Archive for the ‘Healthcare & Affordable Housing’ Category
Last year I posted about whether the HUD LEAN Mortgage Insurance Process is working. It appears that HUD still has an unmanageable backlog. Yesterday HUD’s Office of Healthcare Programs announced that it is changing its electronic firm application package requirements and deleting various documents from the firm application. These documents will only have to be submitted prior to OGC review. The new requirements should be posted shortly on the HUD Underwriting Guidance Home Page. Not sure that LEAN is working as hoped.
NEW IRS FORM FOR SOME EXEMPT ORGANIZATION DETERMINATIONS And a Refresher Course on Certain Private Foundation/Public Charity Issues
All nonprofits must file either a Form 1023 or a Form 1024 in order to obtain an initial determination of exempt status. The IRS has released a new form that tax-exempt organizations will use to request certain determinations about their tax exempt status. The new Form 8940, Request for Miscellaneous Determination, will be used to obtain advance approval of certain activities, exemption from Form 990 filing requirements and certain private foundation status issues. (Private foundations are a less favored category of charitable organizations, which are subject to stricter rules and certain excise taxes.) Use of Form 8940 is expected to be simpler, cheaper and faster than a formal request for a private letter ruling.
There is an eight-page set of instructions for the completion of Form 8940. These instructions specify what information needs to be submitted to support each of the nine types of requests that may be submitted. A user fee must accompany most requests. For the following three miscellaneous determinations, the user fee is $1,000:
- Advance approval of set-asides by private foundations;
- Advance approval of voter registration activities;
- Advance approval of scholarship procedures of private foundations.
For the other six types of miscellaneous determinations for which this form may be used, the user fee is $400:
- Exemption from Form 990 filing requirements;
- Advance approval of “unusual grants;”
- Determination of type of section 509(a)(3) supporting organizations;
- Reclassification of foundation status, including a voluntary request from a public charity for private foundation status;
- Termination of private foundation status – advance ruling request;
- Termination of private foundation status – 60 month period ending.
Minimum Distribution Rules Applicable to Private Foundations
One of the requirements applicable only to private foundations is that they must make a minimum amount of “qualifying distributions” each year. An amount set aside for a specific project may be treated as a qualifying distribution in the year it is set aside, rather than in the year that it is actually paid, if at the time it was set aside the foundation establishes that:
(1) The amount will actually be paid for the specific project within 60 months from the date of the first set-aside, and either
(2) (i) The set-aside satisfies the suitability test; that is, that the project is one that can be better accomplished by a set-aside than by immediate payment, or
(ii) the foundation has satisfied certain relatively complicated cash distribution rules in the past.
Private foundations may use Form 8940 to obtain advance approval of these set-asides.
Voter Registration Activities
Private foundations may not make any payments to carry on any voter registration drive. “Nonpartisan” activities are permitted. Activities that satisfy all of the following conditions are considered nonpartisan:
(1) The organization conducting the voter registration drive is an exempt § 501(c) (3) organization;
(2) Its activities are nonpartisan, are not confined to one specific election period and are carried on in at least five states;
(3) The organization spends at least 85% of its income directly for the active conduct of the exempt purpose for which it is organized and operated;
(4) The organization receives at least 85% of its support (other than gross investment income) from exempt organizations, the general public, and/or governmental units;
(5) It does not receive more than 25% of its support (other than gross investment income) from any one exempt organization;
(6) It does not receive more than 50% of its support from gross investment income; and
(7) Contributions to the organization for voter registration drives are not subject to conditions that they may be used only in specified localities of the United States or that they may be used only in one specific election period.
In determining whether the organization meets the support test in items (4), (5) and (6), the support received during the tax year and the four immediately preceding tax years of the organization is taken into account. For organizations with less than four years of operational experience, support tests may be determined by taking into account all available years the organization has been in existence. Again, a private foundation may use Form 8940 for advance approval of its voter registration activities.
Grants to Individuals
If a private foundation makes grants to individuals, such as scholarships, they must be awarded in accordance with procedures approved in advance by the IRS. To secure such approval, the private foundation must demonstrate in its request for advance approval that:
(1) Its procedure awards grants on an objective and non-discriminatory basis;
(2) The procedure is reasonably calculated to result in performance by the grantees of the activities that the grants are intended to finance; and
(3) The foundation will supervise the grants to determine whether the recipients have fulfilled the grant terms.
Approval is based on an evaluation of the foundation’s entire system of standards, procedures and follow-up. Therefore, separate approval for each grant program is not required. Once obtained, such approval applies to any subsequent grant program so long as the procedures under which it is conducted do not differ materially from those described in the original request for approval. A private foundation may use Form 8940 to obtain advance approval of its scholarship procedures.
Exemption from Filing Forms 990
Most organizations must file an annual information return (Form 990 or Form 990-EZ). However, organizations affiliated with one or more churches are exempted from filing Form 990, so long as they satisfy the requirements of 26 C.F.R. § 1.6033-2(g) and (h) (2011), as well as Revenue Procedure 96-10. In addition, organizations that are affiliated with a governmental unit are exempt as long as they qualify under the requirements of Revenue Procedure 95-48. An organization may request a determination that it is not required to file the annual information return when it applies for exemption by providing information requested on the application form (Form 1023 or 1024). If an organization does not request this determination at that time, or its initial request is not approved, it may request a ruling on its filing requirement by using Form 8940.
Publicly Supported Public Charities
Two types of public charities obtain that status based on their sources of support. If an organization receives a substantial part of its support in the form of contributions from other publicly supported organizations, governmental units and/or the general public, it may qualify under §170(b)(1)(a)(vi). For example, a human service organization whose revenue is generated through widespread public fundraising campaigns, United Way drives or government grants is considered a publicly supported charity. In addition, an organization that receives no more than one-third of its support from gross investment income and more than one-third of its support from contributions, membership fees and gross receipts from activities related to its exempt functions is also considered a publicly supported charity under § 509(a)(2). For example, a non-profit theater with box office revenue would usually qualify as a public charity under §509(a) (2).
