Happy 2024! The entire Saul Ewing Health Law Practice Group wishes you and yours a healthy and prosperous new year and successful (and compliant) activities in the health care delivery system this year and beyond.
A special welcome to the newest partner in our health law group, Caroline Patterson who will be resident in our Chesterbrook office.
Because 2024 is a federal election year (in case you were not aware!), the political debate will likely be even more intense, and it is unclear whether any substantive new laws in health care or otherwise will be passed by Congress and signed into law by President Biden in 2024. State governments will likely continue to be active laboratories for democracy. California is generally a nationwide leader in new legislative initiatives, and Saul Ewing is pleased to now have two California offices as a result of our merger that took effect August 1, 2023.
As we have done in previous years, various members of our health law group have made their bold 2024 health care legal predictions. Our group has made predictions for multiple new and new-ish issues (e.g., artificial intelligence, price transparency, and cannabis); evolving technologies (cardiac catheterizations), tried and true health law subjects (antitrust, real estate, tax, potential appellate issues, and bankruptcy) and some older health law issues (telehealth and HIPAA) that continue to evolve from an enforcement standpoint.
See below the Saul Ewing LLP Health Law Practice Group 2024 predictions from various members of our practice group! Our colleagues help interested parties in the health care delivery system with transactional, regulatory, compliance and litigation issues at the federal and state level.
Providers generally faced significant economic headwinds in 2023. Covid transitioned from a pandemic to an endemic and continues to cause too many deaths and disruptions. As we all continue to adjust to this ‘new normal’, our colleagues in the Health Law Practice Group remain committed to providing excellent legal advice to every client and helping our clients achieve their business objectives in a compliant manner.
We hope you enjoy our ‘predictions’ which are non-binding 😊 and we welcome your feedback and sincerely appreciate your confidence in using Saul Ewing for your legal needs.
Chair, Health Law Practice Group
Going Over the “Telehealth Cliff”
Author: Caroline Patterson
I predict that on December 31, 2024, we will go over the “telehealth cliff.” Prior to the COVID-19 pandemic, Medicare beneficiaries had limited coverage to utilize telehealth services. During the public health emergency, Congress lifted nearly all statutory limitations on telehealth coverage. That coverage expires at the end of this year and CMS doesn’t have the regulatory authority to extend it. Congress must enact legislation by December 31, 2024 to ensure continued coverage for telehealth services, which is widely regarded to be in the best interest of Medicare beneficiaries. That said, given that we are in an election year and the extension of this coverage relates to both increased spending issues and the COVID-19 pandemic, I predict that Congress will fail to act and we will go over the “telehealth cliff.”
Provider Consolidations: Private Equity Involvement Subject to Greater Antitrust Scrutiny
Author: Michael Finio
2024 has the potential to continue to see the FTC fanning the flames where private equity interests pursue acquisitions in the health care space because of at least two all-markets regulatory initiatives showing their purpose and intent in at least one important enforcement activity pending in Texas. The agency recently issued new merger guidelines that could be of particular concern to the private-equity industry. The guidelines encourage the FTC and the Department of Justice to look at successive small acquisitions to analyze M&A’s impact on competition in local markets. In addition, the FTC in 2023 proposed significant reforms to the Hart-Scott-Rodino merger review process, which reforms also raise concerns for private equity interests.
The FTC’s Chair, Lina Khan, has stated that the agency is intent on looking more closely at roll-up strategies, in which a company engages in a series of small acquisitions in a single industry that ultimately result in that company holding a significant share of the market. Changes in the merger guidelines and potential changes to the HSR regime will go a long way to giving the FTC the tools it says it needs to better police private equity roll-up strategies.
For the time being, enforcement actions are what the FTC can initiate to demonstrate where it intends to take the bull by the horns and test the kinds of substantive antitrust law theories which form the foundation for the new merger guidelines and the potential HSR changes. For example, the FTC’s complaint against U.S. Anesthesia Partners, Inc. (USAP) and Welsh, Carson, Anderson & Stowe alleges that the two executed a multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits. The FTC believes that Welsh Carson studied the Texas anesthesia markets and determined that by eliminating the amount of competition among and between multiple practices, it could garner significant profits. The complaint alleges that the parties, over the course of a decade, bought up almost every large anesthesia practice in Texas, creating one dominant player that could, and did, demand higher prices, costing Texas consumers tens of millions in higher fees.
Clearly, given the enforcement activity and regulatory changes implemented and proposed, it is highly likely that the FTC will continue to scrutinize private equity roll-ups whether in place as in Texas, or incipient and nascent in the M&A world in health care and other markets into 2024 and beyond. Health care providers and private equity concerns focusing on health care markets need to be aware of what the FTC is doing and how the changes will impact their commercial goals.
