Health Agency Approach on Civil Penalties Shaken by High Court

Federal health agencies are expected to navigate with caution when issuing enforcement actions after a US Supreme Court ruling dealt a blow to their ability to leverage financial penalties, attorneys specializing in health law say.

The US Department of Health and Human Services, the Centers for Medicare & Medicaid Services, and the Food and Drug Administration are likely to face heightened challenges from hospitals, insurers, drugmakers, and others in the health-care orbit after the Supreme Court decision in SEC v. Jarkesy.

In that case, the court ruled that parties are entitled to a jury trial when the Securities and Exchange Commission sought civil penalties from them for securities fraud. The decision is likely to ripple across the administrative state and have a significant impact on the HHS and its agencies.

“The deterrence effect on enforcement is huge,” said Christina S. Ho, professor at Rutgers Law School. “Everything is called into question.”

Federal health agencies have increasingly gained enforcement power—issuing civil monetary penalties in various areas relating to tobacco control, prescription drug plans, nursing home oversight, and Affordable Care Act measures. After the Jarkesy ruling, the HHS is a prime target for lawsuits as their actions may come under close scrutiny, health attorneys say.

“Administrative enforcement actions are probably going to slow down while the agencies figure out what, if anything, they can do to shore up the constitutionality of the processes,” said Jamie L.M. Jones, partner and co-leader of Sidley Austin LLP’s health-care practice.

“But at the same time, there’s a lot of stuff in the pipeline, and I think you are going to see health-care and regulated life sciences companies challenging the actions that these agencies bring against them,” Jones said.

The HHS’ list of civil monetary penalty authorities spans over 20 pages in the Federal Register, according to a Sidley Austin analysis. The agency in 2023 created a division within the Office for Civil Rights to address the “growing need of enforcement.”

Jarkesy presents “such a flabby legal standard” that it would be a missed opportunity for anyone facing a civil monentary penalty to not challenge the HHS in court, Ho said.

Ripe for Challenges

The HHS’ Office of Inspector General is the driver for various civil monetary penalties, which often target the industry for false record statements or failure to report overpayments.

Civil monetary penalties from the CMS often deal with violations of billing rules or the No Surprises Act. The agency’s penalties largely arise under Medicare Part B, which covers outpatient care, provider services, durable medical equipment, and some preventive services, such as screenings and vaccines.

The FDA issues the penalties to companies that manufacture and sell tobacco products but lack the required marketing authorization. The current maximum penalty for violating a requirement of the Federal Food, Drug, and Cosmetic Act relating to tobacco products is $20,678 for a single violation.

But agencies’ wide range of power to issue civil monetary penalties leaves room for challenges if the industry is feeling empowered by Jarkesy, attorneys say.

“Any lawyer who has a client who’s subject to civil penalties from the FDA, a proceeding, would make the argument that this whole thing is illegal. We’re going to court,” said Daniel Kracov, chair of Arnold & Porter’s life sciences industry practice.

“FDA may need to do its own analysis and abandon enforcement of some of their civil penalty regimes based upon this decision,” Kracov said of Jarkesy.

Tackling 340B Disputes

The high court’s decision will also test how federal health programs, such as the 340B Drug Pricing Program, can react to challenges against potential enforcement actions.

The program—overseen by HHS’ Health Resources and Services Administration—requires drugmakers to discount certain drugs to qualifying health providers.

HRSA this year pushed out its administrative dispute resolution process to address pricing issues between manufacturers and health-care providers.

But while there is a freshly implemented dispute process, there isn’t a “history of administrative hearings under 340B like those in other agency proceedings,” said Steve Kuperberg, partner at Feldesman Leifer LLP’s health-care and litigation practice.

“Although HRSA does conduct 340B audits on manufacturers and covered entities that carry the prospect of findings and adverse consequences, HRSA does not adjudicate its audit results in a formal administrative hearing,” Kuperberg said.

“340B is different,” he said. “There are real unresolved judicial and legislative issues that affect the stakeholders to the statute, but the recent wave of Supreme Court decisions haven’t had the immediate effect on 340B that they have elsewhere among regulated industries.”

There also are provisions in the 340B statute that allow for imposition of civil monetary penalties, or referrals of agencies that could impose penalties, but they have never actually been implemented, said Emily Cook, partner at McDermott Will & Emery.

The question now is “what would it look like if the government attempted to actually impose any of these penalties, and then what that would look like in comparison to the opinion,” Cook said.

Constitutional Safeguards

The outcome in Jarkesy is also likely to test an agency’s ability to rely on the administrative law judges (ALJs) that oversee in-house administrative procedures.

“It shines a light on what these administrative law judges actually are, and what the limit of their authority is,” said Andrew Tsui, a former litigator in the Office of General Counsel for CMS, and now of counsel in Greenberg Traurig LLP’s health-care and FDA practice.

“All of these agencies are going to have to undertake a fairly profound review of the practices and authorities bestowed upon their ALJ corps in order to make sure that they are acting in accordance with the court’s decision in Jarkesy,” Tsui said.

King & Spalding LLP counsel Lauren Gennett said that before “challenges come up in federal court,” providers or other health-care organizations may try “to raise this issue as a negotiation factor when they’re engaging with HHS regarding the potential issuance of CMPs.”