Healthcare Regulation Update: CMS to Develop New Integrity Contractors Called “Unified Program Integrity Contractors”

The American Health Care Association (“AHCA”) has reported that the Centers for Medicare & Medicaid Services (“CMS”) will be making efforts to streamline its audit structure. Among the changes will be the development of a new integrity contractor called a Unified Program Integrity Contractor (“UPIC”). These new contractors will focus on both Medicare and Medicaid integrity issues. Initial reports suggest that Zone Program Integrity Contractors (“ZPICs”), Program Safeguard Contractors (“PSCs”) and Medicare Administrative Contractors (“MACs”) will be folded into the UPIC structure. However, subsequent guidance from CMS suggests that ZPICs and MACs will still have some responsibilities independent of the UPIC structure.

CMS also plans to phase out Medicaid Integrity Contractors (“MICs”) while leaving Medicare Recovery Auditors (“RAs”) and Medicaid Recovery Audit Contractors (“RACs”) in place. AHCA also reported that CMS would be consolidating all Medicare and Medicaid data into one unified database.

You can read more about AHCA’s announcement here. We are hopeful that the proposed changes will actually streamline the audit process, prevent duplicative audits and limit duplicative records requests, rather than create an additional burden for providers.

Fuerst Ittleman David & Joseph, PL will continue to monitor the CMS audit landscape. For additional information concerning CMS audits, feel free to read our prior articles on this subject, including “The Latest Zpic Target: Medicare Cost Reports” and “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West”. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

Florida Corporate and Business Law Update: The Florida Revised Limited Liability Company Act, Chapter 605 of the Florida Statutes, Modernizing Florida’s Limited Liability Company Laws

The State of Florida has taken an important step in modernizing its business climate by revamping its limited liability company (“LLC”) laws and thus keeping Florida competitive with other influential commercial jurisdictions in the U.S. Specifically, the Florida Legislature recently passed into law the Florida Revised Limited Liability Company Act (the “Revised LLC Act”), which is codified in the new Chapter 605 of the Florida Statutes. A “substitute” version of the Revised LLC Act is available here. The revisions impact not only existing businesses in Florida but also all third parties who transact business with LLCs in Florida.

Key Revisions

The Revised LLC Act is largely based on the 2011 version of the Revised Uniform Limited Liability Company Act (“RULLCA”), available here, but also retains certain provisions from the existing Florida LLC Act, which is codified in Chapter 608 of the Florida Statutes and is available here. The revised act also borrows from the American Bar Association’s Revised Prototype LLC Act, the Revised Model Business Corporation Act, Florida’s partnership acts, and the LLC statutes of Delaware and other leading commercial states.

Among its key revisions, the Revised LLC Act does the following:

  • Like its predecessor, the Revised LLC Act is a default statute, meaning that it sets forth certain provisions that cannot be waived and it also is used to fill in gaps when parties have failed to consider certain issues in their articles of incorporation and/or operating agreements. The revised act expands the list of non-waivable provisions and contains various gap-fillers, such as for fiduciary duties, special litigation committees, derivative actions, indemnification for wrongful or intentional misconduct, and an LLC’s capacity to sue and be sued. (However, because an LLC may override certain default gap-fillers by contract, the operating agreement continues to be a critical focal point for the rights and responsibilities by and between the LLC’s members and managers).
  • The Revised LLC Act modifies various provisions governing an LLC’s management structure, including, among other such modifications, by eliminating the concept of a “managing-member” and thus leaving LLCs to exist as either member-managed or manager-managed; and by altering certain voting rules for both members and managers, such as by requiring that a majority-in-interest of the members approve any action outside of the LLC’s ordinary course of business.
  • The Revised LLC Act recognizes the agency power of an LLC’s managers and members, giving both of them “apparent” authority to bind the LLC. In the absence of a contrary provision in the articles of incorporation or operating agreement, all Florida LLCs are now considered to be member-managed, and all members have authority to bind the LLC as agents of the LLC. Thus, because information regarding whether an LLC is member-managed or manager-managed may not be contained in public records, third parties under the revised act would be well-advised to ask for copies of an LLC’s operating agreement and/or written management designation to determine the authority of the LLC’s managers and members as agents of the LLC. Alternatively, the revised act now allows for the filing of a statement of authority, which, as with similar statements authorized under Florida’s partnership statutes, allows an LLC to designate any member(s), manager(s) or other person(s) who can bind the LLC. An LLC also can file a statement of denial to revoke (or deny) a prior grant of authority. The revised act further imposes additional reporting requirements regarding information that is submitted to the Department of Corporations.
  • The Revised LLC Act modifies the provisions regarding the winding up of an LLC’s affairs, dissociation of members, and dissolution of LLCs, including by introducing the concept of “wrongful dissociation,” and by giving an LLC the right to damages against a member who wrongfully dissociates from the LLC (and, for example, wrongfully competes against the LLC). Similarly, the revised act clarifies the grounds for judicial dissolution and the appointment of receivers and custodians, including a “deadlock sale” provision addressing deadlock between managers or members. The revised act also eliminates certain prior provisions (under the existing act) regarding the circumstances in which an LLC’s creditor can bring an action against the LLC for judicial dissolution.
  • The Revised LLC Act modifies the provisions regarding service of process on LLCs, and thus clarifies how to serve process on a Florida LLC and/or a foreign LLC that is authorized to transact business in this state.
  • The Revised LLC Act clarifies the provisions regarding appraisal rights and organic transactions, such as mergers, conflict-of-interest exchanges, conversions and domestications, including interest exchanges and in-bound domestications by non-U.S. entities. (The revised act does not currently adopt “Series LLCs,” although the issue continues to be considered and, if necessary, could be the subject of a future special task force.)

Conclusion

Once it is signed into law by the Governor, the Revised LLC Act will become effective on January 1, 2014, and will apply to all new limited liability companies (or LLCs) formed or registered to do business in the State of Florida on or after that date, or to all existing LLCs that registered prior to January 1, 2014 and elect to come under the revised act.

