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On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the “Act”) (Public Law 114-74). Among the various provisions within the Act is a change in how the IRS audits partnerships, as well as elimination of the tax matters partner. The new rules apply to partnership returns for tax years beginning on January 1, 2018. However, pursuant to procedures yet to be established by the IRS, partnerships can elect to apply the new rules to any return for a tax year that began after November 2, 2015.

These new rules are subject to clarification prior to becoming fully applicable. Evidence that the clarification process has begun is found in the March 28, 2016 IRS request for comments on implementation of a number of the partnership audit provisions. Comments were due on April 15, 2016 on electing out of the new audit rules, designation of the PR, and the push up election, in addition to other components of these new rules.

Under the new rules, audits and resulting adjustments will take place at the partnership level. Any subsequent assessment of taxes and related penalties and interest will be assessed at the entity level at the highest individual or corporate tax rate in effect for the year under audit.

Partnerships can elect to have the assessment pass directly to partners by way of a “push up” election. Where a push up election has been made, a revised K-1 is issued to those who were partners during the reviewed year. A benefit of the push up election is that underpayments can be calculated based on a partner’s individual tax rate, and offset based on the partner’s specific tax situation, rather than being taxed to the partnership at the highest marginal rate without offsets. Individual partners may also be able to deduct interest on underpayments while the partnership cannot.

Qualifying partnerships can opt out of the new rules. Upon opt out, any tax adjustments and related penalties and interest are determined at the partner level. The IRS has yet to specify the exact process by which a partnership will opt out. However, the Act limits opt out to those partnerships with 100 or fewer partners. In this context, a partner includes an individual, a C corporation, any foreign entity that would be treated as a C corporation if it were a domestic entity, an S corporation, or an estate of a deceased partner. Each individual S corporation shareholder counts towards the 100 partner limit. Opt out is not available if there is a partnership or trust among the partners.

The Act also eliminates the role of tax matters partner and replaces it with the Partnership Representative (the “PR”). The PR is not required to be a partner of the partnership but must have a substantial presence within the United States. If a partnership has not designated someone as a PR, the Act authorizes the IRS to appoint someone as the PR.

The PR is the direct liaison between a partnership and the IRS. The PR has the exclusive right to act for, represent and bind a partnership in an audit proceeding. This includes whether or not to extend the statute of limitations, contesting or settling an audit, and various Tax Court matters. Individual partners have no such rights outside of the partner’s control and authority over the PR.

Partnerships must prepare for the impact of these new rules.

Because tax adjustments and related penalties and interest can be assessed against a partnership entity, it is possible for current partners to be financially responsible for the actions of former partners. Partnership agreements and operating agreements (“Agreements”) should be amended so that those who were partners in the reviewed year indemnify the partnership and the other partners from any subsequently assessed tax, penalties and interest. Where there is no push up election or indemnification, Agreements should outline the process by which partners determine whether tax adjustments and related penalties and interest will be treated as a general expense to the partnership entity or allocated to partners.

A partnership that opts out of the new rules must remain cognizant of any incoming partners and how they may impact the partnership’s ability to opt out.

Considering the powers held by the PR, it is imperative that partnerships designate their PR as well as establishing oversight and control of the PR. While it is somewhat reasonable to believe that the IRS would appoint someone from within a partnership to the PR role, the Act provides no limitations as to who the IRS can appoint to this role.

Agreements should specify the process and limitations under which the PR is appointed and is authorized to act for the partnership. Certain situations may justify indemnification for the PR as well. The PR must be required to provide regular and timely communication to partners regarding all tax matters. Resolution of partner deadlock regarding PR actions or authority should also be incorporated in Agreements.

These rules also require consideration in the context of mergers and acquisitions. The possibility exists that a target partnership could be audited and assessed taxes and penalties after a merger or acquisition has taken place. Merger and acquisition agreements should contain indemnification provisions whereby partners for the tax year at issue remain liable for any additional taxes, interest and penalties.
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On Tuesday, May 10, 2016, Clinton Mikel, a Partner at The Health Law Partners and Chairman of the eHealth, Privacy and Security Interest Group of the American Bar Association Health Law Section, will be a guest speaker at Politico’s “Outside, In: Unhealthy Hacking: Medical Privacy in the Age of Cyber Attacks,” a live event featuring leading voices in health care, technology, and policy discussing privacy and cybersecurity in the healthcare sector.

In addition to Clinton Mikel, panelists include Texas Representative Will Hurd, Leslie Krigstein, VP of CHIME (College of Healthcare Information Management Executives), and Deven McGraw, Deputy Director for Health Information Privacy, HHS Office for Civil Rights, among others.

