. Insurance companies could go into the business of delivering mail-order prescriptions, in direct competition with local pharmacies. This is exactly what happened, but they didn’t stop there. Health insurance plans, major pharmacy chains and PPO pharmacy benefit management companies developed more and more efficient ways of delivering prescriptions, which will eventually relegate local pharmacies to the same fate as main street hardware stores.

So it was with this in mind, the Texas Medical Board passed a rule in 2015, requiring at least one face-to-face encounter, to establish a physician/patient relationship. After that, the encounter could be by telemedicine. As I wrote at the time, the money was on the other side. Legislation signed by Governor Abbott last week, ends a lengthy court battle between telemedicine companies and the Texas Medical Board.

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Patients mislead physicians for all sorts of reasons, such as addiction, the need to conceal that an abusive relationship caused an injury, or malingering.  I asked Retired FBI Agent, Robert Bettes, currently with Behavioral Assessment Resource Group, LLC, to share some tips on when you can tell a patient is lying.

Martin Merritt: You are frequently retained by companies to employ your FBI training to detect dishonesty in the workplace, whether in a job application or after a loss, can you share some tips and techniques you use to detect dishonesty? 

Robert Bettes:  When individuals are being deceptive, they exhibit both verbal and non-verbal deceptive behaviors.  There are approximately 27 deceptive behaviors that we regard as reliable indicators of deception.  Some of the more common include:

1. Failure to answer the question: When posed a direct question, the interviewee fails to answer because a truthful answer may bring him consequences.

2. Attack Behavior: The deceptive person will attempt to discredit the interviewer to get them to abandon their line of questioning (i.e. You look to young to be a doctor. What medical school did you go to?)

3. Qualifiers: The deceptive person will qualify their answer with terms such as “basically,” “fundamentally,” “probably,” to carve out the bad information that may be detrimental to them.

4. Hiding the mouth/eyes: We tend to cover a lie. It is a way to shield the truth from the one being lied to.

5. Throat clearing before an answer: There is a natural tendency to improve the way a lie sounds. Anxiety triggers difficulty in speaking.  Clearing the throat attempts to counter this effect. 

6. Movement of major body parts in response to a question: Anxiety will cause a person to exhibit uncontrollable body movements.

7. Grooming gestures: A dishonest person may begin to fidget and begin to tidy up surroundings. In a physician’s office, the only thing to tidy up is one’s self. Adjusting a tie, shirt cuffs, straightening a skirt can be a way of dissipating anxiety.

8. Verbal disconnect with behavior: When the narrative answer adds up to a “no,” but head movement indicates the opposing, you may have a problem.

9. Repeating the question: Repeating the question can be an attempt to buy time to make the answer more believable.

10. Providing too much information or overly specific responses:  One way to hide a lie, is to bury it an avalanche of true details.  If a person appears completely open and honest, we believe them. A dishonest person will overdo it and is able to recount very specific details in which the lie is but one detail.

MM:  In an examining room, anxiety can be normal? 

RB: Indicators are a starting point. Sometimes a cigar is just a cigar, but that is why we look for deceptive behaviors to occur in “clusters.” A cluster is two or more deceptive behaviors that occur in response to a question.  If the patient displays a cluster of behaviors, then follow-up questions must be asked.  Active listening is required to identify a patient’s true motive.  Suppose there is a pain medication, the patient wants to keep taking, you suspect at any cost.  Ask the patient, “What is the most significant side effect you have experienced when taking this prescription?”  

This is a very good question. Suppose the patient answers, “This prescription really relieves my pain and basically has improved my quality of life. It is the only thing that works.” Notice the effect of the answer. The question was about side effects.  Talking about side effects takes the patient away from his goal. So the patient provides an answer which pivots the discussion back towards the target.  Further questions are warranted. If the medication always causes some side effects, dry mouth, drowsiness, or constipation, denying all side effects may be further indications of dishonestly.

