Two new healthcare fraud and abuse final rules, effective Jan. 19, 2021, may increase flexibility for private equity firms exploring opportunities in the healthcare space as well as private equity-backed healthcare platforms as they consider transactions, investment/alignment opportunities, patient engagement approaches and other business opportunities.
As discussed in a previous alert, the new final rules released by the Centers for Medicare & Medicaid Services (CMS) and the U.S. Department of Health and Human Services Office of Inspector General (OIG) significantly amend the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute (AKS) and the Civil Monetary Penalties (CMP) Law, with the intent to “provide greater flexibility for healthcare providers to participate in value-based arrangements” and “ease unnecessary compliance burden for healthcare providers and other stakeholders.”
Significantly, absent an unexpected fact pattern, no action is needed at this time for healthcare providers to maintain compliance with these federal fraud and abuse laws. If healthcare organizations and affiliated entities are currently compliant, they will remain compliant when the final rules take effect. Nevertheless, given that they reflect the most extensive updates to these fraud and abuse laws in a decade, private-equity firms and affiliated or associated platforms should consider the following ways the final rules may change how they evaluate and manage their healthcare investments:
1. Healthcare investors will have increased flexibility in addressing Stark Law-related diligence findings during transactions. The final rules provide an opportunity to cure Stark Law compensation discrepancies discovered during transaction-related diligence without requiring self-disclosure. Currently, technical physician compensation violations under the strict liability Stark Law are frequently uncovered during healthcare investment and sale transactions, which can trigger a self-disclosure obligation.
In an effort to reduce such disclosures for technical violations, CMS made a number of changes, including: (i) a new regulatory reconciliation period for up to 90 days following the end of an arrangement to cure compensation discrepancies; (ii) additional flexibility to satisfy writing and signature requirements in various Stark Law exceptions; (iii) a new de minimis service exception permitting payments below $5,000 annually for services; and (iv) new guidance allowing more office and equipment rentals to meet the applicable exception. Additionally, CMS expressly acknowledged that physicians can “stack” exceptions — e.g., using the de minimis services exception for the first $5,000 followed by the 90-day flexibility to satisfy writing requirements — to protect longer-term arrangements.
The key takeaway here is that fewer transactions are expected to necessitate disclosure through the Stark Law Self-Referral Disclosure Protocol, even if the parties to the transaction still need to negotiate the risk allocation of such potential noncompliance through indemnity and other means.
2. New protections for value-based arrangements will open new opportunities for external alignment models. Although the protections given to value-based arrangements require adherence to complex regulatory safeguards and contain significant, nuanced differences between the Stark Law and the AKS, providers will have new opportunities to structure external relationships with other providers. CMS and OIG anticipate that these final rules will remove impediments to pioneering new models and increasing care coordination by allowing certain financial relationships, such as gainsharing, between providers that meet certain value-based goals within a target population.
To qualify for these protections, two or more providers need to partner through a value-based enterprise (VBE). The final rules include three levels of financial risk, with lesser regulatory requirements for those VBEs carrying more financial risk by the provider participants. As the healthcare industry grows more comfortable with the VBE rules, innovation with new provider alignment opportunities may open, including with commercial payors. Expect the final rules also to provide additional opportunities for physician alignment within larger group practices by utilizing these value-based models to align internal compensation models.
3. Additional regulatory protections will be available for provider compensation. The final rules will provide additional protections for commonly used productivity-based and outcome-based compensation models with independent contractors. The AKS safe harbor will no longer mandate aggregate compensation to be set in advance for service arrangements. Instead, productivity and unit-based methodology can meet the service arrangement safe harbor (but not office and equipment rentals) as long as the methodology is fair market value and determined prospectively (similar to the Stark Law). This AKS safe harbor will also provide protection for certain outcome-based payments to providers (but, notably, this protection will not apply to payment from certain providers such as laboratory companies and pharmacies and related entities). These changes offer safe harbor immunity to contractor relationships where outcome-based and productivity compensation was not previously protected.
CMS also clarified the regulatory language around when it is permissible for a provider or managed care payor to require referrals under the Stark Law, which may lead to additional flexibility in managing where physician employees and contractors can refer DHS and other services. Finally, as noted in 2 above, VBE participants will have new protected compensation options for their associated providers.
4. Stark Law will become more forgiving, while AKS remains a backstop for a broader range of conduct. As discussed, the final rules provide new ways to protect previously problematic arrangements under the Stark Law’s strict liability statute. Many private equity firms will take comfort here as the strict liability nature of the Stark Law often prohibited otherwise non-abusive conduct if the arrangement did not clearly meet an exception.
Caution, however, is still warranted. Both CMS and the OIG remind providers that the AKS remains an enforcement tool for abusive arrangements even if they are now Stark Law-compliant. These reforms will likely reduce the number of voluntary self-disclosures, but platforms will need to remain vigilant in ensuring transactions and ongoing financial arrangements comply with the AKS where any intent to induce or reward referrals is the touchstone of prohibited conduct.
5. Some limited additional protections will exist for patient engagement and support tools. The final rules will allow VBE participants to provide patients up to $500 annually (adjusted for inflation) for in-kind engagement and support tools. Effectively, providers that participate in VBEs can provide items, goods or services to patients that are directly connected to the coordination and management of care within a target population. OIG requires these provided items advance a specific goal of the VBE. Moreover, the AKS transportation safe harbor will now allow returning a patient to his or her residence after an inpatient discharge without distance requirements and allow rural providers to transport patients up to 75 miles from the provider. Protections will also be added to the regulations for certain telehealth technology donations for in-home dialysis patients.
6. Group practice compensation should be reviewed during calendar year 2021. Group practices have until Jan. 1, 2022, to revise productivity compensation and profit-sharing plans to comply with new Stark Law “group practice” compensation rules (overlaying already-complicated and multifaceted compensation rules). This change will have particular impact on multispecialty practices that often attempt to share different ancillary lines in different ways. Many private equity-backed medical groups have complex physician compensation programs to align individual incentives with the medical group’s overall success. With CMS expressly providing group practices nearly a year until the overall final rules’ effective date, all groups should use this time to review their plans thoroughly. Group practices can then adjust, if necessary, before the Jan. 1, 2022, implementation. McGuireWoods plans to provide guidance later this year.
* * * * *
As the presidential inauguration approaches, it is possible that the Biden administration will pause the final rules’ effective date; however, a long delay is not expected. These significant changes come as welcome flexibility for providers, including private equity-backed healthcare platforms. Further, longer term, private equity funds may have new opportunities and alignment possibilities outside of existing models for healthcare transactions and financial arrangements.
Please do not hesitate to contact a McGuireWoods attorney or one of the authors of this alert for more information regarding these final rules or for assistance in assessing various financial arrangements in light of the new rules. For additional information, please attend our webinar, “Fraud and Abuse Regulatory Reforms: Key Themes for Private Equity-Backed Platforms,” on Jan. 12, 2021, at 12 p.m. (ET).
To review additional guidance on the final rules, see the following McGuireWoods legal alerts: