Amy M. Joseph (ajoseph@health-law.com) is an attorney in the Hooper, Lundy & Bookman PC’s Boston office. Stephanie Gross (sgross@health-law.com) and Jeffrey Lin (jlin@health-law.com) are attorneys in the firm’s San Francisco office.
At the time this article went to print, it was unclear whether the Biden administration would revisit certain regulations that were published shortly before the transition, including the Stark and Anti-Kickback regulations discussed here. While changes are not anticipated, readers are advised to confirm the current status of these regulations prior to relying on them.
In late 2020, the Centers for Medicare & Medicaid Services (CMS) and Department of Health & Human Services Office of Inspector General (OIG) respectively released the long-awaited new federal Physician Self-Referral Law (referred to as the Stark Law)[1] and federal Anti-Kickback Statute (AKS) regulations.[2] These new regulations were issued as part of the Department of Health & Human Services’ Regulatory Sprint to Coordinated Care, with the goal of removing potential barriers to care coordination and value-based care. A key feature is the introduction of new protections for certain “value-based arrangements,” which aim to provide flexibility to encourage innovation between various healthcare providers and other individuals and entities.
The Stark Law, in particular, has historically presented potential barriers to innovative financial relationships between hospitals and physicians, given its nature as a strict liability statute and the fact that any financial relationship must fit every element of an applicable exception to be in compliance. In addition, under the AKS, hospitals and physicians may be hesitant to enter into an innovative arrangement unless it meets a safe harbor (although, unlike the Stark Law exceptions, the AKS safe harbors are voluntary). For example, although gainsharing arrangements between hospitals and physicians can help achieve cost efficiencies and enhance patient quality of care, without a clear AKS safe harbor and corresponding Stark Law exception, some parties have been hesitant to enter into such arrangements due to potential fraud and abuse risk exposure.
The new value-based regulations present significant opportunities for hospitals and physicians to enter into innovative arrangements. At the same time, the new regulations are nuanced, and arrangements must be structured thoughtfully to ensure compliance. While a comprehensive review of all the requirements of the new rules is beyond the scope of this article, the following provides an overview, along with some examples of value-based arrangements between hospitals and physicians and key compliance considerations.
What is a ‘value-based arrangement’ under the new regulations?
The new Stark Law exceptions and AKS safe harbors apply to a “value-based arrangement” entered into by a “value-based enterprise” made up of value-based enterprise participants, in which the parties engage in “value-based activities” with respect to a “target patient population.” An understanding of the meaning of these terms is critical for compliance with the new exceptions and safe harbors (see Table 1).
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Key value-based terms |
Summary (full definitions located at Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. 77,492, 77,657–663 (December 2, 2020) and Medicare and State Health Care Programs: Fraud and Abuse; Revisions to Safe Harbors Under the Anti-Kickback Statute, and Civil Monetary Penalty Rules Regarding Beneficiary Inducements, 85 Fed. Reg. 77,684, 77,889–894 (December 2, 2020) ) |
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Value-based arrangement |
An arrangement in which a value-based enterprise and/or its participants engage in value-based activities. |
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Value-based enterprise (VBE) |
Two or more value-based participants collaborating to achieve a value-based purpose pursuant to a value-based arrangement, which has (a) an accountable body or person responsible for oversight, and (b) a governing document. Formation of a VBE can be accomplished in many ways, ranging from formation of a new joint venture legal entity to simply amending an existing professional services agreement. |
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VBE participants |
Individuals or entities engaged in a value-based activity as part of a VBE (e.g., hospitals, physicians, digital health companies, skilled nursing facilities); protection under AKS unavailable for some provider types. |
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Value-based activities |
An activity that is reasonably designed to achieve a value-based purpose. May include providing an item or service, taking an action, or refraining from taking an action, but does not include making a referral. |
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Value-based purposes |
Coordinating and managing care, improving quality, appropriately controlling costs of payers, or transitioning from volume to value. Internal cost savings is not a sufficient purpose. |
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Target patient population |
Identified patient population selected using “legitimate and verifiable” criteria set out in writing, in advance, which further a value-based purpose (e.g., based on diagnosis, zip code, or payer type). |
What are the new value-based arrangement exceptions and safe harbors?
Three new Stark Law exceptions and AKS safe harbors protect remuneration between VBEs and their participants in the context of value-based arrangements. They can be categorized based on tier of downside risk: (1) full financial risk, (2) meaningful or substantial downside risk, and (3) no downside risk. The number of requirements to comply with a safe harbor or exception depends on the level of risk. Arrangements in which providers accept greater levels of financial risk are subject to fewer regulatory requirements. Notably, under all of the Stark Law exceptions, the remuneration need not be fair market value and can take into account the volume or value of referrals of patients within the target patient population, which is a significant departure from many other Stark Law exceptions.
In addition, a new AKS safe harbor protects certain in-kind remuneration provided, from a value-based participant to a patient in a target patient population, including providing tools and supports to address social determinants of health.
Although OIG and CMS coordinated closely, the safe harbors and exceptions are not identical. The following is an overview of the Stark Law exceptions (applicable to financial relationships with physicians or immediate family members only). Key differences in the AKS safe harbors are highlighted for comparison.