Generative Artificial Intelligence or GenAI, a type of AI that can generate high-quality images, text, and other content based on the data on which the AI is trained, is transforming the delivery of health care. Clinicians are on the frontline of these changes and, as health care institutions seek to address clinician burnout and its inherent costs, improve access to care, and respond to financial pressures, clinicians will need to become increasingly conversant with AI technology.
To address clinician burn-out, health care institutions will increasingly rely on GenAI to help them handle administrative workflow and support clinical decisions through the use of AI assistants with human-like skills to answer questions and perform various tasks, such as the ambient transcription of patient visits, to create summaries of a patient’s life since previous visit, complete forms, summarize patient portal messages, send patients instructions, provide diagnosis codes, and place pharmacy orders. Clinical decision support software also will improve patient treatment by providing physicians with current practice treatment guidelines for common illnesses or conditions, while enabling health care professionals to independently review the basis for the recommendations provided, and machine-learning models will assist with diagnostics by, for example, annotating medical imaging for review by physicians.
To enable doctors to maximize treatment effectiveness, health care institutions may assemble healthcare teams to build sophisticated AI algorithms that generate personalized treatment plans by analyzing patients’ genomic data and physical status, demographic information, and testing results to predict disease progression, drug responses, and toxicity.
Health care institutions should thoroughly assess and plan for the implementation of GenAI through steering committees. These steering committees will include practicing physicians who assist in confirming the value proposition of a GenAI tool, including by testing AI tools for specific-use cases, and obtaining physician buy-in. Health care institutions should formally train clinicians and other healthcare providers who may use AI to help them recognize the potential pitfalls and communicate with the Information Technology (IT) personnel of the health care institution. Clinicians who test AI systems before adoption by their facility will require some understanding of the technology’s risks
There also will be pressures on health care institutions to independently evaluate a vendor’s representations of regulatory compliance to minimize the risks associated with the use of AI, such as biased data and algorithms. It will be critically important to have a robust team of subject matter experts that includes IT personnel, as well as strong commercial contracts that provide indemnity, incident response provisions, and duty to cooperate clauses for when problems occur.
Challenges will continue, including documenting the treating clinician’s oversight when using AI technology in health care settings to assure that AI is used “as a tool and not a decision maker.” Human intervention is key before using AI output for patient treatment, and the effective management of AI will require monitoring and updating policies to adapt to changes in patient care and technology while continuing to preserve the privacy of patients and the protected health information and other data that healthcare institutions maintain.
Cardiac Catheterization Shift From Hospital-Based to Surgery Centers Will Accelerate in 2024
Author: Joe Ourth
Readers of this article are likely aware of the dramatic shift in surgical and other procedures away from hospital-based locations to ambulatory settings. Even procedures long the domain of traditional hospital surgical suites, such as total joint replacements, have increasingly moved to the outpatient setting. A similar shift is transitioning cardiac procedures from hospitals to surgery centers or freestanding cardiac catheterization labs. Medical advancement, patient and physician preference, and most importantly Medicare reimbursement will inevitable further drive this transition. According to Corazon, a leading cardiac cath consulting firm, in 2018 only 10 percent of cardiovascular procedures were performed in surgery centers-- a number expected to grow 30 percent by the mid-2020s. The Cardiovascular Shift to the Outpatient Setting. According to information included in a recent Certificate of Need application to become only the second surgery center in Illinois, the number of single-specialty cardiology ASC’s billing Medicare rose from only 18 in 2017 to 88 in 2019 (lates available information). Application for Permit-07-25-2022 (illinois.gov) p. 68.
Cardiac catheterization is a diagnostic and/or therapeutic procedure used to evaluate and treat various cardiovascular conditions. Historically performed primarily in hospital cath labs, this procedure involves inserting a catheter in the heart chambers or blood vessels and then the physician manipulating the tip into the desired position to diagnose and treat conditions such as coronary artery disease, valve abnormalities and other heart defects. Sometimes referred to as a Percutaneous Coronary Intervention (“PCI”), which can include balloon angioplasty, laser, stent implantation, and thrombectomy. When PCI procedures first began in the 1970s these procedures were limited to hospitals with open-heart surgical capabilities (surgery-on-site or “SOS) because there was significant risk of cardiac surgery as a result of PCI complications.
Significant improvements in clinical delivery have led to significant decline in complication rates which increased the prevalence of PCIs being safely performed in hospitals without on-site surgery. Ongoing advancements have similarly found that many, but certainly not all, PCI cases can be performed in the surgery center context. In 2023, the Society for Cardiovascular Angiography and Intervention (“SCAI”) released a consensus statement addressing PCI and acknowledged PCI at surgery centers can increase patient access and satisfaction and reduce costs.
