Unpacking the Federal Anti-Kickback Statute’s Application to Payments to Medicare Advantage Agents and Brokers
On December 11, 2024, the U.S. Department of Health & Human Services’ Office of Inspector General (OIG), issued a Special Fraud Alert (Alert) focusing on financial arrangements involving Medicare Advantage (MA) Organizations (MAOs), their agents and brokers, and health care professionals (HCPs).[1] This blog post will unpack OIG’s commentary on these arrangements and discuss how – and if – the federal Anti-Kickback Statute (AKS) applies to them.
The first section provides a brief background on the Centers for Medicare & Medicaid Services’ (CMS) regulations applicable to compensation for agents and brokers for MA plans with a focus on the regulations that were to be effective for Contract Year 2025 but have been stayed (i.e., delayed) pending the outcome of court cases in the Northern District of Texas. The second section provides an overview of OIG’s 2024 Alert, and the final section explores the application of the AKS to arrangements involving payments to MA plan agents and brokers.
CMS Revised Agent, Broker & TPMO Compensation Regulations
By statute, CMS is given regulatory authority over MA agent and broker compensation – see Social Security Act (SSA) § 1851(j)(2)(D), 42 U.S.C. § 1395w-21(j)(2)(D) – which describes prohibited activities and limitations related to eligibility, election, and enrollment, including “[t]he use of compensation other than as provided under guidelines established by the Secretary. Such guidelines shall ensure that the use of compensation creates incentives for agents and brokers to enroll individuals in the Medicare Advantage plan that is intended to best meet their health care needs.” That statutory authority is implemented through CMS regulation at 42 C.F.R. § 422.2274, which addresses MA plan payments to agents and brokers.
In its April 2024 Final Rule revising section 422.2274, CMS outlined the following approach for revisions to the agent, broker and third-party marketing organization (TPMO) compensation structures:
generally prohibit contract terms between MA organizations and agents, brokers or other TPMOs that may interfere with the agent’s or broker’s ability to objectively assess and recommend the plan which best fits a beneficiary’s health care needs;
set a single agent and broker compensation rate for all plans, while revising the scope of what is considered “compensation”; and
eliminate the regulatory framework which currently allows for separate payment to agent and brokers for administrative services.[2]
In several places in the Final Rule, CMS noted that, depending on the circumstances, agent and broker relationships can also be problematic under the AKS if they involve, for example, compensation in excess of fair market value (FMV), compensation structures tied to the health status of the beneficiary (e.g., cherry picking for the most profitable enrollees), or compensation that varies based on the attainment of certain enrollment targets.[3]
On July 3, 2024, the U.S. District Court for the Northern District of Texas issued preliminary injunctions in Americans for Beneficiary Choice v. HHS, No. 4:24-cv-00439, and Council for Medicare Choice v. HHS, No. 4:24-cv-00446, which stayed for the duration of the litigation the effective date of certain of the provisions of the revised CMS agent/broker/TPMO compensation provisions, specifically, those amending 42 C.F.R. § 422.2274(a), (c), (d), (e) (and for Medicare Part D at § 423.2274(a), (c), (d) and (e)). Therefore, the regulatory language within those subsections that were effective prior to the issuance of the final rule will be in effect in Contract Year 2025 so long as the stay remains in place.[4]
To be clear, with or without the revisions to the compensation provisions, the agent, broker and TPMO compensation regulations at 42 C.F.R. § 422.2274 currently and as revised allow compensation that is quite different than what is reflected in the AKS safe harbors and OIG guidance on the provider side. For example, the CMS regulations allow per enrollment fees to brokers or agents based on successfully enrolling beneficiaries into MA plans (a “success fee”), which have caps set at “fair market value” amounts (defined in the regulation) determined by CMS.[5] Further, payments for referrals (up to $100) are specifically allowed (e.g., a lead fee) for the “recommendation, provision, or other means of referring beneficiaries to an agent, broker or other entity for potential enrollment into a plan.”[6] These compensation methodologies have been commonplace in the insurance market for decades, but they are quite different than sales agent compensation for providers that are paid by the federal health care programs.
Overview: OIG Special Fraud Alert
In the wake of CMS’ Final Rule, OIG released a Special Fraud Alert, which focuses on:
marketing arrangements between MAOs and HCPs and
arrangements between HCPs and agents and brokers for MA plans.[7]
The Alert illustrates how OIG views the application of AKS in arrangements between HCPs and agents and brokers for MA plans.
OIG noted that a substantial area of risk involves MAOs, directly or indirectly, paying remuneration (i.e., anything of value) to HCPs or their staff in exchange for referring patients to the MAOs’ plans.[8] OIG acknowledged that CMS regulations allow HCPs to engage in certain limited marketing related functions on behalf of an MAO, but MAOs must ensure that HCPs acting on their behalf do not “[a]ccept compensation from the [MAO] for any marketing or enrollment activities performed on behalf of the [MAO],”[9] citing a CMS regulation. (The OIG cited a recent Department of Justice settlement for $60 million involving alleged kickbacks paid to insurance agents in Medicare Advantage patient recruitment.[10])
The Alert noted that the second area of risk involves payments from HCPs to agents and brokers, e.g., payments from an HCP to agents and brokers to recommend that HCP to a particular MA enrollee or refer to the enrollee to the HCP.[11] According to OIG, in some cases, HCPs make these payments to refer Medicare enrollees to the HCP, in return to become designated as the primary care provider for the enrollee at their particular MA plan.[12]
OIG is concerned that agents, brokers and HCPs may skew the guidance they provide related to HCPs or MA plans based on their financial self-interest.[13] When a party knowingly and willfully pays remuneration to induce or reward referrals of items or services payable by a federal health care program, the AKS may be implicated.[14] By its terms, the statute ascribes liability to parties on both sides of an impermissible kickback transaction. Arrangements involving HCP compensation to an agent or broker could implicate the statute if the HCP offers or pays an agent or broker to refer enrollees to the HCP for the furnishing or provision of items or services that are reimbursable by a federal health care program.[15] Similarly, arrangements involving MAO compensation to an HCP or their staff could implicate the statute if the MAO offers and pays an HCP or their staff to refer enrollees to a particular MA plan to furnish or arrange for the furnishing of items or services that are reimbursable by Medicare.[16]
Based on its experience, OIG provides a list of “suspect characteristics” that “taken together or separately, could suggest that an arrangement presents a heightened risk of fraud and abuse.”[17] These characteristics include, but are not limited to:
MAOs, agents, brokers, or any other individual or entity offering or HCPs or their staff remuneration (such as bonuses or gift cards) in exchange for referring or recommending patients to a particular MAO or MA plan.
MAOs, agents, brokers, or any other individual or entity offering or paying HCPs remuneration that is disguised as payment for legitimate services but is actually intended to be payment for the health care provider’s referral of individuals to a particular MA plan.
MAOs, agents, brokers, or any other individual or entity offering or paying HCPs or their staff remuneration in exchange for sharing patient information that may be used by the MAOs to market to potential enrollees.
MAOs, agents, brokers, or any other individual or entity offering or paying remuneration to HCPs that is contingent upon or varies based on the demographics or health status of individuals enrolled or referred for enrollment in an MA plan.
MAOs, agents, brokers, or any other individual or entity offering or paying remuneration to HCPs that varies based on the number of individuals referred for enrollment in an MA plan.
HCPs offering or paying remuneration to an agent, broker, or other third party that is contingent upon or varies based on the demographics or health status of individuals enrolled or referred for enrollment in an MA plan.
HCPs offering or paying remuneration to an agent, broker, or other third party to recommend that HCP to a Medicare enrollee or refer an enrollee to the HCP.
