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Holland & Hart, L.L.P.

Ninth Circuit Says Critical Habitat Designation Is Not Mandatory For Species Listed Before 1982
The Ninth Circuit Court of Appeals recently held that the designation of critical habitat for a species listed under the Endangered Species Act (ESA) prior to the 1982 amendments is within the discretion of the United States Fish and Wildlife Service and subject to arbitrary and capricious review under the Administrative Procedures Act.

07-11-2006

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Holland & Hart, L.L.P.

Ninth Circuit Expands Scope Of ESA Obligations For Federal Agencies
On June 8, 2006, the Ninth Circuit denied en banc review in Defenders of Wildlife v. US Environmental Protection Agency. Environmentalists contend, and industry representatives fear, that the decision forces federal agencies to consider the effects of their non-discretionary actions on endangered species even when the agency does not have the authority to consider such effects. While the United States has not decided whether it will seek review in the Supreme Court, given the significance of the decision and its conflict with decisions in other Courts of Appeal, it seems likely that intervenors, including the National Association of Home Builders and the Arizona Chamber of Commerce, will seek Supreme Court review.

At issue in Defenders was EPA’s decision to approve the State of Arizona’s application to administer the National Pollution Discharge Elimination System (NPDES) program under section 402 of the Clean Water Act (CWA). The CWA identifies nine criteria for approval of a state NPDES program and requires EPA to delegate the program if those criteria are met. None of these criteria include endangered species considerations. Environmental groups sued alleging that EPA had not properly consulted with the Fish and Wildlife Service under section 7(a)(2) of the Endangered Species Act (ESA) and that EPA had relied on an inadequate biological opinion. While it was required to consult with the Fish and Wildlife Service, EPA contended that it had no discretion under the CWA to deny or condition approval of Arizona’s NPDES program based on any effects on endangered species.

On August 22, 2005, a split panel of the Ninth Circuit agreed with the environmental plaintiffs and vacated EPA’s approval of Arizona’s application based on adverse impacts to listed species. The majority concluded that the biological opinion was fatally deficient and that the requirement imposed by section 7(a)(2) to avoid jeopardy and adverse modification of critical habitat was “in addition to those [obligations] created by an agencies’ own governing statute.” Moreover, the majority found that EPA was arbitrary and capricious in relying on the analyses in the biological opinion because it failed to evaluate the loss of ESA consultation that would result from the transfer of the NPDES program. Since ESA consultation obligations do not apply to States, once the NPDES program is transferred to the State of Arizona, there would be no ongoing obligation to consider the effects on endangered species or their habitat caused by an activity authorized by a state issued NPDES permit or to mitigate such effects.

The United States filed for rehearing of the decision arguing that the majority’s opinion allowed the ESA to trump the mandatory obligations of the Clean Water Act. As it has in other ESA cases, the United States argued that the ESA only applies to “actions in which there is discretionary Federal involvement or control.” The Ninth Circuit denied both requests. Judge Kozinski wrote a sharply worded dissent from the denial noting:

The majority’s opinion has far-reaching effects on the scope of the Endangered Species Act. Its holding – that the ESA imposes an affirmative duty on a federal agency to protect endangered species, even in the face of a governing statute that explicitly precludes the agency from doing so – contradicts FWS’s statutory interpretation, ignores the very recent instruction of the Supreme Court, and creates a conflict with two other circuits.

Defenders of Wildlife v. USEPA, No. 03-714390 at 6299 (9th Cir. June 8, 2006). Requests for Supreme Court review would be due at the beginning of September.

07-11-2006

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Foley & Lardner

Qualified Retirement Plans: May and June 2006 Developments
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P. L. 109-222, 5/17/2006), signed by the President on May 17, 2006, includes expanded opportunities for Roth IRA conversions.