In addition, as of January 1, 2015, the revised act (in Chapter 605 of the Florida Statutes) will repeal the existing Florida LLC Act (in Chapter 608) for all LLCs formed or registered to do business in Florida prior to January 1, 2014, and thus will become the mandatory default statute for all LLCs (regardless of registration date) as of January 1, 2015. The one-year gap provides existing LLCs a limited window within which to assess their current governance procedures and corporate documentation before being subject to the new provisions of the Revised LLC Act.

Although the statutory revisions are designed to, and should, make Florida a more desirable location for business owners, the Revised LLC Act contains significant changes from the existing act and thus implicates many material issues for anyone who conducts business in this state and/or deals with Florida or foreign LLCs here, including lenders and other parties who contract with Florida LLCs.

The key revisions identified above provide a non-exhaustive glimpse into the subject changes. Florida business owners and third parties with commercial operations in this state should consult with a legal advisor to determine what changes, if any, are appropriate given the Florida Revised LLC Act and to avoid unintended consequences of transacting business in this state.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of commercial transactions, including incorporation, management, governance and compliance issues. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

Business Litigation Update: When Settlement Agreements Settle Nothing

In business, there is an absolute need for certainty. With the interminable uncertainty posed by the litigation process, businesses frequently “purchase” certainty by agreeing to settle a lawsuit, oftentimes at amounts which they may subjectively feel to be unjust. However, with such finality, a business is able to properly budget and forecast its financial needs, and hence make solid business decisions. But what happens when the certainty which was “purchased” remains uncertain?

In Nall v. Mal-Motels, Inc., a copy of which is available here, the Eleventh Circuit Court of Appeals opened the floodgates to uncertainty by reversing a settlement which was found to be, after an evidentiary hearing, “a fair and reasonable resolution of a bona fide dispute.” Before we pull all of the (remaining) hair from our heads, it must be noted that this case was decided under the limited confines of the Fair Labor Standards Act (“FLSA”). However, its implications are far-reaching.

Nall started as a routine overtime case. The plaintiff was coaxed by her employer to stop “punching the clock,” and instead was paid a “salary” equal to her hourly rate. There is no known exemption reported to apply. After a few years, the employee grew weary of not receiving any overtime, and quit. The employee, soon finding herself destitute and “homeless,” filed suit.

The employer, without counsel, reached out to the employee and explained that the lawsuit would “ruin his business,” and pleaded with her to quickly settle the case without lawyers. The employee met with the employer, without any counsel present, and at that meeting agreed to resolve the dispute, and signed a Notice of Dismissal With Prejudice along with a pre-prepared letter to her lawyer advising that the case had been settled. In return, the employee received a check and much-needed cash; however, the compensation was dramatically less than what she would have been entitled had she prevailed.

The Notice of Dismissal was filed; however, the trial court sua sponte rejected the Notice as it was not submitted by the employee’s lawyer. The employer then asked the court to enforce the settlement agreement, which the employee’s lawyer opposed. At the evidentiary hearing, the court found that a settlement had in fact been reached, and that the settlement agreement was “a fair and reasonable resolution of a bona fide dispute under the FLSA.” The court then dismissed the case with prejudice. The employee appealed.

The Eleventh Circuit, citing to Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), noted that there are only two ways for an FLSA case to be settled by compromise: (a) under the supervision of the Secretary of Labor, which did not apply to the case; or (2) through a lawsuit between the employee and employer, where the parties “present to the district court a proposed settlement” and “the district court may enter a stipulated judgment after scrutinizing the settlement for fairness.” In so scrutinizing the settlement’s fairness, the court must balance the “often great inequalities in bargaining power between employers and employees.” Indeed, in legislating FLSA, Congress intended “to protect certain groups of the population from substandard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce.” The FLSA encompasses built-in deterrents in the form of liquidated damages to ensure the employer’s compliance, and thus, permitting “an employer to secure a release from the worker who needs his wages promptly will tend to nullify the deterrent effect which Congress plainly intended that [the FLSA] should have.”

The question thus becomes, what constitutes a “stipulated judgment”? A stipulation requires an agreement by two parties. Here, however, even though the court found as a matter of fact, after an evidentiary hearing, that a settlement was reached by the parties, and that the settlement was “a fair and reasonable resolution,” the Eleventh Circuit found that because the employee through her counsel later objected to the enforcement of the settlement agreement, there was no stipulation. Because there was no “stipulated judgment,” there could be no resolution of the FLSA claim. The dismissal was thus reversed.

The Nall Court did leave room to find that the holding was limited to cases where the employee is without counsel by noting, “[s]ettlements may be permissible in the context of a suit brought by employees under the FLSA” because the employees are “likely to be represented by an attorney who can protect their rights under the statute” when the settlement is reached within the “adversarial context of a lawsuit.” However, the court went on to further note that it was not deciding the question of whether a settlement reached by the parties with counsels’ respective participation, but later objected to by employee’s counsel, would comport with the “stipulation” requirement, thus leaving open the very real potential for FLSA-plaintiffs’ counsel to abuse the system by demanding more money at the “stipulation hearing.” Moreover, in virtually every case settled by agreement, a party may suffer from a form of “buyer’s remorse,” which may pervade the very need for certainty at inception. In other words, settlements may become unrealistic in the context of FLSA cases if the Nall doctrine is expanded.

The implications of the case are potentially far-reaching and impactful to other types of claims. Indeed, the case is open to reliance for any claim brought where there are statutory remedies available “to deter misconduct.” It would not take a leap of logic to apply the Nall doctrine and argue that parties cannot settle cases involving statutory claims without the involvement of counsel. After all, to enforce such pro-se agreements would “tend to nullify the deterrent effect which Congress plainly intended.” The holding, if so broadly applied, would actually tend to result in less money available to plaintiffs, as there is an obvious economic cost to pay the lawyers on both sides to “ratify” the parties’ agreement. That is not and cannot be the intent of Congress. Unless, of course, the courts tell us it is.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex litigation, including international and domestic business matters, contract disputes, and insurance issues. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

Healthcare Regulation Update: Centers for Medicare and Medicaid Services Announces Enrollment Moratorium On New Home Health Agencies in Miami-Dade and Monroe Counties

Last week, from July 23-25, the Home Care Association of Florida held its annual convention in Orlando, Florida. We were actively involved in the convention, and among the many discussions we participated in was the federal government’s increased (and sometimes confusing, abusive, and ultra vires) efforts at combating fraud, waste, and abuse in the home health industry in Florida. Coincidentally, only a day after the conference concluded, the Centers for Medicare and Medicaid Services (“CMS”) announced its imposition of a moratorium on the enrollment in the Medicare, Medicaid, and Children’s Health Insurance Program (“CHIP”) of home health agencies in Miami-Dade and Monroe counties to prevent and combat fraud, waste, and abuse. A copy of CMS’s notice announcing the moratorium can be read here and will be published in the Federal Register on July 31, 2013.