HCPs offering or paying remuneration to an agent, broker, or other third party that varies with the number of individuals referred to the HCP.[18]
Application of the Federal AKS to Arrangements Involving Agents and Brokers for MA Plans
On the provider side, the AKS is well known and should be carefully navigated. The AKS prohibits providers from knowingly and willfully soliciting, receiving, offering, or paying, directly or indirectly, any remuneration in return for either making a referral for an item or service covered by a federal health care program (including Medicare and Medicaid) or ordering any covered item or service.[19] For purposes of this statute, remuneration includes the transfer of anything of value, in cash or in kind, directly or indirectly, covertly or overtly.[20] OIG has promulgated AKS regulations, which provide safe-harbor protection for certain activities that might otherwise be subject to scrutiny under the AKS.[21] If a safe harbor applies to an arrangement, it must satisfy all elements of the safe harbor to receive protection. If an arrangement does not fall within a safe harbor, OIG will review the full facts and circumstances to make a compliance determination.
In the Alert, OIG suggests that financial arrangements involving agents and brokers for MA plans may implicate the AKS. Arrangements involving HCP compensation to an agent or broker could implicate the statute if the HCP offers or pays an agent or broker to refer enrollees to the HCP for the furnishing or provision of items or services that are reimbursable by a federal health care program.[22] Similarly, arrangements involving MAO compensation to an HCP or their staff could implicate the AKS if the MAO offers and pays an HCP or their staff to refer enrollees to a particular MA plan to furnish or arrange for the furnishing of items or services that are reimbursable by Medicare.[23]
However, the AKS’s application to agent/broker arrangements is murky territory, which we explore further below.
i. AKS History
In 1972, the federal AKS was created in two (2) identically worded sections of the SSA in title XVIII (SSA § 1877) (Medicare) and title XIX (SSA § 1909) (Medicaid). Until 1999, there were Parts A and B of Medicare, but no Part C – i.e., no Medicare Advantage (previously called Medicare+Choice).[24] The AKS prohibition related then, as it does now, to referrals of “items or services” and purchasing, leasing, ordering or arranging for or recommending purchasing, leasing, or ordering any good, facility, service or item for which payment may be made in whole or in part “under the [Medicare and Medicaid] title.” (That payor language is now “under a Federal health care program.”[25])
The Medicare definitions for that original SSA section 1877 were found in SSA section 1861 (42 U.S.C. § 1395x) (under Part E – Miscellaneous Provisions). Under the Medicare definitions (SSA Sec. 1861 Definition of services, institutions, etc.), “item or service” is not specifically defined, but there are references to its meaning in the other definitions in that section. For example, SSA section 1861(n) “The term ‘physicians’ services means professional services performed by physicians, including surgery, consultation, and home, office, and institutional calls….”[26] SSA section 1861(s) “The term ‘medical and other health services’ means any of the following items or services: (1) physician services; (2)(A) services and supplies…; (B) hospital services…(C) diagnostic services….”[27]
In 1987, Congress moved SSA section 1909 to section 1128B and repealed the anti-kickback provisions of SSA section 1877. (Remember SSA sections 1877 and 1909 were identically worded.) SSA section 1128B is under SSA title XI (General Provisions, Peer Review and Administrative Simplification) and does not have a definition of “item or service.”[28] However, the definitions section under SSA title XVIII (Medicare) at section 1861 still exist. Further, and as previously noted, in 1999, Medicare Part C (also known as Medicare+Choice, now Medicare Advantage) was created and is part of the SSA title XVIII.
The meanings of items or services have remained at SSA title XVIII, section 1861 (entitled “Definitions”). As such, items include, e.g., prescription drugs and supplies; services include, e.g., physician services. Items and services have never been interpreted as being a Medicare Advantage plan itself.
ii. Agent/Broker Payments
Payments tied to marketing for enrollment of beneficiaries into an MA plan do not implicate the AKS because such plan marketing services are not referrals of items or services nor are such plan marketing services purchasing, leasing, ordering or arrangement for or recommending purchasing, leasing, or ordering any good, facility, service or item.
AKS does apply to health plans, but in looking at the AKS regulatory safe harbors (the OIG’s implementing regulations), it is clear that the statute’s application (and the meaning of items and services), does not include marketing and other pre-enrollment activities.
1. 42 C.F.R. § 1001.952(l) Increased coverage, reduced cost-sharing amounts, or reduced premium amounts offered by health plans. “(1) As used in section 1128B of the Act, ‘remuneration’ does not include the additional coverage of any item or service offered by a health plan to an enrollee or the reduction of some or all of the enrollee’s obligation to pay the health plan or a contract health care provider for cost-sharing amounts (such as coinsurance, deductible, or copayment amounts) or for premium amounts attributable to items or services covered by the health plan, the Medicare program, or a State health care program, as long as the health plan complies with all of the standards within one of the following two categories of health plans….”
2. 42 C.F.R. § 1001.952(m) Price reductions offered to health plans. “As used in section 1128B of the Act, ‘remuneration’ does not include a reduction in price a contract health care provider offers to a health plan in accordance with the terms of a written agreement between the contract health care provider and the health plan for the sole purpose of furnishing to enrollees items or services that are covered by the health plan, Medicare, or a State health care program, as long as both the health plan and contract health care provider comply with all of the applicable standards within one of the following four categories of health plans….”
3. 42 C.F.R. § 1001.952(t) Price reductions offered to eligible managed care organizations. “(1) As used in section 1128B of the Act, ‘remuneration’ does not include any payment between: (i) an eligible managed care organization and any first tier contractor for providing or arranging for items or services, as long as the following three standards are met — (A) the eligible managed care organization and the first tier contractor have an agreement that: (1) Is set out in writing….
(2) For purposes of this paragraph, the following terms are defined as follows:
…(iv) Items and services meanshealth care items, devices, supplies or services or those services reasonably related to the provision of health care items, devices, supplies or services including, but not limited to, non-emergency transportation, patient education, attendant services, social services (e.g., case management), utilization review and quality assurance. Marketing and other pre-enrollment activities are not “items or services” for purposes of this section.”
4. 42 C.F.R. § 1001.952(u) Price reductions offered by contractors with substantial financial risk to managed care organizations. “(1) As used in section 1128(B) of the Act, “remuneration” does not include any payment between: (i) A qualified managed care plan and a first tier contractor for providing or arranging for items or services, where the following five standards are met — (A) The agreement between the qualified managed care plan and first tier contractor must: (1) Be in writing and signed by the parties;….
(2) For purposes of this paragraph, the following terms are defined as follows:
…(iv) Items and services means health care items, devices, supplies or services or those services reasonably related to the provision of health care items, devices, supplies or services including, but not limited to, non-emergency transportation, patient education, attendant services, social services (e.g., case management), utilization review and quality assurance. Marketing or other pre-enrollment activities are not “items or services” for purposes of this definition in this paragraph.”
Except for the Alert discussed in this Article, there is no OIG regulatory or sub-regulatory guidance providing direction related to MA plan-agent/broker arrangements. The recent Alert discusses arrangements involving MAO compensation to an HCP or their staff that could implicate AKS if the MAO offers and pays an HCP or their staff to refer enrollees to a particular MA plan to furnish or arrange for the furnishing of items or services that are reimbursable by Medicare. The Alert’s analysis concludes applicability of the AKS while it jumps past (or around) the “conduct” – i.e., the recommendation of the MAO plan enrollment – to the items and services provided by a plan.
Prior to the most recent Alert, OIG’s last discussion of such arrangements was in 1996 (even before MA) and noted that the issue of independent agents and brokers in the managed care arena was beyond the scope of the 1996 final rule (regarding safe harbors for protecting health plans) and “would require separate notice and public comment in order to be adopted.”[29] There has been no such separate notice and comment.
The 2008 and 2024 rules from CMS noted that “agents and broker relationships can be problematic under the federal anti-kickback statute if they involve, by way of example only, compensation in excess of fair market value, compensation structures tied to the health status of the beneficiary (for example, cherry picking), or compensation that varies based on the attainment of certain enrollment targets.”[30] OIG, not CMS, has authority to interpret the AKS and its safe harbors. Thus, this CMS preamble language is interesting, but it is not OIG guidance, or more fundamentally a statutory expansion that would apply the AKS to incentives related to MA plan choices.