The difficulty with these support tests is that they include in the definition of “support” contributions from each donor only up to two percent of the organization’s total support. This two percent limitation does not apply if a grant is considered an “unusual grant.” An “unusual grant” is one that is attracted because of the publicly supported nature of the organization, in an unusual or unexpected amount that would otherwise adversely affect the status of the organization as normally being publicly supported. An organization may use Form 8940 for an advance determination that a potential contribution is an unusual grant, excluded from these public support calculations.
Another type of public charity is a § 509(a) (3) supporting organization. This is an organization that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.
A supporting organization must be organized and operated exclusively to support specified supported organizations. Moreover, it must have one of three relationships with the supported organizations, all of which are intended to ensure that the supporting organization is responsive to the needs of the supported organization and intimately involved in its operations and that the public charity is motivated to be attentive to the operations of the supporting organization. No supporting organization may be controlled by “disqualified persons,” usually substantial contributors. The following are the three types of supporting organizations:
- Type I – the supporting organization is operated, supervised or controlled by the supported organization;
- Type II – the supporting organization is supervised or controlled in connection with the supported organization;
- Type III – the supporting organization is operated in connection with the supported organization.
Because Type III relationships are less formal than a Type I or Type II relationship, Type III organizations must meet both a responsiveness test and an integral part test. These tests are designed to ensure that the supporting organization is responsive to the needs of the public charity and that the public charity oversees the operations of the supporting organization.
If a Type III supporting organization changes its governance or operational structure, it may qualify under as a Type I or Type II supporting organization. A supporting organization in that situation may use Form 8940 to request a determination in the change of type of supporting organization it is.
Reclassification of Private Foundation/Public Charity Status
Sometimes a private foundation expands its sources of support or operations so that it may in the future qualify as a public charity. On the other hand, a public charity may also change its organizational structure or sources of support and no longer qualify as a public charity. In both of those situations, the organization may request reclassification of its foundation status using Form 8940.
Once an organization is classified as a private foundation, it may only terminate that status under the provisions of § 507. Under § 507, there are four ways to terminate private foundation status, two of which involve tax liability:
(1) Voluntary termination by notifying the IRS of the intent to terminate and paying a termination tax. Unless the organization requests abatement, it must pay the tax at the time the statement is filed.
(2) Involuntary termination for either repeated or flagrant violation of the private foundation excise tax provisions, in which case the organization also becomes subject to a termination tax.
(3) Transfer of all its assets to one or more organizations that have been determined to be public charities under § 509(a) (1). The recipient organization must have been in existence and described under § 509(a) (1) for a continuous period of at least 60 months.
(4) An organization may operate as a public charity for a continuous period of 60 months after giving appropriate notice to the IRS. In this way it may terminate its private foundation status as long as it meets the requirements of § 509(a)(1), (2) or (3) for a continuous 60 month period beginning with the first day of any tax year. It must notify the IRS before beginning the 60-month period that it is terminating its private foundation status. The organization also must establish immediately after the end of the 60-month period that it has met these requirements. The organization may use Form 8940 both to give prior notice to the IRS as well as to demonstrate how it has satisfied the requirements at the end of the 60-month period.
If your organization is grappling with issues covered by Form 8940, this simplified process may expedite resolution of your concerns. However, if your organization is experiencing other issues, like how to handle a material change in its operations, it may have to fall back on the old, time-consuming and relatively expensive private letter ruling process.
I discussed at http://tinyurl.com/2b9c9pt the cases from the First Circuit holding constitutional New Hampshire and Maine statutes restricting the sale of prescriber identifiable prescription information. The Supreme Court declined to hear appeals from these cases. I predicted that it would take a conflict among the circuits, i.e., a holding from another circuit striking down such a statute as unconstitutional, for the issue to reach the Supreme Court. That is exactly what has happened.
In 2007, the State of Vermont enacted the following statute:
”A health insurer, a self-insured employer, an electronic transmission intermediary, a pharmacy, or other similar entity shall not … exchange for value regulated records containing prescriber-identifiable information, nor permit the use of regulated records containing prescriber-identifiable information for marketing or promoting a prescription drug, unless the prescriber consents …. Pharmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents ….”
The same prescription drug data intermediaries that challenged the New Hampshire and Maine statutes filed suit against the Vermont attorney general, seeking an injunction against enforcement of the law. The district court found that the statute was a constitutionally permissible commercial speech restriction and that the statute did not violate the dormant Commerce Clause. Plaintiffs appealed, and the Second Circuit Court of Appeals reversed, holding that the statute is an impermissible restriction on commercial speech. IMS Health Inc. v. Sorrell, No. 09-1913-cv(L), 09-2056-cv (CON) (2d Cir., Nov. 23, 2010), available here http://tinyurl.com/48nhak6. The Supreme Court granted the State’s petition for a writ of certiorari on January 7, and oral argument is set forth Tuesday, April 26.
In the Second Circuit, the State of Vermont attempted to avoid a First Amendment analysis by claiming that the data constitute merely a commodity, which is subject to regulation. The court rejected that argument, holding that the data in fact comprise information protected by the First Amendment. “The statute is … clearly aimed at influencing the supply of information, a core First Amendment concern…. [W]hen a statute aims to restrict the availability of [truthful] information for some purposes, that restriction must be judged under the First Amendment.”