Full financial risk
The first new value-based Stark Law exception protects remuneration paid under a value-based arrangement where the VBE is at full financial risk, meaning the VBE is financially responsible on a prospective basis for all patient items or services covered by a payer.[3] The remuneration must be for performing value-based activities for the target patient population. It cannot be an inducement to limit medically necessary care or be conditioned on referrals of patients outside of the target patient population or business outside the value-based arrangement. In addition, if remuneration requires or is conditioned on referrals of patients in the target patient population to a particular provider, then this requirement must be set out in writing, and does not apply if the patient expresses preference for another provider, a payer determines the provider, or the physician determines in their professional judgment that the referral is not in the best interest of the patient. Record-keeping requirements apply.
The corresponding AKS safe harbor for this tier of risk is very similar but includes additional requirements.[4] For example, the arrangement must be set forth in a signed writing, and the VBE must provide or arrange for a quality assurance program for services provided to the target patient population to protect against underutilization and otherwise assess quality of care. In addition, this and all the other new AKS safe harbors require that the remuneration not be exchanged or used for marketing or patient recruitment activities.
Meaningful or substantial downside risk
The second Stark Law exception protects remuneration paid under a value-based arrangement where the physician is at “meaningful” downside risk for failure to achieve a value-based purpose, meaning at least 10% of the physician’s compensation is at risk.[5] In addition to the requirements that apply under the full financial risk exception, a description of the physician’s downside risk must be in writing, and the methodology used to determine the amount of remuneration must be set in advance.
The corresponding AKS safe harbor is similar but varies fundamentally with respect to the risk involved.[6] The AKS safe harbor requires that the VBE take on “substantial downside risk” from a payer, and a value-based participant “meaningfully shares” in such risk. “Substantial downside risk” is defined to include a few alternatives, including the so-called “shared savings and losses methodology” (risk of at least 30% of loss for all items and services provided to a target patient population), “episodic payment methodology” (risk of at least 20% for a clinical episode of care that spans multiple care settings), and the “VBE partial capitation methodology” (VBE receives a capitated payment that is designed to produce material savings for a predefined set of items and services). A “meaningful share” of the VBE’s risk means that the VBE participant either assumes two-sided risk for at least 5% of the losses and savings or receives a capitated payment. The same safeguards applicable in the AKS safe harbor for value-based arrangements with full financial risk apply. In addition, the remuneration in question must be “directly connected” to a value-based purpose and “used predominantly” to engage in value-based activities directly connected to items or services for which the VBE has assumed risk (except for remuneration paid pursuant to one of the risk methodologies, such as a periodic capitation payment).
No risk required
The third Stark Law exception protects remuneration paid under a value-based arrangement regardless of downside risk.[7] It is subject to substantially more requirements than the exceptions that require some level of downside risk, including: (1) a signed writing that describes the arrangement in detail, including identification of outcome measures (if any) against which remuneration is assessed; (2) any changes to outcome measures must be prospective and set forth in writing; (3) the arrangement must be commercially reasonable; and (4) one or more parties must monitor the agreement at least annually to assess performance, and if it is determined on review that a value-based activity is not expected to further a value-based purpose, the parties must terminate or modify the arrangement.
The AKS safe harbor, while similar, is more limited.[8] While the Stark Law exception protects both cash and in-kind remuneration, the AKS safe harbor protects only in-kind remuneration, which is used predominantly to engage in value-based activities that are directly connected to care coordination and management for the target patient population. Notably, the recipient of the in-kind remuneration must pay at least 15% of the offeror’s costs or 15% of fair market value of the in-kind services received. Other key provisions (in addition to all of the safeguards applicable to the other AKS value-based safe harbors) include a requirement that the arrangement be commercially reasonable, and that the parties establish legitimate outcome or process measures reasonably anticipated to advance care coordination or management, with associated benchmarks. Such measures and benchmarks must be monitored, periodically assessed, and prospectively revised as necessary to ensure they continue to advance care coordination and management of the target patient population.
How can hospitals partner with physicians in a value-based arrangement?
Although both OIG and CMS intentionally declined to provide many illustrations of value-based arrangements in the preamble to the final rules, their commentary expressly contemplates arrangements for the “distribution of shared savings or repayment of shared losses, gainsharing arrangements, and pay-for-performance arrangements” with physicians.[9] The following examples draw from these discussions to demonstrate how hospitals and physicians may collaborate to design a value-based arrangement, with a particular focus on compliance considerations.
In each of the following examples, the target patient population is Medicare Advantage beneficiaries requiring hip or knee replacements. Under each example, remuneration to the physician is protected and can be conditioned on the physician performing all hip and knee replacement procedures for the target patient population at the hospital (subject to patient choice, payer determination, and the physician’s professional judgment). Due to the differences between the Stark Law and AKS regulations, the parenthetical remarks indicate whether the arrangement would comply with one or both sets of rules. (Depending on the circumstances, other safe harbors or exceptions may also apply.)