Pursuant to section 6401(a) of the Patient Protection and Affordable Care Act and its implementing regulation found at 42 C.F.R. § 424.570, the Secretary of the Department of Health and Human Services (“HHS”), of which CMS is a member agency, is authorized to implement a temporary moratorium on new enrollment by fee-for-services providers and suppliers, if the secretary determines that such a moratorium is necessary to prevent or combat fraud, waste, or abuse. Additionally, pursuant to section 1866(j)(7)(B) of the Social Security Act, the Secretary’s decision to impose a temporary enrollment moratorium is not subject to judicial review.

In deciding to implement the moratorium, CMS looked at a variety of factors. First, CMS consulted with the Office of Inspector General (“HHS-OIG“) and the Department of Justice (“DOJ“) which cited the significant potential for fraud in Miami-Dade County. Second, CMS compared Miami-Dade to other similarly sized metropolitan areas and found that Miami-Dade had approximately 38 home health agencies per 10,000 beneficiaries while the national average for similar sized areas is approximately 2 agencies per 10,000 beneficiaries. In addition, CMS found that Miami-Dade HHAs frequently had excessive “outliers” and payments to HHAs in Miami-Dade were 77 percent greater than the average for comparison counties. (In simple terms, outliers provide Medicare providers with additional payment for high cost cases. Under the prospective payment system, CMS adjusts basic prospective payments for unusually high costs. These additional payments are known as “outlier” payments and are designed to protect providers and suppliers from excessive losses due to unusually high-cost cases.) Further, excessively high outliers continue to exist in Miami-Dade despite CMS’s efforts to limit outlier payments through policy change.

CMS’s rationale for the moratorium in Monroe County was more prophylactic in nature. As explained by CMS:

Florida has divided the state into 11 home health “licensing districts,” that prevent a home health agency from providing services outside its own licensing district. Monroe is the only bordering county within the same licensing district as Miami-Dade. CMS has determined that it is necessary to extend this moratorium to Monroe to prevent potentially fraudulent HHAs from enrolling their practices in a neighboring county to avoid the moratorium.

However, CMS found it was not necessary to extend the moratorium to other counties in South Florida, such as Broward and Palm Beach, because “the state’s home health licensing rules ”¦ prevent providers enrolling in these counties from serving beneficiaries in Miami-Dade.” It remains to be seen whether the moratorium will actually prevent waste, fraud, and abuse or merely shift it to other large population bases (such as Broward and Palm Beach counties) throughout the state.

As a result of the moratorium, new home health agencies will be barred from enrollment for the next six-months. Additionally, should CMS believe it is necessary, the moratorium may be extended in six-month increments. Existing providers will not be affected by the moratorium and will be allowed to continue to participate in the Medicare, Medicaid, and CHIP programs. However, we remind those providers still operating in South Florida that combatting fraud among Miami-Dade HHAs has remained a major priority for CMS since as early as 2007 and we expect that these providers will remain under the CMS microscope for years to come.

The health law attorneys of Fuerst Ittleman David & Joseph, PL have extensive experience handling the various regulatory and compliance issues surrounding the provision of Medicare and Medicaid services. For more information, please contact at 305-350-5690 or contact@fidjlaw.com.

FTC Regulatory Update: FTC Settles with Marketers of Bed Bug and Head Lice Treatments; Highlights Confusing Interplay Between FTC and FDA

On July 16, 2013, the Federal Trade Commission (“FTC”) announced that it entered into settlement agreements with Chemical Free Solutions LLC and Dave Glassel (collectively “Cedarcide Defendants”), the marketers of bed bug and head lice products. The parties agreed to these settlements after nearly a year of litigation regarding allegedly false and unsubstantiated claims about the ability of the product, BEST Yet!, to stop and prevent head lice and bed bug infestations. (To read more about the FTC’s 2012 complaint, please click here.) The settlements prohibit the use of allegedly deceptive claims and require pre-approval from the U.S. Food and Drug Administration (“FDA”) prior to making any treatment claims.

Settlement Orders

The settlement orders prohibit the Cedarcide Defendants from claiming that their BEST Yet! products by themselves are effective in stopping or preventing bed bug infestations, more effective than other products or services at stopping and preventing bed bug infestations, or any other representation about the product’s performance or efficacy without “competent and reliable scientific evidence” to support the claim. (To read the full text of the settlement orders, click here and here.) Furthermore, the Cedarcide Defendants are also barred from claiming that the product is effective in treating head lice infestations unless the claims are non-misleading and they obtain FDA’s approval of a new drug application or the product properly conforms to an existing over-the-counter (“OTC”) drug monograph. The settlement orders also prohibit the Cedarcide Defendants from marketing, promoting, or misrepresenting, either expressly or by implication, that the BEST Yet! product is endorsed or approved by a government entity or third-party organization. The agreed-upon settlement orders impose a $4.6 million judgment against Glassel, who is facing bankruptcy, and an $185,206 judgment against Chemical Free Solutions, LLC, which will be suspended due to the party’s inability to pay. By agreeing to the Stipulated Orders for Permanent Injunction and Monetary Judgment, the Cedarcide Defendants are legally obligated to abide by the terms contained therein, and the penalties associated with violating such orders can be severe.

