Health Care Providers Face Legal and Strategic Challenges to Participate in the Financial Incentives Offered by the Patient Protection and Affordable Care Act

National health care reform, as enacted by the Patient Protection and Affordable Care Act (“PPACA”), seeks to achieve major changes in the health care delivery system to enhance quality, efficiency, and patient-centered care.1 PPACA adopted a variety of policy tools to advance these goals that will affect providers across the continuum of care, including: pay-for-performance for long-term care, home care, and other providers; pilot program funding to create medical homes; demonstration programs for bundled payments to providers; and establishment of a Center for Medicare and Medicaid Innovation to study and fund new models of health care delivery.

National health care reform also embraced Accountable Care Organizations (ACOs) as a means to drive quality and efficiency, mandating that the Centers for Medicare and Medicaid Services (CMS) establish a Shared Savings Program for ACOs (the “Shared Savings Program”) with an effective date of January 2012.2 While the initial Shared Savings Program for ACOs is limited to serving Medicare Fee-For-Service beneficiaries, the Program is expected to encompass other payment methodologies over time, including partial risk-sharing and full capitation. Likewise, the PPACA establishes Shared Savings Program criteria solely for Medicare, but it is anticipated that private health plans will seek similar arrangements with providers across the continuum of care.3 This memorandum presents an overview of the major legal issues facing health care providers as they seek to position themselves to participate in ACOs and other collaborations that entail innovative care delivery and payment arrangements.  

I. What is an Accountable Care Organization?

The PPACA defines an ACO as an organization of health care providers that share responsibility for the cost and quality of care for a specified patient population, and can participate in shared savings for Medicare Fee-for-Service (FFS) patients generated by enhanced coordination of care and reduced costs.4 PPACA specifies five types of organizations that may participate in an ACO: (i) partnerships or joint ventures between physicians and hospitals; (ii) physician group practices; (iii) networks of physician practices (i.e., independent practice associations); (iv) hospitals employing physicians; and (v) other providers of health care services and supplies specified by CMS.5

In order to participate as an ACO under the Shared Savings Program, an organization must meet the following minimum requirements:

  • be willing to be accountable for the quality, cost, and overall care of Medicare beneficiaries;  
  • enter into an agreement with CMS to participate in the program for at least three years;  
  • include a sufficient number of primary-care physicians to care for beneficiaries assigned by CMS;  
  • have at least 5,000 FFS beneficiaries assigned by CMS;6  
  • define processes of care to promote evidence-based medicine and patient engagement in their own care, report on quality and cost measures, and coordinate care, such as through the use of telehealth or remote patient monitoring;  
  • have a formal legal structure that can receive and distribute payments for shared savings;  
  • have a leadership and management structure that includes clinical and administrative systems;  
  • meet criteria for patient-centered care to be set forth by CMS, such as individualized care plans; and
  • have the capacity to report to CMS the information required on quality measures, physician ACO members, and the determination of payment for shared savings.7  

II. Financial and Quality Challenges

ACOs can participate in shared savings under the Medicare program only if they meet benchmarks for cost savings set by CMS. CMS will determine the targets for cost savings based on expenditures by the ACO compared to the per beneficiary cost of care, adjusted for beneficiary characteristics, for Part A and B services during the prior three years.8 CMS has not yet provided guidance on the allocation of cost savings between itself and ACOs. This information as well as the savings that must be achieved above the baseline cost of care per beneficiary are crucial to the potential financial rewards for providers. Access to capital will be another key financial consideration for providers; ACOs will require investment in information systems, analytic capacity, and management.

Only ACOs that meet quality performance standards that will be set by the Secretary of Health and Human Services in forthcoming regulations will be eligible to participate in shared savings. Among other challenges, ACOs must determine how shared savings will be allocated between physicians and other ACO participants to provide incentives to improve quality and efficiency, consistent with federal and state fraud and abuse laws and the tax-exempt status of participating providers.9 Participants in an ACO will need a coordinated approach to health care quality that targets key areas of opportunity for improvement, adopts shared protocols and measures of quality, and assigns and sustains accountability for outcomes. In particular, ACOs must have the capacity to collect and utilize quality data across the spectrum of participating providers.

III. The Legal Issues Posed by ACOs

A. Legal Structure for an ACO

PPACA did not specify a particular legal structure for ACOs; an ACO can be built around a large physician practice, a hospital-physician joint venture, an integrated delivery system of hospitals and physicians, or other structures. As discussed below, any structure chosen should take into account other concerns, such as the implications for the tax status of the ACO and participating providers. However organized, the ACO must have shared governance among the leading participants and the capacity to forge consensus on key financial, clinical, and operational issues, including: (i) governance and management; (ii) the allocation of financial rewards and/or shared risks; (iii) investment in information systems and infrastructure; (iv) quality goals and financial incentives tied to attainable outcomes; and (v) redesign of the care delivery model to achieve cost and quality targets.  

B. Tax Issues

An ACO may be comprised of not-for-profit health care providers and for-profit entities such as physician groups. Tax-exempt members of an ACO will be subject to certain requirements and limitations, and special issues will arise for an ACO consisting of tax-exempt and for-profit members. The IRS takes the position that when tax-exempt organizations and for-profit entities, including physician groups, enter into profit-sharing arrangements, the tax-exempt's participation in the arrangement must further its charitable purpose and the arrangement must permit the tax-exempt organization to act exclusively in furtherance of its taxexempt purpose and only incidentally for the benefit of the for-profit partners. Accordingly, the tax-exempt organization in a profit-sharing arrangement with a forprofit entity must retain ultimate authority over the assets and activities being operated or managed under the profit-sharing arrangement, including the right to ensure that the terms and conditions of any contracts entered into in connection with the arrangement are reasonable.10 These principles will apply to ACOs that include tax-exempt organizations and for-profit entities.  

