As discussed in a previous McGuireWoods alert, the Department of Health and Human Services (HHS) published final rules, effective Jan. 19, 2021, that significantly amend the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute (AKS) and the Civil Monetary Penalties (CMP) Law. This client alert, the latest in McGuireWoods’ summary series on these final rules, focuses on the AKS safe harbors and Stark Law exceptions finalized by the HHS Office of Inspector General (OIG) and Centers for Medicare & Medicaid Services (CMS) aimed at reducing regulatory burdens to allow healthcare providers to engage in value-based arrangements.

These protections include (1) three safe harbors to the AKS for remuneration exchanged between or among participants in a value-based enterprise (VBE) that includes two or more participants collaborating to achieve a value-based purpose with an accountable body, or person responsible, and a governing document; and (2) three new exceptions to the Stark Law for remuneration to physicians participating in a value-based arrangement. Each agency has a different approach in light of the scope of each law and agency enforcement objectives, but both place fewer regulatory burdens on the parties when the VBE accepts full risk for all of a target population’s care, with greater burdens when VBEs accept less financial risk. By implementing these changes, OIG and CMS seek to permit more flexibility around valued-based arrangements that could, in the absence of these changes, be deemed to induce or reward referrals in violation of the AKS, or be deemed a financial relationship between a physician referrer and a provider of designated health services (DHS) not covered by an exception to the Stark Law.

OIG and CMS largely adopted their proposed approach to VBEs, discussed in part in a Nov. 22, 2019, McGuireWoods alert, with certain tweaks that largely did not make compliance more difficult.

  1. Three new value-based safe harbors. As outlined below, OIG created three new value-based safe harbors that render a value-based arrangement immune from sanction if it meets all the terms of the safe harbor. The amount of risk the VBE assumes, if any, dictates which safe harbor applies, with higher financial risk correlating to lesser requirements.
    1. Care coordination arrangements (no financial risk). The first safe harbor protects remuneration when the VBE and its participants provide remuneration to achieve a value-based activity directly connected to coordination and management of care for the VBE’s target patient population. The OIG intends for this safe harbor to protect in-kind remuneration exchanged by and among a VBE and VBE participant(s), such as providing care coordinator staff, technology for care coordination and devices to monitor a patient’s recovery upon discharge. As this safe harbor does not require financial risk, the OIG included more safeguards than for the other value-based safe harbors (all discussed below). For example, the remuneration cannot be intended to induce referrals of patients or business not covered under the value-based arrangement, the remuneration cannot be exchanged or used more than incidentally for the recipient’s billing or financial management services, and the recipient must pay at least 15 percent of the cost for the in-kind remuneration.
    2. Value-based arrangements with substantial downside financial risk. The second safe harbor protects remuneration when the VBE assumes substantial downside financial risk from the payor (or will assume such downside risk in the next six months). This safe harbor, unlike the care coordination safe harbor, protects in-kind and monetary remuneration exchanged by and among a VBE and its participants. Substantial downside financial risk means the VBE: (i) assumes at least 30 percent of any loss for all items and services of the target population compared to a bona fide benchmark (reduced from the 40 percent stated in the proposed rule); (ii) assumes 20 percent of any loss where savings and losses must be calculated by comparing current expenditures to a bona fide benchmark designated to approximate the expected total cost of such care and the parties design the clinical episode to cover more than one care center; or (iii) receives from the payor a prospective, per-patient payment that is designed to produce material savings and is paid on a monthly, quarterly or annual basis for a predefined set of items and services to approximate the expected total cost of expenditures for the predefined set of items and services. The VBE participant receiving remuneration must also assume a meaningful share of the risk, meaning the participant (i) assumes two-sided risk for at least 5 percent of the losses and savings realized by the VBE, or (ii) receives a prospective, per-patient payment.
    3. Value-based arrangements with full financial risk. The final safe harbor protects remuneration when the VBE takes on full financial risk from a payor (or will assume such risk within one year) for all patient care and services related to a target patient population. Full financial risk means the VBE has assumed prospective risk for all items and services for the target patient population for at least one year — i.e., a full capitated payment. Similar to the substantial financial risk safe harbor, in-kind and monetary remuneration will be protected for VBEs that assume full financial risk. A requirement of this safe harbor is that the VBE participant cannot claim payment in any form from a payor for items or services except as set forth in the VBE agreement.