No downside risk (Stark Law only). A hospital and physician enter into a VBE where the physician can earn cash incentives for participation in post-discharge meetings after a joint replacement procedure, with a purpose of facilitating care transitions and reducing hospital readmissions. The cash incentives are contingent on the hospital reducing its readmission rate below a set percentage for patients treated by the physician.
No downside risk (AKS and Stark Law). A hospital and physician enter into a VBE whereby the hospital provides remote patient monitoring software technology and support personnel to assist the physician, with a purpose of facilitating care transitions when a patient of the physician is discharged to their home. The physician pays 15% of the cost of the technology and personnel support provided by the hospital and can bill the applicable payer for the remote patient monitoring services.
Meaningful downside risk (Stark Law only). Pursuant to a professional services and coverage agreement between an orthopedic medical group and a hospital, which have partnered to form a VBE, a physician is entitled to an annual base payment of $50,000. The medical group has the ability to earn an additional $25,000 for performing certain value-based activities, including payment for abiding by a hospital’s redesigned care protocols, which requires the physicians to alter prior patient care practices.
Substantial downside risk (AKS and Stark Law). The example listed above could also meet the AKS safe harbor if the VBE takes on substantial downside risk from a payer and the medical group meaningfully shares in such risk. For example, this could occur where a hospital, medical group, and skilled nursing facility form a VBE that enters into an agreement with a payer under which the VBE receives a global capitated payment for a clinical episode of care and passes on a portion of that capitated payment to each participant.
Full financial risk (AKS and Stark Law). A health system (which includes a home health agency, skilled nursing facility, and other providers and suppliers in addition to a hospital) and a physician organization have respective contractual arrangements with a payer to receive capitated payments for certain items and services provided to Medicare Advantage patients in an identified geographic service area. These payer agreements, when combined, account for all items and services provided to such patients. The value-based participants have entered into a VBE to better coordinate and manage care across the respective care settings for the target patient population. The physician receives a shared savings payment from any collective savings across the VBE.
What are some key compliance considerations?
Close review of value-based arrangements for compliance is well advised, particularly given that the rules are new and it will take some time before the requirements become as familiar as the requirements in other commonly used safe harbors and exceptions. A few key compliance considerations are provided below.
Documentation
Many (but not all) of the new value-based safe harbors and exceptions require the value-based arrangement to be set forth in a signed writing. In addition, as a threshold requirement, the VBE must have a governing document that describes the enterprise and how the participants intend to achieve the value-based purposes.[10] In addition, the criteria used to select the target patient population must be set out in writing in advance of the commencement of the value-based arrangement.[11]
Monitoring
Several of the exceptions and safe harbors require monitoring of the effectiveness of the value-based arrangement to determine whether it continues to further the VBE’s value-based purposes. Mechanisms for monitoring and evaluation should be incorporated from the outset when designing a value-based arrangement. If the arrangement involves no financial risk, monitoring takes on particular prominence: under the applicable Stark Law exception, the arrangement must be terminated within 30 days or modified within 90 days after monitoring reveals that it is no longer effective in advancing the VBE’s goals.[12]
Selection of target patient population
The selection of the target patient population must be based on legitimate and objective criteria. Criteria to target particularly lucrative patients (“cherry-picking”) or to avoid high-cost patients (“lemon-dropping”) would not meet this standard. In addition, although nothing in the regulations precludes identifying a target patient population as an entire patient population served by a value-based participant, OIG has cautioned that such an approach should be closely scrutinized for compliance to ensure the broad selection criteria is legitimate and necessary to achieve the value-based purpose.[13]
Reduction of or limitation on medically necessary care
While a fee-for-service payment methodology could potentially encourage overuse, the opposite concern exists in the context of value-based care, particularly where a value-based purpose is to control costs of payers. For example, if reductions in length of stay or readmission rates is one of the goals of the arrangement, care should be taken to ensure such goals are not achieved through stinting of medically necessary care.[14]
Other applicable laws
Regardless of whether a value-based arrangement complies with federal fraud and abuse laws, state laws must also be considered. For example, arrangements involving full or partial financial risk might implicate state laws aimed at insurers or risk-bearing organizations. In addition, nonprofit, tax-exempt organizations must keep in mind the restrictions on private benefit and inurement. Pending new guidance from the Internal Revenue Service, a tax-exempt entity may choose to confirm any remuneration paid is fair market value, even if this is not required under the new AKS and Stark Law value-based regulations.
Conclusion
Historically, the AKS and the Stark Law have served as potential barriers to value-based care by restricting a wide range of payment structures envisioned by healthcare providers that have low fraud and abuse risk. Although it remains to be seen whether the new regulations will open the floodgates to innovative new arrangements, they certainly provide hospitals and physicians with greater flexibility in their efforts to collaborate to improve care.
Takeaways
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New Stark Law and Anti-Kickback Statute regulations seek to promote value-based care.
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As physicians undertake more financial risk, fewer regulatory requirements apply.
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Some of the typical requirements, including the requirement that compensation be fair market value, are not applicable.
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No downside risk is required to use one of the value-based exceptions and safe harbors.
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After establishment of a value-based arrangement, periodic monitoring is advised (and, in some cases, required).
