Happy Spring to my fel-low Health Law Section Mem-bers! And congratulations to the Newsletter Committee, chaired by Michael Murchison – as well as to the contributing authors - for producing yet another terrific edition this year! As a former editor, I know how much hard work goes into producing each

newsletter, and it is a credit to the entire team for pro-ducing such valuable material for our members. I want to thank the North Carolina Society of Healthcare At-torneys, as well, for their partnership and contributions to the Newsletter. It really is a team effort!

This newsletter is just one of the many exciting proj-ects the Health Law Section Council, and our array of Section volunteers, have been working on this year. The CLE Committee, chaired by Tina Simpson, has been hard at work putting together our upcoming Annual Meeting. By now, you should have received the agenda and registration information. I think you will agree that the Committee has done an amazing job organizing a terrific panel of speakers who will address a variety of timely and meaningful topics affecting all of our practice areas. Congratulations to the entire Committee for all of your hard work putting this program together! If you have not already, please register for the upcoming An-nual Meeting, which will again be held at the Bar Center in Cary on April 29, 2016.

The Long Range Planning Committee, chaired by Kim Licata, has worked hard over the course of this year to further our law school engagement initiative. Specifi-cally, the Committee has been working to solidify the relationships the Section maintains with each of the law schools and help further promote the law student lunch-and-learn trainings that the Section has put together for law students interested in health law. A lot of work has gone into developing a truly valuable presentation for the students, and the efforts of the Committee this year will go a long way toward helping to ensure that this terrific programming will be made available to law school stu-dents throughout the state in the years to come.

Published by the Health Law Section of the North Carolina Bar Association and the North Carolina Society of Healthcare Attorneys • Vol. 32, No. 2 • April 2016

Prognosis

Medicaid Transformation:

Expanding Managed Care in North Carolina

By Andrew M. Walsh

Last summer in the longest session of the North Carolina General Assembly (NCGA) in over a decade, Session Law 2015-245 (House Bill 372) was passed and signed by the Governor effective September 23, 2015. This “Act to Transform and Reorganize North Carolina’s Medicaid and NC Health Choice Program” ushers into North Carolina an expan-sion of Medicaid managed care much like the majority of other states.1 Medicaid managed care has existed in North Carolina since perhaps 2006, but only for behavioral healthcare and even that nominal sector was not fully expanded statewide until April 2013. N.C. Session Law 2011-264. While this experiment with non-profit public-authority managed care successfully “bent the cost curve” for Medicaid, improving savings without sacrificing services or close local touch in North Carolina communities, it still remained a small part of the high and growing Medicaid budget.2

Thus, the question heavily debated by our legislators last session was not whether to expand managed care to physical health, but how to do so. The House supported a bill that would build on local homegrown struc-tures already existing in North Carolina. The Senate preferred to bring in large, experienced health plans already serving other states. Both involved for-profit entities. The final enactment was a compromise, summarized

The Chair’s Comments

2 | NCSHCA President’s Report8 | New 2016 Stark Law Changes10 | CMS Model Payment Programs and Initiatives: The Growing Target of Quality and Care Improvement11 | Resources On LGBT Health Care Rights Available12 | Case Law Update

Inside this Issue...

Joe Kahn

www.ncbar.org919.677.0561@NCBAorg

Continued on page 3

Continued on page 2

PrognosisPublished by the Health Law Section of the North Carolina Bar Association and the North Carolina Society of Healthcare Attorneys

Vol. 32, No. 2, April 2016

EditorsLori JesseeRuth Levy Michael Murchison Shawn Parker

Chair Joseph M. Kahn

Immediate Past ChairJames D. Wall

Vice ChairKimberly A. Licata

SecretaryJennifer C. Hutchens

TreasurerKimberly Short Kirk

Section CouncilChristina Apperson J. Dennis Bailey Blakely Kiefer Christina E. Simpson Brian C. Vick Sarah A. Coble Lori L. Jessee Michael Murchison Melissa P. Phipps Jennifer L. Schenk Turner John B. Garver III Amy K. Kendall Timothy L. McNeill Richard Saver J. McLain Wallace Jr.

© 2016 North Carolina Bar Association. Views and opinions expressed in articles published herein are the authors’ only and are not to be attributed to Prognosis, the Health Law Section or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations. No portion of the publication may be reprinted without permission.

2Prognosiswww.ncbar.org

NCSHCA President’s ReportBy David R. Broyles

The North Carolina Society of Health Care Attorneys (“Society”) had a very active transi-tion into 2016, as well as first quarter of this year. The Society’s Board and various committees continue to focus on providing a wide variety of programs and activities that reflect the diversity of health care law and our health care clients. I will take this opportunity to highlight some of the great things that have happened, and will be happening, with the Society in the coming year.

The Education Committee has been hard at work to maximize the professional education pro-vided by the Society to its members. Because of the superb work of Jessica Lewis and the Education Committee, the agenda and slate of speakers for the Society’s 2016 annual meeting conference and meeting have been finalized. If you have not already signed up, mark your calendars for Friday, September 16, 2016 and plan to join us at the Rizzo Center in Chapel Hill – registrations will fill up quickly! On top of planning work for the annual meeting and conference, the Education Commit-tee has continued to identify topics of interest for webinars and other educational offerings. We are planning a webinar CLE that we hope will take place in the next couple of months, as well as a CLE and networking program scheduled to take place in July, co-sponsored by the Society and other great partners. More details on these events will be coming soon from the Education Committee.

The Gifts and Grants Committee recently sent this year’s grant application packets to the North Carolina law schools, and will be working in the coming weeks and months as the applica-tions come in for review. This will be the fifth year of the Society’s law school grant program, and we look forward to the continued wonderful opportunities for outreach and growth which this program presents to law school students throughout the state. If you would like to learn more about how to get involved in the programs that benefit from the Society’s law school grants, please do not hesitate to reach out to me or Nancy Hemphill, Gift and Grants Committee Chair.

The Membership and Outreach Committee is focusing its efforts on ways to maximize the benefits of Society membership through various platforms, including the Society’s website. We are working with developers to assess the most effective way to add to the Society’s outreach ca-pabilities through the website, and the details about that will finalized in the near future. We are confident that the added benefits to members provided by these measures will be great resources that you frequently use. Please reach out to me or Robb Leandro, Membership and Outreach Committee Chair, with any questions or specific input you may have.

The Society Board hosted another open meeting and discussion at its February meeting, and the discussion highlighted recent trends with trial and appellate courts’ treatment of health care arbitration agreements. The membership attendance grows at each meeting, so take advantage of this excellent way to be involved with the Society’s leadership and members, and reach out to me with a topic and/or speaker of interest for the upcoming May Board meeting. It is an exciting time for the Society. Thank you for continuing to be involved as we strive to positively impact the practice of health care law in North Carolina.

Additionally, the Pro Bono and Special Projects Committee, chaired by Lori Jessee, has been hard at work developing what I believe will turn into the Section’s next flagship initiative – the “Ac-cess to Affordable Care Project.” The objective for this new community outreach project will be to inform and educate the public on successfully assessing and accessing affordable health care options. This incredibly exciting project syncs perfectly with our Section’s mission, and I believe will provide an opportunity for all of our Members to engage with and provide assistance to their community in a truly productive and meaningful way. Please join me in congratulating the members of the Pro Bono and Special Projects Committee for developing such a great project for our Section!

As you can see, it has been a busy and productive year for the Section so far. All of these out-comes are the result of countless hours of work by our Section volunteers. Thank you to all of you who continue to make such valuable contributions to our Section!! I look forward to seeing all of you at the Annual Meeting!

Joe Kahn practices with Nexsen Pruet, PLLC.

The Chair’s Comments, continued from the front page

section by section in the last issue of this newsletter. Parker, “North Carolina’s Medicaid Program Transitions to Managed Care,” 32(1) Prognosis 1 (Dec. 2015). This article goes the next step, describing what the federal government will expect from managed Medicaid, how the new state law is being implemented and apropos for this newsletter: a prognostication of what to expect in the near and long-term future.3

A Sneak Peek at the FutureCurrently, only behavioral health (mental health, substance

abuse and intellectual/developmental disabilities) (MH/SA/IDD) is under a Medicaid managed care system in North Carolina. It has eight geographically exclusive public authorities called Local Man-agement Entities/Managed Care Organizations (LME/MCOs) with mandatory enrollment within their “catchment areas.” Those eight public authorities are a consolidation from over 45 or more LMEs in the past, which was a reduction from the 60 plus pre-LME MH/SA/IDD “area authorities.” As of March 17, 2016, the Secretary of the North Carolina Department of Health and Human Services (NCD-HHS) published his plan for further consolidation to four, requiring each LME/MCO to merge with a specified neighboring LME/MCO, but under terms and timelines not yet determined.4 The new behav-ioral health Medicaid map would look as follows:

Meanwhile, on March 1, 2016, at a meeting of the NCGA’s Joint Legislative Oversight Committee on Medicaid and NC Health Choice (JLOC Medicaid), the NCDHHS unveiled its proposed map for creating the six regions for bidding by provider-led entities (PLEs)5 to manage physical health Medicaid:

As directed by Session Law 2015-245, the State will issue an RFP for up to ten regional contracts with PLEs for one or more contiguous regions and up to three statewide contracts with large commercial plans. At the March 1st JLOC Medicaid meeting, regulators indicated an intent not to contract with more than any one region can success-fully support. As a result, you might expect two or three statewide contracts, but in some regions maybe only one or two PLEs. Regard-less, each Medicaid enrollee will likely have choices of about four Medicaid healthcare “prepaid health plans” (PHPs) in their county: two or three statewide commercial plans and one or more regional PLE plans. How this might look is discussed further below.

