Health Headlines – March 25, 2025

Seventh Circuit Rules that Hospital Cannot Sue Their States to Enforce Medicaid Prompt Payment Obligations

On March 14, 2025, the Seventh Circuit Court of Appeals ruled en banc (i.e., in a decision by the full court) that a Chicago hospital cannot sue the State of Illinois for injunctive/declaratory relief that would compel the state to force the managed care organizations (MCOs) with which the state contracted to administer the state Medicaid program to comply with prompt payment provisions of the Medicaid Act. The court determined that the statutory language does not contain “rights-creating, individual-centric language” necessary to create a private right of action for providers against the state.

Chicago-based Saint Anthony Hospital (the Hospital) filed a federal suit against the State of Illinois through the director of the state Department of Healthcare and Family Services under 42 U.S.C. § 1983, alleging that Illinois violated the Hospital’s right to receive prompt Medicaid payments. The lawsuit requested declaratory and injunctive relief that would require the state to cause the MCOs with which it contracted to administer the program to comply with statutory requirements to pay for “clean claims” (claims for which all information necessary to make a payment has been provided) within the 30 to 90 day window contemplated by statute.

According to the Hospital, this right derives from 42 U.S.C. § 1396u-2(f) of the Medicaid Act, which mandates that “[a] contract” between the state and an MCO require the MCO “make payment to health care providers … on a timely basis consistent with the claims payment procedures described in section 1396a(a)(37)(A)” or some alternative agreed upon by the MCO and a provider.

Section 1396a(a)(37)(A), in turn, requires that payment for 90% of clean claims be made within 30 days of receiving those claims, and that 99% of clean claims must be paid within 90 days. According to the Hospital, the MCOs take anywhere from 90 days to two years to make payment, and that therefore, the state had not met its obligation to ensure that its contracts with MCOs caused the MCOs to comply with the Medicaid windows for prompt payment.

A federal district court granted the State’s 12(b)(6) motion to dismiss on the grounds that § 1396u-2(f) did not create a privately enforceable right for providers like the Hospital. The Hospital appealed, and the Seventh Circuit reversed the decision. Illinois then petitioned for a writ of certiorari in the Supreme Court. After issuing an opinion in Health & Hospital Corp. of Marion County v. Talevski, 599 U.S. 166 (2023), which provided clarification as to the existing framework to be used for determining whether laws passed under the Spending Clause, like the Medicaid Act, created an enforceable right under § 1983, the Supreme Court vacated the Seventh Circuit’s judgment and remanded for reconsideration. Upon reconsideration, the Seventh Circuit again reversed the district court’s decision. Illinois then sought en banc review from the entire Seventh Circuit.

In a 9-3 decision, the full court of the Seventh Circuit determined that § 1396u-2(f) did not create a right that could be enforced via a § 1983 private cause of action because § 1396u-2(f) failed the first step of the Supreme Court’s two-step test from Gonzaga Univ. v. Doe, 536 U.S. 273, 285 (2002).

Under the Gonzaga test, the Court should consider 1) whether “Congress has ‘unambiguously conferred’ ‘individual rights upon a class of beneficiaries’ to which the plaintiff belongs,” and 2) if such individual rights were conferred, whether Congress “explicitly or implicitly intended to preclude § 1983 enforcement.”

According to the majority, § 1396u-2(f) failed this first step, because the timely payment provision was not “unmistakably focused on providers like Saint Anthony. It is instead expressly focused on what a contract between a state and MCO must contain,” and thus, primarily concerns “the state’s contractual relationship with MCOs, not what, if any, rights providers are entitled to….” According to the majority, the fact that providers might benefit from the inclusion of prompt payment schedules in MCO contracts would only place providers “within the timely payment provision’s zone of interest,” which, according to the majority, was insufficient.