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On June 16, 2016, the United States Supreme Court issued a unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar which upheld what is termed the “implied certification” theory of liability under the False Claims Act (“FCA”); while adopting a more rigorous materiality standard for determining liability in such cases. This is one of the most important FCA cases in years. Historically, the government and plaintiffs, without any authority, have argued that the federal FCA can be violated if a physician or other provider or supplier (“Provider”) submits a claim when the provider did not meet all compliance standards associated with that claim. This has been known as the “implied certification” theory of liability; that providers were impliedly certifying to compliance with laws associated with the claim when it was submitted.

The FCA imposes liability on anyone who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the federal government. The FCA also punishes whoever knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim. The statute does not, however, provide a definition of a “false” or “fraudulent” claim. One theory that has been adopted by some courts is the “implied certification theory.” Under the implied certification theory, a claim can be deemed false for purposes of liability under the FCA based on an implied representation that the provider or supplier who submitted the claim is in compliance with all applicable statutes, regulations, or government contract provisions.

As a hypothetical example, think of an ambulance company which has certified that it has complied with all applicable laws and regulations when it submitted a claim, but perhaps the entire fleet’s registration stickers had expired. Does that make the certification “false?” Could a whistleblower sue and the government recover every penny it paid to the ambulance company? That is the kind of thing litigants have been arguing about: A false certification of compliance regarding regulations that don’t seem to have anything to do with meeting conditions of payment.

Reasonable minds differ. Circuit courts of appeals across the county couldn’t agree. Some say there should not be an implied certification theory, others say there should. The Supreme Court did what it typically does, answer the question, then create a test which is more confusing than the original question.

What does Escobar mean for physicians and providers? The Supreme Court upholds the theory, but then it narrows its application with a new demanding “materiality” standard which will offer physicians and providers an additional defense in FCA cases going forward. I doubt the number of FCA cases based on the implied certification theory will increase after Escobar. Certainly, the case provides lower courts with a basis for granting summary judgment in favor of physicians because of the new test. It is also possible Congress will respond with changes to the statute to wipe out the new “materiality” test. This would likely result in a wave of new False Claims Act lawsuits.

The Supreme Court termed the materiality standard “rigorous” and “demanding,” finding that it is insufficient that the government merely would have had the option to decline payment had it known of noncompliance. It also emphasized that the FCA is not intended to punish “garden-variety breaches of contract or regulatory violations” or to impose “treble damages and other penalties for insignificant regulatory or contractual violations.”

It may be years before the full impact of this decision is known. As always, it is best to consult a healthcare attorney in your state, if you have any questions regarding your practice’s compliance.

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Increasingly, insurance plans are using the audit process to recoup payments for services which were preauthorized, on the grounds that the chart does not support the coding.  I asked Angela Miller of Dallas’ Medical Auditing Solutions LLC to share some her insights.

Martin Merritt:  What should physicians, dentists, psychologist, psychiatrist and others know about claims audits by payers?

Angela Miller: First and foremost, anything that is not documented, didn’t happen!  The documentation will either win the day or kill your chances of winning an audit.  Perception is key — for example, if the physician is reviewing and not the rendering provider, then the signature line should say “reviewed by,” not signed, as if to give the impression the physician rendered the service.

MM: Can you elaborate more on the examples, perhaps starting with E&M codes for office visits?

AM: Absolutely, the visit chart notes must contain all components used to determine the E&M: History, Exam, and Medical Decision Making.  “Chief complaint” must be the presenting symptoms and should not be “follow-up.”  If a physician reviews the history at each visit, it must be noted that he reviewed the history and there are no changes or this should be pulled from prior visit and noted.  The exam is based on “bullets or points” from each bodily system to count toward each level of complexity.  Every visit may not need to be a comprehensive physical exam.  The medical decision making is a compilation of the current and existing diagnosis, the tests or procedures performed, and what decisions the physician made regarding the patient based on the number of diagnosis, new or old, review of medications, etc.  Again, this all must be documented.  Every visit is not a level 4 or 5, just because the provider is a specialist.  If anything, it is more difficult to get to level 4 or 5 when specialists’ patients are stable. 