The data mining companies argued that the statute restricted noncommercial speech, such that a strict scrutiny standard of review applied. The court noted that the primary purpose of detailing is to propose a commercial transaction (the sale of prescription drugs to patients), so it analyzed the statute as a restriction on commercial speech.
To sustain a restriction on commercial speech, the government must assert a substantial interest to be achieved by the regulation. The state alleged that the statute advances three substantial state interests: (1) protection of public health; (2) protection of the privacy of prescribers and prescribing information, and (3) containment of health care costs in both the private and public sectors. The appellants did not argue that protection of public health and cost containment are not substantial state interests. They did dispute whether protecting the privacy of prescribers and prescribing information is a substantial state interest.
The court noted that the statute neither forbids the collection of prescriber-identifiable data nor bans any use of the data other than for marketing purposes. The state argued that use for marketing purposes threatened the integrity of the prescribing process and damaged patients’ trust in their doctors by preventing patients from believing that their physicians are inappropriately influenced by such marketing. The court held that this interest is too speculative to qualify as a substantial state interest.
Next, the state had to demonstrate that the regulation directly advances the state interest involved. The court held that the statute does not advance the state’s interests in public health and reducing costs in a direct and material way. It restricts the information available to detailers so that their marketing practices will be less effective and less likely to influence the prescribing practices of physicians. “The appellees have failed to cite to any case … that has upheld a regulation on speech when the government interest in the regulation is to bring about indirectly some social good or alter some conduct by restricting the information available to those whose conduct the government seeks to influence.”
To uphold the statute, the government would also have to demonstrate that its governmental interest could not be served as well by a more limited restriction on commercial speech. The court stated:
“The statute prohibits the transmission or use of [prescriber-identifiable] data for marketing purposes for all prescription drugs regardless of any problem with the drug or whether there is a generic alternative. The statute bans speech beyond what the state’s evidence purportedly addresses.”
Moreover, the court believed that Vermont does have more direct, less speech-restrictive means available. The state could wait to assess what the impact of a newly funded counter-speech program will be, including academic detailing and sample generic vouchers. Interestingly, the court also believed that the state could mandate the use of generic drugs as a first course of treatment, absent a physician’s determination otherwise, “for all those patients receiving Medicare Part D funds.” It is not clear how a state can mandate or restrict the use of Medicare Part D funds, but, if the Attorney General raised that concern, the court ignored it.
The court concluded that the statute cannot survive intermediate scrutiny and is an unconstitutional regulation of commercial speech. Therefore, it did not have to reach the dormant Commerce Clause issue, i.e. whether the statute unconstitutionally restricts commerce outside Vermont.
As indicated above, oral argument is set forth April 26. Because argument will take place so close to the end of the Court’s term on June 30, we may not have a definitive ruling until next fall or later.
Deciding whether a departing CEO should serve on the board and oversee a successor might seem like a benign consideration. But it can impede an organization’s efforts to move forward and ultimately affect the bottom line, a recent study found.
Matteo Tonello, director of corporate governance research at The Conference Board, said the findings aren’t surprising because “it’s something we have been anecdotally seeing as The Conference Board works with board members.”
“This is a very timely study because companies are changing their lead executives more often than in the past,” Tonello noted.
Powerful CEOs Linger Longer
The report, released Oct. 5, 2010, analyzed 358 CEO turnovers for reasons other than mergers, reorganizations, spinoffs and death at S&P 1500 firms from 1998 to 2001. It looked at a variety of data, including length of the departing CEO’s board service, personal and professional attributes of the incoming CEO, and the firm’s subsequent stock performance.
According to the study, the effects of a former CEO’s retention on the board also seem to vary based on individual attributes. For example, there was a negative correlation between postturnover stock returns and board retention of a CEO who wasn’t a founder of the firm. In addition, the study found that board retention frequently involves powerful, aging CEOs who have achieved a less-than-distinguished record of financial performance at their firm in the years leading up to their departure, Schloetzer said.
One-Third Invited to Stay
While retaining the departing CEO on the board is done less frequently than in the past, “it still occurs somewhat frequently today,” Schloetzer said. According to The Conference Board’s 2010 Survey of Board Practices, about 35 percent of surveyed companies said they invite the departing CEO to remain on the board.
According to Schloetzer’s study, former CEOs remained on their companies’ boards for at least two years in 130 of 358 (36 percent) of turnovers reviewed.
Attributes that appear to impact the decision include whether the CEO owns a large percentage of the firm’s stock, whether he or she is holding the board chairman position jointly and whether the board has relatively few independent directors.
Meanwhile, the study found that departing CEOs were often retained if the succession choice enabled the former CEO to keep a relatively powerful bargaining position within the firm.
- Are we doing this because of “solid pre-departure performance” or because of his or her power and influence over the board?
- Will the departing CEO harm the successor selection process or alter the quality and characteristics of prospective successors?
- Should the successor define his or her relationship with the former CEO, or should directors decide?
- Are we prepared to take action should conflict arise?
- Instead of a board position, could we engage in informal communication when questions arise or retain access to the former CEO through a well-defined short-term consulting agreement?
Few companies have explicit policies on retaining departing CEOs on their boards. Most consider it on a case-by-case basis, Tonello said. He added that there’s no “one-size-fits-all solution” because some companies might decide that “the benefits of retaining a CEO on the board outweigh the negatives.”
A board that opts to retain the former CEO should take “appropriate safeguards,” according to Tonello:
- The time frame of the former CEO’s board tenure should be determined clearly in advance so that “it’s well known that this would be a temporary thing and that at some point the CEO will step down from his director role as well,” Tonello said.
- Activities and functions of the former CEO as director should be overseen by the board’s lead independent director, if one exists. Increasingly, boards have added such positions to help guarantee a balance of power that helps facilitate a smooth transition, Tonello noted.