While clinical advancements have allowed for this shift from cardiovascular procedures from hospitals, it would not occur without a change in Medicare reimbursement. The Centers for Medicare and Medicaid (“CMS”) maintain an Inpatient-only list of services for which Medicare will only reimburse if performed in an in-patient setting. CMS also maintains a Covered Procedure List that names the procedures for which it will reimburse if performed in an ASC setting. In 2021 rulemaking CMS removed procedures from the In-patient only list and added procedures, including cardiac cath procedures, for which Medicare would cover in an ASC. Subsequent rulemaking reversed many of the removals from the In-patient only list (discussion is beyond the scope of this article) but importantly, many of the cardiac cath procedures remain off the In-patient only list and remain on the Covered Procedures List. See The FY 2022: Reimbursement Outlook: The Cath Lab Impact for a deeper discussion.
It is easy to see CMS’s cost savings rationale when you compare reimbursement rates for cardiac cath procedures in surgery centers vs. hospital settings. The savings to Medicare is significant. For example, comparing the top ten diagnostic cath codes shows a Medicare savings of between 84-97 percent in an ASC setting vs. a hospital outpatient department. Even more dramatic is the out-of-pocket cost savings to patients, where patients would pay between 160-191 percent more in a HOPD setting. Application for Permit-07-25-2022 (illinois.gov).
As location of cardiac cath procedures change, so too will the regulatory environment. Michigan and Pennsylvania have revised the regulations of cardiac cath procedures. Illinois, which this year approved only its second cardiac cath service in a surgery center, has undertaken to rewrite its Certificate of Need regulations, which has remained unchanged for over 20 years. 2024 will see continued shift in the delivery of cardiac cath services to surgery centers and an accompanying change in the regulation of cardiac catheterization services.
Author: Adam Isenberg
Last year was a difficult one in the healthcare industry, as healthcare-related bankruptcies soared. These bankruptcies included staffing firms, hospitals, pharmaceutical companies and senior living facilities, such as Envision Healthcare, Lion Star Nacogdoches (Texas) Hospital, Heywood Healthcare, Westlake Medical Center, St. Margaret's Health, Trinity Regional Hospital Sachse, Madera (Calif.) Community Hospital, American Physician Partners, Rite Aid, Bablyon, Pear Therapeutics, among many others.
All indications suggest that the industry’s difficulties will continue in 2024, as ever-shrinking margins, combined with rising labor costs and high interest rates, pose continued challenges. Indeed, according to Deloitte’s annual Health Care Outlook Survey, just 3 percent of health system executives, and 7 percent of health plan executives, have a “positive” outlook for 2024 – down from 15 percent and 40 percent, respectively, last year.
Moody’s has identified a number of factors underlying the industry’s challenges: (i) a shortage of skilled labor, such as nurses; (ii) a rise in union activity, with the possibility of contentious negotiations and work stoppages; (iii) reimbursement rate increases, including those from Medicare, that do not fully cover recent expense increases; (iv) higher levels of uncompensated coverage; (v) increased government scrutiny of mergers; (vi) potentially increased nurse-to-patient staffing ratios and (vii) ongoing challenges from insurer denial of claims. The healthcare industry continues to grapple with these factors by, among other things, increased adoption of digital technologies, increased levels of outsourcing and offshoring, and reduction of non-clinical staff. The extent to which these types of actions will offset the industry’s underlying challenges remains to be seen.
The Continued Push for Transparency in U.S. Healthcare
Author: Athira Sivan
In 2023, we saw a lot of movement towards increasing price transparency for patients by both providers and payers.
One of the biggest actions was the No Surprises Act, which we all followed as it moved through various levels of review and commentary throughout the year. While the No Surprises Act had a noble cause – shielding patients from unexpected medical bills – it left a bureaucratic mess in its wake. We saw this play out through numerous legal challenges and requests for clarification from frustrated and confused providers as they scramble to implement procedures to bring their practices to compliance. The challenges will carry forward into 2024 with several legal filings against portions of the No Surprises Acts brought by Texas and other states still making its way through the court system. Portions of the No Surprises Act have been vacated since its 2022 introduction and the Center for Medicare and Medicaid Services has continued to provide finalized rules, fact sheets and extensions to deadlines to make the transition easier. One of the main issues in the transition, has been the independent dispute resolution (“IDR”) process, which even before the lawsuits were proving to be a difficult endeavor – with thousands of requests for IDR pouring in and resulting in an almost immediate backlog. There is no doubt the No Surprises Act will continue to surprise us in 2024.