FTC Commissioners’ Statements

At present, the FTC is headed by four Commissioners, who act as the final decision makers in FTC enforcement actions. These Commissioners review and vote on all cases prior to filing suit in federal court or taking any action in an administrative proceeding. After reviewing the case against the Cedarcide Defendants, the Commissioners voted 3-1 to approve the proposed settlements described above. The Commissioners released statements explaining their individual decisions on this matter. In their statements, the Commissioners primarily focused on the provisions in the Stipulated Order requiring FDA pre-approval, and for that reason alone the statements are worthy of further examination.

FTC Chairwoman Edith Ramirez and Commissioner Julie Brill entered a joint statement in support of requiring the Cedarcide Defendants to obtain FDA pre-approval prior to making any representations that the product can stop, prevent, or treat bed bug or head lice infestations. (To read the full text of the Ramirez and Brill joint statement, please click here.) The joint statement supports the FTC’s decision, “notwithstanding the Commission’s recent decision in POM Wonderful, LLC (“POM Wonderful”) in which [the FTC] declined to impose an FDA pre-approval requirement for the food products in question.” The joint statement clarifies that head lice infestation, or “pediculosis,” is a medical condition; therefore, any product that claims to treat it is subject to FDA regulations and the federal Food, Drug, and Cosmetics Act (“FDCA”). The joint statement goes on to explain that “requiring the defendants to have FDA pre-approval as substantiation for future claims is particularly appropriate as it harmonizes their obligations under the FDCA and the FTC Act.” Accordingly, Chairwoman Ramirez and Commissioner Brill’s joint statement asserts that the defendants “should not be permitted to skirt a well-established regulatory scheme for demonstrating the efficacy and safety of head lice treatments,” especially when the cost of complying with the FDA regulatory scheme is not prohibitive for companies seeking to market such treatments.

In a separate opinion, Commissioner Joshua D. Wright wrote that “[a]s a general matter, I believe that FDA pre-approval provisions should play a very limited role in FTC orders and that the conditions under which they are appropriate are fairly narrow.” Nevertheless, Commissioner Wright voted in support of the FTC’s decision to require FDA pre-approval in this settlement. (To read the full text of Commissioner Wright’s statement, please click here.)

Commissioner Maureen K. Ohlhausen issued a dissenting statement that raises thoughtful questions about the boundaries of inter-agency cooperation and each agency’s standards for substantiation. In her dissent, Commissioner Ohlhausen stated that she voted against the settlements in this case because:

the requirement that defendants obtain FDA preapproval prior to making head lice treatment claims is inconsistent with Commission precedent and that imposing such a high bar for these types of claims in general may ultimately prevent useful information from reaching consumers in the marketplace.

(To read the full text of Commissioner Ohlhausen’s statement, please click here.) These settlements, she argued, are a departure from the FTC’s two most recent decisions regarding deceptive health claims, wherein the FTC determined that requiring FDA pre-approval was unnecessary because the FTC’s standard of requiring competent and reliable scientific evidence was sufficient to substantiate that a representation is true.

In a footnote, Commissioner Ohlhausen pointedly explained why she believes requiring FDA pre-approval is at odds with FTC’s policies. An important distinction between the FDA and FTC’s substantiation policies is that the FDA views safety and efficacy as “fundamentally linked” for the purpose of drug approval, meaning that the FDA’s approval standards are “more stringent than FTC substantiation standards.” More specifically:

Under the FTC Act, it is not our mission to police drug safety or efficacy directly. Advertisers are liable to substantiate material claims that products are safe, just as they are liable to substantiate material claims that products are efficacious. But they are not liable to substantiate claims that they do not make or imply. If an advertiser makes an efficacy claim, but not a safety claim, there are two related reasons why FDA approval standards would be more stringent than FTC substantiation standards. First, FDA approval requires testing two properties (efficacy and safety). Second, FDA approval requires sufficient testing to consider each of these two properties in view of the other.

Commissioner Ohlhausen reasoned that requiring defendants to undergo FDA’s review process is unnecessary because the FTC has the capability to “impose directly by order the type of substantiation that experts in the field believe is reasonable.”

In her dissent, Commissioner Ohlhausen also expressed her concern that industry would interpret these settlements as the FTC adopting or aligning with the FDA’s substantiation standard, which would send “the wrong signal to parties trying to ascertain the level of substantiation required to make health-related claims.”  Such an interpretation could have a significant impact on regulated industry, as it could “potentially chill health-related claims and deprive consumers of useful information.” Furthermore, her statement emphasized that she dissented from the majority decision because the FTC’s responsibility is “limited to requiring adequate substantiation based on [the FTC’s] enabling statute and relevant precedent” and not to ensure that advertisers comply with their obligations under the FDCA.

What This Means

The FTC’s settlements with the Cedarcide Defendants highlight certain issues that can arise as a result of the relationship between the FTC and the FDA. Commissioner Ohlhausen’s dissent offers insight into how the FTC’s regulation of any advertising and promotion of FDA-regulated products can create a complex and oftentimes confusing regulatory framework for industry. Here, it is especially interesting that the FTC required FDA pre-approval for purported head lice and bed bug treatments, when it did not require such a high standard for purported treatments involving cancer or heart disease in its decision in POM Wonderful. (To read our coverage regarding the FTC’s decision in POM Wonderful, please click here, here, here, and here.) From the industry’s perspective, the FTC’s settlement agreements with the Cedarcide Defendants further blurs the line between the FTC and FDA’s substantiation standards. Without clearer guidance regarding the application and interpretation of the FTC and FDA’s separate substantiation standards, industry is forced to guess how its products will be regulated and which standards it must meet to be compliant with federal laws and regulations.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience working with regulated industry to ensure that products are marketed and advertised in compliance with all FTC and FDA laws and regulations. If you have any questions, please contact us by email at contact@fidjlaw.com or telephone at (305) 350-5690.

FATCA Compliance Update: U.S. Treasury Announces Six Month Delay In Implementing FATCA

On July 12, 2013, the U.S. Treasury announced that due to overwhelming concern from countries around the world, the implementation of FATCA (the Foreign Account Tax Compliance Act) would be deferred from January 1, 2014 to June 30, 2014.

