HHS Proposes Sweeping Changes to AKS and Stark Law, Part 3: Personal Services and Management Contracts, Outcomes-Based Payments, and Warranties

Mintz - Health Care Viewpoints

Mintz - Health Care Viewpoints

This post is the third installment of our blog series on recent proposed rules from the Department of Health & Human Services (HHS) that, if finalized, would implement major changes to the Anti-Kickback Statute (AKS) and the Physician Self-Referral Law (commonly known as the Stark Law).  Below is an in-depth summary of the Office of Inspector General’s (OIG) proposed modifications to the safe harbors for personal services and management contracts, which includes a proposed new provision protecting outcomes-based payments.  We also cover the OIG’s proposed modifications to the warranties safe harbor.

Personal Services and Management Contracts

The OIG’s proposed rule includes changes that, if implemented, would more closely align this safe harbor with the personal service arrangements exception to the Stark Law and alleviate some of the difficulties associated with satisfying this safe harbor. 

  • Aggregate Compensation.  The OIG proposes to loosen the requirement that aggregate compensation itself must be set in advance to require only that the methodology for determining the compensation be set in advance.  This change would allow an arrangement to meet the safe harbor even if the compensation is set on a per-unit or hourly basis, which are compensation mechanisms that technically do not comply with the current safe harbor.  To mitigate against the risk of parties periodically adjusting the compensation as a reward for referrals, the compensation methodology must be set in advance. Additionally, the compensation must still be fair market value, commercially reasonable, and not take into account the volume or value of referrals or other business generated between the parties.  
  • Periodic, Sporadic, or Part-Time Services.  The OIG proposes to eliminate the requirement that, if an agreement provides for services on a periodic, sporadic, or part-time basis, the contract must specify the schedule, length, and the exact charge for such intervals.  The OIG has had a long-standing concern that part-time agreements are vulnerable to abuse, as they can be easily modified based on changing referral patterns.  However, the OIG believes that existing safeguards (i.e., term of one year, compensation set at fair market value and commercially reasonable) would provide sufficient safeguards.

Outcomes-Based Payment Arrangements

In response to new payment models such as shared savings, episodic payments, gainsharing, and pay-for-performance, the OIG proposes a new section to the personal services and management contracts safe harbor that would protect certain outcomes-based payments.  Outcomes-based payments would be defined as “payments from a principal to an agent that: (i) reward the agent for improving (or maintaining improvement in) patient or population health by achieving one or more outcome measures that effectively and efficiently coordinate care across care settings; or (ii) achieve one or more outcome measures that appropriately reduce payor costs while improving, or maintaining the improved, quality of care for patients.” 

As with the value-based safe harbors, the OIG proposes to exclude any outcomes-based payments, directly or indirectly, by a pharmaceutical manufacturer; DMEPOS manufacturer, distributor, or supplier; or a laboratory.  The OIG is also considering excluding pharmacies, pharmacy benefit managers, wholesalers, and distributors.  Alternatively, the OIG may limit this safe harbor to value-based enterprise participants only.  “Value-based enterprise” is broadly defined as an arrangement where the participants have agreed to collaborate for value-based purposes, which includes coordinating and improving the quality of care of a target patient population and appropriately reducing the costs to payors without reducing the quality of care for a target patient population.  For more information on HHS’s proposed changes to reduce barriers to value-based arrangements, please see our first installment to this blog series.

The outcomes-based payment provision also would not protect any payment that relates solely to internal cost savings for the principal.  For example, it would not protect an outcomes-based payment arrangement between a hospital and physician group, where the parties share financial risk only with respect to items or services for which the hospital receives reimbursement.  However, an outcomes-based payment arrangement that involves a hospital and a physician group sharing financial risk across care settings would be protected.

The OIG is soliciting comments on whether it should further define the specific types of payments arrangements that would qualify, such as shared savings payments, gainsharing payments, and episodic or bundled payments.