Meanwhile, a sibling to the No Surprises Act, H.R. 5378 – the Lower Costs, More Transparency Act (“LCMT”) – passed the U.S. House of Representatives in December 2023. The popular, bipartisan legislation is being lauded as an important step in the right direction to fix the health care crisis in America. Much like the No Surprises Act, the LCMT Act aims to address the issues of hospitals and health insurers failing to fully and correctly disclose the actual prices for treatments and services. The LCMT Act will, if implemented, strengthen enforcement of proper disclosure and broaden requirements to ambulatory surgical centers, laboratories and imaging centers. We will be keeping a close eye on the proposed legislation’s progress in the Senate now that the House has passed it.
While on the federal level actions were being made towards price transparency, the same is being done on a state level. The most recent being California, which, among a slew of legislations all projected to take place in 2024, has put forth Bill AB-716 to take effect as of January 1, 2024. AB-716 targets “surprise” ambulance bills and under the new law, patients will only have to pay the equivalent of what they would have had to pay for an in-network service. Health insurance and ambulance companies will have to settle the bill directly (with whom?) even if they do not have an existing contract. California has been a leader in proposing legislation and we expect many states to follow suit after a suitable time observing how the rollout works in California.
Municipal Bond Financing
Author: Josh Pasker
2023 was a difficult year for the municipal bond market as interest rates continued to rise as a result of eleven federal rate hikes which began in March 2022 and continued into 2023. Market professionals are predicting that 2024 will continue to see a lower volume of deals due to market uncertainty, however there may be some hope for increased market activity for the healthcare sector as discussed below.
In the area of healthcare and hospital transactions we continue to see borrowers working with existing lenders to ensure that financing covenants such as debt service coverage and liquidity requirements can be maintained. It is imperative that healthcare and hospital systems with municipal debt keep their investors informed if issues arise with existing debt covenants. In addition to new-money and refunding transactions, as consolidations and mergers continue in the healthcare and hospital arena it is imperative that the due diligence process includes an in-depth review of any outstanding bond documents that may exist for the merging/consolidating entities, especially for 501(c)(3) organizations.
In November, Moody’s Investors Service 2024 outlook for the not-for-profit and public healthcare sector was changed to stable from negative, driven in large part by a decrease in labor costs. While hospitals and healthcare providers will continue to grapple with high expenses because of a shortage of skilled labor, particularly nurses, Moody's predicts that the growth in expenses will slow as the public healthcare sector makes greater efforts to recruit and retain full-time staff. Even with rising interest rates, growth in operating cash flow margins may allow healthcare entities to make needed investments in facilities and programs. The rate of consolidation among health systems may slow due to increased scrutiny of mergers by federal and state governments, potentially depriving distressed systems of exit strategies and slowing the growth of larger systems active in the M&A space, according to Moody’s.
FTC Will Focus on Listing of Pharmaceutical Patents in the FDA’s “Orange Book”
Author: Alex Callo
The FTC has recently addressed certain pharmaceutical companies’ listing of patents in connection with drugs referenced in the FDA’s “Orange Book,” an FDA publication that sets forth FDA-approved drugs and related patent and exclusivity information for such drugs. By way of background, the Hatch-Waxman Act provides that a branded pharmaceutical company who receives FDA-approval to sell its drug product must submit for listing in the Orange Book any patent that: "(I) claims the drug for which the applicant submitted the application and is a drug substance (active ingredient) patent or a drug product (formulation or composition) patent;" or "(II) claims a method of using such drug for which approval is sought or has been granted in the application." 21 U.S.C. § 355(b)(1)(A)(viii). Should a generic drugmaker seek FDA approval to sell a generic copy of an approved drug before the Orange Book-listed patents on that approved drug expire, the generic drugmaker must certify that its proposed generic drug does not infringe those patents, or that those patents are invalid. The patentee then has 45 days after receiving notice of that certification to sue for infringement of the listed patents, and the filing of such a lawsuit triggers an automatic 30-month stay of FDA approval of the generic drug so as to provide the parties with time to resolve the litigation.
Following a precedential Federal Circuit decision earlier this year requiring a patentee to ask the FDA to delist its improperly-listed Orange Book patent, the FTC on September 14 issued a policy statement in which it “put market participants on notice that the FTC intends to scrutinize improper Orange Book listings to determine whether these constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act.” To this end, the FTC on November 7 sent notice letters to ten pharmaceutical companies, challenging more than 100 patents as improperly listed in the Orange Book. This activity, together with the FTC’s recent submission of amicus briefs addressing allegations of improper Orange Book-patent listings in pending cases (see, e.g., here), suggests that the FTC may continue examining Orange Book listings. Branded pharmaceutical companies should therefore give careful consideration to any Orange Book-patent listing decisions to ensure full compliance with the Hatch-Waxman Act and withstand any potential scrutiny from the FTC.