The majority also determined that the absence of the word “right” in the statutory language indicated an intent not to create a right that would be enforceable under § 1983. The court also buttressed its decision by the fact that Congress had used language that imposed obligations on MCOs that directly contemplated providers in other Medicaid provisions, such as 42 U.S.C. § 1396u-2(a)(5)(B)(i)-(iii) and §1396u-2(b)(7). Thus, according to the majority, the absence of such language here indicated an intent not to confer a comparable enforceable right.

The majority also pointed to federalism concerns, citing the fact that Illinois and the federal government struck a bargain pursuant to which the federal government could cut funding to Illinois if the state failed to comply with Medicaid provisions. Thus, allowing the Hospital’s lawsuit to proceed would “risk transforming an exercise of cooperative federalism into one of compulsive federalism.” According to the majority, recognizing such a private right of action would “turn federal trial courts into de facto Medicaid claims processors,” which the court deemed a “dubious solution,” given that § 1396u-2(e)(4)(a) gave the state the discretion to terminate an MCO’s contract if the MCO failed to meet its contractual requirements, such as those requiring prompt payment.

Because the majority held that the provision did not survive the first step of the Gonzaga test, the opinion did not even consider the second step.

Judge David Hamilton dissented, arguing that the reasonable interpretation of § 1396u-2(f) was that the state had a duty to “ensure that the MCOs actually pay providers…not merely that the contracts between the MCOs and the state include clauses that say as much on paper,” and thus, created both a duty for the state and a right for providers that could be enforced under § 1983.

The majority also upheld the district court’s decision to deny the Hospital’s request to supplement its complaint to include allegations that Illinois “(1) failed to provide it with information pertaining to how payments are calculated under the fee-for-service program and (2) failed to ensure MCOs provide the same information under the managed-care program,” because adding such allegations would “substantially expand the scope of the case.”

However, the majority refrained from weighing in on the viability, or lack thereof, of those allegations, and recognized that the Hospital could initiate a new, separate action, specifically focusing on those allegations because the state had stipulated that it would not assert a defense of claim preclusion on that issue.

A copy of the full opinion is available here.

Reporter, Will Mavity, Los Angeles, + 1 213 218 4043, wmavity@kslaw.com.

NY Department of Health Issues Clarifying FAQs on Healthcare Transaction Notice Law

Earlier this month, the New York State Department of Health (DOH) released its first formal guidance under Public Health Law (PHL) Article 45-A, the state’s recently enacted healthcare transaction notice law. Issued in the form of Frequently Asked Questions (FAQs), the guidance addresses common inquiries received by DOH since the law’s effective date of August 1, 2023. It offers important clarifications on the scope of covered entities and transactions as well as instructions for calculating revenue thresholds and reporting anticipated impacts.

The FAQs come amid broader efforts by New York officials to expand oversight of healthcare consolidation. Legislation proposed in Governor Hochul’s FY 2025–26 executive budget would, if enacted, transition the current notice-only framework to a more robust review process and grant DOH authority to monitor market effects following the closing of a transaction.  Below are selected highlights from the FAQs.

Entities Required to Report

PHL Article 45-A and its reporting requirements apply to “health care entities,” as defined in § 4550(2), which encompasses a broad range of healthcare-related organizations, including, but not limited to, physician practices, management services organizations (MSOs), provider-sponsored organizations, health insurance plans, and other facilities or entities that provide health care services in New York.

The FAQs further clarify that the following are also considered “health care entities” within the meaning of § 4550(2): dental practices, clinical laboratories, pharmacies, wholesale pharmacies (including secondary wholesalers), independent practice associations, and accountable care organizations (ACOs).

Importantly, the applicability of Article 45-A does not depend on whether an entity is physically located or domiciled in New York. Both in-state and out-of-state entities may be subject to the law, provided the proposed transaction would generate the threshold amount of gross in-state revenue. The determining factor is whether the transaction will result in sufficient New York-based revenue, regardless of the entities’ geographic location.

