The Office of Inspector General (OIG) and the Centers for Medicare & Medicaid Services (CMS) jointly published final rules that expand upon and modify regulatory safe harbors and exceptions to the Anti-Kickback Statute and the Ethics in Patient Referrals Act (the Stark law), respectively. This article will address each rule and focus on the exceptions and safe harbors applicable to value-based arrangements.

Stark Law Final Rule: Value-Based Arrangements

The Stark law prohibits physicians from referring patients to receive certain designated health services (DHS) payable by Medicare from entities with which the physician or an immediate family member has a financial relationship, unless an exception applies. When the Stark law was enacted, Medicare reimbursed health care services primarily on a fee-for-service basis. Since the passing of the Affordable Care Act in 2010, CMS has placed greater emphasis on the importance of reimbursing for value, not volume.

Through the Stark law final rule, CMS is encouraging these value-based payment systems by introducing a new three-tiered value-based arrangements exception. If the physician and the health care entity comply with one of these three exceptions, then the value-based arrangement, and subsequent claims to Medicare for DHS, will not violate the Stark law.

CMS defined four terms that are essential to understanding and applying any of the three exceptions: value-based enterprise, value-based arrangement, value-based purpose, and value-based activity.

Rather than repeat the lengthy definitions that CMS provides, an example using each of these terms is helpful. One could imagine a hospital-physician compensation arrangement under which the hospital incentivized a physician group to improve the quality of care for patients who undergo lower extremity joint replacement procedures, with a goal of reducing readmissions, by paying the physician group for each post-discharge meeting one of its physicians attends. The value-based enterprise (VBE) consists of the hospital and the physician group (whether the hospital and the physician group form a distinct legal entity or, instead, create an informal affiliation). The value-based arrangement is the compensation arrangement between the hospital and the physician group. The value-based purpose is to improve the quality of care to lower extremity joint replacement patients. The value-based activity is participation in post-discharge meetings.

The three tiers of the value-based arrangements exception, which provide greater flexibility and impose fewer requirements when the parties to the value-based arrangement take on more financial risk, are as follows: (1) value-based arrangements where the VBE has assumed full financial risk (i.e., the VBE is financially responsible on a prospective basis for the cost of all patient care items and services covered by the applicable payor for patients in the target patient population); (2) value-based arrangements where the physician assumes meaningful downside financial risk (i.e., the physician is responsible to repay or forgo no less than 10% of the total value of the remuneration the physician receives under the value-based arrangement); and (3) value-based arrangements where certain requirements are met.

The elements applicable to each tier of the exception are as follows:

Returning to our hospital-physician group arrangement above, the VBE could consider establishing a value based arrangement where the VBE assumed full financial risk from the payor with respect to the target patient population. The value based arrangement and the payments to the physician group would need to be structured and implemented, to comply with the requirements in the full financial risk exception. If successful, the remuneration paid by the hospital to the physician group for any value-based activity (e.g. the hospital’s payment to the physician group for each post-discharge meeting a physician attends) would not violate the Stark Law.

The Anti-Kickback Statute Final Rule: Value-Based Arrangements

The Anti-Kickback Statute prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or reward, among other things, the referral of business reimbursable under any of the federal health care programs. While failure to fit within a safe harbor does not mean that an arrangement violates the Anti-Kickback Statute, if an arrangement meets each requirement of an applicable safe harbor, the arrangement will not be subject to sanctions under the Anti-Kickback Statute.

Like CMS, the OIG created three value-based safe harbors, with each safe harbor providing a sliding scale of flexibility based on the amount of financial risk undertaken by the participants (with greater financial risk providing greater flexibility). All three safe harbors protect in-kind (i.e. non-monetary) remuneration, but monetary remuneration is only protected under the substantial downside financial risk and full financial risk safe harbors (a key difference from the Stark law exception, which protects both monetary and non-monetary remuneration under all 3 exceptions, regardless of the amount of financial risk undertaken by the participants).

The definitions for value-based arrangement, value-based enterprise, value-based activity, and value-based purpose in the Anti-Kickback Statute final rule are substantially similar to the definitions in the Stark law final rule. Again, an example may be helpful. Let us assume a hospital and a skilled nursing facility (SNF) have entered into a value-based arrangement under which the hospital will provide care coordinators to the SNF. The value-based enterprise consists of the hospital and the SNF. The value-based activity is the provision of care coordinators. The value-based purpose is to help patients in the target patient population navigate the transition from the hospital to the SNF, ultimately resulting in fewer readmissions to acute care.

