HHS to Ease Fraud and Abuse Rules Part 5: CMS Proposes Value-Based Arrangement Stark Exceptions

November 22, 2019

As discussed in an Oct. 9 alert, the Department of Health and Human Services announced two proposed rules to significantly amend the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute and the Civil Monetary Penalties Law. This client alert, the fifth in McGuireWoods’ summary series on these proposed rules, focuses on the Centers for Medicare & Medicaid Services’ (CMS) three proposed Stark Law exceptions aimed at reducing the regulatory burdens that healthcare providers long have claimed prevented value-based payment model adoption. Stark Law is a strict liability statute, which prohibits a physician from referring a Medicare beneficiary for designated health services (DHS) to an entity with which the physician has a financial relationship, unless that financial relationship meets all of the delineated requirements of an applicable exception.

The Stark Law proposed rule stems from HHS’ Regulatory Sprint to Coordinated Care (discussed in a Sept. 26, 2018, client alert), which outlines the agency’s desire to incentivize value-based arrangements and patient-care coordination by expressly permitting certain activities that could be deemed problematic under current law. CMS’ proposed changes to Stark Law were released on the same day the HHS Office of Inspector General (OIG) proposed new value-based arrangement safe harbors under the Anti-Kickback Statute, to be discussed in a forthcoming alert.

CMS indicated that it seeks to adopt the new value-based arrangement Stark Law exceptions to address the transition away from traditional fee-for-service reimbursement to value-based reimbursement and care-coordination incentives. HHS has granted certain limited fraud and abuse waivers for participants in various value-based and care-coordination initiatives to avoid the strict liability of the Stark Law when a value-based financial relationship would not meet an exception. These waivers, however, do not apply to commercial payor-led or provider-driven activities that nonetheless could implicate the Stark Law, including certain capitation, shared savings, gainsharing and bundled payment programs. CMS and HHS developed this proposed rule to address worries that these restrictions impeded the goals of the Regulatory Sprint.

The following summarizes eight key aspects of the proposed Stark Law changes, intended to reduce regulatory hurdles and afford healthcare providers greater flexibility when participating in a value-based enterprise (VBE).

  1. Three new value-based exceptions. The financial risk assumed by the parties to a VBE would dictate which of the three exceptions would apply to a particular arrangement, with additional safeguards required for arrangements that carry less financial risk for providers. Each of the proposed exceptions would protect remuneration made to a physician by other participants in a VBE, regardless of payor, if it fits the applicable exception’s requirements. A key feature of each of these exceptions is that they do not include the traditional requirements for existing Stark Law exceptions that payments be commercially reasonable, consistent with fair market value, and not vary based on the volume or value of referrals. Instead, as discussed below, each exception would have its own requirements, provided that the VBE is organized as a group of providers, suppliers and other actors collaborating to achieve at least one value-based purpose (as discussed further in point two below). The three types of VBE for which exceptions have been proposed are distinguished as follows:

    1. Full financial risk. The VBE prospectively takes on full financial risk from a payor for all patient care and services related to a target patient population for a specified time period.
    2. Meaningful downside financial risk. The VBE places meaningful downside financial risk on the physician VBE participant for failing to achieve the value-based purpose. CMS proposed “meaningful downside” to mean either where 25 percent of remuneration value paid under the arrangement is at risk or where the physician is prospectively responsible for the cost of all or a defined set of patient-care items for each patient in the target patient population.
    3. General VBE arrangement. The VBE adopts other value-based arrangements to achieve a value-based activity meeting the requirements discussed in this alert, but which provide only potential financial upside for a physician participant.

  2. New exceptions would allow remuneration involving referrals. Due to the nature of value-based arrangements, the proposed exceptions would not prohibit remuneration conditioned on referring patients included in the VBE’s target patient population. For example, if the value-based arrangement focuses on joint replacements, these exceptions would allow conditioning remuneration to the physician on referring joint replacement treatment to certain facilities (but notably would not permit a requirement that the physician refer all of his or her orthopedic patients to such facility). VBE participants could then receive remuneration based on these referrals if the remuneration furthers the value-based purpose.