07-11-2006

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Pillsbury Winthrop Shaw Pittman LLP

Control Over Staff Physicians: What Is The Risk of Employee Status Under Federal Law?
Hospitals exercising control over medical staff physicians in the supervision and quality of medical care risk being classified as the employer of their staff physicians under employment laws, thus exposing the hospitals to potential liability in the event of a discrimination, retaliation, or other employment-related claim. However, recent cases have lessened that risk somewhat, as courts continue to view medical staff physicians as independent contractors under employment laws while allowing hospitals to monitor the award and continuation of staff privileges as needed to ensure the delivery of high quality medical care.

07-11-2006

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Pepper Hamilton, L.L.P.

Negotiating 'Pay for Performance' Contracts
Hospitals and physicians are being thrust into a new arrangement with payers called “pay for performance.” Whether providers like it or not, most major payers - including Medicare - have announced initiatives that will enhance payments to providers who can demonstrate that they have met certain “quality” measures.

In the next five years, these pay for performance systems likely will be commonplace and drastically change the way providers are paid. While the revenue enhancements offered to providers appear to be a rewarding inducement to get involved with pay for performance programs, the proof will be in the details of the contractual commitments that providers will be asked to make.

Why Pay for Performance Contracts?

Pay for performance arrangements arise out of the desire of vastly different groups to measure the quality of patient care being provided by physicians and hospitals. Employers with self-funded health plans, and consumers with Health Savings Accounts (HSAs) and high-deductible plans, are looking for cost-effective, measured outcomes from their providers. As a result, even though many providers do not have the necessary data on their own quality measures as a benchmark, they will be forced or lured into thinking that they can earn higher payments by meeting the thresholds and goals set by a disparate set of organizations.

Hospitals that have arrangements with payers on a pay for performance basis have the ability to earn between 1 and 4 percent of total revenue with a payer if they meet the quality of care goals established in the contractual arrangement. Assuming a $100 million contract, a 1 to 2 percent increase can result in substantial additional revenue. Physicians, where there are currently fewer examples available, likely would need an additional 10 to 25 percent of revenue to be attracted to a voluntary pay for performance arrangement.

Hospital Performance Measurements

The biggest unknowns for most hospitals faced with a pay for performance arrangement are the level of quality care that they currently provide, whether they have the data systems in place to track the quality of their performance and the ability to track changes in performance.

As with most initiatives to change behavior in hospitals, pay for performance will be successful only if there is leadership from the top and a commitment from the physicians and clinical and administrative staffs to make it work.

Assuming a hospital has made a commitment to quality improvement, it needs to determine what quality measurements should be employed in its contract with a particular payer. Literally dozens of clinical standards have been developed independently by numerous groups. Some are accreditation standards, others are independent standards based on what an interest group may feel is an important measure to its constituents or members. The Hospital Quality Alliance currently has 26 primary care measures. The National Quality Forum supports more than 40 measures of hospital performance. The Leapfrog Group has its own list of measures, and the Joint Commission on Hospital Accreditation (JCAHO) recently announced an initiative on quality reporting derived from its accreditation surveys.

Choosing which measures to employ in a particular pay for performance agreement can be daunting.

Physician Performance Measurements

While determining which measures of quality hospitals should use is difficult, determining which physician measurements to employ on quality is even less clear. Many practitioners are concerned about how physician measures apply to the type of patient being seen.

Physicians are concerned that they will be at risk for the non-compliant patient. They fear that they do not have the resources to cope with language barriers, cultural differences and severity of illness that might skew their respective quality results. They also worry that those practices that are able to make large capital investments in technology, such as electronic health records, will see better outcomes than physicians who may be struggling with a lower socio-economic patient base.

Overall, physicians are anxious that they will become responsible solely for patient outcomes, rather than for the process of providing appropriate care.

One area of concern for physicians is diabetes care. If the quality measure involves how many HbA1c tests (a long-term test to measure blood glucose) are given across the population in the practice (a process measure), physicians believe that they will have control over that measure. However, if the quality measure involves the number of patients in the practice’s population who have a test result over a certain threshold (an outcome measure showing poor control), physicians believe that they may be charged unfairly with providing poor care, due largely to non-compliant patients over whom they may have no control.