  2. AKS safe harbor requirements. Each of the three safe harbors requires the following universal requirements: (i) the arrangement must be reflected in a signed writing among all VBE participants (though timing of these writing requirements varies based on risk); (ii) remuneration must be directly connected to one or more of the VBE’s value-based purposes; (iii) no inducements to reduce medically necessary treatment can be included; (iv) remuneration based on referrals must be tied to the target patient population and business covered under the arrangement; (v) VBE participants must retain records sufficient to establish compliance for a period of six years; and (vi) certain entities may not qualify as VBE participants within each safe harbor, which typically include pharmaceutical manufacturers, laboratory companies and device manufacturers. Moreover, the final rule requires that parties to a value-based arrangement establish certain monitoring requirements for outcome or process measures for care coordination arrangements that the parties reasonably anticipate, based on clinical evidence or credible medical or health science, will advance the VBE’s quality goals, with full financial risk arrangements having the most flexibility in such monitoring activities. In addition to these universal requirements, the substantial downside risk and care coordination safe harbors also require that the value-based arrangements do not: (i) place any limitations on the VBE participants’ ability to make patient care decisions; nor (ii) direct or restrict referrals to a particular provider if: (a) a patient expresses a preference for a particular provider; (b) the patient’s payor determines the provider, practitioner or supplier; or (c) directing the patient is contrary to Medicare and Medicaid policy. Finally, since VBE participants in a care coordination model are not taking financial risk, only in-kind (i.e., non-monetary) remuneration, such as information technology and patient monitoring tools, may be protected and, as noted above, the safe harbor requires that the recipient of any remuneration under this safe harbor contribute at least 15 percent of the offeror’s cost or the remuneration’s fair market value.
  3. Stark Law key differences. The Stark Law exceptions are similar to the safe harbors discussed above — with the requirements decreasing as the financial risk on the participants increases — but are generally easier to meet. If the VBE includes payment by a DHS entity to physicians, one of these exceptions must be met (or the requirements of another Stark Law exception must be met instead) to avoid a Stark Law violation for that physician’s referrals to the DHS entity. Unlike the AKS safe harbors, where adherence is voluntary to gain protections, the strict liability nature of Stark Law mandates strict compliance. The key distinctions between the AKS safe harbors and the correlating Stark Law exceptions are discussed below.
    1. Full financial risk. The Stark Law’s full financial risk exception similarly protects value-based arrangements by and among a VBE and VBE participants when the VBE has assumed full financial risk for the cost of all patient care items and services covered by a payor for a targeted patient population. Like the AKS safe harbor, the VBE is responsible, or is obligated within one year (increased from six months in the proposed rule) following the commencement date of the value-based arrangement to assume responsibility. As a result, VBE participants can utilize this exception during the “pre-risk period” prior to the VBE assuming full financial risk.
    2. Meaningful downside financial risk exception versus substantial downside financial risk. The Stark Law’s meaningful downside financial risk exception shares similarities with the AKS safe harbor for value-based arrangements with substantial downside financial risk. However, significant differences exist. First, the Stark Law exception requires the physician to be responsible for at least 10 percent (down from the 25 percent stated in the proposed rule) of the risk, instead of measuring the VBE’s risk in totality. CMS clarified in the final rule that this risk can be established if either: (i) the physician is required to repay remuneration already received if the value-based purpose is not achieved, or (ii) a portion of the physician’s remuneration is withheld and paid only upon the achievement of the value-based purpose. Moreover, whereas the proposed rule included an alternative definition of meaningful downside financial risk where the physician would be financially responsible to the entity on a prospective basis for the cost of all or a defined set of patient care items, CMS omitted this alternative financial risk methodology from the final rule. Also, CMS did not provide a pre-arrangement protection period as it did with the full financial risk model.
    3. Value-based arrangements exception. The Stark Law’s corollary to the limited AKS care coordination safe harbor is a broader general exception to protect value-based arrangements that do not fall into the meaningful downside financial risk or full financial risk exceptions. The value-based arrangements exception applies regardless of the level of risk assumed by the VBE or physician, even if no risk component is involved. This gives physicians and DHS entities flexibility to participate in value-based arrangements that do not assume any financial risk at this time, but where the VBE is working to achieve a value-based purpose, such as coordinating and managing care, improving quality and reducing costs. To satisfy the criteria, there are a significant number of safeguards described further below.