IRS Notice 2013-43, available here, provides that this additional time is necessary to 1) revise timelines for implementation of FATCA, and 2) develop additional guidance concerning the treatment of foreign financial institutions (FFI) in countries which have either signed an Inter-Governmental Agreement (IGA) with the United States or which the United States will treat as if they had.

The IRS has not yet established its on-line registration portal which would allow participating FFIs to begin the process of registering submitting the information by FATCA.  The registration portal is now expected to be open on August 19, 2013. In order to ensure that a FFI would be included on the IRS FFI list, the FFI would need to finalize their registration by April 25, 2014.

To date, only 10 IGAs have been signed although discussions have been ongoing with dozens of countries. Consequently, FATCA compliance may differ significantly depending on where the FFI is located, and more specifically whether the FFI is in a country with an IGA.  There will also be differences if the IGA is a form of a Model 1 IGA or Model 2 IGA and whether the IGA has provisions requiring U.S. reciprocity in reporting U.S. financial institution information.

Although the IRS has issued a draft form of IRS Form W-8BEN-E (an eight page form containing 20 different types of FATCA categories reflecting the enormous complexity of FATCA), it is expected that the IRS will finalize the W-8BEN-E sometime in the fall of 2013.  It is also expected that the IRS will finalize guidance so that affected taxpayers will be able to confidently prepare and file it.

There is a significant amount of ongoing controversy surrounding the IGAs and the potential for having the United States committed to reciprocity. The Treasury Department in its IGA negotiations had promised that the information reporting through an IGA or by the account holders directly would work as a two-way street, and not surprisingly, some foreign governments will only sign where the U.S. provides “equivalent levels of reciprocal automatic exchange” with foreign “FATCA partners.” However, Treasury has acknowledged that it does not have the statutory power to make any such promise of reciprocity and has requested that Congress provide it with such power so as to overcome what could be a fatal flaw in FATCA.

If Congress grants such statutory authority to the Treasury, the consequences may be that every financial institution in the United States would become a FFI to the other IGA countries. The U.S. financial institutions would then have to go through the same registration process and information reporting on their customers that the FFIs from IGA countries must deal with now.

Will Congress pass the necessary legislation?

At this point, there are opponents in the House of Representatives where the tax bills originate. Congressman Bill Posey (R-Florida, 8th) a key member of the House Financial Services Committee, has written a letter to Jack Lew, Secretary of the Treasury, sharply turning down any thought of imposing FATCA on U.S. financial institutions. A copy of Congressman Posey’s letter is available here. As Congressman Posey stated, “…it is difficult to conceive of any circumstance that would justify imposing such an expensive and counterproductive domestic mandate.”

In addition to getting approval from the House Financial Services Committee, an approval would be needed from the House Ways and Means Committee.

Without the IGAs being widely accepted among the financial centers of the world, FATCA could prove to be effectively unenforceable.

Fuerst Ittleman David & Joseph will continue to monitor IRS’s implementation of FATCA, as well as any and all further developments in Congress. For more information, please feel free to contact us via email at contact@fidjlaw.com or by phone at (305) 350-5690.

Food Safety Regulatory Update: Court Imposes Deadlines on FDA to Promulgate and Implement FSMA Rules by 2015

On June 21, 2013, the United States District Court for the Northern District of California issued an order requiring the U.S. Food and Drug Administration (“FDA”) to publish regulations under the Food Safety Modernization Act (“FSMA”) by June 30, 2015. (To read the full text of the June 21, 2013 order, please click here. For additional news coverage by Food Safety News, please read their article here.) As we previously reported here and here, the FSMA contains various sweeping provisions that significantly expanded the FDA’s authority to regulate the conditions under which food products are produced, manufactured, transported, imported, and marketed in the United States. In enacting the FSMA in January 2011, Congress set specific deadlines by which the FDA was expected to promulgate all of its food safety rules, with some deadlines as early as 180 days after FSMA’s enactment and others as late as two years thereafter. Although the FDA has made some progress in promulgating and implementing the FSMA, it has also missed several mandatory deadlines.

In August 2012, the Center for Food Safety and Center for Environmental Health (“Plaintiffs”) filed a complaint against FDA Commissioner Margaret Hamburg seeking declaratory and injunctive relief regarding the FDA’s failure to promulgate final regulations by the mandatory deadlines contained in the FSMA. (For additional news coverage, please read Food Safety News’s article here.) On April 22, 2013, the Court issued an order granting Plaintiffs’ motion for summary judgment and request for a judicial declaration that the FDA had violated the FSMA by failing to promulgate the required regulations in accordance with the deadlines mandated by Congress. (For more information, please read Bloomberg’s coverage here.) Moreover, the Court found that the Plaintiffs were entitled to injunctive relief, but requested the parties to submit a joint statement setting forth agreed proposed deadlines. The parties were unable to reach an agreement and submitted competing proposals for the court’s review.

The Plaintiffs submitted a schedule of proposed deadlines, which would have required the FDA to publish all final rules in the Federal Register by May 1, 2014. The Court rejected the Plaintiffs’ proposed schedule as “overly restrictive in light of the FDA’s showing of the complexity of the task” and the FDA’s “showing of diligence in attempting to discharge its statutory duty to promulgate regulations.” The FDA countered with proposed target timelines of 2015 through 2016 for the publishing of all final rules, which the Court also rejected as “an inadequate response to the request that the parties submit a proposal regarding deadlines that can form the basis of an injunction.” Instead, the Court imposed its own deadlines on the FDA, emphasizing the need for adequate time for public comment and review by the Office of Management and Budget (“OMB”). The Court’s order requires the FDA to publish all proposed regulations by November 30, 2013 and to close all comment periods no later than March 31, 2014. Additionally, the order requires the FDA to publish all final regulations in the Federal Register no later than June 30, 2015.

Even though the Court imposed firm deadlines on the FDA, it acknowledged that the FDA “has limited resources” to carry out the complex and difficult task of promulgating the FSMA. Moreover, while the Court’s decision seems intended to prevent the FDA from any further delay in implementing the FSMA, the timing of the Court’s deadlines, which provide a compromise between the proposals submitted by both parties, suggests that the Court was also reluctant to force the FDA to rush the procedural processes required to promulgate and implement the FSMA.