What Constitutes a Material Transaction

The notice requirement under PHL Article 45-A applies only to “material transactions.” As defined in § 4550(4), a material transaction includes:

• A merger involving a health care entity;
• The acquisition of one or more health care entities;
• An affiliation agreement or contract formed between a health care entity and another person; and
• The formation of joint ventures, partnerships, ACOs, or MSOs for the purpose of administering contracts with health plans, among other arrangements.

The notice requirement applies whether the transaction occurs as a single event or as part of a series of related transactions within a rolling twelve-month period, so long as it results in an increase of $25 million or more in gross in-state revenue.

Conversely, as highlighted in the FAQs, the following types of transactions are not considered material and are therefore exempt from the notice requirement under PHL Article 45-A:

• A clinical affiliation of one or more health care entities formed for the purpose of collaborating on clinical trials or graduate medical education programs;
• Any portion(s) of a transaction subject to the DOH’s Certificate of Need (CON) process or an insurance-entity approval process under PHL Articles 28, 30, 36, 40, 44, 46, 46-A, or 46-B; and
• De minimis transactions, defined as transactions or series of related transactions that result in a health care entity increasing its total gross in-state revenues by less than $25 million.

Notably, for transactions that include components subject to the CON or other regulatory review processes, the FAQs clarify that any discrete portion of the transaction not subject to those processes must still be reported under PHL Article 45-A if it independently exceeds the $25 million “de minimis” threshold. To determine whether notice is required, the parties must conduct the following analysis:

• Estimate in good faith the total in-state gross revenues attributable to the entire transaction, excluding the revenues associated with components subject to CON review and for which an application is anticipated;
• If the resulting amount is $25 million or more, the non-CON portions of the transaction must be reported under PHL Article 45-A.; and
• If the resulting amount is less than $25 million, the transaction does not meet the definition of a “material transaction,” and no notice to DOH is required.

Calculating the $25 Million “De Minimis” Threshold

The FAQs provide additional detail on how to assess whether a transaction falls below the $25 million “de minimis” threshold.

For single transactions, parties should evaluate whether the acquired or merged entities generated $25 million or more in combined gross in-state revenue during the 12-month period preceding the anticipated closing date (the “lookback period”).

For a series of related transactions, DOH expects parties to assess the gross in-state revenue associated with each individual transaction occurring within the 12-month lookback period, based on each transaction’s actual or anticipated closing date. If the total combined gross in-state revenue attributable to the related transactions is $25 million or more, the series will be subject to the notice requirement under PHL Article 45-A.

Required Impact Assessment

Under PHL § 4552(f), notices of material transactions must include information regarding the anticipated impact of the transaction on cost, quality, access, health equity, and competition. The FAQs clarify that submitting parties are expected to provide a good-faith assessment of these effects as part of the notice.

DOH provides a non-exhaustive list of factors that parties should consider in their analysis, including whether:

• Services will be eliminated, reduced, added, or expanded (in terms of staffing or service hours);
• Contracts with certain insurance carriers will be added or eliminated, including any impact on Medicaid participation;
• Locations will open or close, or otherwise expand or reduce service availability;
• Healthcare staffing changes are expected (e.g., staff additions or reductions);
• Increases in contracted commercial payor rates are anticipated;
• There will be changes in the share of services provided to historically underserved populations; and
• The transaction is expected to result in increased market consolidation (evidenced by changes in market share in any region of the state).

This new FAQ guidance offers healthcare providers and investors greater insight into how New York expects entities to comply with Article 45-A’s notice requirements. While the proposed budget legislation may further expand DOH’s oversight powers, this initial guidance is a key step toward operationalizing the law and helping parties structure deals in compliance with evolving regulatory expectations. The new FAQ guidance can be found here.

Reporter, Francis Han, New York, +1 212 556 2154, fhan@kslaw.com.