Similar examples may be provided for hospital care, where the measurements of process do not reveal information about whether the patient actually improved in the inpatient setting. For example, if the preferred method of treating a heart attack patient is to use angioplasty to open an obstructed blood vessel in the heart, but the institution does not have the capability to perform an angioplasty, administrators are concerned about how that environmental reality will impact the quality measure at the hospital for heart attack patients.

Nationally Defined, Standardized Measures

The Centers for Medicare and Medicaid Services (CMS) and its Medicare program have publicly supported pay for performance measurements. Its Hospital Quality Incentive Demonstration (HQID) project was launched in July 2003. To be eligible for HQID, hospitals had to submit 2003 clinical and administrative data to Premier, Inc. - a health care alliance owned by 200 U.S. hospital systems, which provides group purchasing as well as other services to its members.

In this project, participating hospitals volunteered to have their quality data for certain high-volume clinical conditions analyzed in a standard way. Medicare agreed that the top performing hospitals in those clinical areas would be rewarded. In November 2005, the first year’s results were announced. CMS paid the top performing hospitals $8.85 million in incentives, and the list of hospitals was publicly disseminated. In future years, ratings will be revealed for both top performers and low performers, and particularly low performers will face payment reductions.

The HQID program involves five preselected clinical areas: acute myocardial infarction, coronary artery bypass graft, heart failure, pneumonia, and hip and knee replacement surgery. Thirty-four “nationally defined, standardized measures” involving process measures and patient outcomes are being tracked to determine whether the hospitals are consistently meeting evidence-based practice standards.

While these “nationally defined, standardized measures” sound like they represent easily agreed upon achievable measures in all hospitals, that may not be the case – especially when an institution has a percentage of its revenues at stake.

Insuring Smooth Contract Negotiations

Contract negotiators and their legal teams must sort through these so-called standards and determine, with the particular health care system and hospital, whether they have the data systems in place to capture this information and the clinical programs in place to meet the selected standards in the contract.

In the Blue Distinction Program recently announced by the Blue Cross Blue Shield Association, the standards established for “Surgical Infection Prevention” require administering prophylactic antibiotics within one hour before a surgical incision and discontinuing them within 24 hours after surgery end time. Before the contract team can build such measures into a contract for pay for performance, the appropriate clinical quality team at the hospital must agree that the measure is understood and agreed upon by the physicians, nurses, pharmacy and purchasing area of that hospital, in order to meet and achieve the incentive being negotiated.

Although CMS and the payers may start to promote the use of these quality measures in their standard contracts and provider agreements offered to hospitals and physician groups, the careful contract team and legal representative (whether in-house or outside counsel) will have to assemble accurate information about the particular institution and not fool themselves into thinking that national or regional standards can automatically be met.

To insure that contract negotiations with payers go smoothly, consider the following suggestions:

obtain an upfront commitment to quality improvement from both management and clinical leaders
determine the level of data available on different quality measures already in place at the hospital or practice and the reliability of such databases
review the quality measures the hospital is already using to benchmark its clinical care and become intimately familiar with the processes and measures within each
do not agree to quality measures that simply cannot be met without an extraordinary commitment in time and money, without sufficient ramp up provisions and the ability to achieve “stretch goals”
be aware of penalty provisions that may be unrealistic due to the institution’s historical treatment patterns or patient population
become familiar with databases of your peer-group hospitals rather than using benchmarks for institutions that do not relate to yours in size, location, clinical specialties and patient population, and negotiate an appropriate severity adjustment
consider whether limiting patient quality indicators by the particular payer makes sense in your institution or practice, rather than including patients in the performance measure who may be more apt to be non-compliant
decide up front which diagnosis codes trigger the patient’s inclusion in the measures and who determines that
build in a reward mechanism that varies over time and increases the overall quality of care of the institution
consider applying different weights to various performance measures (e.g., mortality should have greater weight than some other sub-measures).
Clearly, pay for performance contracts will challenge providers and their legal counsel. Most payers already have data and experience developed from years of studying the issues involved. Providers will be challenged to make a bigger commitment to raise the quality of care while negotiating contracts that meet the financial needs of the provider. The negotiating process itself will be long and detailed, and will require the efforts and cooperation of many to be successful.