Fuerst Ittleman David & Joseph will continue to monitor the FSMA as it is implemented by the FDA. For more information, please feel free to contact us via email at contact@fidjlaw.com or by phone at (305) 350-5690.

FDA Tobacco Regulation Update: FDA announces first substantial equivalence decisions for tobacco products

On June 25, 2013, the FDA announced that for the first time since the passage of the Family Smoking Prevention and Tobacco Control Act, which granted the agency the authority to regulate cigarettes and other tobacco products, the agency has authorized the marketing of two new tobacco products and denied the marketing of four others through the substantial equivalence pathway. A copy of the FDA’s press release can be read here.

While the FDA does not “approve” tobacco products as it would drugs, it does regulate which products may be marketed through the Tobacco Control Act. If FDA determines a new tobacco product meets the relevant legal requirements, FDA will issue a written notification permitting the marketing of the new tobacco product. Under the Tobacco Control Act, tobacco manufacturers may use one of three pathways when seeking to market “new tobacco products.” [A “new tobacco product” is a product that was not sold in the United States prior to February 15, 2007. Also any modification made to tobacco products which were in existence as of February 15, 2007 reclassifies the product as a “new tobacco product.”] These pathways are: 1) premarket review and approval; 2) substantial equivalence; or 3) exemption from substantial equivalence regulation. An overview of these pathways can be read on the FDA’s website here.

Generally speaking, pursuant to section 910 of the Food, Drug, and Cosmetic Act, prior to marketing a new tobacco product a manufacturer must submit a premarket tobacco product application and receive an order authorizing marketing from the FDA. The FDA’s traditional “safe and effective” standard for evaluating drugs does not apply to tobacco. Rather, premarket approval requires the applicant to demonstrate that the FDA permitting the marketing of the new tobacco product would be “appropriate for the protection of the public health.” The statute provides that the basis for this finding shall be determined with respect to the risks and benefits to the population as a whole, including users and nonusers of the tobacco product, and taking into account: 1) the increased or decreased likelihood that existing users of tobacco products will stop using such products; and 2) the increased or decreased likelihood that those who do not use tobacco products will start using such products.

Premarket approval is required unless pursuant to section 905(j), 1) the manufacturer submits a report (known as a “905(j)” report) and is granted an order finding that its product is substantially equivalent to a tobacco product marketed in the U.S. prior to February 15, 2007; or 2) the tobacco product is exempt from the requirements of section 905(j) pursuant to a regulation issued under 905(j)(3). A new tobacco product is “substantially equivalent” to a predict tobacco product if the FDA has found that the new product:

  • Has the same characteristics as the predicate product; (“characteristics” means the materials, ingredients, design, composition, heating source, or other features of a tobacco product), or
  • Has different characteristics and the information submitted contains information, including clinical data if deemed necessary by the Secretary, that demonstrates that it is not appropriate to regulate the product under section 910 because the product does not raise different questions of public health.

It should be noted that a new tobacco product may not be found to be substantially equivalent to a predicate tobacco product that has been removed from the market at the initiative of the Secretary or that has been determined by a judicial order to be misbranded or adulterated. The FDA has published additional guidance on 905(j) reports which can be read here. While similar to the scheme established for approval of medical devices there are some slight differences. The most glaring difference between tobacco product and medical device substantial equivalence determinations is that tobacco products may only rely on one predicate product whereas a medical device is free to use more than one predicate device to establish substantial equivalence.

The final pathway to marketing tobacco products is through the granting of an exemption from substantial equivalence by the FDA. Pursuant to 21 C.F.R. § 1107.1, the FDA may exempt  products that are modified by adding or deleting a tobacco additive, or increasing or decreasing the quantity of an existing tobacco additive if: 1) such modification would be a minor modification of a legally marketed tobacco product; 2) a 905(j) report is not necessary to ensure that permitting marketing would be appropriate for the protection of the public health; and 3) an exemption is otherwise appropriate.

While the FDA now plays an increased role in the regulation of tobacco products, it is important to note that tobacco product regulation in the United States also involves the U.S. Customs and Border Protection (CBP) and the U.S. Department of the Treasury, Alcohol, Tobacco, Tax and Trade Bureau (TTB). Additionally, the Department of Justice, Office of Consumer Protection Litigation (OCPL) regulates Cigarette labeling and advertising, and the Bureau of Alcohol, Tobacco, and Firearms (ATF) investigates and enforces interstate trafficking of contraband cigarettes. State laws may also be implicated.

If you have questions pertaining to the FDCA or the Tobacco Act or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman David & Joseph PL at contact@fidjlaw.com.

Compound Pharmacy Regulatory Update: Senate to Vote on Proposed Legislation Granting FDA Broad Authority to Regulate Compounding Pharmacies

On May 22, 2013, the United States Senate Health, Energy, Labor and Pensions (HELP) Committee approved the Pharmaceutical Compounding Quality and Accountability Act (“Senate Bill 959”), which, if passed, would significantly change the regulatory framework for compounding pharmacies. (To read the HELP Committee’s summary of Senate Bill 959, please click here.) Senate Bill 959 was drafted in response to the recent illnesses and deaths linked to contaminated drugs produced by a compounding pharmacy in New England, which we previously reported on here and here. The Senate is expected to vote on Senate Bill 959 within the next two weeks. (For information related to Senate Bill 959, please read news coverage by Reuters here and The Washington Post here.)

Changes to the Regulation of Traditional Compounders and Compounding Manufacturers

Under the current regulatory framework, all pharmacies, including compounding pharmacies, are regulated by state boards of pharmacies. Consequently, drugs produced by compounding pharmacies are not subject to premarket review by the FDA or any other regulatory body, unless state laws so require. Therefore, although the FDA has explicit jurisdiction to regulate the manufacture of drugs under the FDCA, the agency’s current jurisdiction over compounding drugs and compounding pharmacies is much less clear. (We previously reported on issues related to FDA’s jurisdiction over compounding pharmacies here and here.) Senate Bill 959 aims to clarify the oversight responsibilities of state and federal authorities.