C. Antitrust Compliance

Federal and state laws prohibit health care and other entities, such as ACOs, from restraining trade or engaging in mergers or acquisitions that substantially lessen competition or tend to create a monopoly.11 The Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) exercise federal enforcement authority for antitrust matters.12 Regardless of the specific form of the integration, FTC and DOJ will analyze the substance of the combination on a case-by-case basis, weighing the likely anticompetitive impact of the integration against the likely procompetitive benefits to consumers and payers.

Guidance statements from both FTC and DOJ suggest that the goals of ACOs to integrate care, improve quality, and lower cost are also likely to be factors that mitigate the risk of antitrust violations in provider joint ventures and networks.13 In fact, the degree of clinical and financial integration achieved is a key guidepost for antitrust analysis in assessing the potential benefits to patients and payers as sufficient integration is considered necessary to achieve significant efficiencies. Among other factors, the analysis will focus on whether a network of physicians or a multiprovider network:

  • shares substantial financial risk;  
  • seeks to achieve clinical integration though shared quality protocols, goals and measures;  
  • chooses physicians to participate based on their willingness and capacity to meet financial and quality goals;  
  • establishes incentives or procedures to modify provider behavior to meet the goals set; and  
  • makes a substantial investment in infrastructure such as information systems.  

The agencies have recognized that combinations and joint ventures in health care are rapidly evolving, and therefore have refrained from endorsing or condemning any particular model so long as efficiency and vigorous price and non-price competition are encouraged.14

D. Fraud and Abuse Compliance  

Federal and state laws to prevent fraud and abuse have posed barriers to collaborations between providers that could integrate care, reduce cost, and provide incentives to improve quality. The primary laws to prevent fraud and abuse relevant to ACO development are the Civil Monetary Penalties (CMP) Law, the Anti-Kickback Law, and the Stark Law.  

Among other prohibitions, the CMP bars hospitals from making a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided to a Medicare or Medicaid beneficiary.15 Hence, any arrangement between a hospital and physicians to share cost-savings would potentially implicate the CMP.  

Federal and state anti-kickback laws make it a criminal offense for any party to offer, pay, solicit, or receive any remuneration to induce or reward the referral of services or goods paid for by federal or state health care programs.16 The Office of Inspector General (the “OIG”) has expressed concern that payments to physicians for cost-savings could in fact represent payments for referrals since physicians could receive payments that depend on the number of patients referred.17  

The Stark law prohibits physicians from referring Medicare patients for certain designated health care services to entities in which the physician or a family member has a financial relationship, unless one of the exceptions in the law applies.18 Any entity that receives a referral in violation of the Stark law may not bill for the services rendered.  

The OIG has issued a series of opinions indicating that certain arrangements to share savings with physicians do not violate fraud and abuse prohibitions, but these opinions are based on highly specific fact patterns and clinical protocols.19 In order to encourage the creation of ACOs, PPACA specifically grants the Secretary of Health and Human Services (“HHS”) the authority to waive certain provisions of the fraud and abuse laws.20 At a public meeting hosted by the OIG, CMS and FTC on October 5, 2010, the Inspector General of HHS signaled the intention of the Department to ensure that bona fide ACOs designed to improve quality and decrease costs are not “unduly inhibited by existing laws, including the fraud and abuse laws.”21

E. Quality of Care and Credentialing

PPACA expands pay-for-performance among a broad spectrum of providers. For this reason, ACOs would benefit by aligning their quality goals with pay-forperformance incentives as well as financial penalties for poor performance adopted by CMS and private payers.22 In developing quality goals for physicians and mechanisms to gain physician cooperation, such as report cards on physician performance, financial incentives for quality outcomes, or disciplinary action, ACOs must consider fraud and abuse laws as well as requirements set forth in physician contracts and medical staff bylaws. Among other steps, ACO participants should agree on standards and a process for credentialing, determine if credentialing standards will be uniform throughout the delivery system, and if credentialing for all providers will fall under the ambit of the medical staff bylaws at a hospital or other entity.23 ACOs also raise questions about ownership of the medical information generated by the ACO and the impact of sharing medical information on the confidentiality protections accorded by state peer-review statutes.

IV. Looking Ahead

ACOs incentivize health care providers to devise new methods of collaboration that integrate care delivery, improve quality, and share the financial rewards and risks of providing care to a defined population of patients. Many questions remain unanswered, including:

  • How will CMS assign beneficiaries to ACOs?  
  • What percent of savings will CMS share with ACOs?  
  • What quality standards must ACOs meet to be eligible for shared savings?  
  • What criteria will CMS set for patient-centered care?  
  • How will fraud and abuse and antitrust enforcement be waived to encourage collaboration among providers and incentives to achieve quality and cost goals?  
  • Will ACOs achieve sufficient cost savings to offset the required investment in infrastructure and management?  

Forthcoming CMS regulations will provide crucial guidance about the Shared Savings Program. The success of ACOs and other collaborative arrangements will also depend on the capacity of providers to manage the care of chronically ill and other high-cost patients effectively across the continuum of care. The capacity to collect and use data to meet the twin challenges of higher quality and lower cost will therefore be a key benchmark for ACO participation. As incentives shift from traditional FFS reimbursement to accountability for the cost and quality of care, providers must also assess their willingness to assume risk and innovate in their approach to health care delivery.