Credits, Credits, and More Credits
Author: Rich Frazier
As part of the evolving federal initiatives to encourage energy conservation and the use of alternative energy sources, tax-exempt organizations and governmental agencies are now able to be paid by the federal government for investing in alternative energy projects and energy conservation methods. That means that thousands of nonprofit and governmental healthcare providers, as well as academic health institutions, may now be able to recoup some of the capital expenditures or operating costs associated with clean energy projects or energy conservation activities. There are a total of twelve separate refundable tax credits available to the tax-exempt community, all with their own unique requirements and some with bonus incentives, for things such as meeting prevailing wage or apprenticeship requirements or locating the project in a low-income community. A few things to note: (1) the entity must register the project with the IRS in order to be eligible, (2) the entity must own the project or conduct the activities that generates the credit, (3) while the owner may be a disregarded entity or a co-owner of the property, at the present time, the credit is not available if the project is owned by a partnership, and (4) if the project is financed with tax-exempt bonds, the amount of the credit may be reduced. The Treasury has issued some proposed regulations, but more will be forthcoming, and some of the proposed regulations will undoubtedly change. Just about every building or equipment purchase should be analyzed to see if there are credits available to tax-exempt entity.
Federal appellate courts, including the U.S. Supreme Court, will hear and decide a number of important cases implicating healthcare issues and impacting the healthcare industry in 2024. These cases will have tangible human implications that impact employees and employers in all industries. For healthcare providers and other stakeholders in the healthcare industries, these open issues may raise additional regulatory and compliance risks.
Before the 2023-2024 SCOTUS term ends in late June or early July, the Supreme Court will decide whether federal law requiring hospitals receiving federal funding provide stabilizing care as part of their emergency medicine must provide abortion care to pregnant people suffering a medical emergency or whether hospitals must transfer such patients out of state to receive needed stabilizing care. The federal government argues that the federal Emergency Medical Treatment and Labor Act (“EMTALA”) requires such access to stabilizing abortion care despite the near-total abortion bans in Idaho and Texas that have been adopted after the 2022 Dobbs decision. The Supreme Court will also decide whether Native American tribes are entitled to funding from the Indian Health Service for costs associated with the healthcare they provide using the revenue they receive from third-party reimbursements.
Federal courts of appeal are also adjudicating cases with important implications for patients and healthcare providers alike. The dormant Commerce Clause, which is receiving renewed attention as a legal doctrine limiting state regulation in certain circumstances after being highlighted at the Supreme Court in National Pork Producers Council v. Ross last term, is being relied upon by industry groups to challenge a number of state healthcare regulations. For example, the Eighth Circuit will consider whether Minnesota’s law fixing the prices manufacturers can charge for some drugs impermissibly regulates transactions occurring outside the state.
The Fourth Circuit will decide whether West Virginia’s law restricting access to the medication abortion drug mifepristone, which is a more widely-used method of accessing abortion care after Dobbs, violates the dormant Commerce Clause. The same court will also address the increasing tension between the FDA’s regulations regarding the drug and state laws’ increasingly restrictive treatment of it. As states continue to pass anti-abortion legislation as well as implement bans on gender-affirming care impacting transgender people and their families, challenges regarding these “hot button” healthcare issues will continue to feature heavily on appellate dockets nationwide in 2024.
This year the Biden administration will also continue to defend against challenges to its healthcare policy priorities in the courts. The Fifth Circuit will hear oral argument in March on whether the Affordable Care Act’s mandate that health insurance plans cover preventive health measures violates the Religious Freedom Restoration Act. Both the Second Circuit and the Fifth Circuit will also soon decide cases targeting the No Surprises Act, which changed the way out-of-network healthcare providers can bill patients.
Saul Ewing’s appellate practice will be closely monitoring these and other healthcare-related issues in the state and federal appellate courts and will provide updates of interest to stakeholders in the healthcare industry throughout the coming year.
New Civil Rights Regulations Will Be Pushed Out This Spring
Authors: Rob Duston
It is an election year. That means the administration is watching the calendar. Under the Congressional Review Act, if Republicans win the White House or maintain or increase their power in Congress, they have the power to introduce resolutions to reverse federal agency actions taken after a cut-off date. The date varies depending on how often Congress is in session. In 2020, the date was August 21. This means there is going to be a heavy push, across all agencies, to try and finalize regulations between March and May. The Unified Agenda published in the Federal Register lists numerous regulations that the agencies hope to finalize in that period. They include a number of important civil rights laws.
HHS has two rules they expect to finalize. HHS is targeting January/February 2024 for changes to the 2020 Final Rule implementing ACA Section 1557. This revised rule clarifies coverage issues, including health care providers who receive federal financial assistance, including Medicare Part B. It also locks in protections for sexual orientation, gender identity and pregnancy-related conditions, including pregnancy termination, as “sex” discrimination. There are also revised rules on patients with Limited English Proficiency, and obligations for telehealth providers.