If passed, Senate Bill 959 would establish a clear boundary between “traditional compounders” and “compounding manufacturers”. “Traditional compounders” are defined as any entity wherein a drug is compounded by a pharmacist or physician licensed under state law upon receipt of a prescription. The draft legislation creates a new category for “compounding manufacturers,” which are defined as any “entity that compounds a sterile drug prior to or without receiving a prescription and introduces such drug into interstate commerce.” Under Senate Bill 959, intrastate distribution of compound drugs and interstate shipment of drugs within a hospital system would not fall within the definition of compound manufacturing.

Furthermore, Senate Bill 959 defines the FDA’s role in overseeing the compounding industry. The bill authorizes the FDA to create and enforce a national, uniform set of rules for compounding manufacturers, but reserves primary regulatory authority over traditional compounders to state boards of pharmacy. The proposed provisions require every compounding manufacturer to register with the FDA, list any products it makes, and pay a registration fee. Moreover, compounding manufacturers will be required to make products under a pharmacist’s supervision and in compliance with good manufacturing practices. Compounding manufacturers would also be subject to labeling regulations and adverse event reporting requirements. Furthermore, section two of Senate Bill 959 grants the FDA clear authority to regulate compounded drugs as new drugs under the FDCA:

(a) Clarification of new drug status – For purposes of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.), the term “new drug” (as defined in section 201(p) of such Act) shall include a compounded human drug.

Although Senate Bill 959 reserves jurisdiction over traditional compounders to state boards of pharmacy, the draft legislation significantly diminishes their regulatory authority. The draft legislation prohibits traditional compounders from compounding certain drug products, including any drugs that the FDA deems “demonstrably difficult to compound” (e.g., complex dosage forms and biologics), any FDA-approved drugs on the market that are not in shortage, variations of marketed FDA-approved drugs unless they fulfill a specific patient need, and products subject to certain risk evaluation and management strategies. Additionally, traditional compounders would be prohibited from engaging in wholesale distribution of compounded products. Thus, even though Senate Bill 959 purports to reserve jurisdiction over traditional compounders to state boards of pharmacy, the proposed legislation would actually give the FDA expanded jurisdiction to regulate and restrict the range of drugs that compounding pharmacies can and cannot produce.

Senate Bill 959’s Impact on the Production and Regulation of Biologics

Members of industry are particularly alarmed by the provision of Senate Bill 959 that prohibits traditional compounders from compounding “a drug or category of drugs that presents demonstrable difficulties for compounding, which may include a complex dosage form or a biological product, as designated by the Secretary.” As it is written, the proposed bill gives the FDA wide discretion to define the meaning of “difficult for compounding” and determine which drugs or category of drugs fall within that definition. In the absence of precise guidance outlining how the FDA must show that a drug is difficult to compound, this provision has the potential to substantially affect the biologics industry. Under this regulatory framework, if the FDA determines that all biologic products are too complex or difficult to compound, producers of biologics could be required to submit their products to the FDA for formal approval. Senate Bill 959 thus gives the FDA explicit authority to restrict the compounding of biologics products and also has the potential to completely transform the future of biologics regulation.

It should be noted, however, that Senate Bill 959 provides exceptions for the compounding of biologics. Under the bill, a drug that is a biological product may be compounded if it is compounded from a licensed biological product and the compounding does not involve combining or mixing the biological product with a bulk drug substance. Similarly, a biological drug may not be combined or mixed with certain approved or conditionally approved drugs, unless the compounding is limited to combining, mixing, or diluting licensed allergenic products. Additionally, traditional compounders and compounding manufacturers may, upon the receipt of an authorized prescription from a physician or medical order from a hospital, compound a biological product if the compounded biological product is an allergenic product or produces a clinical difference between the compounded drug and the licensed biological product, as determined by a prescribing practitioner or licensed practitioner of a hospital.

Opposition by Industry

Although members of the compounding industry support certain changes to the current regulatory framework, many members strongly oppose Senate Bill 959 because it gives too much power to the federal government to regulate drug compounding. The International Academy of Compounding Pharmacists (“IACP”) stated that the proposed legislation is “too far-reaching in its scope” and constitutes “micromanagement of practitioner decisions.” (For more information, please read the IACP’s press release here.)

Industry members are particularly concerned with Senate Bill 959’s explicit grant of authority to the FDA to disallow entire categories of compounding drugs. (For more information from industry groups, please read statements from MyMedsMatter here and the Alliance for National Health USA here.) Even though these provisions would give the FDA broad power to ban the production of drugs that it believes can harm consumers, it also gives the FDA authority to ban the compounding of drugs that have been effective in patient treatments but are not otherwise available in a standard drug form. For this reason, the IACP argues that the draft legislation fails to “contain any provisions that speak directly to standards aimed at raising the quality of compounded medications,” despite lawmakers’ insistence that Senate Bill 959 will protect the public from unsafe compounded products. (For more information regarding IACP’s position on this issue, please read the IACP’s summary here.) Members of industry do not seem to outright oppose federal oversight of the compounding industry; however, they generally agree that Senate Bill 959 goes too far in stripping state boards of pharmacy of control.

What This Means

The enactment of Senate Bill 959 could have significant, widespread impacts on the compounding industry and the public’s access to compounded drugs. In granting the FDA broad authority to regulate compounding manufacturers and, indirectly, traditional compounders, this legislation could unnecessarily hamper the compounding industry’s ability to provide customizable medications for patients’ medical care. At present, it remains unclear whether increasing the scope of the FDA’s regulatory authority will actually help to achieve the goal of improving the safety of compounded drugs.

It is worth noting that Senate Bill 959 is not the first attempt by lawmakers to increase the federal government’s oversight of the compounding industry. As we previously reported here, lawmakers have been open to legislation that tightens regulations governing the compounding industry but have, up to this point, been unable to agree on how to address the gaps in the present regulatory scheme. Fuerst Ittleman David & Joseph, PL will continue to monitor any developments in the regulation of compounding pharmacies. For more information, please feel free to contact our offices by email at contact@fidjlaw.com or by phone at (305) 350-5690.