Among the issues the panelists will address are the following: Can health care providers afford security? Is the cyber-kidnapping of hospitals the new normal? Is greater health information exchange going to lead expanded, dangers/hacks? Is the need to secure records another driver toward consolidation in health care, because of the costs? Do we need more congressional or regulatory action to assure our records are safe and secure?

Politico will live stream the May 10 event at beginning at 5:30 p.m. EST.
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The HHS Office for Civil Rights (“OCR”) has announced that it will begin the 2016 Phase 2 HIPAA Audit Program, the next phase of audits of covered entities and their business associates. In Phase 2, OCR will review the policies and procedures adopted and employed by covered entities and their business associates to satisfy standards and implementation specifications of the Privacy, Security, and Breach Notification Rules. Phase 2 audits will primarily be desk audits, however, some on site audits will occur. OCR will evaluate the results and procedures used in the Phase 2 audits to develop a permanent audit program.
The Phase 2 audit process begins with OCR sending an email to covered entities and business associates requesting verification of an entity’s address and contact information. OCR will then send pre-audit questionnaires to obtain information about the size, type, and operations of covered entities and business associates. This information will be used in conjunction with other information to create potential audit subject pools.
If a covered entity or business associate does not respond to OCR’s email request to verify contact information or the pre-audit questionnaire, OCR will use publically available information to verify contact information or respond to the questionnaire. Thus, covered entities and business associates should be aware that ignoring OCR’s emails will not keep them from being part of potential audit subject pools.
OCR will post updated audit protocols on its website closer to when it will begin to conduct the 2016 audits. The audit protocol will be updated to reflect HIPAA Omnibus Rulemaking.
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In U.S. ex rel. Wall v. Circle C. Construction, Case #14-6150, 2016 WL 423750 (6th Cir. Feb. 4, 2016), the 6th Circuit Court held that damages in false certification cases should be based on the difference between the value of the items or services the government should have received and the value of the items or services the government actually received. The holding, which arose in the non-healthcare context of a construction contract, arguably applies in healthcare matters where medically necessary items or services were furnished pursuant to referrals that violated AKS or Stark laws and thus the government did not sustain any actual damages. A court could then find that the treble damage provision under the False Claims Act is not applicable and the government’s damage recovery is limited to the $5,500-11,000 per claim penalty.
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Although there is no federal or state law barring physicians from providing health care services to themselves or their immediate family members including prescribing medication, there are limitations imposed by both applicable ethical rules and third party payor billing policies. For example, the American Medical Association (“AMA”) has Ethics Opinion 8.19 which provides, in pertinent part, that: “physicians generally should not treat themselves or members of their immediate families” since their “professional objectivity may be compromised” and they may fail to: “probe sensitive areas when taking the medical history” or “perform intimate parts of a physical examination.” AMA Ethics Opinion 8.19 does indicate that self-treatment or immediate family treatment may be appropriate in emergency circumstances or isolated settings where there is no other available qualified physician, however, it warns that controlled substance prescribing for themselves or immediate family members should only be done in emergencies. Michigan physicians should be aware that a violation of the AMA Ethics Opinion 8.19 could give rise to an administrative action against the physician’s medical license under MCL 333.16221(b)(vi) which authorizes such action for lack of good moral character as evidenced by violation of the ethics opinion. It should also be noted that many third party payors have policies that bar claims for reimbursement for services rendered by physicians to themselves or their immediate family members. For examples, Blue Cross Blue Shield of Michigan does not cover services that health care providers render to themselves or any first-degree relatives, including parents, siblings, spouse and children. This bar covers not only controlled substances but all care services and does not provide for any exceptions. Thus, in the rare event that a Michigan physician does provide self-treatment or immediate family treatment, he or she should document the treatment using a S.O.A.P. format and indicate the emergency reason (which is required if prescribing a controlled substance) and/or isolated circumstances (if not prescribing a controlled substance). Moreover, in either case, the physician should not bill a third party payor for his/her services unless such payor allows such claims (which is unlikely).
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On November 2, 2015 the President signed The Bipartisan Budget Act of 2015, requiring that civil monetary penalties must be raised to account for inflation, followed by an annual review for further increases. Providers accused of False Claims Act (FCA) violations are likely to see an increase as high as 40% over the current penalty ranging from $5,500 to $11,000. Higher penalties may add up quickly in FCA cases, which generally involve hundreds of alleged tainted claims.

This could potentially have a negative impact on providers that have earmarked monies for quality of care improvement efforts who must now spend the money on paying higher penalties. The threat of higher penalties might also influence a provider’s decision to settle FCA cases due to the risk of astronomical penalties that may be imposed.