Georgia Senate Passes Tort Reform Bill

On March 21, 2025, the Georgia Senate passed S.B. 68, which contains numerous provisions affecting civil lawsuits in Georgia.  The provisions include limits on the amounts plaintiffs can recover for medical expenses, restrictions on the amount of attorney’s fees that can be recovered, a prohibition on lawyers arguing for specific damages amounts from juries, revisions to premises liability causes of action for negligent security, and more.  The bill is now headed to Government Brian Kemp for his signature and is expected to be signed into law soon. Below is a summary of the key parts of S.B. 68.

Damages for Pain and Suffering

S.B. 68 prohibits counsel from stating any specific amount for pain and suffering damages to the jury (either in argument or through a witness), a practice known as “anchoring.”  The remedy for such violations includes courts rebuking counsel, striking prospective jurors, or, if a jury has already been empaneled, instructing the jurors not to consider anchoring statements.

Answers to Lawsuits

If a party responds to a lawsuit by filing a motion, S.B. 68 requires the party to answer the lawsuit within 15 days of the court’s ruling on that motion.  If a defendant files a motion for a more definite statement, the defendant must file an answer within 15 days of when the more definite statement is served.  These changes bring Georgia law largely in line with the Federal Rules of Civil Procedure (the “Federal Rules”), which differ only in that they allow 14 days instead of 15 days for parties to file an answer under the same circumstances. 

Discovery Stays

S.B 68 retains automatic discovery stays until a court rules on a motion filed in response to a pleading.  But to extend the automatic discovery stay beyond 90 days, S.B. 68 requires a party to file a motion and show good cause to the court.  Previously, the discovery stay lasted until the court ruled on the motion filed in response to the pleading.  Under the Federal Rules, filing a motion does not automatically stay discovery. 

Dismissing Lawsuits

S.B. 68 narrows the window within which a plaintiff may dismiss a lawsuit without permission of the court. The bill requires a plaintiff to dismiss the lawsuit before the opposing party serves an answer or a motion for summary judgment.  Previously, a party could wait until after a jury was empaneled and just before a witness was sworn in to dismiss a lawsuit.  This change aligns Georgia law with the Federal Rules.  The first dismissal does not limit the party’s ability to re-file the lawsuit, but if a plaintiff dismisses suit based on the same claim a second time, the plaintiff cannot bring that claim again.

Attorney’s Fees

S.B 68 limits recovery of attorney’s fees to one recovery, unless a statute authorizes recovery of duplicate attorneys’ fees and costs.  S.B. 68 also provides that contingent fees cannot be admitted as proof of what is reasonable in determining reasonable attorney’s fees.  There is no limit or change to contractual rights providing for attorney’s fees. 

Expenses of Litigation in Breach of Contract Cases

S.B. 68 explicitly allows for the award of litigation expenses in breach of contract cases, but only when a party has acted in bad faith or has been stubbornly litigious.

Seatbelts

In a reversal of long-standing policy, S.B. 68 allows for the introduction of evidence against a party when that a party was not wearing a seatbelt in negligence and other cases.  S.B. 68 also provides, however, that insurers cannot cancel insurance or raise rates for drivers or occupants for not wearing a seatbelt.

Medical Costs / Special Damages

S.B. 68 limits the amounts juries can award for medical and healthcare expenses to the reasonable value of medically necessary care, treatment, or services.  Where a plaintiff has health insurance, S.B. 68 requires juries to be shown both the total billed charges for services and the amount that would be paid after any applicable discount, whether the amounts were already incurred or projected for the future.  Although a prior version of the bill would have prohibited juries from awarding a plaintiff the total billed charges for medical costs, S.B. 68 does not preclude such an award.  It merely requires that jurors be shown the breakdown between billed charges and actual costs. 

Phasing Trials

S.B. 68 provides for splitting trials into three phases: one to determine liability, a second to determine the amount of damages that should be awarded, and a third to decide whether to award punitive damages, attorney’s fees, or court costs. 