The three value-based safe harbors are as follows:

• Care Coordination: Arrangements where the VBE participants have little or no financial risk. This safe harbor does not apply to payments to VBE participants but only to in-kind remuneration offered to the VBE participant. The recipient of the in-kind remuneration must pay at least 15% of the offeror’s costs, using any reasonable accounting methodology or the fair market value of the in-kind remuneration. Additionally, the VBE is required to review the arrangement at least annually to determine whether the arrangement is achieving its stated outcomes (if the arrangement is not advancing its stated goals or is adversely affecting patient care,e t the VBE must terminathe arrangement within 60 days of making such determination).
• Substantial Downside Risk: Value-based arrangements with substantial downside risk, meaning the VBE has assumed substantial downside financial risk from a payor and the VBE participant “meaningfully shares” in the VBE’s downside financial risk (which is different than the meaningful downside risk exception under the Stark law that requires the individual physician to assume the downside financial risk). Substantial downside risk is financial risk equal to at least 30% of any loss as determined by comparing costs to historical expenditures (or 20% with respect to clinical episodes of care), and to “meaningfully share” means the VBE participant: (1) assumes two-sided risk for at least 5% of the losses and savings realized by the VBE; or (2) is subject to full or partially capitated payment from the VBE. This safe harbor applies only to remuneration that is directly connected to the VBE’s value-based purposes and that is primarily used to engage in value-based activities directly connected to the items or services to which the VBE has assumed downside financial risk.
• Full Risk: Value-based arrangements with full financial risk, meaning the VBE is at risk on a prospective basis for the cost of all health care items, devices, supplies, and services covered by the applicable payor for each patient in the target patient population for a term of at least one year.

The elements applicable to each safe harbor are as follows:

A key distinction between the care coordination safe harbor and the other two value-based arrangement safe harbors (and a key distinction between the care coordination safe harbor and the equivalent exception under the Stark law) is the limited application to in-kind contributions. If we return to the value-based arrangement example above, in which a hospital provides a care coordinator to a SNF, and we assume the VBE has not accepted any risk, the hospital is limited to providing the care coordinator – the hospital would not be permitted to provide money to the SNF to employ or provide a care coordinator.

The Anti-Kickback Statute final rule also includes the following additional value-based related safe harbors:

1. The patient engagement and support safe harbor

The patient engagement and support safe harbor protects patient engagement tools or supports furnished directly by a VBE participant to patients in the VBE’s target population, if such tools or supports are directly connected to specified goals, including: (1) adherence to treatment/drug regimens; (2) adherence to a follow-up care plan; (3) disease/health condition management; (4) improving health outcomes; and (5) ensuring patient safety.

The safe harbor applies only to in-kind items, goods, or services. It does not apply to cash or cash equivalents. Additionally, the tool or support must be recommended by the patient’s licensed health care professional, the aggregate retail value of the tool or support may not be greater than $500 on an annual basis, and the tool or support may not be made available in a manner that takes into account the type of insurance coverage of the patient.

2. The CMS-sponsored innovative payment models safe harbor

Historically, the OIG has issued waivers for certain “CMS-sponsored model” payment arrangements established through the CMS Innovation Center and under the Medicare Shared Savings Program. In an effort to simplify compliance with the Anti-Kickback Statute for CMS-sponsored model participants, the OIG introduced this safe harbor, which effectively permits CMS to grant Anti-Kickback Statute safe harbor protection when defining the particular CMS-sponsored model.

3. The outcomes-based payment safe harbor

The OIG created a new outcomes-based payments safe harbor to protect payments, outside of the value-based arrangement context, from a principal to an agent for the achievement of one or more legitimate outcome measures that were selected based on clinical evidence or credible medical support to improve quality, reduce costs to payors, or both. The payment methodology for outcomes-based payments must be consistent with fair market value, commercially reasonable, and cannot take into account the volume or value of referrals.

In the preamble to the proposed rule, the OIG listed a number of examples of outcomes-based payment arrangements, including shared savings payments, shared losses payments, gainsharing payments, pay-for-performance payments, or episodic or bundled payments.

The OIG declined to extend the definition of outcomes-based payments to arrangements that relate solely to achievement of internal cost savings for the principal. For example, an arrangement between a hospital and a physician group, where the parties share financial risk or gain only with respect to items or services reimbursed to the hospital under the Medicare prospective payment system for acute inpatient hospitals would not be protected under the safe harbor, since the savings under the arrangement would not accrue to the payor. If instead, a hospital and a group of physicians and post-acute care providers agree collectively to be paid by a payor for an episode of care (e.g., inpatient stay and 90 days post-discharge) and share among themselves the savings or losses generated against a benchmark, the arrangement would be protected.

The final rules published in the Federal Register are available here (the Stark law final rule) and here (the Anti-Kickback Statute final rule). With one exception, the final rules went into effect on January 19, 2021.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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