What is Medicaid managed care and why is it preferred?For years, nationwide Medicaid was operated on a fee-for-

services (FFS) basis, which remains the default Medicaid delivery system historically and by law. With some exceptions, services were paid on a set fee schedule without prior approval and minimal con-trol by a payer over cost, utilization, and quality of care. There was no “closed provider network,” but rather all eligible healthcare pro-viders and professionals were enrolled into Medicaid. Your doctor would perform the necessary services and Medicaid would pay on

Medicaid, continued from the front page

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a per-visit, per-test, per-procedure or other per-unit basis. In the 1990s, health maintenance organizations (HMOs) experimented with managed care, but overall were not well received. The debate about why continues. However, at least one significant reason was concern that financial and administrative considerations might and arguably did trump sound medical professional judgment and pa-tient choice of quality providers.

A problem with the Medicaid FFS delivery model is that it incentivizes volume. While ethical healthcare professionals resist the pressure, it is nonetheless there. For regulators, legislators, and taxpayers, the common pattern was a never-ending increase in the Medicaid budget from year to year to year. Although federal match-ing participation funding rules had states only paying a small per-centage of the total bill, that percentage of Medicaid still remained a significant percentage of the North Carolina budget. While argu-ably the budget overruns North Carolina has experienced in the past were partially due to unrealistic budget forecasts, there can be no doubt that the North Carolina Medicaid budget is fundamentally unpredictable, large, and unsustainable.

Medicaid managed care in its simplest form merely requires that Medicaid healthcare services be monitored and managed. In most instances, that is done a couple of ways. First, generally, prior ap-proval is required before services can be rendered. For most services, the healthcare provider must request the service in advance from the state or more often it’s designated managed care organization

(MCO) or entity (MCE).6 Under federal law discussed below, there are tight deadlines by which each MCO’s utilization management (UM) qualified clinicians must make “medical necessity” determi-nations as to each of the service or treatment authorization requests. While the clinicians are not allowed to have financial incentives, and their decisions are subject to a rather robust due process review, see 42 CFR, Part 438, Subpart F, most managed care programs shift some or all of the risk to the MCO. This is done usually through capitated payments by the state to the MCOs, generally on a “per month, per member” (PMPM) basis, creating an at-risk model for MCOs, including the future NC PHPs.

Medicaid managed care can also provide services beyond the array of Medicaid benefits, most notably care coordination and qual-ity management. Care coordination is generally performed by payer staff who assist Medicaid patients and providers through the UM process, facilitate discharge planning by providers, ensure annual person/patient-centered health plans, and guide or “link” patients to providers, services and more. Quality management involves a num-ber of monitoring tools, including program integrity to ferret out “credible allegations” of fraud, waste or abuse (FWA) that require action ranging from recoupment of overpayments and plans of cor-rection to state and federal prosecution.7

In the end, Medicaid managed care is preferred to FFS because it gets closest to the Triple Aim: the Holy Grail of healthcare policy wonks and academicians. The Triple Aim strikes the optimal bal-

ance between cost, quality and population health. But as with all things, the devil is in the details. Which Medicaid managed care delivery system comes closest and how can it be directed to the in-tended goals with minimal regulation, oversight cost and micro-management?

How is Medicaid managed care regulated?There are a number of risks with Medicaid managed care, not

the least of which is ensuring that financial considerations do not overshadow patients’ true medical needs, the availability of provider choice, and timely access to quality services.

In 2002, the Centers for Medicare and Medicaid Services (CMS) promulgated Medicaid rules and regulations, including those specif-ically for managed care, which was perhaps still in its nascent years. See 42 C.F.R., Part 438; 67 FR 40989 (June 14, 2002). Those rules, mostly unchanged to date, contain detailed requirements to avoid such excesses, especially as to the contract terms between states and MCOs, constraints on utilization management, adequacy of provider networks, and availability of due process by enrollees. For example:

MCOs must maintain, monitor and document a network of ap-propriate, contracted, compliant and culturally competent providers sufficient to provide adequate access to all covered services, includ-ing as needed 24/7 services and out-of-network providers. See 42 CFR 438.206 and .207.

Service requests must be approved or denied within 14 days – shorter (3 working days) for urgent matters, longer (up to 28 days) in special circumstances. See 42 C.F.R. §438.210(d).

UM staff cannot be compensated in any way to incent deni-als, limits or discontinuances of enrollee services. See 42 C.F.R. §438.210(e).

The “amount, duration, or scope” of Medicaid services must be identified and defined within certain parameters, including that they be no less than FFS Medicaid services and “to reasonably be expect-ed to achieve the purpose for which the services are furnished.” See 42 C.F.R. §438.210(a)(1)-(3).

The “medical necessity” of Medicaid service must be well-de-fined consistent with certain authorities. See 42 C.F.R. §438.210(a)(4). “Medical necessity” in North Carolina is currently defined by Clinical Coverage Policies (CCPs) promulgated by the North Caro-lina Department of Health and Human Services (NCDHHS), Divi-sion of Medical Assistance (DMA). They are online at http://dma.ncdhhs.gov/document/clinical-coverage-policy-ccp-index.8

Service request denials or partial denials must be made by qual-ified clinical professionals. See 42 C.F.R. §438.210(b)(3).

Due process must be robust and offered on almost every Medic-aid service request denial and partial approval, even if the same par-ties and services, just different scopes, durations or service dates. See 42 C.F.R. Part 438, Subpart F (“Grievance System”) and N.C. Gen. Stat., Chapter 108D. Such decisions are “managed care actions,” 42 CFR §438.400(b)(to be renamed “adverse benefit determinations” in pending new federal regulations), subject to strict timelines and content requirements for notice and opportunity to appeal within the MCO to an independent clinician (called “reconsideration” in North Carolina), and then if desired via a State fair hearing (called “appeal” in North Carolina), 42 C.F.R. §438.402-.410.

Medicaid service benefits must continue to the disputing Med-icaid enrollee during this due process provided certain minimum

requirements are timely met and sustained. See 42 C.F.R. §438.420. While the enrollee is at risk of refunding the cost of these contin-ued benefits if they lose the dispute, see 42 C.F.R. §438.424(a), it has rarely if ever been exercised in North Carolina.

In recent years, North Carolina amended its statutes to reflect and align with these same federal requirements, especially due pro-cess, see N.C. Gen. Stat., Chapter 108D and Session Law 2013-397.

9 However, in some instances North Carolina has significantly devi-ated from federal Medicaid managed care requirements.10 The pru-dent attorney would review both federal and state law when facing issues in this area.

To ensure compliance by MCOs, Medicaid managed care cur-rently in North Carolina is also regulated by extensive auditing from the State, federal government, recovery audit contractors (RACs), mandatory accreditation organizations, and others, with sometimes very specific requirements. For example, current North Carolina LME/MCOs must meet certain financial solvency and service-spend requirements. See N.C. Gen. Stat. § 122C-124.2. Also, by contract, Medicaid MCOs in North Carolina must meet certain “medical loss ratios (MLRs),” based on a state-created variation of a federal for-mula. The MLR essentially requires at least 85% of Medicaid funds go to services and quality improvement activities, and no more than 15% goes to administrative and other expenses.

To complicate matters further, last summer, CMS proposed the first major revision of the Medicaid Managed Care rules. See NPRM #CMS-2390-P, 80 FR 31097 (June 1, 2015). Those proposed rules un-derwent public comment, CMS prepared responses not yet disclosed, and sent the rules to OMB. The final rules are expected as early as April or May. Over 201 pages (before comment responses), they are worthy of their own article. In a nutshell, the new rules seek to give states greater guidance on how Medicaid managed care should work, balancing oversight with flexibility. They flesh out and clarify much of the confusion in the states over MLRs, program integrity, due process, and more. A key goal is to align Medicaid managed care rules across all the “other major sources of coverage,” including private health in-surance, group plans and Medicare Advantage. North Carolina must keep one eye on these pending federal rules as it makes its own trans-formation, to avoid mid-course conflicts and changes.

