1. THE IMPACT OF COVID-19 ON THE PROVISION OF HEALTHCARE AND LIFE SCIENCES
The response to the COVID-19 pandemic has changed certain aspects of the delivery of healthcare services in the United States, although many of these changes are anticipated to be temporary. Key developments include the following:
- A significant growth in telehealth adoption rates, particularly among small providers that historically rovided in-person encounters only, and in patient populations such as older patients that previously preferred in-person encounters.
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act, subsequent legislation and regulatory changes supported the use of telehealth services during the pandemic by lowering longstanding barriers to Medicare reimbursement and the use of telehealth in additional care settings.
- State emergency declarations and orders expanded Medicaid coverage, eased licensure barriers, and generally expanded the ability of healthcare professionals to deliver services via telehealth.
- The increased availability of telehealth services during the pandemic has prompted further policy discussion around the appropriateness of lasting changes as well as addressing historical barriers to virtual care.
- Although buoyed by a large influx of cash through Provider Relief Funds (PRF) under the CARES Act, health systems have suffered significant financial losses due to the reductions in elective procedures as a result of state mandated shut-downs and lower consumer demand – and the PRF cash is a temporary fix, as funds provided need to be repaid.
- Health insurers have benefited financially from the reduction in demand, but the impact of significant unemployment and demand for COVID-related treatments are not yet fully understood.
- After a period of stagnation during the middle of 2020, investment in the healthcare services sector has picked up, and digital health and life science investing has remained strong.
- Technology sector interest in healthcare delivery and life sciences has increased.
- Election year politics diminished the prospect of another round of significant government support prior to the change in administration.
2. OWNERSHIP OR EQUIVALENT RESTRICTIONS IN RELATION TO THE PROVISION OF HEALTHCARE SERVICES
There are limited barriers to the ownership and operation of private healthcare services in the United States. Nonetheless, some restrictions do exist at both the federal and state levels. Individual state licensing regimes for health services and healthcare facilities make a national strategy challenging. Participation in government payment systems and private payment systems by healthcare service providers requires enrolling in those systems independent of any applicable state licensure requirements. Moreover, individual US states impose estrictions on the ability of unlicensed persons to practice medicine or employ medical professionals under a doctrine known as the “corporate practice of medicine” prohibition.
Investing in healthcare services must also conform to both federal and state fraud and abuse laws, designed to isolate clinical decision-making and patient choice from the financial incentives associated with care delivery. Because these laws and regulations can exist at both a federal and state level, compliance efforts can be burdensome.
Strategies exist to address these hurdles, but the resulting structures can be complex and confusing to those unfamiliar with the US healthcare market. In addition, changes in ownership can trigger notice or consent requirements from the relevant government oversight agency, which present timing issues and additional administrative burden on completing these types of transactions.
3. REIMBURSEMENT OF PUBLIC OR NATIONAL HEALTHCARE SERVICES AND AWARD OF CONTRACTS
Unlike European jurisdictions, the United States has a significant market for the private reimbursement of healthcare services, which is generally offered by employers. Public reimbursement is largely limited to Medicare (federal health insurance for seniors and individuals with certain disabilities) and Medicaid (state-run insurance for individuals with low incomes).
Medicare is the largest government insurance program, providing insurance for over 59 million people. Medicare-eligible beneficiaries may choose either to receive insurance coverage directly from the federal government under so-called “Original Medicare,” or to enroll in a Medicare Advantage plan, under which their Medicare benefits are administered by a private commercial insurance entity that shares in the risk of the cost of care. Medicare beneficiaries can also choose to purchase a prescription drug plan as part of a Medicare Advantage plan or as a standalone plan, as prescriptions are generally not covered under Original Medicare.
Original Medicare has typically been paid on a fee-for-service basis, under which providers submit claims for each reimbursable service. Increasingly, however, the federal government is exploring valuebased purchasing programs and other innovative payment models that seek to link payment rates to quality of care, rather than simply volume of services. Shared risk models, such as Medicare Advantage and the Medicare Shared Savings Program, are increasingly popular and, in some instances, are proving to be cost effective.
Providers of healthcare services must enroll in order to participate in Medicare. Enrollment may also require accreditation by an approved non-government agency or government agency for facilities. Reimbursement from Medicare can be through feefor-service, bundled services, and shared risk models. Appropriate coding of claims for care rendered and compliance with reimbursement requirements are also required.
Medicaid is administered by the individual states and shares many of the same characteristics as Medicare, although states have additional flexibility with how these programs are implemented and what is paid for.
Americans that do not qualify for Medicare or Medicaid largely receive health insurance from commercial health insurance coverage, either through their employer or the private marketplace created by the Affordable Care Act. Federal law sets standards for commercial health insurance coverage, which is often supplemented by state-specific requirements.