In the 2024 Final Rule, in its discussion of AKS, CMS also referenced a 2010 OIG report, but that 2010 report specifically stated: “Finally, we [OIG] did not determine whether plan sponsors’ payments complied with the Federal anti-kickback statute. A legal analysis of whether plan sponsor payments violated the Federal anti-kickback statute was beyond the scope of this study.”[31]
Conclusion
The AKS is broadly applicable to items and services provided by the federal health care programs, but it is not currently applicable to MA broker and agent compensation related to MA plan choices that are not “items and services.” CMS has broad authority related to MA broker, agent and TPMO compensation by statute and regulation. Without a statutory change to the AKS, CMS is the sole authority over MA broker, agent and TPMO compensation in accordance with the rules set forth at 42 C.F.R. § 422.2274.
[1] U.S. Dep’t. of Health & Hum. Servs. Office of Inspector General, Special Fraud Alert: Suspect Payments in Marketing Arrangements Related to Medicare Advantage and Providers (Dec. 11, 2024) (available at https://oig.hhs.gov/compliance/alerts/).
[2] 89 Fed. Reg. 30,448, 30,620 (CMS Final Rule, Apr. 23, 2024).
[3]Id. at 30,617, 30,618 and 30,624.
[4] CMS, Medicare Drug and Health Plan Contract Administration Group, UPDATED Contract Year 2025 Agent and Broker Compensation Rates, Submissions, and Training and Testing Requirements (July 18, 2024) available at https://22041182.fs1.hubspotusercontent-na1.net/hubfs/22041182/Memo_Updated%20AB%20Compensation%20and%20T%20and%20Testing%20Requirements%20CY2025_Final.pdf.
[5] 42 C.F.R. § 422.2274(a), (d).
[6]Id. § 422.2274(f).
[7] U.S. Dep’t. of Health & Hum. Servs. Office of Inspector General, Special Fraud Alert: Suspect Payments in Marketing Arrangements Related to Medicare Advantage and Providers (Dec. 11, 2024), available at https://oig.hhs.gov/documents/special-fraud-alerts/10092/Special%20Fraud%20Alert:%20Suspect%20Payments%20in%20Marketing%20Arrangements%20Related%20to%20Medicare%20Advantage%20and%20P.pdf (hereinafter, “Alert”).
[8]Id. at 2.
[9] 42 C.F.R. § 422.2266.
[10]See Press Release, U.S. Department of Justice, Oak Street Health Agrees to Pay $60 Million to Resolve Alleged False Claims Act Liability for Paying Kickbacks to Insurance Agents in Medicare Advantage Patient Recruitment Scheme (Sept. 18, 2024), https://www.justice.gov/opa/pr/oak-street-health-agrees-pay-60m-resolve-alleged-falseclaims-act-liability-paying-kickbacks.
[11] Alert at 2.
[12]Id.
[13]Id. at 3.
[14]Id. at 4.
[15]Id.
[16]Id.
[17]Id. at 5.
[18]Id.
[19] SSA 1128B(b)(1), 42 U.S.C. § 1395a-7b(b)(1).
[20]Id.
[21] 42 C.F.R. § 1001.952.
[22] Alert at 4.
[23]Id.
[24]See Balance Budget Act of 1997, P. L. 105-33, 111 Stat. 251, tit. IV (Aug. 5, 1997).
[25] “Federal health care program” is defined as “(1) any plan or program that provides health benefits, whether directly, through insurance, or otherwise, which is funded directly, in whole or in part, by the United States Government (other than the health insurance program under chapter 89 of title 5); or (2) any State health care program, as defined in section 1320a-7(h) of this title.” SSA 1128B(f), 42 U.S.C. § 1320a-7b(f).
[26] SSA § 1861(n), 42 U.S.C. § 1395x(n).
[27] SSA § 1861(s), 42 U.S.C. § 1395x(s).
[28]See generally SSA § 1861, 42 U.S.C. § 1395x.
[29] 61 Fed. Reg. 2122, 2124 (OIG Final Rule, Jan. 25, 1996).
[30]See, e.g., 89 Fed. Reg. 30,448, 30,617 (Final Rule, Apr. 23, 2024).
[31] 89 Fed. Reg. at 30,618 (citing Levinson, Daniel R, Beneficiaries Remain Vulnerable to Sales Agents Marketing of Medicare Advantage Plans (March 2010), https://oig.hhs.gov/oei/reports/oei-05-09-00070.pdf)).
CMS Administrator Outlines His Vision for CMS at NFP Healthcare Investors Conference
The Administrator for the Centers for Medicare & Medicaid Services (CMS), Dr. Mehmet Oz, spoke to non-profit health system executives, investors, and industry observers this week at the 25th Annual Not-for-Profit Healthcare Investors Conference sponsored by Barclays, HFMA and the American Hospital Association. Dr. Oz outlined his vision for CMS – after joking that the difference between a “vision” and a “hallucination” is whether a person can bring others along with them—and addressed some of the critical policy issues related to Medicaid currently under debate in the United States Congress.
Dr. Oz focused on two priority areas for CMS: (1) the digital transformation of health care, including the request for information (RFI) that CMS published on May 16, 2025; and (2) eliminating “fraud, waste, abuse,” citing examples of hospice providers and DME suppliers submitting fraudulent claims to Medicare for items and services not actually needed or dispensed and individuals enrolled in Medicaid or subsidized plans offered through health insurance Exchanges that they were unaware of due to abusive practices by enrollment brokers.
Dr. Oz explained the goals of the RFI are to increase access to healthcare information for both patients and doctors. The objective is to empower individual patients to better understand their health and make informed decisions about their care, while also eliminating paperwork and other administrative burdens for doctors, allowing them to focus more of their time and attention on patient care. He wants to reduce bureaucratic processes and ease administrative burdens, including improving the prior authorization process. He also encouraged the audience to envision a future where Medicare beneficiaries receive messages on their phones to address basic health issues or engage in daily exercise, and where they can interact with an AI-enabled physician avatar to discuss their condition or understand what to expect from an upcoming procedure before arriving at their appointment.
Dr. Oz also described CMS’s focus on the “core” populations intended to be covered by the Medicaid and Medicare programs as children and aging adults, respectively, and expressed his support for requiring adults to seek employment, volunteer, pursue education or to take care of someone else in order to be eligible for Medicaid benefits, an issue currently being debated in Congress.
Dr. Oz applauded Medicare PACE programs and benefits that help Medicare beneficiaries stay healthy and active as they age. He also welcomed “insurgents” in the health care market, noting that private-equity support for newcomers to healthcare is one way to help new players with really good ideas to compete against the established market players.
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DOJ Civil Rights Fraud Initiative: FCA Enforcement Expanding Into Alleged Discrimination
On May 19, 2025, the U.S. Department of Justice (DOJ) announced a new Civil Rights Fraud Initiative that will leverage the federal False Claims Act (FCA) to investigate and litigate against universities, contractors, health care providers, and other entities that accept federal funds but allegedly violate federal civil rights laws.
The initiative will be led jointly by the DOJ Civil Division’s Fraud Section and the Civil Rights Division—with support from the Criminal Division, federal civil rights agencies, and state partners.
The initiative implements President Donald Trump’s Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (January 21, 2025), directing agencies to combat unlawful discrimination through the FCA, and complements Attorney General (AG) Bondi’s February 5 memorandum, “Ending Illegal DEI and DEIA Discrimination and Preferences.”
How DOJ Plans to Use the FCA to Combat Discrimination
DOJ signaled it will rely on the FCA’s “false certification” theory of liability: When a funding recipient expressly or implicitly certifies compliance with statutes such as Title VI or IX of the Civil Rights Act of 1964 (CRA) to obtain payment, any knowing violation that is “material” to the government’s decision to pay can trigger treble damages and statutory penalties under the FCA.