Budget Deal Raises Stakes for False Claims, Civil Monetary Penalties [link]
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The Wall Street Journal has reported that Federal prosecutors are investigating widespread fraud, in at least four states, by compounding pharmacies in claims submitted to TRICARE–the health-insurance program that insures over 9 million U.S. military members (active, guard/reserve and retired) and their families. Some of the allegations include: false billings, physicians writing prescriptions despite not meeting the beneficiaries in person, and improper kickbacks being received in exchange for referring business to a government agency.

U.S. Targets Pharmacies Over Soaring Claims to Military Health Program” [link]

The major increase in spending on compounded drugs is believed to be the primary reason behind a $1.3 billion deficiency in the military’s health-care budget earlier this year. As a result, funds had to be redirected from other programs to compensate for the shortage and Prosecutors are considering and pursuing civil and criminal charges against the pharmacies, physicians and drug marketers.

This action by Federal prosecutors is yet another example of the increased enforcement by federal authorities against the pharmaceutical industry seen in the last six months.
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It was just released that Congress is contemplating whether Medicare will be able to restrict at-risk drug abuse beneficiaries to a limited number of pharmacies and providers when they seek narcotics. Currently, Medicaid and the Veterans Affairs (VA) are able to impose these restrictions, but Medicare is not.

If successful, this action will help prevent opioid abuse by averting doctor shopping and encouraging physicians and insurers to aid patients battling drug abuse.

Congress Looks to Curb Medicare Prescription Drug Abuse
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The United States Department of Health and Human Services Office of Inspector General (“HHS-OIG”) has released its Work Plan for Fiscal Year 2016. This plan summarizes new and continuing areas of review and activities that HHS-OIG plans to pursue as well as describing its primary objectives. The newest additions to the work plan are:

• Medical device credits for replaced medical devices • Medicare payments during Medicare Severity Diagnosis Related Groups (MS-DRG) payment window • Content Management System (CMS) validation of hospital-submitted quality reporting data • Skilled nursing facility prospective payment system requirements • Orthotic braces-reasonableness of Medicare payments compared to amounts paid by other payers • Osteogenesis stimulators-lump-sum purchase versus rental • Orthotic braces-supplier compliance with payment requirements • Increased billing for ventilators • Ambulatory surgical centers-quality oversight • Physicians-referring/ordering Medicare services and supplies • Anesthesia services-non covered services • Physician home visits-reasonableness of services • Prolonged (E & M) services-reasonableness of services • Histocompatibility laboratories-supplier compliance with payment requirements • Accountable Care Organizations: Strategies and Promising Practices • Medicare payments for unlawfully present beneficiaries in the United States-mandated review • Medicare payments for incarcerated beneficiaries-mandated review • Content Management System (CMS) management of ICD-10 implementation • Medicare Advantage organization practices in Puerto Rico • Medicare Part D beneficiaries’ exposure to inappropriate drug pairs • Medicare Part D Eligibility Verification transactions • Part D Pharmacy Enrollment • Increase in prices for brand-name drugs under Part D • Specialty drug pricing and reimbursement in Medicaid • Express Lane Eligibility • State agency verification of deficiency corrections • Medical loss ratio-recoveries of MCO rebates from profit-limiting arrangements • Review of States’ methodologies for assigning Managed Care organization payments to different Medicaid FMAPs • Managed long-term-care reimbursements • Center for Disease Control (CDC)-oversight of the Select Agent Program • Controls over networked medical devices at hospitals • Food and Drug Administration (FDA)-tobacco establishment compliance with the Family Smoking Prevention and Tobacco Control Act • Health Resources and Services Administration (HRSA)-compliance with Maternal, Infant, and Early Childhood Home Visiting (MIECHV) Requirements • IHS-change card program review • NIH-controls over subcontracting of NIH grant and contract work • Controls over the preparation and receipt of select agent shipments • Review of Office for Human Research Protections compliance evaluations to ensure human subject protection • Foster Care-States’ protocols for the use and monitoring of psychotropic medications for children in foster care • States’ implementation of guardian ad litem requirements • Consumer Operated and Oriented Plan Loan Program-CO-OP compliance with requirements and CMS monitoring activities • Allowability of contract expenditures • Rollup of State-based marketplace eligibility determination audits and Content Management System (CMS) oversight • Health Resources and Services Administration (HRSA)-compliance with Maternal, Infant, and Early Childhood Home Visiting (MIECHV) requirements
The U.S. Department of Health and Human Services Office of Inspector General has released their Work Plan for Fiscal Year 2016

The HHS-OIG expects significant recoveries in audit receivables, investigative receivables and non-HHS investigative receivables resulting from their Work Plan, as well as tremendous savings in legislative, regulatory, and/or administrative actions.
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