Negligent Security

S.B. 68 also codifies and limits a cause of action for negligent security when a property owner or occupier fails to keep individuals who are on or around their property safe from the wrongful conduct of third parties.  The law raises the standard a plaintiff must meet to hold a property owner liable for foreseeable criminal activity by third parties acting on the property.  When negligent security cases are brought, juries are to consider the following factors when assessing whether a property owner or occupier has breached a duty to keep their property safe from the wrongful conduct of third persons:

• The security measures employed by the owner or occupier at the time of the injury occurs;
• The need for additional or other security measures;
• The practicality of additional or other security measures;
• Whether additional or other security measures would have prevented the injury;
• The respective responsibilities of owners or occupiers with respect to the premises and government with respect to law enforcement and public safety; and
• Any other relevant circumstances.

S.B. 68 requires juries to apportion fault to a third person whose conduct in any way contributed to an injury that gave rise to a negligent security action.  Negligent security actions can also be brought against security contractors under the same rules when the contractors are hired by property owners to keep a premises safe. 

S.B. 68 will become effective on the date Governor Kemp signs it into law. 

A copy of S.B. 68 is available here, and a copy of Amendment #1 on special damages, which was adopted, is available here. 

Reporter, Doug Comin, Atlanta, +1 404 572 3525, dcomin@kslaw.com.

OIG Releases Findings on Medicare Contractor Compliance with Medicare Cost Report Oversight Requirements

Last week, OIG’s Office of Audit Services released its latest report on Medicare Administrative Contractors’ (MACs) compliance with Medicare cost report oversight requirements.  The report, which is titled Medicare Administrative Contractors Did Not Consistently Meet Medicare Cost Report Oversight Requirements (the Report), identified 287 audit issues across all twelve MAC jurisdictions during the audit period, i.e., federal fiscal years 2019 through 2021. 

Background

Pursuant to their contracts with CMS, MACs must ensure that providers follow the cost reporting principles and policies that are contained within the agency’s Provider Reimbursement Manuals and the regulations at 42 C.F.R. §§ 413.20 and 413.24.  CMS has developed specific performance requirements for MACs to carry out these functions.  42 U.S.C. 1395kk-1(b)(3).  CMS’s Quality Assurance Surveillance Plan (QASP) measures the MAC’s compliance with the Statement of Work requirements in the contracts between CMS and the MACs in the following areas:

• Appeals
• Audit & Reimbursement (A/B MACs only)
• Beneficiary Customer Service
• Claims Processing
• Financial Management
• Debt Management
• Medical Review
• Medicare Secondary Payer
• Provider Customer Service Program
• Provider Enrollment (A/B MACs only)

QASP evaluations of each MAC take place annually.  More information on the QASP and its evaluation is available here. 

Focusing on Audit & Reimbursement (AR), CMS has established thirteen AR performance standards, which include (but are not limited to) desk review and audit quality, cost report acceptability timeliness, and Notice of Amount of Program Reimbursement (NPR) timeliness.  CMS assigned each performance standard a performance threshold that it used to determine whether the MAC adequately performed that standard. The Report focuses on the Review and Audit Quality AR Standard (referred to as AR-4).  Using AR-4 as an example, the performance threshold for FFY 2021 was 95 percent.  To achieve this percent performance, CMS established a weighted methodology that assigned points for seven categories. The seven categories include the following: (1) accurate desk review used, (2) uniform desk review modules accurately completed, (3) audit program steps accurately completed, (4) accurate and complete workpapers, (5) accurate summary of issues, (6) accurate NPR reimbursement, and (7) accurate cost report. To determine whether a MAC achieved this 95 percent performance threshold, CMS selected for review a sample of cost reports settled by the MACs.

Methodology

OIG’s objective was to determine whether individual MACs met Medicare cost report oversight requirements stated in the MAC contracts.  OIG’s audit covered the agency’s contracts with all 12 A/B MAC jurisdictions responsible for reviewing and settling provider cost reports, focusing its audit on QASP standard AR-4 and the issues identified by CMS on the annual QASP evaluations for FFY 2019 through 2021.  