Deputy AG Todd Blanche issued a memorandum the same day (the “Blanche Memo”) underscoring that the FCA is implicated when a federal contractor or recipient of federal funds knowingly violates civil rights laws—including Titles IV, VI, and IX of the CRA—and falsely certifies compliance with those civil rights laws. The Blanche Memo, however, notes that liability does not attach to all diversity programs per se, but only when race, ethnicity, or national origin determines the allocation of benefits or burdens. This is significant because, even if an antidiscrimination false certification claim is assumed to meet the materiality standard, a diversity, equity, and inclusion (DEI) program should not be deemed improper if it does not “assign benefits or burdens on [the basis of] race, ethnicity or national origin.”
Enforcement Dynamics
Unlike many FCA matters, which often originate with whistleblowers (also known as qui tam relators) filing suit, we expect DOJ to initiate early cases itself, limiting defendants’ ability to oppose intervention or invoke typical qui tam defenses (e.g., first-to-file rule, public disclosure bar, and original source rule). DOJ nevertheless “strongly encourages” whistleblowers to come forward to report “instances of such discrimination”—a reminder that suspected violations may quickly morph into FCA investigations.
Courts will ultimately decide whether civil rights violations pass muster under the U.S. Supreme Court’s “rigorous” and “demanding” Escobar materiality standard.[1]
Key Takeaways
DOJ’s Civil Rights Fraud Initiative is poised to test the outer limits of the FCA. Whether courts embrace this expansion—or cabin it—is yet to be seen. In the meantime, entities receiving federal funds should assume heightened scrutiny and ramp up compliance efforts.
The Blanche Memo draws an uncertain line between “diversity” and “religion,” and even suggests that DOJ may apply the terms “race” or “racist” differently today than they were understood when Congress enacted the CRA. Courts, however, have yet to endorse the FCA as a generalized antidiscrimination vehicle, largely because the statute’s “rigorous” materiality standard remains a high hurdle. One district court observed that if the FCA is not an “’all-purpose antifraud statute,” it is “surely not an all-purpose antidiscrimination statute” either.[2]
When DOJ unveiled its Civil Rights Fraud Initiative, The New York Times predicted the program was “all but certain” to face immediate legal challenges. Even so, DOJ can bring FCA cases with relative ease and without many of the hurdles that slow private whistleblower suits: The government’s own complaints are immune from first-to-file and public disclosure bar defenses, and defendants cannot oppose DOJ intervention like they can in qui tam cases.
Implied certification cases are also unlikely to disappear. As we have advised previously, organizations that contract with—or receive funds from—the federal government should rigorously re-examine their contract terms and scrutinize DEI policies with counsel to ensure they would not be branded as “illegal DEI” under the FCA.
Importantly, DOJ’s new civil rights focus is one of several avenues through which the Trump administration can wield implied certification theories (e.g., compliance with cybersecurity requirements and Anti-Kickback Statute compliance, among others). Health care entities are squarely in the cross-hairs: We expect to see FCA investigations tied to Medicare and Medicaid reimbursement conditions, price-transparency obligations, and quality-of-care metrics—all areas where the administration argues that noncompliance fuels escalating federal costs. Because reining in health care spending enjoys strong bipartisan support, defendants should expect vigorous enforcement and limited political appetite to scale back those efforts.
Epstein Becker Green Staff Attorney Ann W. Parks contributed to the preparation of this blog post.
ENDNOTES
[1] See Universal Health Services, Inc. v. United States ex rel. Escobar et al., 579 U.S. 176, 194 (2016). And while the government’s decision to expressly identify a provision as a condition of payment is relevant, it is not automatically dispositive under Escobar.
[2] U.S. ex rel. Lee v. Northern Metropolitan Foundation for Healthcare Inc., 2021 WL 3774185 (E.D.N.Y. 2021).
AI Service Provider Faces Class Actions Over Catholic Health Data Breach
AI service provider Serviceaide Inc. faces two proposed class action lawsuits from a data breach tied to Catholic Health System Inc., a nonprofit hospital network in Buffalo, New York. The breach reportedly exposed the personal information of over 480,000 individuals, including patients and employees.
Filed in the U.S. District Court for the Northern District of California, the lawsuits allege that Serviceaide acted negligently and failed to protect sensitive data in its Elasticsearch database that was made publicly accessible allegedly for months before being disclosed.
Serviceaide, which provides AI-driven chatbots and IT support solutions, was contracted by Catholic Health and entrusted with managing protected health information and employment records. Plaintiffs allege that the company delayed notification to the affected individuals, waiting seven months after the incident to notify affected individuals. The affected data included patient records and personal information.
The lawsuits allege claims of negligence, breach of implied contract, unjust enrichment, invasion of privacy, and violations of California’s Unfair Competition Law.
Both plaintiffs seek to represent a nationwide class of individuals whose data was compromised and are seeking injunctive relief, damages, and attorneys’ fees.
These lawsuits highlight growing legal exposure for tech firms that handle protected health information, especially as more hospitals and healthcare systems outsource services to AI and cloud vendors. The healthcare sector remains one of the most targeted industries for cyber threats, and breaches involving third-party vendors are drawing increasing legal scrutiny.
Minnesota Supreme Court Upholds Enforceability of Contract Release Language Against Negligence Claims
The Minnesota Supreme Court issued an important decision this week about the enforceability of contract release language. Lund v. Calhoun Orange, Inc., ___ N.W.3d __, 2025 WL 1450213 (Minn. May 21, 2025). The case arose when a client at Calhoun Orange, one of the defendant’s fitness clubs, went into cardiac arrest and collapsed while working out. The client suffered significant brain damage, and his conservator sued for negligence.
When he joined the fitness club, the client was required to sign a “Client Intake Form.” The Form provided: “Client hereby waives all claims against [the club, its employees and staff];” and “Client hereby agrees to indemnify[,] defend, hold harmless, release and discharge [the club, its employees and staff] from all claims demands, injuries, damage actions[,] causes of action and from all acts of active or passive negligence on the part of the [club, its employees and staff] for any damages, injuries or losses that may be sustained by the Client” while working out at the club.
The club contended that the Client Intake Form barred the negligence claims, while the conservator argued that the release language in the Form was not enforceable. The district court and court of appeals agreed with the club and upheld the release. The Minnesota Supreme Court granted review and affirmed.
The case asked the Court to determine whether the release language in the Client Intake Form the client signed was enforceable under Justice v. Marvel, 979 N.W.2d 894 (Minn. 2024). In Justice, the Court held that the release in that case, which purported to release “any and all claims,” was not sufficiently clear to release claims arising from the defendant’s own negligence. Id. at 902. While the language “‘any and all claims’” was “theoretically broad enough to encompass claims of negligence, the language was not specific enough to manifest a ‘clear and unequivocal’ intent of the parties to shield the [defendant] from liability for its own negligence and was therefore unenforceable.” Lund, __ N.W.3d at __, 2025 WL 1450213 at *4.
In Lund, the Court concluded that the release language in the Form satisfied the test it laid out in Justice. The Court relied specifically on the language that the client “agrees to indemnify [the club, its employees and staff] from all claims . . . and from all acts of active or passive negligence.” This language, the Court held, “clearly and unequivocally states the contracting parties’ intent to shield [the club] from liability for its own negligence.” Id.
The case is important because it provides an example of release language enforceable against negligence claims brought in Minnesota. The case is also significant because the Court affirmed summary judgment for the defense in a civil case.
CMS Announces Sweeping Changes to RADV Audits
On May 21, 2025, the Centers for Medicare & Medicaid Services (CMS) announced significant changes in its risk adjustment data validation (RADV) audits. The changes focus on speed, the volume of targeted contracts, and process. CMS accurately labeled its strategy as aggressive.