For example, commercial payors may be required to offer coverage and/or payment parity for telehealth services under applicable state law. Coverage parity refers to laws that require private payors to provide the same coverage for services provided via telehealth as is offered when they are provided in person, while payment parity refers to laws that require private payors to offer the same reimbursement rates, regardless if the service is provided in-person or via telehealth. Currently, 43 states and the District of Columbia have private payor laws governing telehealth.
As with government payment regimes, healthcare service providers that participate in private health payment systems must enroll and comply with the private reimbursement regimes, which are mandated through participation agreements entered by the providers with the payors. While government reimbursement rates are non-negotiable, the reimbursement rates under private payor contracts can be subject to significant negotiation.
Most healthcare providers participate in Medicare, Medicaid and private payment regimes that are relevant in their markets. Accordingly, they must comply with multiple enrollment and reimbursement regimes, which can place a significant administrative burden on providers.
4. DRUG APPROVALS AND REIMBURSEMENT
The US Food and Drug Administration (FDA) evaluates new drugs and biological products before they can be sold in the United States. For novel therapeutic products, the FDA generally requires substantial clinical and non-clinical data before it will approve or license a product for distribution.
Medicare is the largest third-party payer in the United States. Medicare pays for most outpatient drugs and biological products under Part D, which involves Medicare paying competing private plans to deliver benefits to enrollees, and those plans establishing coverage criteria, formularies, and payment rates for therapeutic products. However, a limited number of drugs are reimbursed under Part B (e.g., certain physician-administered drugs), which allows Medicare to pay providers directly at rates established by statute or regulation.
Commercial payers may cover drugs or biologics under their pharmacy or medical benefit, depending on the drug and the payer’s preference. Subject to certain federal and state laws, commercial payers generally have substantial flexibility when deciding whether to cover and how much to pay for a drug.
5. DEVICES CERTIFICATION AND REIMBURSEMENT
The FDA also regulates the development, manufacturing, and distribution of medical devices in the United States. Depending on the device, a manufacturer may need to obtain premarket approval (PMA), clearance (510(k)), or a de novo classification before offering the product for sale in the United States.
Medicare is a defined benefit program, which means the program can only pay for items and services if there is a statutorily defined “benefit category” for such items and services. While there are Medicare benefit categories for certain types of medical devices (e.g., durable medical equipment), there is no general “device” benefit category. As a result, payment for devices is often bundled into the payment for other covered services (e.g., physician office visits, outpatient hospital admissions).
Commercial payers typically take a similar approach to Medicare, and with certain limited exceptions, consider medical devices an expense incurred by providers when furnished as part of a covered service, as opposed to making separate payment for the device itself.
6. REGULATION OF AI AND SOFTWARE AS A MEDICAL DEVICE
Depending on its technological characteristics and the indications for which its developer intends to market the product, an AI-based or software product may be subject to regulation by the FDA as a medical device.
The FDA’s existing regulatory structure for medical devices was not designed with rapidly-evolving products in mind. However, in 2019 the FDA issued a white paper, announcing plans to consider adapting its existing regulatory framework to promote the development of safe and effective medical devices that use advanced AI algorithms. The FDA’s proposed approach would allow developers to make certain modifications to previously-cleared or previouslyapproved algorithms based on real-world learning and adaptation without requiring a new clearance or approval for the modified product in many cases. If finalised as outlined in the white paper, the FDA’s plans would attempt to better accommodate the iterative nature of AI products while ensuring that the FDA’s standards for safety and effectiveness are maintained.
7. TELEMEDICINE AND TELECONSULTATION
In the United States, telemedicine is regulated at the state and federal level, and by multiple regulatory bodies. At the federal level the Centers for Medicare and Medicaid Services (CMS), the federal agency overseeing federal health reimbursement programs, establishes Medicare reimbursement policies (subject to applicable legislation), and has a certain level of oversight over state Medicaid programs. Many of the reimbursement requirements imposed by these programs have been relaxed during the COVID-19 pandemic. In addition, the federal Drug Enforcement Administration (DEA) plays a role in determining, subject to federal law, whether and how controlled substances may be prescribed via telemedicine. Historically, federal law requires an inperson examination prior to any such prescribing, but the DEA has temporarily waived this requirement during the COVID-19 pandemic.
At the state level, state legislatures and professional licensing boards may create telehealth standards of care that govern telehealth practice. Such standards may relate to licensure requirements, the types of modalities are permitted, remote prescribing of controlled and non-controlled substances, informed consent, medical recordkeeping, technology, confidentiality / privacy requirements, and more. In addition, it is essential to understand that telemedicine practitioners are regulated by both the state where the patient is located and the state where the practitioner is located. This typically requires the provider to be licensed within the state where the patient is located, regardless of where the provider is physically located at the time of the encounter.
Every telemedicine regulatory regime has its own definitions regarding telemedicine. That said, it is typically categorised into three modalities: (1) live, synchronous, audio-visual interactions (e.g., a patient directly speaking to a provider), (2) store-and-forward technology (e.g., a patient sends an image of a clinical concern to a healthcare professional for review), and (3) remote patient monitoring (e.g., mobile applications that track an individual’s blood pressure and send readings to a healthcare professional).