The proposed protection for outcomes-based payments also contains a number of proposed conditions:

  • Foster Goals of Improving Quality of Patient Care, Reducing Costs, or Both.  Protection would extend only to outcomes-based payment arrangements that foster the goals of improving quality of patient care, or that appropriately and materially reduce costs to, or growth in expenditures of, payors while improving, or maintaining the improved quality of care for patients, or both.
  • Evidence-Based Outcome Measures.  Outcomes-based payment arrangements must include one or more specific evidence-based, valid outcome measures that the agent would need to satisfy to receive the payment.  These outcome measures would need to be measurable and valid.  Benchmarks for the outcome measures would be required to be reset periodically, and the OIG is seeking comments on the appropriate timeframe to require resetting of benchmarks (e.g. every one, three, or five years).
  • Methodology for Determining the Compensation.  The OIG proposes conditions for the outcomes-based payment safe harbor similar to the conditions set forth in the existing personal services and management contracts safe harbor.  Under the proposed rule, the methodology for determining the aggregate compensation must be set in advance, commercially reasonable, consistent with fair market value, and not determined in a manner that directly takes into account the volume or value of any referrals or business otherwise generated between the parties.  The OIG recognizes that there are not yet industry standards to determine fair market value for many outcomes-based payment arrangements, and that parties may need to establish payment methodologies that at least indirectly take into account the volume or value of referrals.
  • Written Agreement.  The outcomes-based payments safe harbor would require a written agreement with a term of at least one year and signed by the parties in advance of or contemporaneous with the commencement of the arrangement.  The written agreement must include the outcome measures, the evidence-based data or information relied upon to select the outcome measures, and the schedule for the parties to regularly monitor the outcome measures.


The warranties safe harbor protects the exchanges of value pursuant to a warranty agreement "provided by a manufacturer or supplier of an item to a buyer (such as a health care provider or beneficiary)," as long as certain conditions are met.  The proposed rule includes the following changes to the safe harbor:

  • Bundled Warranties. The OIG proposes to expand the safe harbor to protect warranty arrangements that pertain to bundled items and services rather than just warranties for a single item.  In the proposed rule, the OIG discusses two relevant advisory opinions, 01-08 and 18-10, which involved warranty programs offered by manufacturers of wound care products.  The warranty program in advisory opinion 01-08 covered items and services, and the warranty program in advisory opinion 18-10 covered a bundle of three items.  Although the OIG ultimately determined that it would not impose sanctions for either proposed arrangement, the OIG also found that neither warranty program technically satisfied the warranty safe harbor because it does not protect warranties of bundled items or a combination of items or services.  If the OIG’s proposal to expand the safe harbor to protect bundled items and service is implemented, arrangements like the ones proposed in advisory opinions 01-08 and 18-19 would qualify for protection.
  • Conditions on Bundled Warranties.  In order for bundled warranties to qualify for protection under the safe harbor, all federally reimbursable items or services subject to a bundled warranty arrangement must be reimbursed by the same federal health care program and in the same payment to qualify for the safe harbor.  (This factor was key in the OIG’s decision not to impose sanctions in advisory opinion 18-10; the bundled items were not separately reimbursable.)  The safe harbor would not protect warranties covering only services; services must be tied to one or more items.  The proposal does not protect free or reduced-price items or services that a seller provides as part of a warranty or ancillary to a warranty.  For example, OIG notes that the provision of medication adherence services for free or below fair market value would implicate the AKS.  Specifically noting its concern about drug manufacturers' offers of medication adherence services, the OIG is considering a safeguard that would prohibit direct patient outreach by a seller offering a warranty but that would allow the seller to pay an independent intermediary to perform the patient outreach so long as the intermediary is not paid based on the volume or value of referrals.  
  • Capped Amount of Warranty Remedies.  The OIG proposes to limit the amount of remuneration a manufacturer or supplier may pay any individual (other than a beneficiary) or entity for any medical, surgical, or hospital expense incurred by a beneficiary to the cost of the items and services subject to the warranty.
  • Prohibition on Exclusivity and Minimum-Purchase Requirements.  Manufacturers and suppliers could not condition bundled warranties on the exclusive use of one or more items or services or impose minimum-purchase requirements of any items or services.  Manufacturers will likely want to comment on this prohibition and explain the legitimate need for minimum purchase requirements under certain circumstances in order to adequately assess outcome measures.
  • Revisions to the Definition of Warranty.  The OIG proposes to revise the definition to clarify that the warranties safe harbor applies to FDA-regulated drugs and devices.  This definitional change confirms that the warranty safe harbor can protect guarantees of clinical outcomes, in addition to product defects, if the other safe harbor conditions are met.

Despite the proposed expansion of the warranties safe harbor, the OIG continues to impose strict requirements for compliance and remains concerned about the fraud and abuse risk associated with broad manufacturer warranty arrangements.

For more information please see our high-level overview of key provisions in both proposed rules, Part 1 on value-based arrangements, and Part 2 on cybersecurity technology and related services and electronic health records.  Stay tuned for more installments of this blog series, which will cover (i) a new safe harbor for patient support tools and modifications to existing safe harbors related to beneficiary inducement, and (ii) clarification and guidance on key Stark Law terminology and requirements.

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