Speed
CMS plans to complete all RADV audits for payment year (PY) 2018 – PY 2024 by early 2026. This is a drastic change from CMS’s regular cadence for RADV audits, as audits for 2018 (which are reviews of records for dates of service in 2017) are largely still open and RADVs for many of the PYs included in that window have not been sent out yet. Under CMS’s historic cycle, Medicare Advantage organizations (MAOs) that would have been selected for RADVs for PY 2024 would have been expecting to receive notices of the RADV in perhaps 2028, at the earliest. Instead, MAOs should be expecting to receive notices in the coming days or weeks.
Expediting this process on such short notice will be a significant administrative lift both for CMS and for all MAOs.
Volume of Targeted Contracts
CMS has typically audited approximately 60 MA contracts per year. Most MAOs believed that if they received a RADV audit one year and performed well, they were unlikely to receive one the following year, or at least they would not receive one for the same Medicare contract. That is changing. CMS intends to “audit all eligible MA contracts for each payment year in all newly initiated audits…” In its announcement, CMS recognizes that this growth will result in audits of approximately 550 Medicare Advantage (MA) contracts per year, a growth of over 900%. CMS also anticipates that rather than auditing an average of 35 member records per contract, it will audit 200 member records per contract.
Process
To meet its aggressive goals, CMS intends to use enhanced technology and expand its work force of medical coders from 40 to about 2,000 by September 1, 2025.
Key Takeaways and Questions
CMS’s announced changes do seem rather aggressive, but the industry will learn much more about the scope and impact of these changes once CMS formerly kicks of the “newly initiated audits.” The regulations that govern RADV audits set general parameters for what CMS can do, but the regulations do not require that CMS conduct a specific type of RADV audit. As a result, some of the newly initiated audits that will be conducted for all eligible MA contracts may be more focused on specific diagnosis codes or Hierarchical Condition Categories (HCCs) rather than the random, broad audits that CMS has been conducting.
Historically, while CMS invalided some diagnosis codes in medical records, its audits also identified diagnosis codes that were supported by the medical record but that had not submitted by the MAO. In those circumstances, CMS largely gave the MAOs credit for such missed diagnosis codes, which may have offset some of the diagnosis codes that were found to be unsupported. Based on the information in CMS’s press release, it is unclear whether CMS intends to use its “enhanced technology” to only identify potentially unsupported codes, or whether the technology will also identify potentially supported but not billed for diagnosis codes. To the extent CMS opts for the former, MAOs will have to fight harder to ensure that the results of the audits deliver payment accuracy, rather than just reduced payments, especially in light of the fact that the results of these audits will be subject to extrapolation across the MA contract.
Certified medical coders have already been rather sought after by MAOs, vendors, and the government. We expect opportunities in that industry to continue to grow as CMS expands its team and MAOs seek to support their businesses through the onslaught of audits they should now be expecting.
Disagreeing with the Supreme Court, the Ninth Circuit and Two District Courts Find APA Jurisdiction in Challenges to Federal Contract and Grant Terminations
One of the immediate priorities of the second Trump administration has been the termination of a slew of federal contracts and grants. This, predictably, has led to litigation, mostly filed in the U.S. District Courts, which as we have previously written, have authority to grant equitable relief. The government has been arguing that these cases belong in the U.S. Court of Federal Claims, where only monetary damages are available (and only upon meeting the high burden of establishing that the government acted in bad faith). On April 4, 2025, the Supreme Court issued an emergency stay of a District Court’s preliminary injunction in a case challenging grant terminations, with the five-justice majority suggesting that the termination case belonged in the Court of Federal Claims. But since then, two U.S. District Courts and the Ninth Circuit Court of Appeals have ruled—contrary to the Supreme Court’s emergency stay order—that there is indeed district court jurisdiction in cases challenging contract and grant terminations. As Judge Young of the District Court of Massachusetts stated, “…this Court, after careful reflection, finds itself in the somewhat awkward position of agreeing with the Supreme Court dissenters and considering itself bound by the still authoritative decision of the Court of Appeals of the First Circuit…” which ruled that the Tucker Act did not apply, and that the government’s actions were reviewable under the Administrative Procedures Act (“APA”).
Commonwealth of Massachusetts et al. v. Robert F. Kennedy, Jr. et al., Case No. 25-10814-WHY, U.S. District Court for the District of Massachusetts
On May 12, 2025, the U.S. District Court for the District of Massachusetts ruled that it—not the Court of Federal Claims—has subject matter jurisdiction over a lawsuit brought by a coalition of states challenging the withdrawal of funding opportunities and grant terminations by the National Institutes of Health based on perceived connections to diversity, equity, and inclusion and gender issues.
The District Court noted that the Court of Federal Claims was established, and the Tucker Act was enacted, to allow contractors and grantees to pursue monetary claims against the United States. But not every claim against the government is cognizable under the Tucker Act, even if the remedy may involve the payment of money. The Court noted that “whether a claim is contractual in nature under the Tucker Act [and therefore belongs in the Court of Federal Claims] is based on a determination of the essence of the action,” which requires a court to examine the source of the rights underlying the claim and the type of relief sought or appropriate to redress the claim. Applying this “essence” test, the District Court found that the States are primarily challenging the allegedly unlawful policies and actions of public officials, not the terms of their terminated grants, and the relief sought—directing the expenditures of already-appropriated funds—is mainly injunctive, not compensatory.
The District Court extensively quoted Justice Jackson’s dissent in the Supreme Court’s order to explain why District Court review of terminations under an APA standard is appropriate, including that the government’s “robotic rollout of its new mass grant-termination policy means that grant recipients and reviewing courts are compelled to guess at the theory underlying the agency’s action. Moreover, the agency’s abruptness leaves one wondering whether any reasoned decision making has occurred with respect to these terminations at all. These are precisely the kinds of concerns that the APA’s bar on arbitrary-and-capricious agency decision making was meant to address.”
Community Legal Services in Palo Alto et al. v. HHS et al., Case No. 3:25-cv-02847-AMO
On May 14, 2025, the Ninth Circuit ruled that the district court has jurisdiction to hear challenges to agency actions terminating funding for legal representation of unaccompanied children, despite the government’s argument that such cases should be brought exclusively in the Court of Federal Claims under the Tucker Act. The plaintiffs in this case specifically alleged that the government violated the Trafficking Victims Protection Reauthorization Act (“TVPRA”) by withholding all congressionally authorized funding for direct legal representation of unaccompanied migrant children, thereby failing to “ensure, to the greatest extent practicable,” that unaccompanied children receive legal counsel as mandated by 8 U.S.C. § 1232(c)(5). The majority emphasized that the claims were rooted in statutory and regulatory violations, not contract disputes, noting, “To the greatest extent practicable does not mean to no extent at all.” The court further explained that the Tucker Act did not bar the plaintiffs’ APA claims, particularly since the plaintiffs, as the subcontractors on the program, have no direct contract with the government and thus could not sue under the Tucker Act. In dissent, Judge Callahan went further than arguing that the claims belonged in the Court of Federal Claims, and insisted that the plaintiffs’ claims are unreviewable, because the decision to terminate funding was “committed to agency discretion by law under 5 U.S.C. § 701(a)(2).” As Judge Callahan wrote, “Even if the district court had jurisdiction under the Administrative Procedure Act, the decision to terminate funding—or the decision of who to fund—is committed to agency discretion by law.” Notwithstanding the dissent, this decision underscores the judiciary’s increasing willingness to review agency actions that implicate statutory mandates, even when the government invokes arguments of unreviewability or exclusive jurisdiction elsewhere.
State of Colorado et al. v. HHS et al., Case No. 1:25-cv-00121-MSM-LDA
On May 16, 2025, the U.S. District Court for the District of Rhode Island reached the same conclusion, ruling that it has subject matter jurisdiction under the APA over a lawsuit brought by a coalition of States challenging the termination of public health grants by the Department of Health and Human Services (“HHS”). The Court rejected HHS’s argument that the States’ claims were contractual and fell under the exclusive jurisdiction of the Court of Federal Claims pursuant to the Tucker Act.