- All board members, including retained former CEOs, should undergo performance evaluations. Many boards assess performance as a whole annually but do so less frequently with specific directors.
Although the study shows that successors are constrained by the presence of predecessors, Quigley said it’s not clear why that happens.
“Predecessors might wield their influence by saying ‘no’ a lot, or it might be that successors limit certain initiatives because they sense they could face resistance or worse.” Furthermore, Quigley said, predecessors might be “selectively resistant to certain changes, and perhaps the best CEOs are those who can figure out where and how they can have influence without running afoul of the predecessor.”
Meanwhile, Quigley admitted that when it comes to hard-charging CEOs, personality traits could play a role.
“Future work needs to consider how factors like narcissism or openness to change might influence the process,” Quigley said.
Reprinted with permission of the Society for Human Resource Management (www.shrm.org), Alexandria, VA, publisher of HR Magazine. © SHRM
“A new CEO is likely to bring change and change is very difficult for any organization. It makes it even harder if the old CEO is still around. Old loyalties are there, and that will make any change that the new CEO makes even harder for people in the organization to accept.”
This summer a divided Ninth Circuit held that World Vision, a noted humanitarian organization, could terminate employees on account of their religious beliefs. Although approved for publication, the case offers little guidance because each member of the three-judge panel provided a different analysis for his or her conclusion.
The plaintiffs in Spencer v. World Vision, Inc., available here http://tinyurl.com/268qch6, worked for several years for World Vision in administrative positions: upkeep and maintenance of technology and facilities, miscellaneous office tasks and logistics. When they were hired, they submitted required personal statements describing their “relationship with Jesus Christ.” All acknowledged their “agreement and compliance” with World Vision’s Statement of Faith, Core Values and Mission Statement. In 2006, World Vision discovered that the employees denied the deity of Jesus Christ and disavowed the doctrine of the Trinity. As this was incompatible with World Vision’s doctrinal beliefs, the employees were terminated, and litigation ensued. As is to be expected for a case raising such hot issues, numerous organizations, such as the U.S. Department of Justice, the Christian Legal Society, Alliance Defense Fund, Association for Christian Schools International, etc., appeared as amici curiae.
The Civil Rights Act of 1964 generally prohibits discrimination based on religion but exempts religious institutions as follows:
“This subchapter shall not apply to … a religious corporation, association, educational institution, or society with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution, or society of its activities. ”
The district court granted summary judgment to World Vision, concluding that it was a religious entity within the meaning of the exemption, and the employees appealed. The court of appeals affirmed.
One of the two affirming opinions, written by Judge O’Scannlain, held that World Vision had met its burden of showing that the organization is “primarily religious.” World Vision had contended that its humanitarian relief efforts have religious meaning. The employees claimed that they do not. The Supreme Court has noted that the “prospect of church and state litigating in court what does or does not have religious meaning touches the very core of the constitutional guarantee against religious establishment.” Inquiry into religious views “… is not only unnecessary but also offensive…. [C]ourts should refrain from trolling through a person’s or institution’s religious beliefs.” Therefore, Judge O’Scannlain refused to make a determination on that issue.
He also noted that asking whether an organization is affiliated with or supported by a “formally religious” entity was as problematic as looking into whether an activity is religious or secular in nature. That is, this analysis would favor institutions which claim a denominational affiliation over those that do not. To deny World Vision the protection of the exemption also could raise serious constitutional questions in favor of houses of worship and against independent groups which are organized for religious purposes and have religious tenets but are not affiliated with any particular congregation or sect. Similar difficulties arise in weighing the religious or irreligious nature of funding sources.
Judge O’Scannlain believed that the appropriate approach to analyzing the issue could be summarized as follows:
”A nonprofit entity qualifies for the…exemption if it establishes that it 1) is organized for self-identified religious purpose (as evidenced by Articles of Incorporation or similar foundational documents), 2) is engaged in activity consistent with, and in furtherance of, those religious purposes, and 3) holds itself out to the public as religious.”
He preferred this analysis because it centered on neutral factors (i.e., whether an entity is a nonprofit and whether it holds itself out as religious) and requires the court only to evaluate the purpose provided by the organization against its actual practice. As to the nonprofit factor, Judge O’Scannlain relied on the fact that World Vision is a nonprofit entity that the IRS has classified as a 501(c)(3) tax-exempt organization. Even a cursory review of its Articles of Incorporation, bylaws, core values and mission statement reveal explicit and overt references to a religious purpose; clearly, World Vision is organized for self-identified religious purposes. Does the organization engage in activity consistent with, and in furtherance of, those purposes? World Vision emphasized that providing humanitarian aid to all in need, regardless of religious belief, is a tenet of its faith. Judge O’Scannlain refused to limit the exemption to organizations that engage only in proselytizing and limit their activities to members of their religion. Thus, this factor was satisfied. Finally, World Vision’s logo, religious artwork and texts displayed throughout its campus, its Christian Messaging Guidelines and prayer and worship activities all demonstrated overt Christianity.
In concurring, Judge Kleinfeld reached the same legal conclusion via a different analysis:
“To determine whether an entity is a “religious corporation, association, or society;” [the court should] determine whether it is organized for a religious purpose, is engaged in primarily carrying out that religious purpose, holds itself out to the public as an entity for carrying out that religious purpose, and does not engage primarily or substantially in the exchange of goods or services for money beyond nominal amounts.”
Under that test, the concurring judge affirmed the exemption. World Vision is more like the Salvation Army, which gives its homeless shelter and soup kitchen services away, than a religiously affiliated hospital, which charges the market value of its services. Judge Kleinfeld rejected Judge O’Scannlain’s test as too inclusive, i.e., it would “… facilitate free exercise of religion but would also allow people to advance discriminatory objectives outside the context of religious exercise by means of mere corporate paperwork.” He also believed the focus on nonprofit corporate organization was erroneous, noting that many people worship in informal settings and religious activities, such as a religious summer camp, without benefit of corporate niceties.