    As noted above, this is a departure from many existing exceptions prohibiting payments that vary based on the value or volume of DHS referrals or other business generated between the physician and a DHS entity. CMS noted it is considering including a volume/value variation limitation in the general VBE arrangement exception, citing its concerns that value-based arrangements utilizing this exception are more susceptible to abuse of Medicare or patients because the parties do not assume any meaningful downside financial risk. In addition, any physician remuneration conditioned on referrals needs to satisfy CMS’ longstanding policy within the Stark Law that excludes from such referral requirements patient or insurance preference, and the best interest of the patient.
  3. Certain requirements would apply to all three proposed exceptions. Each of the three exceptions proposed by CMS must meet the following universal requirements.
    1. Remuneration must relate to activities achieving a value-based purpose. In order for a VBE to qualify for an exception, VBE participants would need to engage in certain care activities for a specific target population with the aim to achieve one of the following proposed value-based purposes: (a) coordinating and managing the care of a target patient population; (b) improving the quality of care for a target patient population; (c) reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (d) transitioning to payment mechanisms based on quality of care and control of costs of care for a target patient population.

      Notably, this proposed definition of “value-based purpose” could be seen as vague in light of CMS’ stated desire to permit a wide variety of efforts, ranging from mandatory post-discharge meetings, to incentives to reduce unnecessary care or shared-savings payments. Note that CMS sought feedback to refine its position, and has specifically requested comments on whether it should mandate that the VBE achieve quality of care goals before pursuing cost-sharing. Expect commenters to go beyond addressing CMS’ requested feedback and ask CMS whether specific arrangements satisfy CMS’ meaning of activities achieving value-based purposes.
  1. Prohibition on inducements that reduce medically necessary treatment. CMS sought to safeguard the provision of items or services that are medically necessary, recognizing that VBEs, which include financial downside, could encourage patient-care stinting (underutilization). Though CMS noted that other Medicare regulations ensure patient safety and quality of care are maintained, the proposed exceptions would prohibit remuneration as an inducement to limit or reduce the provision of medically necessary services or items to any patient, even non-Medicare beneficiaries and those outside the target patient population.
  2. Record retention. CMS proposed requiring VBE participants to record the methodology and actual amount paid under a value-based arrangement for a six-year period and make such records available upon request to the HHS secretary. As CMS noted, its regulations already require record retention for certain prongs of the Stark Law “group practice” definition and certain exceptions like those for physician recruitment (although those requirements do not mandate a specific retention period).
  1. Key differences among the exceptions. Overall, CMS believed that the value-based arrangement exceptions needed “fewer ‘traditional’ requirements to ensure the arrangements they protect do not pose a risk of program or patient abuse … [as] value-based health care delivery and payment system[s] itself provides safeguards.” That said, as noted above, the proposed exceptions provided the fewest requirements for VBEs assuming full financial risk “with the requirements increasing and changing as the level of financial risk in the value-based arrangement diminishes.” In this manner, there are unique requirements for the three exceptions due to their respective structures.
    1. Duration of risk. CMS proposed that VBEs be at risk (whether full or meaningful downside, depending on the applicable exception) during the entire duration of the value-based arrangement. Arrangements that begin compliant with the applicable exception but continue to a time when such financial risk no longer exists, such as a circumstance where risk-sharing ends, would no longer receive protection under the applicable exception, and would require a different exception to comply. CMS did propose, however, to allow VBEs to utilize the full financial risk exception for six months prior to achieving full risk on the VBE.
    2. Remuneration set in advance. While the full financial risk exception does not require that the methodology for determination of remuneration be set in advance, CMS proposed a set-in-advance requirement under the meaningful financial risk exception and the general VBE arrangement exception. CMS noted that, for purposes of these exceptions with lower or no risk-sharing, a prospective methodology must be determined before healthcare providers furnish the items or services for which the remuneration is provided. CMS did not, however, mandate the actual aggregate remuneration amount to be set in advance or even be fair market value.
    3. Signed writings. Most Stark Law exceptions require signed writings documenting a particular arrangement. CMS did not propose a signed writing requirement for the full financial risk exception (beyond a governing document or contract for the VBE), but would mandate a written description for the meaningful financial risk exception and a signed writing for the general VBE arrangement exception. This latter signed writing requirement would require VBEs to describe (i) the value-based activities to be undertaken, (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.
    4. Performance or quality standards. CMS acknowledged the need for monitoring of performance and quality standards to ensure the VBE is furthering its value-based purpose. It sought comment on how best to require VBEs to monitor these standards and when the failure to meet such standards should negate the ability to use the applicable Stark Law exception.
  2. New exceptions would protect only compensation arrangements. CMS proposed to protect only compensation arrangements to which a physician is a party, and not any direct ownership relationships or distributions associated with such ownership. In excluding ownership, CMS indicated that receiving a return on investment is not a value-based activity, so a physician’s return on an investment interest in a VBE would not qualify for protection under a value-based arrangement exception. Notably, protected indirect compensation arrangements could include unbroken chains of financial arrangements which include both ownership and compensation arrangements between parties, provided that the financial relationship in the chain closest to the physician is a compensation arrangement that meets a value-based exception, even if other ownership relationships exist elsewhere in the chain of financial relationships. CMS sought comment on these and other formulations that commenters are likely to respond to during the open comment period.
  3. Remuneration may be nonmonetary. CMS proposed that the value-based exceptions protect nonmonetary remuneration in addition to monetary remuneration. This would provide VBEs the opportunity to offer physician participants remuneration such as electronic health record items and services, care-coordination services, and shared staff to promote value-based activities. CMS sought comments on two alternatives here. In the first alternative, CMS proposed limiting the protection of the general VBE arrangement exception to nonmonetary remuneration only, as OIG is doing in its Anti-Kickback Statute proposed rule, and sought comment on whether such a limitation would inhibit the transition to a value-based healthcare system. In the second alternative, CMS proposed requiring physicians to pay 15 percent of the cost of nonmonetary remuneration, as the electronic health record donation exception currently requires, which McGuireWoods lawyers addressed in part three of this series on Nov. 1, 2019.
  4. Price transparency. CMS noted it is also considering whether to include price transparency provisions in these exceptions in response to recent bipartisan actions and administration executive orders promoting price transparency. Such provisions could require physicians to alert patients that their out-of-pocket costs for items and services can vary across referral locations. CMS believed providers would likely be allowed to meet this requirement through signage or patient consent forms.
  5. VBE participants. As mentioned above, VBEs are organized groups of providers, suppliers and other actors who collaborate to achieve at least one value-based purpose. To be clear, the “enterprise” would not need to be a single legal entity; rather, it could be a network of providers or a series of contracts among providers. VBEs would need an accountable body or person responsible for financial and operational oversight, and must have a governing document describing how VBE participants intend to achieve their value-based purposes.

