Venable's healthcare attorneys are constantly monitoring the latest developments in the industry, anticipating new legal challenges and identifying trends that could impact their clients' businesses. Midway through 2024, there are many significant issues to track. In this Q&A, partners Ari Markenson and Valerie Cohen talk about the trends they are seeing in the healthcare space, including the impact of AI technology, private equity investments, drug price regulation, and antitrust enforcement.
Q: Artificial intelligence (AI) seems to be increasingly upending nearly every industry. How is it affecting the healthcare sector?
Ari: Technology like AI is rapidly reshaping how medical services are delivered, managed, and even paid for. The use of AI in reimbursement for care is a particular trend we are following. Policymakers want AI-driven decision-making processes to be transparent and explainable to both healthcare providers and patients. In February 2024, the Centers for Medicare & Medicaid Services (CMS) released a memo to all Medicare Advantage organizations (MAOs) to clarify how they can use AI and algorithms in making coverage determinations. CMS advised that AI algorithms could potentially exacerbate existing biases within healthcare systems. Mitigating bias and enhancing fairness and equity across diverse patient populations are key goals. AI algorithms also rely heavily on patient data to generate insights and recommendations, so according to CMS, MAOs must abide by the Health Insurance Portability and Accountability Act (HIPAA) requirements to protect patient privacy.
Valerie: The use of AI in healthcare has sparked litigation and increased regulatory activity. Late last year, two class action complaints were filed in federal courts centered on the use of AI to make coverage determinations for Medicare Advantage enrollees. The CMS memo Ari just mentioned affirms that AI tools can be used to assist in making coverage determinations, but it cautions against relying on AI as the sole basis for determining coverage. As these and other litigations work through the court system, MAOs utilizing AI in coverage determinations should prepare for audits by reviewing their AI data sources, intended methodology, and whether the AI may be inadvertently contributing to discriminatory bias.
Q: What else is happening in the courts that could affect players in the healthcare industry?
Valerie: The Supreme Court could deal a potentially fatal blow to the Chevron doctrine in the coming days, which may have significant repercussions for the healthcare industry. For decades, where there was ambiguity, this doctrine required courts to afford great deference to agency interpretations of "a statutory scheme [the agency is] entrusted to administer." So, limiting this deference could impact how CMS and other agencies that oversee healthcare entities regulate significant areas like AI. It also may put more pressure on Congress to enact more detailed legislation than in the past, when the legislative branch traditionally left a lot of the specifics to agencies to enumerate through rules and guidance.
Q: If Chevron is struck down, what framework will take its place?
Valerie: The Supreme Court could potentially rely on Skidmore, the pre-Chevron standard of review, which evaluates the influence of an agency interpretation based on "the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control." Skidmore allows courts to judge the persuasiveness of the agency interpretation—a far less deferential standard than Chevron.
Various factors affect the vulnerability of an agency pronouncement, like whether there is an explicit statutory delegation to the Secretary of the U.S. Department of Health and Human Services (HHS) and whether a particular rule went through public notice-and-comment. If an agency pronouncement is issued outside of public notice-and-comment rulemaking, it may be more vulnerable to legal challenges.
Q: What should private equity investors know concerning opportunities and risks in operating in the healthcare industry?
Ari: Healthcare services represent a massive portion of the U.S. economy, and changes in demographics and payment models are creating additional opportunities for consolidation and growth. Potential investors should be aware of the major risks, which include increased federal government oversight, scrutiny, and criticism of private equity investments in healthcare. Strict compliance is required in many areas of the law, including licensure and certification and privacy. These areas are growing increasingly complex as states continue to pass their own new laws addressing private investment in healthcare services in particular and issue guidance. States are reviewing healthcare transactions in ways that they really haven't before, and many are even creating whole new schemes for review. Some of the state laws are just notice laws, but a lot of them are actually pre-closing approvals, and that's changing the landscape of what states people invest in.
Q: Prescription drug pricing is a hot topic right now. What are some recent developments in that space?
Valerie: We have seen a lot of litigation challenging the Inflation Reduction Act (IRA) of 2022, which—for the first time—allows the federal government to directly negotiate with drug manufacturers on prices for the most widely used drugs covered by Medicare. The federal government has taken the position that because Medicare reimbursement uses taxpayer funds, it can set maximum prices that it is willing to pay, akin to private, arm's-length transactions. The IRA has so far withstood constitutional challenge at the federal district court level, but it will be several years before existing and potential future cases wind their way through the litigation and appeals process.
Just last month, CMS issued draft guidance that requires manufacturers and dispensing entities to comply with the IRA's maximum drug pricing, including very narrow payment windows, at the risk of possible enforcement and civil monetary penalties. Though the final version of the guidance may vary from the current draft, it's highly likely that compliance requirements will remain with manufacturers and drug dispensing entities. We are actively advising our clients regarding regulatory compliance implications under the IRA.
Q: Pharmacy Benefit Managers (PBMs) seem to be an integral part of recent drug pricing conversations. Any insights in that space?
Valerie: PBMs are intermediaries who create formularies (lists of drugs for which health insurers agree to pay—at least partially—for particular health conditions). They negotiate rebates with drug manufacturers, process claims, create pharmacy networks, review drug utilization, and manage mail-order and specialty pharmacies. In these roles, PBMs work with drug manufacturers, wholesalers, pharmacies, health insurance providers, and employers.
In recent years, PBMs have been identified by policymakers and other stakeholders as one factor contributing to high prescription drug prices. Over the past year and a half, legislation has been introduced in the House and Senate seeking to increase transparency around PBM drug pricing and practices, require specific data reporting, curb certain PBM practices (e.g., prohibiting spread pricing), and modify the types of relationships PBMs can have with other entities, such as pharmacies and drug manufacturers. Despite significant bipartisan interest and support and some committee-level action, federal PBM legislation is currently stalled. Many states, in the meantime, have moved forward with their own PBM transparency laws, resulting in a patchwork of PBM state laws, which has created regulatory challenges for PBMs with national networks. Federal Employee Retirement Income Security Act (ERISA) preemption challenges to state PBM laws have been working through the courts, resulting in a circuit split between the Eighth and Tenth Circuits regarding the extent of ERISA preemption over states' efforts to regulate PBMs.
Q: What trends are you seeing in the healthcare antitrust space?
Ari: The Federal Trade Commission (FTC), together with other federal agencies (DOJ and HHS) and state agencies, has ramped up its enforcement relating to healthcare transactions, from national mega-mergers to roll-up acquisitions whose market impacts may be only regional. Most recently, a private equity sponsor successfully moved to dismiss FTC's antitrust complaint targeting its portfolio company's roll-up transactions that allegedly consolidated a professional practice market through a series of acquisitions over several years. But the enforcement risks remain real enough for private equity investors who, according to recent reporting, have pulled back investment in roll-up transactions.
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