Judge Berzon dissented. She believed that the tests of both Judge O’Scannlain and Judge Kleinfeld were too broad and would allow a broad range of organizations to refuse to hire and to fire any employee on the basis of religious belief, including organizations that lack any ties to organized religion and perform daily operations entirely secular in nature. Rather, she believed the religious corporation exemption should be interpreted narrowly to include only organizations that exist for the purpose of worship and religious learning. She pointed out that the statutory exemption was one of three exceptions carved out of Title VII for the purpose of accommodating religious freedom. First, courts have carved out a “ministerial exception” in order to insulate the relationship between a religious organization and its ministers from constitutionally impermissible interference by the government. Courts must defer without further inquiry to decision-making about who shall be a minister of a church, even if the decision is based on a classification, such as race or sex, otherwise proscribed by Title VII. Second, any organization may, under the bona fide occupational qualification provision, base particular hiring decisions on religious affiliation to the extent required by operational necessity. The statutory exception for religious corporations, according to Judge Berzon, permits organizations exclusively devoted to propagating religion to conduct all their activities within a community composed wholly of coreligionists.
Applying that test, Judge Berzon noted that World Vision’s Christian beliefs are strongly evident in its organizing documents. However, it is not managed, controlled or operated by, or affiliated with, any particular church. It provided no evidence, other than its conclusory statement, that its donors are “committed Christians.” World Vision did not represent that church outreach or other explicitly Christian work comprises the majority of its daily activities.
“Instead, World Vision’s purpose and daily operations are defined by a wide range of humanitarian aid that is, on its face, secular….
…. [D]eeply-held religious beliefs do not, if combined with primarily secular activities, make the organization religious within the meaning of the statute.”
Thus, the dissenting judge concluded that World Vision did not fit within the exception for “religious corporations.”
Judge Berzon believed that her interpretation enhanced the religious freedom of employees:
“Title VII’s prohibition on religious discrimination aims to protect the religious freedom of employees by insulating their religious beliefs from their economic well-being…. [The statutory exception] reflects Congress’s recognition that for a small group of employers – organizations devoted to prayer and religious instruction – the requirement to accommodate employees of different faiths could represent an unwarranted intrusion into the organizations’ own freedom of religion. For those groups, on balance, the restriction of the relatively few affected jobs to those with approved religious beliefs is tolerable.
“[The interpretation of] my colleagues … would severely tip the balance away from the pluralistic vision Congress incorporated in Title VII, toward a society in which employers could self-declare as religious enclaves from which dissenters can be excluded despite their ability to do the assigned secular work as well as religiously acceptable employees. The consequence would be a broadened impact on the religious freedom of employees and prospective employees, who would feel compelled to reshape their religious beliefs so as to assure their economic survival.”
No petition for writ of certiorari as of the time of this writing has been filed, but there is still time left for the employees to do so.
Skilled nursing facilities employ nurses, aides and other staff who provide varying levels of care to patients and residents. However, most physicians who direct the care are not employees of the nursing homes and therefore have no direct control over the facility staff. This fact raises issues under federal law about what these employees may do to assist physicians who order controlled substances for their patients. The DEA recently issued a Statement of Policy, available here: http://tinyurl.com/24nqnay, on this matter, encouraging practitioners to enter into written agency agreements with specific staff members to authorize certain actions, somewhat like the protocol between physicians and nurse practitioners required under various state laws. While this may be an additional item of paper work not welcomed by long term care facilities, a properly drafted and signed agency agreement will minimize the risk of imposition of DEA penalties on the nursing home and its staff.
The United States Drug Enforcement Agency enforces federal laws dealing with controlled substances, which are drugs that have a potential for abuse and dependence. These include substances classified as opioids, stimulants, depressants, hallucinogens and anabolic steroids. DEA has established a “closed system” of control for manufacturing, distributing, prescribing and dispensing controlled substances. Any person who manufactures, distributes, prescribes and dispenses controlled substances must register with the DEA. Long term care facilities are not registrants, although members of their workforce may be.
A pharmacy needs a valid prescription issued by a DEA registered practitioner in order to dispense a controlled substance. To be valid, the prescription must be issued for a legitimate medical purpose by a practitioner acting in the usual course of professional practice. It is DEA’s long-standing position that the practitioner may not delegate the medical determination of need for a controlled substance. While the practitioner may not delegate this core responsibility for prescribing the drug, he may authorize an employee or agent to communicate the prescription to a pharmacy in order to make the prescription process more efficient. All prescriptions must be dated as of and signed on the day when issued. Paper prescriptions must be manually signed by the issuing practitioner in the same manner that the practitioner would sign a check or other legal document. Electronic prescriptions for controlled substances must be signed in accordance with DEA regulations. A prescription may be prepared by the secretary or agent for the signature of a practitioner, but the prescribing practitioner is responsible in case the prescription does not conform in all essential respects to the law and regulations.
Federal law establishes five schedules of controlled substances, and the requirements for prescribing and dispensing differ based on the schedule in which the drug is listed. Schedule I comprises basically illegal drugs, that is, drugs found to have no currently accepted medical use. Schedule II drugs are currently accepted for medical use with severe restrictions to avoid severe psychological or physical dependence. These drugs include opiates (e.g., morphine) and certain stimulants (e.g., amphetamines), depressants and hallucinogens. Schedule III drugs have been found to have a currently accepted medical use, and abuse of the drug may lead to moderate or low physical dependence or high psychological dependence. This list includes narcotics, anabolic steroids, and certain less strong stimulants, depressants and hallucinogens. Schedule IV drugs are those found to have low potential for abuse, and abuse may lead to only limited dependence. This schedule includes milder narcotics, depressants (e.g. Zolpidem) and stimulants. Finally, Schedule V drugs have the least potential for abuse or dependence. These schedules are reviewed annually.