Applying the “essence” test, Judge Mary S. McElroy ruled that the District Court has jurisdiction because the essence of the case is not contractual, but rather centers on alleged violations of federal statutes, regulations, and constitutional principles. The judge distinguished between claims that arise from contract disputes—which would typically fall under the exclusive jurisdiction of the Court of Federal Claims via the Tucker Act—and claims seeking prospective, equitable relief for unlawful agency action under the APA. She emphasized that the States’ claims do not arise in any contract, but rather arise under the APA—particularly that statute’s provisions forbidding arbitrary and capricious action, action contrary to law, and action in excess of statutory authority and the Constitution’s Spending Clause and underlying separation of powers principles. The court found that the gravamen of the States’ allegations “does not turn on terms of a contract between the parties; it turns largely on federal statutes and regulations put in place by Congress and HHS.”
Judge McElroy further explained that the States are seeking relief that is prospective and equitable—namely, an injunction to halt the allegedly unlawful termination of federal funding—rather than money damages for breach of contract. She cited Supreme Court precedent, particularly Bowen v. Massachusetts, to support the distinction between actions for money damages (which fall under the Tucker Act) and actions for specific relief (which are reviewable under the APA in district court). The judge wrote, “Merely because their requested equitable relief would result in the disbursement of money is not a sufficient reason to characterize the relief as money damages.” She concluded that the case concerns the process and legality of HHS’s actions, not the enforcement of contractual obligations, and that district courts are the proper forum for reviewing such claims. This reasoning was reinforced by her observation that “the source of the States’ rights is based on federal law rather than on contract,” and that the States “have asked this Court to review and interpret the governing federal statute and regulations.” Thus, the District Court retained jurisdiction to adjudicate the States’ claims for injunctive and declaratory relief under the APA and the Constitution.
Conclusion
These recent decisions provide important guidance for parties seeking to challenge broad federal funding directives and contract and grant terminations, clarifying the circumstances under which such claims may proceed in district court rather than the Court of Federal Claims. As the Government continues to contest subject matter jurisdiction in ongoing litigation, further guidance from the Circuit Courts or the Supreme Court is likely. We will continue to monitor these developments and provide updates as the legal landscape evolves.
Enforcement of Mental Health Parity Regulations Suspended: Takeaways for Plan Sponsors and Health Insurance Issuers
In January 2025, The ERISA Industry Committee (ERIC) filed a complaint against the US Departments of Labor, Health and Human Services, and the Treasury (the departments) seeking to invalidate the 2024 final regulations under the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) and the Consolidated Appropriations Act, 2021 (CAA). The US Department of Justice recently filed a motion for abeyance in the pending litigation, requesting that the court pause its review of the case and announcing that the Trump administration will stay enforcement of the final regulations to give the government an opportunity to reconsider the rule, “including whether to issue a notice of proposed rulemaking, rescinding or modifying the regulation.” The motion was approved on May 9, 2025.
In Depth
On May 15, 2025, the departments issued a communication titled “Statement of U.S. Departments of Labor, Health and Human Services, and the Treasury Regarding Enforcement of the Final Rule on Requirements Related to the Mental Health Parity and Addiction Equity Act.” The departments’ action is at least partially in response to Executive Order 14219, titled “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative,” which directs federal agencies to review regulations to identify those that may impose undue burdens on small businesses or significant costs upon private parties that are not outweighed by public benefits.
The statement is significant, as it advises that the departments “will not enforce the 2024 Final Rule or otherwise pursue enforcement actions, based on a failure to comply that occurs prior to a final decision in the litigation, plus an additional 18 months.” Notably, the relief applies only to those portions of the 2024 Final Rule that are newly added since the 2013 Final Rule. The statement reinstates the 2013 Final Rule, as interpreted by “FAQs About Mental Health and Substance Use Disorder Parity Implementation and the Consolidated Appropriations Act, 2021 Part 45.” The departments also note that MHPAEA’s statutory obligations, as amended by the CAA, continue to apply. In the case of the application of the MHPAEA rules within the jurisdiction of the department of Health and Human Services (i.e., the rules that apply to carriers), the statement encourages states, which are the primary enforcers of MHPAEA, to adopt a similar approach to enforcement.
The statement restores the status quo that was in effect before the adoption of the 2024 Final Rule, with at least three immediate consequences:
The 2024 Final Rule’s “relevant data” requirement is suspended. Thus, compliance with the mental health parity requirements will no longer be tested on outcomes. Rather, the standard that applies temporarily is in the preamble to the 2013 final regulation (i.e., outcomes are not determinative of compliance).
The 2024 Final Rule’s controversial “meaningful benefit” requirement is also suspended. This is the requirement that a plan that provides any benefits for a mental health condition or substance use disorder in any classification of benefits must provide meaningful benefits for that mental health condition or substance use disorder in every classification in which medical/surgical benefits are provided. For this purpose, a plan does not provide meaningful benefits unless it also provides benefits for a core treatment for the mental health condition or substance use disorder in each such classification.
The 2024 Final Rule’s “fiduciary certification” requirement is suspended, at least temporarily. Absent the suspension, the 2024 Final Rule required fiduciaries to certify that they commissioned and reviewed an analysis of their compliance with the MHPAEA nonquantitative treatment limitations (NQTLs) requirements and that they selected and monitored their NQTL vendor.
One important obligation that remains is the requirement to prepare and make available an NQTL comparative analysis. The continued application of the CAA also means that plan sponsors and health insurance issuers must continue with their compliance efforts.
With respect to ongoing plan audits and investigations, the departments offered little insight as to how they may approach review or if their enforcement efforts may change moving forward. The statement notes that “The Departments will also undertake a broader reexamination of each department’s respective enforcement approach under MHPAEA” and that “the Departments may make updates to the subregulatory guidance implementing MHPAEA, including FAQs Part 45,” suggesting that some relief may be forthcoming. Additional guidance on the impact of the departments’ statement on these ongoing audit and enforcement activities would be welcome.
Action Items
Plan sponsors and health insurance issuers should continue to make good-faith efforts to comply with the MHPAEA guidance, as modified by the CAA. This includes, for example, preparation and maintenance of a written NQTL comparative analysis and ongoing review of benefit plans for compliance as applied to the plans’ written terms and operation.
EEOC’s Abortion Accommodation Provision in PWFA Rule Vacated
On May 21, 2025, a federal judge for the U.S. District Court for the Western District of Louisiana vacated a portion of the Biden-era U.S. Equal Employment Opportunity Commission (EEOC) implementing the Pregnant Workers Fairness Act (PWFA) to require employers to reasonably accommodate employees who choose to have an abortion.
Quick Hits
The U.S. District Court for the Western District of Louisiana vacated the EEOC’s final rule interpreting the PWFA to require elective abortion-related accommodations and removing abortion from the definition of a pregnancy-related medical condition.
The ruling tracks a prior preliminary injunction ruling that found the EEOC exceeded its authority and evidence of congressional intent for the PWFA to apply to elective abortion lacking.
U.S. District Judge David Joseph, a Trump appointee, found that the EEOC exceeded its statutory authority by including the “abortion accommodation mandate” in the April 2024 final rule and violated the “major questions doctrine,” which requires clear congressional authorization for agency actions of significant economic and political importance.
The court granted summary judgment in favor of the plaintiffs, vacating the “abortion accommodation mandate” and sent the rule back to the EEOC to revise it and any implementing regulations or guidance, accordingly.
“[T]he record before the Court clearly establishes that the EEOC has exceeded its statutory authority to implement the PWFA and, in doing so, both unlawfully expropriated the authority of Congress and encroached upon the sovereignty of the Plaintiff States under basic principles of federalism,” Judge Joseph said in the decision.