HHS has a target date of April 2024 for revised regulations under Section 504 of the Rehabilitation Act, which applies to all recipients of federal financial assistance. Much of the proposed rule includes regulations consistent with the ADA. But there are certain areas where HHS goes further, including requirements and deadlines for accessibility of websites and other electronic communications.
The U.S. Department of Justice also hopes to issue its regulations under ADA Title II on Accessibility of Web Information. These rules will directly affect state and local government agencies and entities, and thus a wide range of public health care providers. But they will indirectly affect all health care providers by setting technical requirements and standards for enforcement that are likely to by followed by courts under ADA Title III. [DOJ’s Website Accessibility NPRM a Must-Read for Higher Ed, Public Entities and Businesses]
Another example is the Department of Education’s plan to finalize its amended regulations under Title IX, which applies to educational institutions. One of the main goals is implementing the Biden Administration’s priority of combatting discrimination based upon sexual orientation and gender identity.
There are many other agencies planning to push out regulations reflecting administration priorities that will affect the health care industry. The only question is how many of these rules will get through the approval process and OMB in time to meet the cut-off date.
Uncertainty in Real Estate Market to Continue in 2024
Authors: Igor Pleskov
The real estate market, both as it relates to health care and otherwise, will face another year of uncertainty in 2024. The uncertainty will be largely driven by interest rates and broader economic conditions. As such, it is difficult to predict how demand will be affected; however, we do anticipate that the evolution of healthcare services will drive demand for space that can support telehealth infrastructures. The general distress in the office market could also create opportunities for repurposing existing space to better suit the evolving needs for medical offices. Finally, the larger economic conditions will continue to impact financing options for real estate development.
Cannabis and Psychedelics Insights for 2024: Federal Rescheduling, SAFER Banking, Litigation Over ”Intoxicating” Cannabinoids, States Most Likely to Legalize Adult-Use Cannabis Next, and State and Federal Psychedelics Developments
Authors: Matthew Smith, Peter Murphy, and Jonathan Havens
2023 was an active year in both the cannabis and psychedelics spaces, with significant developments across policy, research, litigation, and beyond. While states have largely led on the policy front, we expect increased federal attention in both areas this year, in addition to continuation of state policy developments.
Rescheduling of Marijuana Under the Controlled Substances Act
Major federal cannabis reform appears to be on the horizon, but don’t hold your breath for legalization under federal law in 2024. Although legalization—i.e., complete removal or descheduling of marijuana under the federal Controlled Substances Act (CSA)—is doubtful to happen anytime soon, marijuana is likely to be rescheduled from Schedule I to the less restrictive Schedule III category under the CSA, perhaps as early as this year. The U.S. Department of Health and Human Services (HHS) recommended in August 2023 that the Drug Enforcement Administration (DEA) reschedule marijuana from Schedule I to Schedule III, and DEA is currently reviewing and considering that recommendation – note that HHS’s (really, the U.S. Food and Drug Administration’s (FDA)) recommendation just recently became public because of a Freedom of Information Act (FOIA) lawsuit filed against HHS. Most signs indicate that the rescheduling will occur, which would be a historic shift in federal cannabis policy. However, the exact timing in which rescheduling might occur is not certain.
The CSA contains five schedules into which drugs, substances, and certain chemicals to make drugs may be categorized, ranging from Schedule I (most restrictive) to Schedule V (least restrictive). Since 1970, marijuana has been designated a Schedule I substance under the CSA, meaning that, by definition, it has a high potential for abuse and no currently accepted medical use – some examples of other Schedule I drugs are heroin, lysergic acid diethylamide (LSD), and methylenedioxymethamphetamine (MDMA) (ecstasy). Schedule III, on the other hand, consists of drugs that have a lower potential for abuse than those on Schedules I and II, have a currently accepted medical use, and abuse of the substance may lead to only moderate or low dependence. Schedule III includes substances like Tylenol with codeine and anabolic steroids.
On October 6, 2022, President Biden issued a statement that, among other things, initiated the administrative process to review how marijuana is scheduled under the CSA. Less than one year later, in August 2023, it was reported that FDA had completed its review of marijuana's potential medical uses and public health risks, and the Assistant Secretary for Health at HHS issued a letter to DEA recommending that marijuana should be moved from Schedule I to Schedule III under the CSA. On January 12, 2024, HHS released a full, unredacted copy of its over 250-page findings and recommendation that accompanied its August 2023 letter to DEA, which included reviews and recommendations from FDA and the National Institute on Drug Abuse (NIDA) for rescheduling of marijuana to Schedule III. This marks the first time the federal government has acknowledged that cannabis has currently accepted medical use, although most states had already acknowledged as much by adopting their own medical cannabis laws and implementing programs related to the same.