An employee or agent of an individual practitioner may prepare a written prescription for any Schedule II – V listed drug for his signature, provided that the practitioner has determined that there is a legitimate medical purpose for the prescription and has specified the required elements of the prescription, e.g., drug name and strength, quantity prescribed, directions for use, etc. However, the method of communicating the prescription to the pharmacist differs for Schedule II drugs as opposed to all others. Where a practitioner has made a valid oral prescription for a controlled substance in Schedules III-V by conveying all the required prescription information to an employee, the employee may telephone the pharmacy and convey that information to the pharmacist. In addition, the employee may fax the prescription to the pharmacy, so long as the practitioner has signed it. However, generally a Schedule II controlled substance prescription may not be communicated by facsimile. Thus, in most cases a pharmacist must receive the original, manually signed paper prescription or an electronic prescription prior to dispensing a Schedule II controlled substance.
One exception to this rule allows a practitioner to issue oral prescriptions for Schedule II drugs in an emergency, so long as the oral prescription is limited to the quantity necessary to treat the patient during the emergency period. The pharmacist must immediately reduce the prescription to a writing that contains all the information required in a prescription except for the practitioner’s signature. The oral prescription must also be followed up within 7 days by a practitioner-signed, written prescription to the dispensing physician. The general rule that an employee or agent of the practitioner may communicate prescriptions to a pharmacist does not apply; the prescribing individual practitioner must personally communicate the emergency oral prescription to the pharmacist.
DEA regulations also permit a practitioner to transmit a valid Schedule II controlled substance prescription to a pharmacy by fax for a patient enrolled in a certified Medicare hospice program and for residents of long term care facilities. The fax serves as the original written prescription and must be maintained by the pharmacy as such. An “authorized agent” of the prescribing practitioner may transmit the signed prescription by fax on behalf of the practitioner.
On October 6, 2010 the Drug Enforcement Administration issued a Statement of Policy concerning the proper role of an agent of a DEA registered practitioner in connection with the communication of a controlled substance prescription to a pharmacy. The notice was designed specifically to provide guidance on what affirmative actions may be required to establish a valid agency relationship for this purpose, particularly in settings where the individuals involved do not have an employer/employee relationship with each other, such as an independent physician and a nurse in a long-term care facility. The Statement of Policy expands on how the prescriber may create the authorized agency relationship so that a nurse may communicate a valid Schedule II controlled substance prescription for a person in a hospice program or long term care facility.
The Statement of Policy was intended to clarify language in a 2001 DEA notice, available here http://tinyurl.com/23q4pys. The notice concerned the potential use of automated dispensing systems to prevent the accumulation and subsequent destruction of surplus controlled substances at long-term care facilities. In that notice the DEA briefly discussed the role of nurses in the setting of long-term care facilities, noting that the nurse is not “employed” by the physician and no affirmative actions establishing an agency relationship between the individual practitioner and the long-term care facility nurse exist. Administrators of long-term care facilities became confused about what their staff could do to assist practitioners in the prescribing process.
In order for the practitioner to delegate such authority to an agent, she must “manifest assent” for the individual to act on her behalf. Because the practitioner remains responsible for ensuring that all prescriptions issued pursuant to her DEA registration comply in all respects with federal law and regulations, it is important that the practitioner carefully decide who may act as her agent.
In addition to the prescriber’s “manifesting assent” to having a particular person act as her agent, the agent must reciprocate by manifesting assent to serve as such. The agent must also be “subject to the principal’s control.” In an employment situation, the practitioner establishes the duties of his employees and is responsible for monitoring their activities. However, absent an employer/employee relationship between the individuals, e.g., an independent physician and a nurse employed by a long-term care facility, the physician will generally have less control over other persons whom she may designate as her agents. The Statement of Policy indicates that the practitioner may wish to consider the degree of control that she may exercise over the proposed agent, the proposed agent’s licensure, level of training and experience and other such factors to determine whether the person would be an appropriate agent and to ensure that the agent would not engage in activities that exceed the scope of the agency relationship.
Regardless of the setting, DEA emphasizes that it is the practitioner’s sole decision as to whether or not to designate an agent to act on his behalf and subject to his control. In order to be consistent with the “closed system” of distribution and for DEA to enforce this framework, the agency relationship between a registered practitioner and identified agent for the purposes of communicating controlled substance prescriptions must be explicit and transparent. DEA recommends that the designation of persons authorized to act on behalf of the practitioner and the scope of any such authorization be reduced to writing. Individual practitioners may choose to designate one or more persons at one or more locations within or outside their practice to act as their agent. Likewise, an individual may act as an authorized agent for multiple practitioners depending upon the circumstances. A practitioner may or may not wish to delegate all of these types of authorized communications to a single agent and may tailor the proposed agreement accordingly. The agreement should be clear that the agent may not further delegate the outlined responsibilities. The Statement of Policy provides an example of a written agreement that would properly confer such authority to an agent to act on behalf of an individual practitioner.
Whether the nursing home chooses to use this form or to draft its own, it is well advised to adopt conforming agency agreements.
Data mining of prescription drug information is big business. Pharmaceutical manufacturers spend billions of dollars a year having their sales representatives make regular visits to prescribers nationwide. During these one-on-one visits, the representatives distribute up to $1 million worth of free product samples per year, along with branded promotional materials and pamphlets about the different conditions their particular products can be used to treat. They use data about that provider’s prescribing history to market more effectively. Every sales pitch can be tailored to what the sales rep, also known as a detailer, knows of the prescriber based on his prescribing history. Federal and state laws prohibit the use of patient-identifying data for marketing purposes in the name of privacy. But until very recently no law restricted the use of prescriber-identifying information for any purpose.