The ruling comes in consolidated litigation filed by the states of Louisiana and Mississippi and a group of four Catholic organizations led by the United States Conference of Catholic Bishops, challenging the EEOC’s interpretation of the PWFA’s requirement to reasonably accommodate employees for “related medical conditions” to pregnancy as to include “termination of pregnancy, including via miscarriage, stillbirth, or abortion.” (Emphasis added.)
Both Louisiana and Mississippi passed abortion bans following the 2022 ruling from the Supreme Court of the United States in Dobbs v. Jackson Women’s Health Organization, in which the Court overturned Roe v. Wade and held that the U.S. Constitution does not provide a right to abortion.
In June 2024, Judge Joseph issued a preliminary injunction delaying enforcement of the “abortion accommodation mandate” as it applied to certain employers in Louisiana and Mississippi. Judge Joseph kept that preliminary injunction in place until the final dismissal of the matters by the court.
The latest ruling vacates the mandate for reasons that largely track the findings in the preliminary injunction order. In that order, the judge found that the “abortion accommodation mandate” exceeded the EEOC’s authority under the Administrative Procedure Act (APA) and principles of statutory construction and was not clearly authorized by Congress.
That ruling noted that it must be presumed that Congress’s decision not to include explicit references to elective abortion in the PWFA was intentional. The preliminary injunction ruling pointed out that while the PWFA cross-references Title VII of the Civil Rights Act of 1964, the statute fails to incorporate Title VII’s protections for employees who choose to have abortions.
Further, the preliminary injunction found that the “abortion accommodation mandate” implicated the “major questions doctrine,” and that the EEOC cannot point to clear language in the PWFA that would empower it to make such a rule, which likely would have been addressed by Congress had it intended to do so given the highly contentious political nature of the issue.
The Louisiana district court ruling is the latest blow to the Biden-era EEOC. The ruling comes less than one week after the U.S. District Court for the Northern District of U.S. District Court for the Norther District of Texas vacated portions of the EEOC’s workplace harassment guidance regarding harassment based on sexual orientation and gender identity. Employers should note, however, that the April 2024 enforcement guidance has not been officially rescinded because the EEOC currently lacks a quorum.
Next Steps
Since it is unlikely that the current EEOC will appeal the ruling given the prior statements of EEOC Acting Director Andrea Lucas, this decision presumably means that employers are not required to follow the PWFA’s requirement to provide accommodations for purely elective abortions that are not necessary to treat medical conditions related to pregnancy. While the court vacated the need to accommodate elective abortions under the PWFA, it noted that terminations of pregnancy or abortions stemming from the underlying treatment of medical conditions related to pregnancy are not affected by the order. Employers must continue to provide accommodations for such terminations or abortions to the extent required by the PWFA. Employers should remember that the decision to have or not an abortion remains protected by Title VII.
The Trump Administration Announces Price Targets as It Takes a Second Swing at “Most Favored Nation” Drug Pricing Model
At a Glance
MFN Pricing Returns: The EO revives effort to link U.S. drug prices to those in peer countries, calling for voluntary industry action.
Aggressive Action on the Table: If progress on voluntary price cuts stalls, the Administration may pursue rulemaking, FTC enforcement and FDA actions.
DTC Emphasis: It supports direct-to-consumer drug purchasing.
Broad Scope: Announced price targets cover brand products without generic/biosimilar competition in “all markets.”
On May 12, 2025, President Donald J. Trump signed an Executive Order (EO) titled “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients,” and the Department of Health and Human Services (HHS) quickly followed up with an announcement of related pricing targets on May 20, 2025. According to the announcement, “HHS expects each manufacturer to commit to aligning U.S. pricing for all brand products across all markets that do not currently have generic or biosimilar competition” with the most-favored-nation (MFN) target price. The announcement describes that target price as the lowest price in any Organisation for Economic Co-operation and Development (OECD) country with a Gross Domestic Product (GDP) per capita of at least 60% of the U.S. GDP per capita.
The EO follows the April 15, 2025, release of EO No. 14273 titled “Lowering Drug Prices by Once Again Putting Americans First” (April 15 EO), discussed in our previous Client Alert, and further emphasizes the Administration’s focus on reducing U.S. drug costs. Notably, the EO does not call for legislative reforms or immediate rulemaking to require MFN pricing. Instead, it seeks voluntary pricing changes and specifies additional steps the Administration will take if “significant progress” toward MFN pricing does not occur. In a statement issued shortly after the EO, however, Senator Bernie Sanders indicated that he will soon introduce legislation to ensure people in the U.S. pay no more for prescription drugs than those in other major countries.
This alert provides a brief overview of the EO and identifies key takeaways and issues to watch going forward.
Key Provisions of the Executive Order
The EO directs three initial actions aimed at aligning U.S. drug prices with those paid by similar countries:
Direct-to-Consumer (DTC) Drug Purchasing: The EO calls for the HHS Secretary to facilitate DTC purchasing programs that allow consumers to purchase drugs directly from manufacturers offering an MFN price.
Foreign Practices: The EO directs the Secretary of Commerce and the United States Trade Representative to ensure that foreign countries do not engage in practices that may be unreasonable or discriminatory or impair U.S. national security and that result in U.S. patients shouldering a disproportionate amount of global drug research and development costs.
MFN Price Targets: The EO instructs the HHS Secretary to communicate MFN price targets to pharmaceutical manufacturers. As noted above, HHS announced information regarding price targets on May 20, 2025.
If “significant progress” toward achieving MFN pricing is not delivered, the EO directs the following additional actions:
Rulemaking: The HHS Secretary must “propose a rulemaking plan” to require MFN pricing, but the EO does not address the statutory authority for or scope of this rulemaking.
Personal Importation: The HHS Secretary shall “consider” certifying that personal importation under section 804(j) of the Federal Food, Drug, and Cosmetic Act (FDCA) will pose no additional risk to public health and safety and will significantly reduce the cost of prescription drugs to Americans. (This certification must occur before the U.S Food and Drug Administration (FDA) can use the authority in section 804(j) to waive prescription drug import restrictions for individuals.) If such certification is given, the EO further directs the FDA Commissioner to issue guidance describing circumstances under which waivers will be consistently granted.
Federal Trade Commission(FTC) Enforcement: The Attorney General and the Chairman of the FTC must, to the extent consistent with applicable law, take enforcement action against anticompetitive practices by manufacturers identified in a report to be issued under the April 15 EO.
Drug Exportation: The Secretary of Commerce and other relevant agency heads shall review and consider all necessary action regarding the export of pharmaceutical drugs that may be fueling global price discrimination.
Potential Drug Approval Modifications/Revocations: The FDA Commissioner must “review and potentially modify or revoke approvals” for drugs that may “be unsafe, ineffective, or improperly marketed.”
Key Takeaways and Issues to Watch
The Administration’s focus for MFN pricing appears to be broad: Neither the EO, nor its accompanying Fact Sheet, describes the scope of drugs subject to MFN pricing, but the HHS announcement refers to “brand products across all markets,” indicating that innovator drugs without generic or biosimilar competition—regardless of their cost to federal healthcare programs or indications—are within scope.
What happens if voluntary price reductions fail to materialize? Many actions described in the EO come into play only if there is a failure to make “significant progress” toward MFN pricing. In most cases, the EO offers little detail on the authority and timeframe for those actions (such as the kinds of measures the Administration might pursue to address drug exports contributing to global price discrimination). Without a set deadline for “significant progress” to occur, the EO appears to provide manufacturers and other stakeholders a window to propose changes to current pricing. Whether any voluntary changes will convince the Administration to hold off on rulemaking to implement a mandatory MFN model, enforcement actions, or other activities described in the EO remains to be seen.