As far as timing for potential rescheduling, HHS’s recommendation with respect to its findings on the science behind marijuana's potential health risks and benefits is binding on DEA, see 21 U.S.C. § 811(b), but DEA still has final authority regarding the decision whether to reschedule marijuana after considering relevant criteria. DEA would then undergo a rulemaking process including a public notice-and-comment period, and will allow interested parties to request hearings on the proposed rules. Even then, some expect a variety of lawsuits to emerge that could slow down the rescheduling process.
To be clear, rescheduling marijuana under Schedule III would not legalize it. However, rescheduling would have meaningful implications. For example, cannabis businesses would no longer be precluded from taking business deductions or credits under federal tax law, which presently imposes a significant burden and financial handicap (to put it mildly) for cannabis businesses compared to other businesses. Specifically, marijuana would no longer be subject to Internal Revenue Code Section 280E, which prohibits any businesses “trafficking in controlled substances (within the meaning of schedule I and II of the [CSA])” (i.e., marijuana) from taking business deductions or credits. Rescheduling to Schedule III could also remove some obstacles on medical research regarding cannabis and potentially permit doctors to issue prescriptions for medical cannabis. Some have suggested such a change would place all medical marijuana production under federal government oversight and would spell the end of all state marijuana programs. Such a dramatic shift seems unlikely, however, as federal regulators have allowed state medical and adult-use programs to flourish, despite marijuana’s current status as a Schedule I controlled substance. In addition, simple rescheduling, absent appropriations from Congress to FDA and/or DEA, would not necessarily yield active oversight from these agencies. They both have significant portfolios already, and to actively regulate a complex new area of the law without dedicated budgets (and personnel) to do so seems very unlikely.
SAFER Banking Act
Rescheduling marijuana would also provide additional pressure for much-needed banking reform—namely, the passage of the Secure and Fair Enforcement Regulation (SAFER) Banking Act – this legislation, or similar measures, has passed the House of Representatives numerous times. It has never passed the Senate. Many financial institutions have chosen not to provide services to state-legal cannabis businesses for fear of violating federal anti-money laundering laws or aiding and abetting a federal crime. SAFER would create protections for financial institutions to accept deposits and provide services (including bank accounts, checks, and credit cards) to state-licensed cannabis businesses. As noted above, several iterations of the SAFER Banking Act have failed in the Senate, and although the Act passed the Senate Committee on Banking, Housing and Urban Affairs with a bipartisan vote of 14-9 on Sept. 27, 2023, passage of the law by the entire body in 2024 is far from certain.
Hemp Derivatives Litigation
Litigation will likely continue through 2024 in various state and federal courts regarding the legality and regulation of certain intoxicating hemp-derived substances such as delta-8 tetrahydrocannabinol (THC). The Agricultural Improvement Act of 2018 (the “2018 Farm Bill”) legalized hemp (defined in the bill as cannabis with a delta-9 THC level of not more than 0.3 percent on a dry weight basis) by removing it from the CSA. The law, however, left open a potential loophole whereby intoxicating hemp derivatives that mirror the effects of delta-9 THC, such as delta-8 and delta-10 THC, are technically legal under the 2018 Farm Bill because they do not contain more than 0.3 percent delta-9 THC. A growing number of lawsuits have arisen in various states where members of the hemp industry have sought to bar enforcement of state policies and laws precluding or restricting the sale of intoxicating products derived from legal hemp. One argument raised by hemp advocates is that those state laws should be preempted by the 2018 Farm Bill, which otherwise legalized hemp and hemp derivatives nationwide. This fight has arisen in several states, including Virginia, Arkansas, Texas, Maryland, and Alaska, and courts have come down on both sides of the issue. A growing number of states are enacting similar policies, which will undoubtedly lead to more lawsuits.
The 2018 Farm Bill was set to expire on September 30, 2023, and some had hoped that the new iteration of the Farm Bill would contain language addressing this issue. However, Congress did not adopt a new version of the bill, and in November 2023, the 2018 Farm Bill was extended through September 30, 2024. Still, it is unclear whether the 2024 Farm Bill (assuming it comes together by the new deadline) will settle the issue. Rather, it may be left to the states and the courts to hash out. In any event, one thing is certain—litigation over delta-8 THC and other so-called intoxicating cannabinoids will continue this year.