Next Steps for North Carolina Medicaid Managed CareOn March 1st at the JLOC Medicaid hearing, NCDHHS com-

pleted the first big deadline created by Session Law 2015-245: pres-ent a plan. The next deadline looming is to present by June 1, 2016 a Section 1115 Waiver to CMS for federal approval.11 Approval by CMS could be as fast as six months, but educated prognosticators foresee it taking about 18 months, as it is an iterative process between the state and federal regulators.12 Assuming CMS waiver approval by January 2018, NCDHHS anticipates letting contracts between April and Sep-tember 2018, with “readiness reviews” of those PHPs between perhaps October 2018 and June 2019 (see chart on page 6.)

Meanwhile LME/MCOs, as noted above, likely will be consolidat-ing into four entities. The session law states that Medicaid behavioral health services will continue to be covered by the LME/MCOs until four years after the date capitated contracts begin with the PHPs. That would be perhaps some time in 2022 by these estimates. At that junc-ture, Medicaid behavioral health service delivery is to be integrated into the PHP contracts and plans covering physical health. By inte-

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grating behavioral and physical treatment into these 13 or less PHPs, it is hoped that “the whole person” enrollees will be better served; per-haps through superior information exchange, perhaps through greater coordination of treatment of both the mind and body by a single en-tity, if still by different professionals. Others worry that focus will be on whatever services and needs are most prevalent and profitable and that MH, SA and IDD needs might not get the attention they do now, nor the local community “touch” and connections.

The law is silent as to what becomes of the LME/MCOs after that 4-year post-PHP contracting deadline. Some foresee LME/MCOs morphing into entities supporting or even part of the PHPs, per-haps well before this deadline, thereby still providing care coordina-tion and/or utilization management expertise developed over many years. Others speculate the LME/MCOs might become Medicaid managed care health plans for both behavioral and physical needs, but of smaller, high-need, high-cost specialty populations like per-sons with Serious Mental Illness (SMI), Serious and Persistent Men-tal Illness (SPMI), and/or Serious Emotional Disturbance (SED).

Who will get those initial PHP contracts and be the main play-ers in the new NC Medicaid world circa 2018? Certainly for the statewide contracts, the legislators have invited into North Carolina to bid the big commercial plans (CPs), which would include if de-sired Aetna, Amerigroup, AmeriHealth, Anthem, Blue Cross Blue Shield, Centene, Cigna, Humana, Magellan, Meridian, Tenet, Unit-edHealth and WellCare, to name a few.

The regional PLEs could effectively be statewide as well, since bidding is allowed for multiple regions, if contiguous. In December

2015, eleven of North Carolina’s larger hospital and health care systems formed the Provider-Led, Patient-Centered Care, LLC (PLPCC), “a collaboration to investigate development of a provider-led and owned Medicaid only Prepaid Health Plan (PHP) in support of the General Assembly and Governor’s goal to transform the State’s current Medic-aid system….”13 In early March, the joint venture added Presbyterian Health Plan of New Mexico as a partner, ostensibly to serve utilization management, analytical and administrative roles for the planned PHP. News reports suggest about 600 jobs in a new office in New Mexico and another 600 in North Carolina, administering services for PLPCC.

ConclusionLast summer’s new Medicaid Transformation law at best is a

broad stroke attempt to change North Carolina’s Medicaid system toward greater budget predictability and eventually more integrated health care services. This spring, we saw the plan, with maps. By summer, a waiver undergoing public comment will be submitted to CMS for approval, leading to implementation likely in 2018. The players will likely be a mix of big, out-of-state, for-profit commercial plans already with a history in other states, and smaller, homegrown provider-led entities including at least one already being formed from this state’s 11 largest hospitals and healthcare systems and a New Mexico administrative partner. The competition between the large and local rivals could be fierce and potentially ruinous. Stan-dardization for providers and enrollees could be largely replaced with diverse contracts, provider choice, vigorous marketing, and no small amount of confusion. Where smaller providers will land, in

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what networks, and what will become of the existing public LME/MCOs in local communities remains to be seen. Managed care for both behavioral and physical Medicaid services is inevitable in this state, as is integrated services and ultimately more budget predict-ability. However, it is a gamble if this newest wide-reaching Med-icaid reform, with all its fast moving parts and focus on for-profit, competing entities both regional and out-of-state, will achieve the goals sought, … and what gains might be lost in the process.

Andrew Walsh has worked in North Carolina Medicaid man-aged care for three of the eight LME/MCOs, starting only a few years after their creation. He is licensed in North Carolina and three other contiguous states, practicing law for over 25 years. He is cur-rently General Counsel and Chief Legal Officer at Partners Behav-ioral Health Management, and formerly with Cardinal Innovations Healthcare Solutions (fka PBH) and Smoky Mountain Center. How-ever, the views expressed in this article are those of the author only, and not to be attributed to any other person or organization.

(Endnotes)1 According to the Centers for Medicare and Medicaid Services’ (CMS’) 2013 Medicaid Managed Care Report, 73% of the 62.5 million Medicaid enrollees in the United States were in some Managed Care Organization (MCO) health plan. Most (27) states had a penetration rate of over 51% for comprehensive MCOs. Seven states had none. North Carolina was among the 17 states with less than 50% penetration by comprehensive MCOs – but only negligibly over 0% in North Carolina. This should change dramatically with the new NC Medicaid model. 2 In FY15, the NC Medicaid budget was over $13B, of which behavioral health was 21% (under $3B). Payment Primer Fiscal Brief (NCGA Fiscal Research Division 3/18/15), at p.4. While North Carolina Medicaid costs are generally up (11th highest in the nation in FY14 per Kaiser Family Foundation), not so North Carolina behavioral health Medicaid, which has flattened spend and increased services with managed care. According to data to the N.C. General Assembly on March 1, 2016, of $13.8B FY15 Medicaid spend, 60% was federal, 24% was state, and the remaining 16.7% was miscellaneous receipts or transfers. This is slightly down from the peak $14.2B in 2012, but up from all other years since 2003 ($7.2B). Fiscal Brief (NCGA Fiscal Research Division 2/29/16).3 Some changes are not covered in this article, or only tangentially. E.g., transi-tioning Medicaid from the Division of Medical Assistance (DMA) to a uniquely structured Division of Health Benefits (DHB); and the creation of the Joint Legislative Oversight Com-mittee on Medicaid and NC Health Choice (JLOC Medicaid) in addition to the existing Joint Legislative Oversight Committee on Health and Human Services (JLOC HHS). 4 NCDHHS press release, letter and map issued 3/17/16, available online at https://www.ncdhhs.gov/news/press-releases/state-announces-new-lmemco-service-re-gions. 5 “PLE” could as easily stand for physician/clinician-led entity, as “[a] majority of the entity’s governing body is composed of physicians, physician assistants, nurse practi-tioners, or psychologists.” NCSL2015-245, §4, ¶(2)b.2. The law defines qualifying PLEs and commercial plans (CPs) collectively as prepaid health plans (PHPs).6 Technically, federal law distinguishes between MCOs, pre-paid inpatient health plans (PIHPs) and prepaid ambulatory health plans (PAHPs). 42 C.F.R. § 438.2. And MCEs cover all of these and more. 42 C.F.R. §455.101 (“Managed care entity (MCE) means managed care organizations (MCOs), PIHPs, PAHPs, PCCMs, and HIOs.”) For pur-poses of this article, the distinctions are generally not important. But beware: they can be