In 2008, the State of Maine adopted a statute that stated that “a carrier, pharmacy or prescription drug information intermediary…may not license, use, sell, transfer or exchange for value, for any marketing purpose, prescription drug information that identifies a prescriber who has filed for confidentiality protection.” The Maine law limits detailers’ access to an individual prescriber’s identifying data only if the prescriber has affirmatively registered with the relevant Maine licensing board for confidentiality protection. When a prescriber opts in, the relevant Maine licensing board must place the individual’s name on a list that is submitted monthly to the Maine Health Data Organization, an independent state executive agency. The statute is designed to protect only prescribers in the Maine health care systems. Only Maine prescribers can opt in, and even opted-in prescribers’ identifying data can be used for any purpose other than detailing.
A prescription drug information intermediary is a company that collects these vast amounts of identifying data about individual prescribers and aggregates the data into reports and databases for use when marketing pharmaceutical products. Violation of the statute is a violation of the Maine Unfair Trade Practices Act. The Maine Attorney General can enjoin the practice and levy civil penalties of $10,000 per violation.
Once pharmaceutical manufacturers obtain detailing-oriented databases and reports, they generate individualized reports for detailers, who then use individual prescribers’ data to target prescribers in Maine. In an effort to eliminate this type of sales pitch, Maine focused on the original transfer of the data for marketing purposes, rather than on a prohibition against a particular type of marketing speech.
The Maine statute was to become effective on January 1, 2008. Before its enforcement, the plaintiffs, all prescription drug data intermediaries, sued Maine’s Attorney General in the federal district court of Maine, claiming that the statute’s limitations on licensing, sale, use, transfer or exchange of Maine prescribers’ identifying data for a marketing purpose were unconstitutional limitations on protected speech under the First Amendment. They also claimed that the law regulates transactions outside of Maine in violation of the dormant Commerce Clause. On December 21, 2007, the district court granted plaintiffs a preliminary injunction and prohibited Maine from enforcing the statute based on the plaintiffs’ First Amendment claims.
In IMS Health, Inc., et al. v. Janet T. Mills, as Attorney General for the State of Maine (Aug. 4, 2010), available here http://tinyurl.com/2b9bnw9, the United States Court of Appeals for the First Circuit rejected the information intermediaries’ First Amendment challenge. It held that the statute regulates conduct, the sale of the data, not speech. It also held that, even if it regulates commercial speech, that regulation satisfies constitutional standards. The plaintiffs had also argued that the statute was unconstitutional under the “dormant Commerce Clause” if applied to their out-of-state use or sale of opted-in Maine prescribers’ identifying data. The First Circuit held that the statute does regulate prescription drug information intermediaries’ out-of-State use or sale of opted-in Maine prescribers’ data. But it held that the statute constitutionally reached the plaintiffs’ out-of-state transactions as a necessary incident of Maine’s strong interest in protecting opted-in Maine prescribers from unwanted solicitations, a policy that the court held Maine rationally believed would lower its health care costs. It also held that the regulation of prescription drug information intermediaries’ out-of-state use or sale of opted-in Maine prescribers’ identifying data is not a disproportionate burden on interstate commerce.
In November 2008, the Court of Appeals for the First Circuit upheld a similar but not identical New Hampshire statute in IMS Health Inc. et al. v. Ayotte available here http://tinyurl.com/2ccpyhs. The New Hampshire statute provides that records relative to prescription information containing patient-identifiable and prescriber-identifiable data shall not be licensed, transferred, used or sold by any pharmacy benefits manager, insurance company, electronic transmission intermediary, retail, mail order or internet pharmacy or other similar entity, for any commercial purpose, except for the limited purposes of pharmacy reimbursement; formulary compliance; care management; utilization and review by a healthcare provider, the patient’s insurance provider or the agent of either; healthcare research; or as otherwise provided by law. By its terms, the statute does not appear to apply to pharmaceutical manufacturers.
In the Ayotte case, the court dodged the most serious First Amendment argument by holding that the plaintiffs, the same information intermediaries as in the Maine case, had no standing to assert the First Amendment rights of third parties, i.e., the pharmaceutical manufacturers and their sales representatives or positions. They could not assert the right of detailers to use prescriber-identifiable information in communicating face-to-face with physicians, nor could they assert the rights of physicians to receive that information during such interactions.
The First Circuit held that what New Hampshire sought to regulate was conduct, not expression. “This case poses the relatively narrow question of whether the Prescription Information Law constitutionally may guard these plaintiffs (data miners) from aggregating, manipulating, and transferring data for one particular purpose only…” According to the First Circuit, the challenged portions of the statute principally regulate conduct, and to the extent that the challenged portions impinge at all upon speech, that speech is of scant societal value.
Although this holding could have ended the First Amendment analysis, the First Circuit also reached the same conclusion assuming that the acquisition, manipulation and sale of prescriber-identifiable data come within the compass of the First Amendment. “If speech at all, these transactions are commercial speech; that is, they at most embody ‘expression related solely to the economic interest of the speaker and its audience.’” Citing a 1980 U.S. Supreme Court case, Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, available here http://tinyurl.com/24eg2bg, the First Circuit noted that statutory regulation of commercial speech is constitutionally permissible only if the statute is enacted in the service of a substantial governmental interest, directly advances that interest and restricts speech no more than is necessary to further that interest.