In an audit, the entire chart note must be printed and provided.  It is important to read it, double check to ensure all pages printed and pull any tests as well.

Keep in mind all paper and/or electronic chart notes must be signed by the rendering provider.  Medicare provided direction back in 2009 that providers must sign off within two weeks of the date of service.  If the physician does rounds in a hospital, there may have shorter periods required per the credentialing contract just like your commercial plans.

MM: How do tests and procedures affect the providers in an audit? Is there a way for the provider to know if those tests will be covered?

AM:  All tests and procedures must be medically indicated and ordered.   Providers need to not only verify the patient has benefits at each visit, but any special tests, I would recommend speaking to a person to verify they will be covered.    

MM: Where do you see audits going for the future?

AM:  Audits will only increase.  With the added patients onto insurance rolls due to the ACA and those patients receiving care for the first time in years, insurance payer costs are going up. Payers are intent upon cutting costs and that usually means at the expense of Physicians.

Friday the 13^th was a bad day for the Federal Trade Commission (FTC) and a very good day for the healthcare industry.   I covered the dispute in the LabMD case in Physicians Practice in February 2014, just after the FTC ruled in favor of itself and its own strained extension of HIPAA-type jurisdiction over beleaguered healthcare providers.  Opponents, including LabMD, argued that physicians and healthcare providers have enough to worry about in the context of patient privacy, security and breach notification under HIPAA, the Omnibus Rule, and HITECH, which is already adequately enforced by the United States Department of Health and Human Services’ Office of Civil Rights (“OCR”).

The FTC seemed to be jumping on the HIPAA bandwagon as well, but unlike the OCR, the FTC lacked a specific statute or rule granting it the authority to regulate healthcare patient privacy.  Thus, the FTC decided for itself last year that it had jurisdiction under Section 5 of the FTC Act. The agency said that a failure to institute reasonable and appropriate data security standards constituted an “unfair trade practice” under the FTC Act because the conduct “caused or is likely to cause substantial injury to consumers.”

On Nov. 17, Chief Administrative Law Judge D. Michael Chappell rejected the FTC’s theory in the LabMD case, holding that the “harm” required to bring a cause under Section 5 of the FTC Act required more than “hypothetical or theoretical harm” caused by the lab’s conduct and therefore insufficient to maintain the commission’s allegations.  In other words, the mere possibility that someone might be harmed was insufficient and the FTC incorrectly assumed the right to file a HIPPA-type action against LabMD.   

This ruling squares with the outcome of many state lawsuits seeking damages under state law, which are frequently tossed out of court because the cases are based upon the mere possibility of harm, rather than actual demonstrable injury.

The LabMD conflict started in August 2013, when the FTC filed a complaint against LabMD Inc., over a breach of 9,300 patients’ personal information, including names and social security numbers, on a public file-sharing network.   The Atlanta-based medical laboratory challenged the action, claiming the FTC has no authority to address private companies’ data security practices as “unfair … acts or practices” under Section 5 of the FTC Act’s unfairness prong.  The FTC ruled in January 2014 that it did have jurisdiction.  

Prior to Friday’s decision, the FTC had obtained consent decrees in 53 out of 55 cases brought against businesses in recent years – all of which were based merely upon the possibility of harm. 

“The reason that the decision was so shocking and important is that because the security standard imposed by the FTC has never been challenged in any court, the FTC has created an enormous castle of air in recent years that everyone has come to believe in,” Kilpatrick Townsend & Stockton LLP big data, privacy and information security practice co-leader Jon Neiditz told Law360 in a story reported earlier this week.  “But with this decision, that whole castle of air has been completely deflated.”  

The case is surely far from over. The ALJ decision can be appealed to the commissioner and then to the courts. Nevertheless, for an overregulated healthcare industry, Friday the 13^th was a good day.

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