very important in legal analyses for you or your clients, especially as North Carolina again experiments with new Medicaid delivery systems and entities. In fact, North Carolina has had perhaps five Medicaid “reforms” in the past 15 years, culminating in a collection of confusing, arguably inconsistent statutes, entity names, and entity powers and obligations, including “area authorities,” Local Management Entities (LMEs), and LME/Managed Care Organizations (LME/MCOs). For definitions, see N.C. Gen. Stat. § 122C-3(1), (20b) and (20c) and -116(a) and § 108D-1. For potentially conflicting authority and duties, compare generally N.C. Gen. Statute, Chapters 122C, 108A, 108C and 108D. Ironically, in 2001 with the “Mental Health System Reform Act,” LMEs were created to separate the management of mental health services from the delivery of those services, thereby avoiding a perceived conflict of interest inherent in the old HMO system. Now, North Carolina is merging pay-ment management and service provision together again in PLEs.7 Medicaid Health Plans of America lauds these managed care benefits over FFS: predictable costs; access and care coordination; delivery system innovation; fraud and abuse prevention; and quality assurance and improvement. These closely align with the SL 2015-245 goal of “budget predictability for the taxpayers of this State while ensuring quality care to those in need.”8 Under statutory amendments in recent years following McCrann v. N.C. HHS, 209 N.C. App. 241, 704 S.E.2d 899, rev. denied, 365 N.C. 198, 710 S.E.2d 23 (2011), much of what NCDHHS does in the managed care arena, including the CCPs, are expressly exempt from the rulemaking requirements of the NC Administrative Procedures Act. See N.C. Gen. Stat. § 150B-1(d)(9), (20) and (22). However, public comment periods are still com-mon, if not entirely required, including the current one for the 1115 Waiver application from March 7, 2016 to April 18, 2016 pursuant to 42 C.F.R. §431.408.9 Due process has been heavily litigated in North Carolina behavioral health Medicaid managed care, and will likely be so again when expanded to physical healthcare.10 E.g., federal Medicaid law requires that each participating state have a “single state agency” administering the program. See 42 CFR 431.10. By Session Law 2013-397, the NCGA deviated from that rule by moving “State fair hearings” out of DMA and to the North Carolina Office of Administrative Hearings (OAH). This ultimately required a spe-cial exemption by CMS denied or resisted in earlier years.11 A “waiver” in Medicaid parlance is a vehicle states can use to test new or exist-ing ways to deliver and pay for health care services in Medicaid and the Children’s Health Insurance Program (CHIP), deviating and being “waived” from some of the traditional Medicaid statutory requirements.  North Carolina currently has two waivers substantially merged into one: a §1915(b)/(c) waiver. (“§1915” comes from that portion of Title XIX of the Social Security Act.) The “(b) waiver” allows for Medicaid mental health and substance use (MH/SA) services to be provided in North Carolina via a managed care delivery model. The “(c) waiver” known in North Carolina as the Innovations Waiver, provides home and community based services (HCBS) in lieu of institutionalization, but exclusively for IDD consumers. The Innovations Waiver also allows Medicaid managed care delivery by pig-gybacking on the (c) waiver. Thus, North Carolina, at least for MH, SU and IDD Medic-aid enrollees, has a §1915(b)/(c) concurrent waiver. It grew from a §1115 research and demonstration project waiver in North Carolina around 2006. The expansion of Medicaid managed care from behavioral health and into physical health is also to be done by a §1115 waiver, unveiled on March 1, 2016 at the JLOC Medicaid meeting and posted at http://www.ncdhhs.gov/nc-medicaid-reform for public comment until April 18, 2016.12 Some experts have worried that CMS might take longer, given North Carolina is among the 19 states that as of March 14, 2016, had not adopted Medicaid expansion under “Obamacare.” See Kaiser Family Foundation, www.kff.org. However, Alabama is an-other non-expansion state, and its “Regional Care Organization Medicaid Transformation” §1115 waiver (somewhat similar to North Carolina’s proposed waiver) was approved by CMS in February 2016 -- about 20 months.13 PLPCC Press Release dated 12/3/15. At formation, PLPCC members included Cape Fear Valley Health System, Carolinas HealthCare System, Cone Health, Duke Uni-versity Health System, Mission Health, New Hanover Regional Medical Center, Novant Health, University of North Carolina Health Care System, Vidant Health, Wake Forest Bap-tist Medical Center, and WakeMed Health & Hospital.

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2016 Health Law Section Annual MeetingFriday, April 29 | NC Bar Center, Cary | Live and Webcast

Register now: www.tinyurl.com/CLE512HLM

On November 16, 2015, the Centers for Medicare & Medic-aid Services (“CMS”) adopted various welcome changes to the Stark regulations as part of the 2016 Physician Fee Schedule (the “2016 Amendments”). (80 Fed. Reg. 70885, 71300-379, November 16, 2015). The 2016 Amendments, first proposed on July 15, 2015 (80 Fed. Reg. 41685, July 15, 2015) generally went into effect January 1, 2016.

The 2016 Amendments create two new exceptions to the Stark regulations for recruitment of non-physician practitioners and time sharing arrangements. They also contain a number of helpful clarifications which, in practice, loosen certain Stark technical re-quirements. CMS’s stated reason for adopting these changes was to accommodate healthcare delivery payment reform, facilitate com-pliance, and reduce the volume of self-disclosures under the Self-Referral Disclosure Protocol for putative violations of Stark which pose no risk to the Medicare program.

Stark generally prohibits a physician from making referrals for certain designated health services (“DHS”) payable by Medicare to an entity with which the physician or an immediate family member has a direct or indirect financial relationship, unless an exception applies. Over time, CMS has promulgated a handful of exceptions for financial relationships involving physician ownership or invest-ment interests and a considerably greater number of exceptions for compensation arrangements. Many of the exceptions for compensa-tion arrangements require that they be memorialized in writing, that financial remuneration be set in advance and at fair market value, and that such remuneration not vary with the volume or value of referrals. The 2016 Amendments add two new important exceptions for compensation arrangements, as follows.

New Exception for Assistance to Non-Physician Practitioners (42 C.F.R. §411.357 (x)).

The Stark regulations contain an exception for recruitment pay-ments from a hospital to a physician or his/her new practice to in-duce the physician to relocate to the geographic area served by the hospital. The 2016 Amendments essentially expanded the physician recruitment Stark exception to non-physician practitioners, allow-ing a hospital, federally qualified health center or rural health clinic to provide assistance to a physician or physician organization to em-ploy, contract with, or otherwise compensate a non-physician prac-titioner (“NPP”) to provide patient care services. NPP is defined to include physician assistants, nurse practitioners, clinical nurse spe-cialists, certified nurse-midwifes, clinical social workers and clinical psychologists. While there are certain overlaps between the physi-cian recruitment exception and the new NPP assistance exception, there are also important differences. First, because the stated goal was to encourage the expansion of primary care services, the excep-tion only applies if substantially all, (i.e. at least 75 percent of the services) provided by the NPP to patients of the physician’s practice are primary care or mental health services. A NPP employed to pro-vide specialist services will not qualify. Second, unlike the physician recruitment exception (which has features designed to insure that

most of the recruitment payments go directly to the recruited physi-cian), the NPP assistance exception simply caps the assistance at 50 percent of actual compensation, signing bonus and benefits provided by the physician or physician organization to the NPP in the first two years. Third, to qualify for the assistance, the NPP cannot, within one year of being employed, engaged or compensated by the physi-cian or physician organization, have (a) practiced in the geographic area served by the hospital or (b) been employed, engaged, or oth-erwise compensated by a physician or physician organization that has medical practice site in the geographic area served by the hospi-tal, even if the NPP did not furnish services within that geographic area. This latter requirement is designed to avoid a medical practice located in the hospital’s catchment area from qualifying for the as-sistance by simply relocating the NPP from another office. Fourth, the exception may only be used once every three years by the physi-cian, except in the case of a NPP who is brought in to replace another NPP who leaves during the first year. The remaining elements of the exception dovetail largely with the physician recruitment exception: (a) the arrangement must be in writing and signed by all three par-ties, (b) the assistance from the hospital must not be determined in a manner that takes into account the volume or value of referrals by the physician, any physician in the physician’s practice or the NPP, (c) the physician cannot impose practice restrictions on the NPP, such as a non-compete, which unreasonably restricts the NPP from providing services in the geographic area, and (d) the arrangement between the physician and the NPP must be an employment or com-parable arrangement in which compensation passes directly to the NPP (employment through a staffing company is not permitted.) Incidentally, in response to the comments to the proposed regula-tion, CMS reaffirmed that a hospital’s assistance directly to a NPP through an arrangement in which none of the assistance flows to the physician or his/her practice, does not implicate Stark unless the NPP serves as a conduit for physician referrals or the NPP is a family member of a physician. CMS cautioned, however, that such direct assistance could implicate the anti-kickback statute.

New Exception for Timesharing Arrangements (42 C.F.R. § 411.357 (y)).

Stark has traditionally been interpreted by CMS to make it difficult for physicians to engage in timesharing arrangements. One of the prin-cipal hurdles is that the lessee exclusively occupy the property (or use the equipment) while such occupancy or use is occurring. CMS, cogni-zant of these difficulties, has created a new exception designed to allow hospitals, physicians and physician organizations to enter into time-sharing arrangements for use of space, equipment, personnel, items, supplies or services that do not fit into the exception for traditional office space lease arrangements. One of the articulated goals is to allow hospitals and physicians in rural or underserved areas to accommodate specialty services on a part-time basis by visiting or newly relocated physicians. The timesharing arrangement exception has a number of components that are intended to differentiate it from traditional lease arrangements. First, the premises, equipment, personnel, supplies, and

New 2016 Stark Law ChangesBy Michael Murchison

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services covered by the arrangement must be predominantly for the provision of evaluation and management (E/M) services and not des-ignated health services (DHS). In this regard, the arrangement may not be used to furnish DHS other than those incidental to the E/M servic-es, nor can it involve advanced imaging, radiation therapy or clinical or pathology lab equipment, other than equipment used to perform CLIA waived laboratory tests. In addition, such equipment must be located in the same building where the E/M services are provided. Second, the arrangement cannot be with an imaging center or laboratory which does not function as a hospital or physician organization. Third, the arrangement cannot convey a possessory leasehold interest in the office space (i.e. it cannot be functionally the same as a lease). The remaining components of the exception mimic those common to lease arrange-ments under the existing regulations: (a) the compensation cannot be on a “per click” basis or tied to the percentage of revenue billed or col-lected, but must be based on time, (b) the exception applies regardless of whether the hospital, physician or physician organization is grantee/licensee or grantor/licensor, (c) the arrangement must be in writing, signed by the parties, specify the premises, equipment, etc. to be pro-vided, (d) the arrangement must not be conditioned on referrals of patients, (e) the compensation is set in advance and consistent with fair market value, (f) the arrangement is commercially reasonable even in the absence of referrals, and (g) the arrangement does not violate the anti-kickback statute or other comparable law.