The First Circuit restricted its analysis to New Hampshire’s governmental interest in containing costs. It discussed in some detail the State’s evidence showing that detailing increases the cost of prescription drugs. New Hampshire was the first State in the country to enact such a statute, so there were no hard data to confirm the assumptions that detailing increases costs. However, testimony by a Harvard professor and a report of the New Hampshire Medical Society sufficiently justified the State’s interest in that goal. “…[T]he District Court’s demand that the state prove that the substitution of generic drugs for brand-name drugs would not lead to higher net health care costs subjected the state to a level of scrutiny far more exacting than is required for commercial speech.”
This conclusion left the final First Amendment issue to be decided: whether the regulation was no more extensive than necessary to serve the State’s interest in cost containment. The plaintiffs suggested alternatives such as a ban on gifts between detailers and physicians, a campaign to educate physicians to prescribe generic drugs whenever possible and a retooling of New Hampshire’s Medicaid programs so that non-preferred drugs – such as expensive brand name drugs for which no bioequivalent generic substitutes exist – would only be dispensed upon a physician’s consultation with a pharmacist. The First Circuit rejected all of these alternatives as impractical and unlikely to achieve the State’s goal of cost containment.
The First Circuit then considered the dormant Commerce Clause issue. “The proper mode of analysis under this so-called single ‘dormant Commerce Clause’ depends upon the scope of the challenged statute. A law that purports to regulate conduct occurring wholly outside the enacting state ‘outstrips the limits of the enacting State’s constitutional authority and, therefore, is per se invalid.’” This is the weakest part of the court’s analysis. The Attorney General “… urged [the court] to interpret the law as governing only in-state transactions,” and the First Circuit agreed without examination. If that interpretation is correct, there is no dormant Commerce Clause issue. The statute applies primarily to New Hampshire based pharmacies, which are permitted to transfer data for reimbursement purposes, etc. Unless transferred to a New Hampshire PBM, billing intermediary or insurance company, the data end up outside New Hampshire. These data are then collected by data miners outside New Hampshire into reports and databases sold to pharmaceutical manufacturers outside New Hampshire. The manufacturers then send salesmen to New Hampshire physicians to market drugs using information about each physician’s prescribing patterns. This marketing does not appear to be prohibited by the New Hampshire statute. As long as the data miners physically stay out of New Hampshire, data may be routinely transferred to out-of-state facilities where they can then be aggregated and sold legally to others. This interpretation limits, if not guts, the effectiveness of the law. There was little discussion of the Attorney General’s contention that the act governs only transactions that take place within New Hampshire versus the plaintiffs’ (in my opinion more reasonable) contention that all of the conduct that the act purports to regulate occurs outside the State. Of course, it would be difficult for a federal district court to disagree with a state attorney general on an interpretation of a new state law. A dissenting judge held that he did not believe the court had an adequate foundation for evaluating the implications for the Commerce Clause analysis and he would remand the case to the District Court with instructions to address the Commerce Clause issue in the first instance.
The New Hampshire case is not very well reasoned and can be criticized in a number of ways. The New Hampshire Attorney General may have a difficult time enforcing the statute against detailers marketing in New Hampshire to New Hampshire prescribers. The plaintiffs petitioned the Supreme Court for certiorari, but that petition was denied.
The Maine statute was much more narrowly tailored and the case more clearly reasoned. When patients of an opted-in Maine prescriber fill their prescriptions, the pharmacy still collects the prescriber’s identifying data and may transfer them to a central data center outside the State of Maine as long as the pharmacy is doing so for one of the permitted purposes (formulary compliance, reimbursement, etc.). The law does not, by its terms, affect this transfer. But the statute does regulate transactions between those pharmacy data centers and prescription drug information intermediaries like the plaintiffs. It prohibits them from selling, transferring or licensing opted-in Maine prescribers’ identifying data for a marketing purpose. The statute does not explicitly limit detailers’ use of prescriber-identifying data, but the earlier stages of regulation are meant to prevent this information from getting to detailers for use in marketing.
So far there is no subsequent appellate history of this case, but the time to file a petition for a writ of certiorari has not yet expired. Given the denial in the New Hampshire case, it is unlikely that the Supreme Court would grant the writ. We will probably have to wait until a state outside the First Circuit enacts such a law, which law is then struck down on appeal in that circuit. Then there would be a conflict among the circuits for the Court to resolve.
As I indicated at http://tinyurl.com/27s8zo3, in December the Department of Health and Human Services (“HHS”) published an interim final rule that adopted an initial set of standards, implementation specifications, and certification criteria for electronic health records (“EHR”). The standards are tied to the EHR Incentive Program: to qualify, an eligible provider must both adopt Certified EHR Technology and demonstrate meaningful use of the technology.
On July 28 HHS issued the final rule, which it said more closely aligned the standards with the final meaningful use Stage 1 objectives and measures. (See http://tinyurl.com/257n46b.) Under the final rule, Complete EHRs and EHR Modules will be tested and certified according to the adopted criteria. The final rule discusses the certification criteria together with associated standards and implementation specifications to improve clarity. In an effort to better structure the regulation text for future revisions, HHS revised the structure conceptually to group content exchange standards and associated implementation specifications and vocabulary standards and separated them into different sections. In line with this ‘‘conceptual’’ restructuring, HHS determined that specifying how a Complete EHR or EHR Module must comply with an adopted standard should be solely reflected in the certification criteria. As a result, several certification criteria have been revised to more clearly reflect how a Complete EHR or EHR Module must comply with adopted standards and, where applicable, the relevant adopted implementation specifications. HHS states that, in large part, the final rule is very similar to the interim final rule. However, in response to public comments, the final rule clarifies certain standards and certification criteria, and some of the adopted certification criteria were revised to realign with changes to the Medicare and Medicaid EHR Incentive Programs final rule. The final certification rule may be found from a link at http://tinyurl.com/2af6hks.