Based on the QASP results for these evaluation periods, OIG selected a non-statistical sample of six jurisdictions that failed to reach the AR-4 95 percent performance threshold in at least one year of the audit period for a more detailed review of their internal controls, cost report documentation and audit processes, and oversight.  In addition, OIG found that these six jurisdictions had numerous issues identified by OIG during the QASP reviews for each of the three years in the audit period.

OIG’s Findings

The report found that each of the twelve MAC jurisdictions failed to meet the 95 percent performance threshold for AR-4 for at least one year within the audit period.  CMS identified 287 total audit issues, which the report categorizes into the below five categories.  For each of the categories, the report provides several examples of the issues identified. This article includes only a sample of those examples.

• MACs did not perform proper review.
  • Example: “One MAC did not calculate the Hospital Acquired Condition program in the Provider Statistics and Reimbursement (PS&R) cost report settlement data, resulting in an overpayment of approximately $250,000.”

• Inadequate review of graduate medical education and indirect medical education reimbursement.
  • Example: “One MAC used an incorrect GME update factor, resulting in a GME overpayment of $3,000.”

• Improper review of allocation, grouping, or reclassification of charges to cost centers.
  • Example: “One MAC failed to account for physician and physician assistant salaries, resulting in an estimated cost reduction of approximately $1.8 million that would have significantly reduced the Medicare reimbursement to the hospital.”

• Improper calculation and reimbursement for nursing and allied health programs.
  • Example: “One MAC erroneously included Title XIX Health Maintenance Organization (HMO) days and skilled nursing facility inpatient routine charges in the calculation of a proposed adjustment, resulting in an estimated overpayment of more than $250,000.”

• Inadequate review of bad debts.
  • Example: “One MAC's workpapers did not state that it reviewed the provider's policies and procedures for billing the State for deductible and coinsurance amounts. The audit program requires MACs to review the provider's policies and procedures for billing the State for the deductible and coinsurance amounts. If the provider does not have an ongoing billing system—or if there is a system in place but it has not been operated properly—the related bad debts for deductible and coinsurance amounts claimed under Medicare should be disallowed.”

MAC oversight personnel from the six sampled jurisdictions suggested that CMS contributed to the MACs’ failure to meet Medicare cost report oversight requirements in multiple ways, including unclear guidance from CMS, limited feedback on the results of the CMS QASP reviews, and inadequate training for specific challenges faced by individual MACs.

OIG’s Recommendations and CMS’s Response

The Report recommends that CMS take the following three actions:

• Provide MACs with a thorough explanation of the QASP results;
• Update the audit program to incorporate revised change requests and Technical Direction Letters so MACs can obtain a better understanding of CMS expectations and be evaluated on current requirements; and
• Offer MACs additional training and guidance, based on the results of their QASP, and include best practices used by MACs.

CMS responded to each of the recommendations.  CMS indicated that it meets weekly with each individual MAC to go through a detailed report outlining QASP findings and results.  CMS indicated that it is currently working to incorporate change requests and Technical Direction Letters into the audit programs to give MACs a better understanding of CMS’s expectations of evaluation. CMS also stated that it is also in the process of issuing a revised uniform desk review that incorporates additional change requests or Technical Direction Letters that have been issued since the latest version issued in 2021. CMS stated that it supports the MACs in their review of cost reports and has provided a uniform desk review program that provides guidance to MACs on conducting desk reviews. Finally, CMS also stated that it provides various training methods to the MACs related to the cost report and reimbursement areas.

CMS requested that OIG consider the first and third recommendations closed as implemented.

OIG’s report is available here. 

Reporter, Ahsin Azim, Washington, D.C., +1 202 626 5516, aazim@kslaw.com.

Editors: Christopher P. Kenny and Catherine (Kate) S. Stern

Issue Editors: K. Tyler Dysart and Alek Pivec