Clarification of Writing and Signature Requirements and Expansion of Grace Period for Noncompliance with Signature Requirements

Many of the Stark exceptions, such as the exceptions for leases and personal service arrangements, require that the agreement or arrangement be in writing and be signed by the parties. There has, however, been confusion as to whether this required a single formal written contract in which all of the material terms of the arrangement are set forth, or something looser. To address this uncertainty (and the accompanying unwanted volume of self-referral disclosures), CMS makes it clear in the 2016 Amendments that a single formal written contract is not required and that the writing requirement can be satisfied through a collection of documents, including contempo-raneous documents evidencing the course or conduct between the parties. CMS gives helpful, non-exhaustive examples as to what sorts of collections of documents might comply with the writing require-ment, including email exchanges, invoices, board meeting minutes, and even checks. CMS emphasizes, however, that the collection of writings must permit a reasonable person to verify compliance with all required elements of the exception. CMS also stresses that writ-ings created after the arrangement has begun can only be used to justify referrals going forward, not those that preceded fulfillment of the requirement.

With respect to the signature requirement, CMS clarifies that, if the arrangement is documented by a collection of writings rather than a single formal contract, there need not be a signature on all of the documents in the collection of writings, as long as there is a sig-nature which clearly relates to the contemporaneous writing or writ-ings documenting the relationship. Also, while the Stark regulations do not define what constitutes a signature, CMS appears to endorse the proposition that any electronic or other signature passing muster under applicable federal or state law is sufficient.

In a related development, the 2016 Amendments change the ex-isting regulations to give entities a grace period of 90 days to comply with the signature requirement, regardless of whether the failure to obtain a signature is inadvertent. The only caveat is that the 90-day grace period may only be used once every three years for the same referring physician.

Clarification of One Year Term Requirement and Extension of Holdover Arrangements

The Stark exceptions for space and equipment leases and per-sonal service arrangements require that each such arrangement has at least a one year term. (The exceptions also require that if the par-ties terminate the arrangement in the first year, they cannot enter into a new arrangement for the same space, equipment or services within that year). In response to confusion as to whether this one year term requirement required a formal contract provision explic-itly setting forth the term, the 2016 Amendments clarify that the one year term requirement is met if the arrangement lasts one year “as a matter of fact.” In other words, a formal contract provision setting forth the term is not required. This helpful clarification is consistent with CMS’s approach to the writing requirement.

The pre-2016 Stark exceptions for space and equipment lease and personal service arrangements also limited holdover arrange-ments to six months. The 2016 Amendments eliminate this six month holdover limitation, and permits indefinite holdovers, as long as: (a) the arrangement complies with the applicable exception when it expires, (b) the holdover continues on the same terms and conditions, and (c) the arrangement continues to meet the exception during the holdover period. CMS’s change to the six month hold-over restriction is welcome because, as CMS noted, numerous par-ties were in technical noncompliance simply because of their failure to enter into a new arrangement at the expiration of the old one, even though the fundamental underlying terms of the arrangement were fully compliant. However, compliance with the third require-ment may require adjustment of the underlying terms to ensure the arrangement is at fair market value during the holdover period. For example, if the underlying rent on a lease is at fair market value at the beginning of the holdover period, but the rent falls below fair market value at some point during the holdover period, CMS takes the posi-tion that the rent must be adjusted to fair market value.

Standardizing the Volume or Value of Referrals RequirementMany of the Stark exceptions require that the compensation pro-

vided not take into account the volume or value of a physician’s re-ferrals or other business generated between the parties. In the 2016 Amendments, CMS recognized that it had used different language to describe this requirement, such as, “take(s) into account,” “based on” and “without regard to,” which might cause a particularly careful read-er to think that there were different volume or value standards for the various exceptions. With the 2016 Amendments, CMS confirms that it considers the volume or value standard to be the same, regardless of the language used, and standardizes the applicable language so that it conforms with the language of the Stark statute: that the compensa-tion not “take into account” the volume or value of referrals.

Other Technical Corrections In addition to the above exceptions and clarifications, the

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2016 Amendments make a number of corrections which are likely to have more limited application or which are technical in nature. These technical corrections include: (1) adding a definition of the “geographic area served” in the physician recruitment exception for federally qualified health center or rural health clinics to clarify the relocation requirement for physicians recruited to those entities, (2) clarifying an issue with respect to the maximum amount of reten-tion payments that may be paid to physicians in underserved areas, (3) clarifying the scope of the statutory exceptions for what consti-tutes “remuneration” between the parties, (4) clarifying that split bill arrangements(where, for example, a physician uses hospital resourc-es in treating patients, but only bills for the professional services pro-vided by the physician and the hospital bills for the facilities used by the physician) does not involve remuneration between the parties, (5) clarifying application of the signature and “stand in the shoes” requirements insofar as it applies to employees and contractors, (6) clarifying application of the “stands in the shoes” requirements and

the volume or value of referrals standard, by making it clear that CMS will take into account the volume or value of referrals gener-ated even by physicians who do not stand in the shoes of a physician organization, (7) removing the phrase “stands in the shoes” from the definition of locum tenens physician, (8) clarifying the type of web sites and public advertising on which a physician-owned hospital must disclose physician ownership, and (9) clarifying the types of exchanges that meet the publicly traded securities exception.

SummaryThe 2016 Amendments, in general, provide welcome changes and

clarifications to Stark and hopefully presage a more flexible and prag-matic approach to application of the Stark law and Stark regulations.

Michael Murchison is a member of Murchison, Taylor, & Gibson, PLLC, based in Wilmington. He devotes a significant part of his practice to representation of health care entities.

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Like it or not, the Centers for Medicare and Medicaid Services (CMS) is expanding its focus on quality and care improvement as the basis for payment to providers throughout the continuum of care. The Final Rule for the Comprehensive Care for Joint Replace-ment Model (CJR) published by CMS in November, 2015 is now in effect, with a mandatory participation date of April 1, 2016.

CJR Final RuleLower-extremity joint replacements are the most commonly

performed Medicare inpatient surgeries, with predictions show-ing continued growth in utilization. Under the CJR Final Rule, the quality and cost of care for an inpatient hospital stay that results in a Diagnostic-Related Group (DRG) of 469 or 4701, and all related care provided during the 90-day period following hospital discharge (the “episode”), will be measured and adjusted using a retrospective bundled payment. At the end of a model performance year, actual spending for the episode is compared to the Medicare target episode price for the responsible hospital. The payment model and phases of the CJR model will extend for five performance years, concluding on December 31, 2020.

Under the CJR model, mandatory participation will impact 67 geographic areas across the country, including four in North Carolina (Asheville, Charlotte-Concord-Gastonia, Durham-Chapel Hill, and Greenville). A listing of the participant hospitals in these four geo-graphic areas can be found at https://innovation.cms.gov/initiatives/cjr. Participant hospitals will be held financially accountable for the quality and cost of items and services provided to Medicare fee-for-service beneficiaries for lower-extremity joint replacements and re-covery, including all hip and knee replacements, the episode. Most

Medicare Part A and B items and services that are provided within the episode are covered by the CJR Final Rule, including physicians’ ser-vices, inpatient hospital services, inpatient psychiatric facility services, long term care acute hospital services, skilled nursing facility services, home health agency services, hospital outpatient services, outpatient therapy services, clinical laboratory services, durable medical equip-ment, Part B drugs and biological, and hospice services.

Participant hospitals may enter into financial arrangements in the form of CJR collaborator agreements and sharing arrangements with all post-acute care providers (PAC) involved in the beneficiary’s care throughout the episode. These CJR collaborator agreements can include gainsharing payments for CJR in which a hospital shares sav-ings with collaborators throughout the episode. In addition, these CJR collaborator agreements may require the CJR collaborator to share financially in downside risk with the anchor hospital under the CJR model. All of these payments align with CMS’s shift in focus to in-centivize hospitals and PAC providers to work collaboratively, thereby improving the quality of care provided in all settings throughout the continuum of care. As further encouragement to work collaboratively, the Final Rule also implements certain target pricing on the DRGs af-fected, a weighted methodology for quality and patient satisfaction in determining incentive payments, and stop-loss and stop-gain limits to protect hospitals, collaborators, and CMS.