A new MFN rule will be a likely target of legal challenges. During President Trump’s first term, Centers for Medicare & Medicaid Services (CMS) issued an interim final rule that would have tied Medicare Part B payments for 50 single source drugs to the lowest GDP-adjusted price paid in economically similar countries. Multiple organizations swiftly challenged the rule, and three federal courts temporarily blocked its implementation, citing the likely insufficiency of notice and comment rulemaking procedures under the Administrative Procedure Act (APA). The rule was later withdrawn by the Biden Administration. This time around, the Trump Administration may seek to reduce the likelihood of an APA procedural challenge by issuing a proposed rule for public comment before implementing any mandatory MFN pricing. However, it is reasonable to expect that any final rule issued on this topic will prompt litigation.
Pharmacy benefit managers (PBMs) may face increased pressure. In his remarks at the EO signing, President Trump was clear that one of the aims is to “cut out the middlemen”—a likely reference to the pharmacy benefit managers (PBMs) that, among other things, negotiate with drug manufacturers and pharmacies to set prices. The EO’s directive to facilitate DTC purchasing programs reflects this goal but is short on specifics that will be key to the impact of such programs. For example, it’s unclear if manufacturers will be required to participate and if patients will ultimately pay more out of pocket for drugs offered through the DTC programs than they would by obtaining drugs through their insurance. Nonetheless, the EO, along with April 15 EO calling for regulations to improve PBM fee transparency may increase pressure on PBMs to change their pricing practices.
The impact of any personal importation waivers may be limited. During the first Trump Administration, FDA expressed significant concerns about implementing the personal importation waiver authority under section 804(j) of the FDCA. Even if thinking at HHS and FDA has changed, and the HHS Secretary makes the required certification to implement the authority under section 804(j), the waivers described in the EO must be issued to individuals on a case-by-case basis to permit them to import unapproved drugs from other countries. Such waivers, which would not facilitate large-scale commercial drug imports, seem unlikely to result in significantly increased access to lower cost drugs.
Should manufacturers expect FDA scrutiny if they don’t reduce prices? The EO’s reference to potential modification or revocation of existing drug approvals is puzzling. While the FDA has authority to withdraw the approval of a drug or revoke a biological product license, those actions must be based on certain findings, and none of the bases for withdrawal or revocation refers to drug pricing. The EO makes no express link between drug manufacturer pricing actions and FDA review of existing drug approvals, but it could be read to imply that those manufacturers who do not voluntarily reduce prices will see additional FDA examination of their approved products.
While significant questions remain about the authority for and impact of several directives in this new EO, the Trump Administration is clearly focused on drug pricing reforms. The EO also appears to be another piece of the Trump Administration’s approach to tariffs on pharmaceuticals and biologics. (See our previous client alerts on Section 232 investigations of pharmaceutical imports and President Trump’s May 5, 2025 Executive Order to Promote Domestic Production of Biopharmaceuticals). Pharmaceutical and biologics industry stakeholders should closely monitor additional developments in this area.
PTAB Rejects AI-Driven Medical Patent – Not for Novelty, But Eligibility
In a recent decision with important implications for artificial intelligence (AI) driven innovation, the Patent Trial and Appeal Board (PTAB) denied a patent for an AI-based medical tool.[1] The refusal was not because the invention was not new or inventive. Rather, the refusal was because the invention did not meet a fundamental rule of U.S. patent law. In Ex parte Michalek, the PTAB specifically acknowledged that the patent claims at issue recited new information about the nexus between certain biomarkers and the development of lung cancer as facilitated by machine learning. In fact, prior to appeal, the applicant had successfully refuted all arguments raised by the patent examiner that the invention was not new or nonobvious. That said, based on U.S. Patent Office guidance and a related example from that guidance, the PTAB still determined the claims were flawed based on the legal principle of subject matter eligibility. Although the facts in this decision concern medical health innovation, the decision is helpful to inform patent strategy for AI-enabled inventions across various disciplines and industries.
In its patent application, the applicant submitted patent claims covering a machine learning enabled capability to predict a disease state of a human based on certain biomarkers. During prosecution, the applicant had overcome all prior art rejections. Thus, the issue of novelty and nonobviousness of the claims had been specifically raised, considered, and resolved in the applicant’s favor. Patentability rested on the only remaining issue of subject matter eligibility.
Subject matter eligibility refers to whether an invention is of the required type to qualify for patent protection under U.S. patent law. Processes, machines, manufactures, and compositions of matter are patentable but natural laws, mathematical concepts, and abstract ideas, for example, are not. In practice, distinguishing between the two categories has proven difficult. Because of this difficulty and the unique complexities posed by AI driven innovation, the U.S. Patent Office has issued specific guidance on subject matter eligibility of AI-related inventions. The guidance sets forth principles that inform how patent examiners should assess whether AI-driven innovations meet subject matter eligibility requirements. To illustrate these principles, the USPTO has provided various specific “examples” demonstrating when AI-related inventions are patent-eligible and when they are not.
Although it acknowledged that the invention involved a new idea, the PTAB in Michalek found that the invention was a natural law and a mathematical concept. The PTAB relied on an example from Patent Office guidance that characterizes an invention relating to determination of patient risk for a medical condition as ineligible because it involved an improvement to an abstract idea, not to the functioning of a computer or other technology. According to the cited example, the recital of a treatment for the medical condition in theory could have helped the applicant to demonstrate the subject matter eligibility of the invention. However, the PTAB did not discuss this option and, in any event, no evidence indicated that a treatment had been described in the patent application. As perhaps more relevant, the PTAB did not discuss other examples from Patent Office guidance that might have better applied to save the invention.
While this case involved medical health technology, the implicated issues inform patent strategies for AI-enabled inventions across all industries. Patent applicants working with AI should be prepared for the Patent Office to apply similar reasoning to their applications. Patent applicants should be prepared to address strained reliance on certain examples from Patent Office guidance or, better yet, highlight more analogous examples. It is critical for patent applicants at the preparation stage to proactively devise an application drafting strategy supported by the guidance and examples to invite smoother prosecution.
FOOTNOTES
[1] Ex parte Michalek, Appeal No. 2023-004204 (PTAB Dec. 27, 2024).
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Mental Health Parity Alert – Non-Enforcement of Final Rules
The Mental Health Parity and Addiction Equity Act (MHPAEA), and its implementing regulations and guidance, prohibits health insurance policies and group health plans that cover mental health and substance use disorder (MH/SUD) benefits from imposing limitations on MH/SUD benefits that are less favorable than the limitations imposed on medical/surgical benefits. As we have written previously, the Consolidated Appropriations Act, 2021 (CAA) added a requirement for health plans to document their compliance with nonquantitative treatment limitation (NQTL) requirements under the MHPAEA by completing a written NQTL analysis. As described in detail below, the Trump Administration has recently indicated that it will make it a bit easier for plan sponsors to comply with the written NQTL analysis requirement.
Last fall, the Department of Labor , Department of Health and Human Services, and the Department of the Treasury (“the Departments”) published final MHPAEA regulations (“Final Rule”). You can read more about the Final Rule in our prior article available here, and about the Departments’ priorities related to MHPAEA here and here. Several of the requirements imposed under the Final Rule significantly raised the bar that health plans are required to meet in their NQTL analysis.
In January, a lawsuit was filed against the Departments seeking to invalidate the Final Rule for several reasons, including alleging that the Departments exceeded their authority in issuing the Final Rule. Earlier this month, the Departments indicated in a filing in that lawsuit (which is now paused) that the Trump Administration intends to reconsider the Final Rule and will be issuing a non-enforcement policy in the near future related to the Final Rule’s requirements.
While this position of non-enforcement means that the Final Rule will not be enforced against health plans, it does not impact the status quo under the CAA. Plan sponsors still need to maintain a written NQTL analysis, but the Final Rule’s additional NQTL analysis requirements will not be enforced (e.g., ERISA fiduciary certification, “meaningful benefits” standard, etc.). The Departments have continued to indicate that MHPAEA compliance is a top priority, and lawsuits in the MHPAEA space remain common. While the reduced lift from non-enforcement of the Final Rule offers welcome relief to employers and plan service providers, the underlying requirement created by the CAA remains in effect.