FDA Regulatory Update: FDA Commissioner Suggests that New LDT Regulations are Forthcoming; Laboratory Industry Challenges FDA’s Authority to Regulate LDTs

On June 2, 2013, U.S. Food and Drug Administration (“FDA”) Commissioner Margaret Hamburg delivered a speech at the American Society of Clinical Oncology’s annual meeting, in which she explained that the FDA is in the process of changing the regulations governing laboratory-developed tests (“LDTs”). (To read the full text of Commissioner Hamburg’s speech, please click here.) In her speech, Commissioner Hamburg stated that the FDA is developing a risk-based framework that is intended to “make sure that the accuracy and clinical validity of high-risk tests are established before they come to the market” and “provide for safe and effective diagnostics while promoting innovation and patient access.” Although the FDA has not formally announced any changes to the regulation of LDTs, Commissioner Hamburg’s comments suggest that the FDA is closer to finalizing the modified regulatory framework for LDTs. (To read our previous coverage of the FDA’s regulation of LDTs, please click here.)

Background 

The FDA defines LDTs as “a class of in vitro diagnostics that are manufactured, including being developed and validated, and offered, within a single laboratory.” (To read the full text of the Federal Register notice requesting comments for the Oversight of Laboratory Developed Tests published on June 17, 2010, please click here.) Common examples of LDTs are genetic tests, emerging diagnostic tests, and tests for rare conditions. The FDA claims authority to regulate LDTs under the federal Food, Drug, and Cosmetics Act but has not drafted applicable regulations with respect to LDTs. Therefore, the primary federal regulation of laboratories and LDTs has been under the Clinical Laboratory Amendments of 1988 (“CLIA”).

Since 1992, the FDA has consistently maintained its position that it will not enforce regulations regarding LDTs. The most notable departure came on June 10, 2010, when the FDA issued five Untitled Letters to companies stating that their tests did not qualify as LDTs because they were “not developed by and used in a single laboratory.” (To read the FDA’s Untitled Letters to Industry, please click here, here, here, here, and here.) In those instances, the FDA determined that it would regulate those tests as medical devices and require premarket approval. In June 2010, the FDA stated that increased regulation of LDTs may be necessary due to the changing nature of LDTs from “generally relatively simple, well-understood pathology tests” to tests that “are often used to assess high-risk but relatively common diseases and conditions and to inform critical treatment decisions.” (To read the full text of the Federal Register notice regarding federal oversight of LDTs, please click here.)

One week after the FDA issued the Untitled Letters described above, the FDA announced that it would hold a public meeting because the “agency believe[d] it [was] time to reconsider its policy of enforcement discretion over LDTs.” (To read the full text of the Federal Register notice requesting comments for the Oversight of Laboratory Developed Tests published on June 17, 2010, please click here.) In the Federal Register notice announcing that public meeting, the FDA stated that LDTs were originally intended to be used by doctors and pathologists within a single facility or institution where both the doctor and pathologist were actively involved in the patient’s care. According to the FDA, the nature of LDTs had changed significantly over the last two decades. The FDA indicated in the Federal Register notice that modern LDTs are often used to diagnose “high-risk” diseases and conditions and to guide “critical treatment decisions.” Furthermore, the FDA explained that modern LDTs have departed from traditional LDTs because modern tests are “often performed in geographically distant commercial laboratories instead of within the patient’s health care setting under the supervision of the patient’s pathologist and treating physician.”

On July 19-20, 2010, the FDA held the public meeting to discuss the state of regulations governing LDTs. In that meeting, the FDA reiterated that laws for regulating LDTs were already in effect and that the agency had merely exercised enforcement discretion with respect to LDTs. The FDA also claimed that it could implement a new regulatory framework at any time through the issuance of guidance. With the exception of the FDA’s issuance of Untitled Letters in June 2010, the FDA has not taken any formal steps to exercise its enforcement authority. (For more information about the FDA’s public meeting, please click here.)

Roughly two years after the FDA’s public meeting, President Obama signed into law the Food and Drug Administration Safety and Innovation Act (“FDASIA”), which requires the FDA to notify Congress at least 60 days prior to issuing a draft or final guidance on the regulation of LDTs. (For the full text of FDASIA, please click here.) The legislative history is silent as to Congress’s rationale for requiring the FDA to provide notice prior to issuing new guidance; however, some have interpreted this provision to suggest that Congress views LDTs as an important issue that warrants close monitoring. At a minimum, the notification requirement contained in FDASIA effectively acts as a warning to industry to prepare for new changes to the regulation of LDTs before they take effect.

Resistance to FDA’s Regulation of LDTs

The FDA’s push for increased regulation over LDTs has been met with resistance by the laboratory industry. On June 6, 2013, the American Clinical Laboratory Association (“ACLA”) submitted a Citizen Petition requesting the FDA to confirm that LDTs are not devices under the FDCA. (For more information about ACLA’s Citizen Petition, please click here. To read the full text of ACLA’s Citizen Petition, click here.) In its Citizen Petition, the ACLA argued that the Center for Medicare and Medicaid Services (“CMS”) has authority to regulate LDTs under the CLIA and, therefore, LDTs are beyond FDA’s jurisdiction. This Citizen Petition is not the first of its kind to suggest that the FDA does not have authority to regulate LDTs. In fact, the FDA has addressed and denied similar Citizen Petitions in the past.  (For example, Genentech submitted a Citizen Petition regarding LDTs in 2008, which is available here.)

Moving Forward

Commissioner Hamburg’s speech at the American Society of Clinical Oncology meeting is the most recent public FDA activity in the area of LDT regulation since it issued Untitled Letters to industry in 2010. However, it is important to recognize that the FDA could move forward at any time and issue new guidance modifying how LDTs are regulated. Members of the laboratory industry should be prepared to comment on any proposed guidance or regulation that the FDA may announce in the Federal Register. Additionally, it would be prudent for physicians and laboratories  using or creating such tests to take notice of whether their tests satisfy the criteria for LDTs or whether the tests could otherwise qualify for regulation as medical devices.

Fuerst Ittleman David & Joseph, PL will continue to monitor any developments in the regulation of LDTs. For more information, please contact us via email at contact@fidjlaw.com or via phone at (305) 350-5690.