Further, the CJR Final Rule waives certain Medicare program rules in order to allow additional flexibility for hospitals and PAC providers to provide care to beneficiaries in CJR episodes. The pur-pose of this waiver is to improve the quality of care, increase the coordination of care, and provide financial efficiencies for providers and the Medicare program. The waivers target the direct supervi-

CMS Model Payment Programs and Initiatives: The Growing Target of Quality and Care Improvement

By David Broyles and Iain Stauffer

sion requirement for certain post-discharge home visits, telehealth requirements, the three-day rule for skilled nursing facilities (SNF), post-operative billing restrictions, and certain deductible and coin-surance requirements that apply to reconciliation payments or re-payments. Also, in addition to the specific waivers referenced above, waivers for certain fraud and abuse authorities were issued jointly by CMS and the United States Department of Health and Human Services, Office of Inspector General (OIG) concurrently with the CJR Final Rule. Those waivers, which include waivers for specified arrangements involving CJR model participants, can be found at: https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfRe-ferral/Fraud-and-Abuse-Waivers.html.

Discharge Planning Conditions of Participation (CoPs) - Proposed Rule

Another quality and care improvement initiative is the dis-charge planning CoPs Proposed Rule issued by CMS on November 3, 2015. The CoPs Proposed Rule continues CMS’s focus on improv-ing health outcomes and reducing health care costs by creating more robust discharge planning requirements designed to decrease patient complications and avoid hospital readmissions. Consistent with the CJR Final Rule summarized above, CMS intends the new require-ments in its Proposed Rule regarding discharge planning CoPs to increase communication between providers, patients, and families/caregivers in the discharge planning process by incorporating pa-tient goals and utilizing quality and resource-use data to enable peo-ple to take charge of their own health care. The CoPs Proposed Rule requires hospitals, home health agencies and critical access hospitals to communicate and document certain additional information in

the patient’s discharge plan. This additional information is related to the discharge planning process, available PAC services, discharge and transfer summary content. Further, under the Proposed Rule, the patient’s freedom of choice among available PAC providers upon discharge, or other providers upon facility transfer, must be com-municated to the patient and included in a patient’s discharge plan. The full text of the CoPs Proposed Rule can be found at: https://federalregister.gov/a/2015-27840

These particular rules, along with other ongoing CMS payment programs and initiatives, should put hospitals and other providers on alert that CMS is determined to utilize quality and resource-use data to improve health outcomes and reduce health care costs, while expanding program rules and opportunities to all health care deliv-ery settings.

David R. Broyles and Iain M. Stauffer are attorneys with Poyner Spruill LLP in the firm’s Raleigh office. They practice in the firm’s Health Care Section, advising health care providers on state and federal regulatory compliance ranging from daily operations to long-term strategic planning. They also regularly represent clients in reimbursement-related matters dealing with governmental and com-mercial payors, including program integrity, provider credentialing, authorization, payment denial appeals, audits and recoupments.

(Endnotes)1 DRG 469 is the diagnosis code used for a major joint replacement or reat-tachment of lower extremity with major complications or comorbidities. DRG 470 is the diagnosis code used for a major joint replacement or reattachment of lower extremity without major complications or comorbidities.

Resources On LGBT Health Care Rights Available

The Wake Forest University School of Law Elder Law Clinic has put together a collection of resources for lawyers, providers and the public on LGBT health care rights. This effort was funded in part by the North Carolina Society of Health Care Attorneys.

The Society’s grant has allowed the Elder Law Clinic to give presentations to long-term care providers, physicians and other staff at Wake Forest Baptist Medical Center, and at community programs with local churches and aging service provider organizations in the Triad area.  For more information,  go to http://elder-clinic.law.wfu.edu/lgbt/.

11Prognosiswww.ncbar.orgAs a member of the North Carolina Bar Association

(NCBA) you now have free access to Fastcase. Fastcase is the leading next-generation legal research service that puts a comprehensive national law library and smarter searching tool at your fingertips.

Log in to Fastcase at www.ncbar.org using your NCBA member ID or password.

Case Law Update By S. Todd Hemphill and Matthew A. Fisher

Shannon v. Testen, ___ N.C. App. ___, 777 S.E.2d 153; 2015 N.C. App. LEXIS 819, No. COA15-64 (N.C. App. Oct. 6, 2015)

Facts: Appellee-Defendant Physician’s Health Program performed a

neuro-psychiatric assessment on Appellant-Plaintiff, at the request of Gaston Memorial Hospital where Plaintiff Shannon had physician privileges. Based upon the evaluation by Defendant, Gaston Memo-rial terminated the privileges granted to Dr. Shannon.

Dr. Shannon filed suit against Defendant alleging a breach of statutory duties and his statutory due process rights as part of the health assessment performed by Defendant. The Superior Court dismissed Shannon’s complaint for failure to state a claim upon which relief may be granted.

Appellant-Plaintiff appealed to the North Carolina Court of Appeals.Holding:The Court of Appeals held that absent a showing of articulable

bad faith, medical providers participating in the peer review process set forth under N.C.G.S. §90-21.22 are immune from suit. Thus the Court of Appeals affirmed the ruling of the Trial Court.

Analysis: The North Carolina Court of Appeals held that Dr. Shannon’s

complaint failed to allege anything more than “run-of-the-mill neg-ligence” and bad faith could not be inferred from the allegations found in the complaint. To do so would require the Court to infer bad faith as a result of an allegation of carelessness.

The Court further held that Dr. Shannon could neither pursue a private cause of action under the federal Health Care Quality Im-provement Act (since no such right was explicitly granted therein), nor maintain a state common law claim for violation of his rights under the federal law. In particular, the Court held that a party is not permitted to “bring a state common law claim to enforce an al-leged violation of a federal statute simply because federal law does not permit a private cause of action.”

The Court further held that if there were any violation of the North Carolina Peer Review law due process requirements (set forth at N.C.G.S. §90-21.22(b)), then any cause of action lay against the North Carolina Medical Board, not the instant Defendants.

Colon Health Centers of America, LLC v. Hazel, ___ F.3d ___, 2016 U.S. App. LEXIS 1014, No. 14-2283 (4th Cir. Jan. 21, 2016)

Facts: Appellants Colon Health Centers and Progressive Radiology are

out-of-state medical providers who sought to establish specialized MRI and CT services in the Commonwealth of Virginia. Appellants challenged the constitutionality of Virginia’s certificate of public need (“CON”) law, claiming that the law discriminates against out-of-state providers and violates the dormant Commerce Clause as well as the Fourteenth Amendment’s Equal Protection, Due Process, and Privileges or Immunities Clauses. The District Court dismissed appellants’ suit under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted.

On appeal, the 4th Circuit Court of Appeals affirmed the dis-

missal of appellants’ Fourteenth Amendment claims, reversed the dismissal of the dormant Commerce Clause claim, and remanded the case for further factual development on the Commerce Clause issue. Colon Health Centers of America, LLC v. Hazel, 733 F.3d 535, 539 (4th Cir. 2013).

On remand, the district court conducted an extensive discovery process and ultimately granted summary judgment in favor of the Commonwealth. Appellants appealed.

Holding:The Court of Appeals held that Virginia’s CON law neither dis-

criminated against out-of-state providers nor placed an undue bur-den on interstate commerce, and affirmed summary judgment in favor of the Commonwealth.

Analysis: On appeal, appellants raised two general grounds. First, they

argued that Virginia’s CON requirement violates the dormant Com-merce Clause by discriminating against interstate commerce in both purpose and effect. Second, appellants contended that even if the program does not unconstitutionally discriminate, it nevertheless violates the dormant Commerce Clause because it places an undue burden on interstate commerce.

Discrimination Against Interstate CommerceIn addressing the first argument, the Court discussed the de-

velopment of the law related to the Commerce Clause, noting that the Supreme Court long had recognized that, in addition to giv-ing Congress the power to regulate trade, the Commerce Clause also limits the power of the states to erect barriers against inter-state trade. This implicit or “dormant” constraint is “driven pri-marily by concerns over economic protectionism—that is, regula-tory measures designed to benefit in-state economic interests by burdening out-of-state competitors” (citation omitted). However, not all economic harms or anticompetitive choices can be remedied through application of the dormant Commerce Clause. States can and should have the right to impose even burdensome regulations in the interest of local health and safety. For that reason, any such claim typically requires a case-by-case analysis.

The Court noted that a state statute may discriminate against interstate commerce in one of three ways: “facially, in its practical ef-fect, or in its purpose.” Envtl. Tech. Council v. Sierra Club, 98 F.3d 774, 785 (4th Cir. 1996). In this instance, appellants claimed that Virginia’s CON program discriminated in both purpose and effect.