There is significant variation in state and federal regimes relative to these modalities. For example, most, if not all, states permit physicians to prescribe non-controlled substances on the basis of a synchronous, audio-visual encounter. Beyond that, there is a significant amount of variation in terms of the types of (a) healthcare professionals that are permitted to provide services via telehealth, (b) modalities deemed sufficient to prescribe, and (c) healthcare professionals permitted to use telehealth to prescribe when prescribing is otherwise within the professionals’ scope of practice.
These variations make national telemedicine programs challenging to implement. Further, as we see telemedicine evolve with the utilisation of more technology, including artificial intelligence, these variations can multiply along with the many use cases being developed.
8. ANTI-KICKBACK RULES AND INCENTIVES TO DOCTORS
The healthcare industry is subject to a number of fraud and abuse laws. Most notably, this includes federal statutes known commonly as the Anti-Kickback Statute and the Stark Law, which regulate financial relationships within and among healthcare stakeholders, and the False Claims Act, which prohibits providers from submitting false or fraudulent claims to government payment programs. The Anti-Kickback Statute is a criminal law that prohibits the knowing and willful payment of remuneration to induce or reward patient referrals, while the Stark Law prevents healthcare providers from referring patients for certain services to entities in which they have a financial interest. In addition, states have their own fraud and abuse laws, which often mirror – and sometimes extend beyond – federal law.
The Department of Justice (DOJ) has long played a significant role in bringing enforcement actions against healthcare providers for fraud and abuse violations. As we have highlighted in prior editions of the Healthcare Enforcement Quarterly Roundup (see here and here), the DOJ is increasingly bringing enforcement actions against telemedicine providers. Recently, in October 2020, it brought charges against 345 defendants for, among other things, paying healthcare providers to order over $4.5 billion dollars’ worth of unnecessary durable medical equipment, genetic testing, and pain medications either without a patient interaction or based upon a brief telephone encounter. The DOJ said that this is its largest healthcare fraud enforcement action taken to date.
9. MERGER AND FOREIGN INVESTMENT CONTROL
Investment in the healthcare and life sciences industries in the United States is not subject to specific foreign investment protocols or specific merger or acquisition controls outside of those related to licensure requirements for healthcare facilities and professionals and regulated insurers. Some of these regimes can be burdensome, and are generally state-based. Participation in public and private reimbursement regimes also includes following specific protocols related to change in control transactions.
Some states are more active in overseeing the availability of healthcare resources and require approval of expansions or changes in the control of healthcare services through “certificate of need” laws, which in addition to other regulatory approvals require independent government agency approval over a transaction. Like every industry in the United States, healthcare and life sciences transactions are subject to antitrust laws, the enforcement of which has increased in recent years with respect to hospital and physician markets. While state antitrust regimes can also play a role, federal antitrust enforcement generally takes precedent.
In recent years, the role of the Committee on Foreign Investment in the United States (CFIUS) has expanded through legislation, regulation and high-profile action. The focus of CFIUS is on transactions that could impact the national security of the United States, but the broad scope of concern – ranging from critical technologies to critical information – and the increased utilisation of technology in the healthcare and life sciences sectors has made CFIUS much more relevant now than it has been in past years. Compliance with CFIUS requires a careful review of transaction structure and assets and a determination whether a pre-closing filing may be required.
10. FORTHCOMING AND ANTICIPATED CHANGES IN HEALTHCARE AND LIFE SCIENCES LAW
The results of the 2020 presidential and congressional elections are now finally known, and the Democrats control both the legislative and executive branches of government. The Democratic majorities in the House and Senate, however, are slim and include moderates, who are not likely to go along with the more extreme proposals that may emanate from the progressive wing of the party. In addition, a Senate rule provides Republicans with the power to prevent the body from voting on legislation unless 60 of the 100 Senators vote in favour of moving forward. While this tool cannot stop all legislation, it can limit what Democrats are able to pass. Traditionally, the party in control of the Presidency loses seats in the legislative branch in midterm elections, and while the dynamics may be unusual, there will be pressure for the Biden administration to move quickly.
While pandemic response will be the most public area of focus for the Biden administration in healthcare, there are other areas where the administration is already acting or signalling its attention to act. The Biden administration is likely to reverse a series of Trump administration executive actions to limit or roll-back aspects of insurance coverage under the Affordable Care Act. In other areas, the Biden administration is likely to review or reduce enforcement prioritization of Trump administration rules for which there is general support.
The failure of the Republicans to repeal the Affordable Care Act means that it is unlikely the Biden administration will propose broad-based legislative change. Instead, we should expect to see efforts to modify aspects of the existing legal and regulatory infrastructure. Enforcement priorities may change as well, although it is still too early to predict with certainty in what ways.