07-11-2006

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Jackson Walker L.L.P.

Fifth Circuit Court Establishes Guidelines for the Evaluation of Deepwater Port Licenses
The United States Court of Appeals for the Fifth Circuit has upheld the decision of the Secretary of the Department of Transportation to grant a license for Gulf Landing LLC to operate a liquefied natural gas (“LNG”) facility in the Gulf of Mexico, despite the challenge brought by prominent environmental groups and a charter boat association (“Petitioners”).

In Gulf Restoration Network v. U.S. Dep’t of Transp., No. 05-60321, 2006 U.S. App. LEXIS 14172 (5th Cir. June 8, 2006), the Court dismissed Petitioners’ arguments that (1) the Secretary of the Department of Transportation (“Secretary”) should have included in the environmental review and subsequent Final Environmental Impact Statement (“FEIS”) for the Gulf Landing facility, the cumulative effect that all five pending applications for similar facilities would have on the environment, rather than including only those applications which have proceeded to the draft Environmental Impact Statement (“EIS”) stage and are within reasonable geographic distance to the Gulf Landing facility and (2) that an open loop system, which uses seawater to warm LNG so that it regasifies, violates the Deepwater Act because it is has a greater negative impact on the quality of water and marine life than a closed loop system, which heats LNG by recirculating water that is warmed by gas-fired boilers located at the port.

The Court found that the Petitioners’ arguments could not withstand the highly deferential standard of review afforded to decisions made by the Secretary which requires that the Secretary’s decision must be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” in order to be overturned.

Specifically, with respect to the Petitioners’ claim that the Secretary failed to consider the cumulative effect of the then three pending applications which were not assessed within the Gulf Landing FEIS, the Court found that in order to be included as cumulative, the impact must be reasonably foreseeable. The Court affirmed the Secretary’s reasoning that the impact of the three facilities would be too speculative because the applications had not yet moved to the draft EIS level. In addition, the Court found that the Secretary did not act arbitrarily or capriciously in deciding that an application for a separate facility located approximately 210 miles east of the Gulf Landing facility is too geographically distant to be included with respect to cumulative impact.

Regarding Petitioners’ open loop system argument, the Court found the statutory requirement under the Deepwater Port Act that the facility use “the best available technology to prevent or minimize adverse impact on the environment” does not mean that a closed loop system must always be implemented over an open loop system due to the greater degree of adverse impact the open loop system allegedly poses to the marine environment. Rather, the Court agreed with the Secretary’s view of the statute as intending to minimize “adverse impact to a reasonable degree given all relevant circumstances.” In the Gulf Landing case, the Secretary considered the technology, the reliability, the fuel-usage requirements and the operating costs in an overall “cost-analysis” of the technology. The Court supported this assessment as being consistent with the language and intent of the Deepwater Port Act.

The Gulf Restoration Network decision is instructive in that (i) it illustrates the high degree of deference afforded to the Secretary in deciding whether to license facilities; (ii) it establishes that the Secretary need not consider applications for which a draft EIS has not been created when calculating cumulative impact; (iii) it creates an approximate distance boundary as to which facilities need not be considered in the cumulative impact assessment; and (iv) it approves the “best available technology” requirement under the Deepwater Port Act as consisting of a cost-analysis assessment of all relevant circumstances which includes the impact on marine life, the technology, the reliability, the fuel-usage requirements and the operating costs.

07-11-2006

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Hunton & Williams, LLP

Eighth Circuit Holds That, Under Arkansas Law, Insurer Need Not Show Prejudice Where Insured Violated Late Notice Provision in General Liability Policy
The Eighth Circuit Court of Appeals, construing Arkansas law, upheld an award of summary judgment in favor of an insurer, holding that the policyholders' failure to comply with the "notice of loss" provision contained in a general liability insurance contract relieved the insurer of any obligation to provide coverage.

07-11-2006

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