States That May Be Next To Legalize Cannabis
At this point, the majority of states (40) and the District of Columbia (DC) have legalized medical cannabis, and 24 states have legalized cannabis for adult use (DC has an adult-use “gifting” program, but not a regulated commercial program). The question remains: who’s next? The states with the best shot at joining the cannabis legalization wave could include Florida, Pennsylvania, Hawaii, and/or New Hampshire. Florida must first overcome a court challenge to permit the issue to go before voters, although Governor Ron DeSantis said on January 22, 2024 that Florida voters will likely see legalization on the November ballot (assuming the Florida Supreme Court approves the measure). The Court is expected to decide on this matter soon – the proposal was challenged by the state's attorney general. Pennsylvania, on the other hand, has seen multiple legalization efforts get deadlocked in the Commonwealth’s legislature. Still, with its neighbors having already legalized adult-use cannabis, Pennsylvania remains on the list of those likely to legalize next, even if it does not happen this year. Spectators are similarly watching legalization proposals in Hawaii and New Hampshire.
Stakeholders have observed that the recent research and policy developments in the psychedelics space look similar to the developments in the cannabis space from 2010 – 2015 (i.e., those that shaped the modern cannabis landscape). Both California and Massachusetts are set to consider psychedelics policy measures this year, either through legislation, ballot initiative, or both. Separately, Colorado will begin reviewing applications for psilocybin licensure before the end of this year. Finally, this year FDA will continue to consider a new drug application (NDA) filed by MAPS in late 2023, requesting approval of MDMA to treat post-traumatic stress disorder (PTSD). FDA previously granted breakthrough therapy designation for MDMA-assisted therapy for PTSD. If FDA approves MAPS’ NDA, it would be the first psychedelic therapeutic ever approved in the U.S.
HIPAA – Old Law; New Issues Continue to Arise
Author: Bruce Armon
HIPAA was enacted in 1996. Privacy Rule regulations, Security Rule regulations and breach notification regulations followed in the years thereafter. HHS OCR has been an active enforcement agency in reviewing and resolving alleged HIPAA violations and it has entered into dozens of settlement agreements with covered entities and business associates of all sizes and across the country. The early settlements focused on alleged Privacy Rule violations and settlements with respect to the OCR Right of Access initiative. Most recently, alleged Security Rule alleged violations – e.g., phishing issues and hacking issues – have become more prevalent. We expect that trend to continue. Do not be surprised if several large covered entities and business associates experience a significant Security Rule issue in 2024 that garner unwanted attention, increased security in information security lapses, costly investigations, and expensive settlements and remediation plans. Despite all of this HIPAA attention, we don’t expect the federal government to amend the HIPAA statutes. State governments may look to fill the void by creating or expanding their own protections for health information that may be part of a comprehensive privacy statute or stand-alone enhancements to existing health law privacy provisions.
Covered entities and business associates would be well-served to review their existing HIPAA privacy and security policies and procedures to be sure they are ready for the inevitable breach that will occur. And then be prepared to adhere to the HIPAA breach notification requirements to ensure PHI is protected and harm is mitigated.
As we get closer to HIPAA’s 30-year anniversary and technology continues to rapidly change, information security and privacy protections will grow in importance and budgets to address these issues on an ongoing basis should be commensurate with the threat these issues pose. Ignore prudent and compliant data protection at your organization’s peril.
 Idaho v. United States, No. 1:22-cv-00329-BLW (D. Idaho Aug. 4, 2022), cert. granted, No. 23-727 (U.S. Jan. 5, 2024); Moyle v. United States, No. 1:22-cv-00329-BLW (D. Idaho Aug. 4, 2022), cert. granted, No. 23-726 (U.S. Jan. 5 2024).
 San Carlos Apache Tribe v. Becerra, No. 21-15641 (9th Cir. Nov. 21, 2022), cert. granted, No. 23-250, 2023 WL 8007336 (U.S. Nov. 20, 2023).
 Ass’n. for Accessible Meds. v. Ellison, Case No. 23-CV-2024 (PJS/JFD), 2023 WL 8374586 at *3-4 (D. Minn. Dec. 4, 2023), appeal filed, No. 24-1019 (8th Cir. Jan. 3, 2024).
 GenBioPro, Inc. v. Sorsaia, No. CV 3:23-0058, 2023 WL 5490179 (S.D.W. Va. Aug. 24, 2023), appeal filed, No. 23-2194 (4th Cir. Nov. 15, 2023).
 Braidwood Mgmt. Inc. v. Becerra, No. 4:20-CV-00283-O, 2023 WL 2703229 (N.D. Tex. Mar. 30, 2023), appeal filed, No. 23-10326 (5th Cir. April 3, 2023).
 Haller v. U.S. Dep't of Health & Hum. Servs., 621 F. Supp. 3d 343 (E.D.N.Y. 2022), appeal filed, No. 22-3054 (2d Cir. Nov. 30, 2022); Texas Med. Ass'n v. United States Dep't of Health & Hum. Servs., 654 F. Supp. 3d 575, 580 (E.D. Tex. 2023), appeal filed, No. 23-10246 (5th Cir. Apr. 6, 2023).