  4. Key differences in requirements among the Stark Law exceptions. As a threshold matter, all Stark Law value-based exceptions must comply with the following requirements, which are similar to the AKS safe harbors: (i) remuneration is for or results from value-based activities undertaken by the recipient of the remuneration for patients in the target patient population; (ii) the arrangement must not cause inducements that reduce medically necessary treatment; (iii) remuneration based on referrals must be tied to the target patient population and business covered under the arrangement; (iv) if remuneration paid to the physician is based on the physician’s referral to a particular provider, the requirement to make referrals must be set out in writing and signed by the parties and does not apply if the patient expresses a preference for a different provider or the referral is not in the best interest of the patient; and (v) VBE participants must retain records sufficient to establish compliance for a period of six years. Also similar to the AKS safe harbors, the Stark Law exceptions have fewer requirements as risk-sharing increases. For example, while the full financial risk exception does not require that the methodology for determining remuneration be set in advance — i.e., could be determined after receiving funds — CMS requires a prospective methodology be determined before healthcare providers furnish the items or services for which the remuneration is provided under the meaningful financial risk exception and the value-based arrangement exception. CMS did not, however, mandate the aggregate remuneration amount to be set in advance or even be fair market value. While the Stark Law meaningful downside financial risk and value-based arrangements exceptions each contain a writing requirement, they differ depending on the levels of risk involved. While the meaningful downside financial risk exception requires only a description of the nature and extent of the physician’s downside financial risk to be set in writing, the signed writings for the value-based arrangements exception must include a fulsome description of: (i) the value-based activities to be undertaken under the arrangement, (ii) the activities furthering the value-based purposes of the VBE, (iii) the target population, (iv) the type or nature of the remuneration, (v) the methodology to determine remuneration and (vi) the performance or quality standards measured against the remuneration recipient. Notably, the full financial risk exception does not contain a writing requirement outside of the VBE’s governing document and likely a contract with the payor. Additionally, the value-based arrangements exception is the only one of the three that includes a commercial reasonableness requirement, mandatory outcome measure andthe obligation that the VBE (or one of the parties to the value-based arrangement) annually monitor the following: (i) whether the parties have furnished their required value-based activities; (ii) whether and how continuation of the value-based activities is expected to further the value-based purpose(s) of the VBE; and (iii) progress toward attainment of the outcome measures against the remuneration recipient. Though the care coordination AKS safe harbor also contains monitoring safeguards, the AKS requirements are not nearly as burdensome as those required under the Stark Law. This is likely due to CMS permitting both in-kind and cash remuneration under this exception, and not requiring the physician recipient to contribute any of his or her own money to the arrangement. For example, under the Stark Law value-based arrangement exception, a VBE could compensate physicians for providing post-discharge services to patients in a target patient population, and have the compensation be dependent on readmission rates. This arrangement would not qualify for protection under the AKS care coordination safe harbor.
  5. Examples of permitted conduct. Provided an arrangement complies with a safe harbor’s requirements noted above and the payment made to a physician complies with a Stark Law exception noted above, VBE participants are permitted to encourage referrals of the target patient population as part of value-based activities. For example, a VBE can create a preferred network of post-acute care providers that meet certain quality criteria. Further, if a VBE seeks to coordinate and manage the care of patients who undergo joint replacement procedures and reduce costs while improving the quality of care, VBEs could condition remuneration to physicians (or other VBE participants) on referring joint replacement treatments to certain facilities under the Stark Law, with certain limitations under the AKS. As a result, VBE participants could receive remuneration based on these referrals so long as the remuneration furthers the value-based purpose. Similarly, although the OIG final rule prohibits remuneration used for marketing items or services furnished by the VBE or VBE participants or for the purpose of patient recruitment activities, a VBE is permitted to provide educational activities on behalf of the VBE participants within the target patient population. For example, a skilled nursing facility staff member may work with patients at a hospital to assist in the discharge planning process and, in doing so, educate patients regarding care management processes used by the skilled nursing facility, provided the patient had already selected the facility and such facility was medically appropriate. OIG would consider such activities occurring prior to the patient’s selection of the facility as marketing and therefore ineligible for safe harbor protection. OIG also made it clear that notifying a patient of the criteria used by a VBE participant to determine patient eligibility is not considered marketing. Additionally, the Stark Law exceptions make it clear that a hospital can share internal cost savings achieved with a physician who is participating in the hospital’s quality and outcome improvement program if the program reaches or exceeds pre-established benchmarks. Such programs are often referred to as gainsharing. More importantly, the Stark Law exception can be utilized even if the physician is not assuming any of the financial risk. The challenge of the separate regulatory structures, however, is that such a gainsharing arrangement will not meet an AKS safe harbor without risk sharing. While failure to meet a safe harbor does not mean the gainsharing arrangement is illegal or improper, it will not have the AKS protection afforded by a safe harbor. This is only one example of how VBEs will need to navigate both regulatory structures when establishing value-based relationships.

With the implementation of these final rules, the OIG and CMS seek to balance a need for innovation within an evolving healthcare system, with the need for safeguards against improper inducements prohibited by the AKS and Stark law. These proposed safe harbors and their analogous exceptions provide greater flexibility for providers to enter into non-conventional arrangements aimed at rewarding value and care coordination while attempting to provide meaningful safeguards to protect against patient and program abuse.