    Notably absent from the definition of VBE participant are certain providers and suppliers, including pharmaceutical manufacturers and suppliers of durable medical equipment, prosthetics, orthotics and supplies, as well as laboratories, pharmacy benefit managers and wholesalers; each would be unable to make payments to a physician pursuant to one of the new exceptions. CMS noted that while this formulation would effectively exclude a direct compensation arrangement between a physician and one of these provider or supplier entities, it would not prevent such providers and suppliers from participating in or contributing to a VBE (provided they are not making payments to physicians). This decision was due to CMS’ belief that these entities lack direct patient contacts and play a minimal role in patient-centered care and ongoing concerns relating to fraud and abuse. CMS sought comment on their exclusion. Expect these provider entities to advocate for their inclusion in response to the proposed rule, which CMS appeared to request by asking for feedback on how such entities could participate in value-based arrangements.

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Through these proposals, CMS sought to balance a need for innovation in the health system with the potential for improper inducements prohibited by the Stark Law, by creating three new value-based arrangement exceptions. CMS aligned its proposal with OIG’s proposed Safe Harbors relating to value-based arrangements, to be discussed in a forthcoming alert. These proposed value-based arrangement exceptions would provide greater flexibility for providers to enter into non-conventional compensation arrangements aimed at rewarding value and care coordination while attempting to provide meaningful safeguards to protect against patient and program abuse. Overall, many providers will likely support these changes, notwithstanding that providers may have desired fewer requirements to meet the proposed Stark Law exceptions.

The proposed changes are subject to a public comment period, open until Dec. 31, 2019. Please do not hesitate to contact a McGuireWoods attorney or one of the authors of this alert for more information regarding these proposed rules or for assistance in preparing a comment to them. After the open comment period, the government will review and may finalize the rule with any desired changes to reduce Stark Law burdens on providers as soon as early 2020.

Given the significance of these proposed changes, McGuireWoods plans to provide additional analysis and summaries on these proposals. To review previous guidance on these proposed rules, click on the links at the bottom of McGuireWoods’ Oct. 10, 2019, alert.