On the first point, appellants cited the stated intent of the law to “discourage the proliferation of services that would undermine the ability of essential community providers to maintain their financial viability.” 12 Va. Admin. Code § 5-230-30. Thus, appellants ar-gued, the law is designed to protect existing providers at the expense of out-of-state providers attempting to enter the market. The Court rejected this argument, finding that the evidence showed that CON laws like Virginia’s “serve an array of public purposes: improving health care quality by discouraging the proliferation of underuti-lized facilities, enabling underserved and indigent populations to access necessary medical services, and encouraging cost-effective

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consumer spending.” 2016 U.S. App. LEXIS 1014 at 11. The Court found no protectionist purpose in this effort to bring health care to Virginia residents in the most efficient and professional manner.

With regard to the effect of the CON law, appellants contended that the mechanism allowing competitors to request the Depart-ment conduct an informal fact-finding conference, to make an ad-versarial presentation at such conference, and to submit compet-ing applications all served to block applications they want to see denied. However, statistical evidence presented by the Common-wealth showed that approval rates for applications submitted by in-state and out-of-state providers were virtually identical 85% of the time, and obtaining a CON took the same length of time for both. The Court also rejected appellants’ expert testimony showing that incumbent applicants tended to be favored over new applicants, be-cause those incumbent companies could be (and were) out-of-state companies doing business in Virginia. Finally, responding to appel-lants’ argument that there are no manufacturers of CT or MRI scan-ners in Virginia, the Court concluded that therefore, there could be no discrimination against those manufacturers in favor of in-state manufacturers.

Undue Burden on Interstate CommerceAppellants’ second argument was based on prior court deci-

sions finding that even where a law does not facially, purposely or in effect discriminate against interstate commerce, the law’s inci-dental burdens on interstate commerce might still be “clearly ex-cessive in relation to [its] putative local benefits.” Sandlands C & D LLC v. Cty. of Horry, 737 F.3d 45, 53 (4th Cir. 2013) (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S. Ct. 844, 25 L. Ed. 2d 174 (1970)) (referred to as the “Pike balancing test”). The Court noted that its previous decision remanding this case to the district court was skeptical of the Pike balancing test, because that test so often involved making subjection decisions on the benefits and burdens of a particular law. In this instance, the Court was sat-isfied that Virginia had advanced legitimate interests in support of the CON program, including boosting healthcare quality by reduc-ing excess medical capacity and helping underserved and indigent populations. Specific examples included (1) conditioning CON re-cipients to provide a certain level of indigent care each year; (2) in-centivizing health care providers to locate in geographically remote areas; (3) allowing hospitals to support money-losing services like trauma centers and neonatal intensive care units with more profit-able operations like the diagnostic services appellants were seeking to provide; and (4) reducing capital costs by preventing untoward increases in excess capacity for equipment and services that patients do not need. On this last point, the Court pointed to testimony from a former Virginia Secretary of Health and Human Resources, who “observed that Virginia experienced a significant increase in expenditures for equipment and new services when it partially de-regulated its health care sector between 1989 and 1992.” 2016 U.S. App. LEXIS 1014 at 24.

In contrast, the Court found that while the appellants’ argu-ments that the CON laws reduce competition and may result in in-efficiently high prices were not unreasonable, it concluded that this was a legislative issue better left to the Virginia General Assembly, rather than a panel of unelected judges. The Court also pointed out that the health care market does not always act consistently with free market principles, because patients often choose a health care

provider based factors other than price and providers lack the cus-tomary freedom of a seller to set the price for their services.

Finally, the Court also cited the trend in federal cases to uphold the power of the states to enforce their police powers to legislate on “subjects relating to the health, life, and safety of their citizens.” 2016 U.S. App. LEXIS 1014 at 26 ) citing Sherlock v. Alling, 93 U.S. 99, 103, 23 L. Ed. 819 (1876)), even where those enforced powers may result in detriment to the citizens of other states. Department of Revenue of Kentucky v. Davis, 553 U.S. 328, 354, 128 S. Ct. 1801, 170 L. Ed. 2d 685 (2008) (upholding Kentucky law taxing income earned from state and local bonds from other states, but not from Kentucky). As in Davis, the Court emphasized that challenges to state laws responding to complex economic problems were more appropriately resolved through the legislative process, rather than by a court attempting to apply the Pike balancing test. In conclu-sion, the Court stated that whatever the wisdom of Virginia’s CON law, it most certainly is constitutional.

Dial v. Britthaven, Inc., ___ N.C. App. ___, ___ S.E.2d ___; 2016 N.C. App. LEXIS 141, No. COA15-753 (N.C. App. Feb. 2, 2016) (unpublished)

Facts: In October 2011, Plaintiff Dial’s mother was referred from

Southeastern Regional Medical Center to Highland Acres Nurs-ing and Rehabilitation Center (“Highland Acres”) for rehabilita-tion care following a fall. As part of the admission process, Plain-tiff signed 12 documents indicating that Plaintiff was signing for her mother in her capacity as an immediate family member (but not as an attorney-in-fact). Plaintiff did not have a power of at-torney at that point and made no representation that she was her mother’s attorney-in-fact. Included among those forms was an arbitration agreement.

In July, 2012, a dispute apparently arose regarding defendants’ refusal to permit Plaintiff to obtain a copy of mother’s blood test results. Plaintiff ’s mother executed a durable power of attorney and a health care power of attorney, naming Plaintiff her attorney-in-fact in both documents. Even after the execution of these docu-ments, Defendants asserted the power of attorney was “not legal” and refused to permit Plaintiff access to mother’s medical records. Approximately one month later, Plaintiff ’s mother was transferred from Highland Acres to hospice and died shortly thereafter.

In 2014, Plaintiff filed suit against Defendants, alleging or-dinary negligence, medical malpractice, and wrongful death, and seeking punitive damages. Defendants moved to stay proceed-ings and compel arbitration. The trial court denied Defendants’ motion, and Defendants appealed.

Holding:The Court of Appeals upheld the trial court’s ruling denying

the motion to stay and compel arbitration.Analysis: The Court first determined that Defendants’ appeal was

properly before the Court, despite the fact that it was interlocu-tory, based on prior court decisions concluding that an order de-nying arbitration is immediately appealable because it involves a substantial right, the right to arbitrate claims, which might be lost if appeal is delayed.

In upholding the trial court’s ruling, the Court found that

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the facts of the case were similar to its prior decision in Munn v. Haymount Rehab. & Nursing Ctr., Inc., 208 N.C. App. 632, 704 S.E.2d 290, 2010 N.C. App. LEXIS 2414 (2010). As in Munn, the Court concluded that Plaintiff had no authority, either actual or apparent, to execute the arbitration agreement presented to her by Defendant’s employee. Key to that determination was the Court’s finding that the Plaintiff made no representation upon execution of the arbitration agreement that she had authority to act on mother’s behalf and the Defendant had no basis on which to “rely” upon Plaintiff ’s authority. In addition, unlike Munn, the evidence showed that even after Plaintiff ’s mother executed both the durable general power of attorney and healthcare power of attorney naming Plaintiff as her attorney-in-fact, the Defendant denied that the Plaintiff had authority to act on her mother’s be-half. Based on this evidence, the Court upheld the order denying arbitration.

Walker v The N.C. State Bd. Of Dental Examiners, ___ N.C. App. ___, __ S.E.2d ___, 2016 N.C. App. LEXIS 187, No. COA15-337 (N.C. App. Feb. 16, 2016)

Facts: Petitioner-Appellant Walker is a dentist licensed to practice

dentistry in North Carolina since 1993. In 2012, following a hear-ing before the N.C. State Board of Dental Examiners (the “Board”), the Board found that Walker had failed to properly document the reasons for prescribing narcotic pain medications for a number of patients in her treatment records and was negligent, in violation of (1) 21 N.C.A.C. 16T.0101(a)(6) (“the Record Content Rule”), related to recordkeeping for narcotic pain medications prescribed for pa-tients; and (2) the standard of care for the practice of dentistry under N.C.G.S. §90-41(a)(12). Walker filed a Petition for Judicial Review with the Superior Court, which upheld the Board’s determination. Walker then appealed that decision to the N.C. Court of Appeals.

Holding:The Court of Appeals reversed the determination that Walker had

violated the Record Content Rule, but upheld the determination that the conduct violated the applicable standard of care and was negligent.

Analysis:Walker was originally cited by the Board for violating the Re-

cord Content Rule because she did not record a reason for prescrib-ing medications in the treatment record.  The Record Content Rule, however, only required that the treatment record must “include . . . [the] [n]ame and strength of any medications prescribed, dispensed or administered along with the quantity and date,”  and did not cre-ate a requirement for a dentist to record a reason.  Citing N.C.G.S. §150B-18 (N.C.G.S. §150B-18 states, in pertinent part, “An agency shall not seek to implement or enforce against any person a policy, guideline, or other nonbinding interpretive statement that meets the definition of a rule contained in G.S. 150B-2(8a) if the policy, guideline, or other nonbinding interpretive statement has not been adopted as a rule in accordance with this Article.”).the Court found that a requirement to record a reason for prescribing medications would constitute a rule, which the Board could not enforce without first going through the rule-making process. 

However, the Court held that the Board did not err in find-ing Walker negligent in violation of N.C.G.S. §90-41(a)(12) for the same conduct.  In this regard, the Court found that the evidence of

record showed that both of the Board’s experts had testified at the Board hearing that the applicable standard of care requires a den-tist to record a reason why the dentist is prescribing a narcotic pain medication, and that Walker had violated that standard. Further, Dr. Walker herself testified that she had received mandatory train-ing for past recordkeeping violations and that this training explained that dentists were expected to record the reasons for the medications they prescribe. The Court found that this testimony provided the Board with substantial evidence that Walker had been negligent in the present case.

The Court also rejected Walker’s contention that the rule en-forcement limitation in N.C.G.S. §150B-18 also prohibited the Board from disciplining her for negligence under N.C. G.S. §90-41(a)(12) because the Board had never adopted a rule requiring dentists to record a reason for the medications prescribed in their treatment re-cords. The Court noted the overlap between N.C. G.S.§90-41(a)(12) and N.C.G.S.S. 150B-18 on the issue of agency discipline, but deter-mined that N.C.G.S. §90-41 is more specific because it applies to the practice of dentistry and gives the Board “power and authority to . . . [i]nvoke . . . disciplinary measures . . . in any instance or instances in which the Board is satisfied that [a dentist] . . . [h]as been negligent in the practice of dentistry.” 2016 N.C. App. LEXIS 187 at p. 8 (em-phasis added by the Court). The Court further concluded that the language of N.C.G.S. §90-41(a)(12) was clear and unambiguous on this issue. Conversely, N.C.G.S. §150B-18 is limited in that it applies only to the authority of agencies to adopt rules.

Therefore, because there was substantial evidence supporting the Board’s finding that Walker was negligent, the Court upheld the Board’s determination under the statute.

Estate of Ray v. Forgy, __ N.C.App. __, __ S.E.2d __, 2016 N.C.App. LEXIS 190, No COA15-236 (February 16, 2016)

Facts: This decision followed a series of appeals by the parties in a

malpractice action filed in 2004 by the Plaintiffs against Defendants Keith Forgy, M.D. P.A. (“Dr. Forgy”) individually, as an agent/appar-ent agent, employee and shareholder of Mountain View Surgical As-sociates (“Mountain View”), and as an agent/apparent agent of Grace Hospital, Inc., Grace Healthcare System, Inc, Blue Ridge Healthcare System, Inc., and/or Carolinas Healthcare System, Inc. (the “Hospital Defendants”). Plaintiffs’ Complaint alleged that defendants’ negligent acts caused the suffering and injuries of Donna S. Ray and Thomas D. Ray and proximately caused the death of Donna S. Ray.

Over the course of 10-11 years, a number of rulings were made and appealed, as follows:

In 2007, the trial court denied Dr. Forgy’s and Mountain View’s motion for summary judgment and granted the Hospital Defen-dants’ motion for summary judgment. Plaintiffs appealed the grant-ing of summary judgment for the Hospital Defendants, but that ap-peal was dismissed by the Court of Appeals as interlocutory. Estate of Ray v. Keith Forgy, M.D., P.A., 195 N.C. App. 597, 673 S.E.2d 799 (2009) (unpublished) (“Ray I”).

In 2012, following an arbitration proceeding in which Dr. Forgy and Mountain View were found liable to the Estate of Donna S. Ray in the amount of $4 million (but not found liable as to Thomas D. Ray’s individual claim for loss of consortium), the trial court entered the arbitration award as a final judgment.

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Following this final judgment, the trial court’s 2007 summary judgment in favor of the Hospital Defendants was ripe for appeal and was appealed to the Court of Appeals. The Court held that the trial court did not err in granting summary judgment in favor of the Hospital Defendants on the theory of apparent agency, but that the trial court did err by granting summary judgment in favor of the Hospital Defendants on the theory of corporate negligence. Estate of Ray v. Forgy, 227 N.C. App. 24, 744 S.E.2d 468, disc. review de-nied, 367 N.C. 271, 752 S.E.2d 475 (2013) (“Ray II”).

In July 2014, the trial court granted Plaintiffs’ motion for partial summary judgment on the issue of Dr. Forgy’s and Mountain View’s negligence and the amount of Plaintiffs’ damages, holding that the only issue for trial was the negligence of the Hospital Defendants. The Hospital Defendants thereafter moved for summary judgment on that issue, but the trial court denied the motion and the Court of Appeals dismissed the Hospital Defendants’ appeal of this determi-nation (“Ray III”).

During this same time period, Plaintiffs sought production of all insurance policies covering the Hospital Defendants for acts of neg-ligence and medical malpractice; documents related to Dr. Forgy’s malpractice insurance coverage; documents related to his hospital re-credentialing at Grace Hospital; documents related to his malpractice insurance coverage; and documents related to queries made to and responses received from the National Practitioner Database regard-ing Dr. Forgy. Hospital Defendants opposed these requests as seeking privileged documents which were immune from discovery under stat-utes exempting records and materials considered by “medical review committees.” Plaintiffs filed a motion to compel and Hospital Defen-dants filed a motion for protective order with affidavits and a privilege log which included a description  of each document, the author or source of each document, the date of the document, and the recipient of the document. After reviewing the affidavits and privilege log, the trial court issued an order on November 19, 2014, directing the Hospi-tal Defendants to provide most of the documents requested. Hospital Defendants appealed the trial court’s order.

Holding: The Court of Appeals reversed the trial court’s order, finding

that the Hospital Defendants had fulfilled their burden of demon-strating that the subject documents were records of a medical review committee, which were immune from discovery pursuant to N.C. Gen. Stat. § 131E-95. 1

Analysis: The Court first addressed the question of whether Hospital De-

fendants’ interlocutory appeal was premature. The Court concluded that, based on its holding in Hammond v. Saini, 229 N.C. App. 359, 748 S.E.2d 585 (2013) (which addressed similar privilege claims), the privilege or immunity sought by Hospital Defendants directly re-lated to the disclosures required by the interlocutory discovery order and was not frivolous or insubstantial, and therefore the challenged order affected a substantial right and was immediately appealable.

The Court’s analysis of Defendants’ appeal focused on N.C.G.S. § 131E-95(b), which provides, in pertinent part, as follows:

The proceedings of a medical review committee, the records and materials it produces and the materials it considers shall be confiden-tial and not considered public records within the meaning of G.S. 132-1 . . . and shall not be subject to discovery or introduction into evidence in any civil action against a hospital . . . which results from matters which are the subject of evaluation and review by the commit-tee. . . . However, information, documents, or records otherwise avail-able are not immune from discovery or use in a civil action merely because they were presented during proceedings of the committee.

A “medical review committee” is defined in the law as “a com-mittee . . . of a medical staff of a licensed hospital . . . which is formed for the purpose of evaluating the quality, cost of, or necessity for hospitalization or health care, including medical staff credentialing.” N.C.G.S. § 131E-76(5). The reasoning behind protecting such com-mittees’ documents from discovery is “the fear that external access to peer investigations conducted by staff committees stifles candor and inhibits objectivity.” 2016 LEXIS N.C.App. 190 at p. 14 (citing Shel-ton v. Morehead Memorial Hospital, 318 N.C. 76, 82, 347 S.E.2d 824, 828 (1986)).

The Court concluded that, based on the language of the statute, there are “three categories of information protected from discov-ery and admissibility at trial in a civil action: (1) proceedings of a medical review committee, (2) records and materials produced by a medical review committee, and (3) materials considered by a medi-cal review committee.” Id.

Based upon the affidavits submitted by Defendants to the trial court and the medical staff bylaws of Grace Hospital, the Court con-cluded that the committees (“MRCs”) created by Grace and main-tained by Blue Ridge for this purpose were “medical review commit-tees” within the meaning of the statute. The Court found that the privilege log, combined with Defendants’ affidavits, established that the subject documents were records and materials produced by the MRCs of Grace and/or materials considered by the MRCs of Grace.

For these reasons, the Court held that Hospital Defendants had sustained their burden to demonstrate that the subject documents were privileged pursuant to N.C.G.S. § 131E-95, that the trial court erred by ordering the Hospital Defendants to produce the subject documents to Plaintiffs, and that the trial court’s order was therefore reversed.

S. Todd Hemphill and Matthew A. Fisher are partners with Poyner Spruill LLP in the firm’s Raleigh office. They practice in the firm’s Health Care Section, concentrating on health care strategic planning issues, assisting clients in the development of health care strategies, negotiating transactions under North Carolina’s Certifi-cate of Need law and litigating Certificate of Need awards and de-nials. They also regularly represent health care clients on licensure, certification and reimbursement issues.

(Endnotes)1 The Hospital Defendants had also argued  that portions of the subject

documents were protected from disclosure by N.C.G.S.. § 90-21.22, N.C. Gen. Stat. § 8-53, and Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Based on its dispositive holding under N.C.G.S.. § 131E-95, the Court elected not to address those arguments.

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