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HHS Proposes Sweeping Changes to AKS and Stark Law, Part 1: Value-Based Arrangements

As we reported last week, the Department of Health & Human Services (HHS) recently issued two proposed rules (one by the Office of Inspector General (OIG) and one by the Centers for Medicare & Medicaid Services (CMS)) that, if finalized, would implement sweeping changes to the Anti-Kickback Statute (AKS) and the Physician Self-Referral Law (commonly known as the Stark Law). One articulated aim of these proposed rules is to ease restrictions on and eliminate obstacles to value-based contracting, which the Trump administration supports. As Congress and Administration officials have been evaluating the future of value-based contracting, health care providers and payors have been clamoring for relief under existing fraud and abuse laws that they argue hinder value-based arrangements that could facilitate improved quality of care as well as lower costs. 

The proposed rules seek to reduce barriers to value-based arrangements in several ways, including: (1) creating new safe harbors to the AKS; (2) adding new exceptions to the Stark Law; and (3) retooling existing AKS safe harbors, along with the Civil Monetary Penalties rules regarding beneficiary inducements. Below are key takeaways from both the OIG’s and the CMS’s proposed rules as they relate to the new value-based arrangements safe harbors and Stark Law exceptions. Given the scope of the proposed amendments to the existing safe harbors and the CMP rules, we will cover those proposals in a separate, forthcoming blog post. 

Proposed New AKS Safe Harbors for Value-Based Arrangements

The OIG’s proposed rule would establish three new AKS safe harbors to address various care coordination and value-based care and payment arrangements. With these proposed safe harbors comes new value-based terminology. The safe harbors are generally designed to protect certain arrangements entered into with or by a “value-based enterprise,” or VBE. VBE is broadly defined to capture any number of network arrangements where the participants have agreed to collaborate for value-based purposes. To qualify for safe harbor protection, a VBE would need to have two or more participants that are parties to a value-based arrangement, as well as an accountable body (e.g., board of directors) or person that is responsible for oversight of the VBE. It would be required to adopt a governing document describing the VBE and how its participants will achieve its value-based purposes.

"Value-based” is used generally in the proposed rule as a qualifier to denote value created through improved care coordination or health outcomes, lower costs or reduced cost growth for patients and payors, and improved efficiencies in care delivery. If a “value-based arrangement” satisfied all conditions of an applicable proposed safe harbor, remuneration exchanged pursuant to that arrangement would be protected. The proposed rule defines a “value-based arrangement” as “an arrangement for the provision of at least one value-based activity for a target patient population between or among: (A) the value-based enterprise and one or more of its VBE participants; or (B) VBE participants in the same value-based enterprise.”

Importantly, not all entities involved in the provision of health care services or goods would be eligible to become VBE participants. There are a number of notable exceptions to the types of entities that could make use of the protections afforded by the three proposed safe harbors. A VBE participant is defined in the proposed rule as an individual or entity that engages in at least one value-based activity as part of a value-based enterprise. It could be, for example, a hospital, physician practice, payor, or social services organization. However, the proposed rule expressly excludes the following types of entities from the definition of "VBE participant": pharmaceutical manufacturers; manufacturers, distributors, or suppliers of durable medical equipment, prosthetics, orthotics, or supplies (DMEPOS); and laboratories. The OIG explains that it views these entities as playing different roles in the delivery of health care goods and services that raise special fraud and abuse concerns. For similar reasons, it is also considering excluding pharmacies, pharmacy benefits managers (PBMs), wholesalers, and distributors from the definition of VBE participant. The OIG seeks comments on whether the proposed exclusions are appropriate and acknowledges that it may need to address safe harbor protections for value-based arrangements by the excluded entities in a future rulemaking.

Proposed safe harbor for care coordination arrangements to improve quality, health outcomes, and efficiency

The first of the three proposed safe harbors would protect certain care coordination arrangements where the participating individuals or entities are not assuming financial risk. Protection would be limited to in-kind remuneration exchanged between qualifying VBE participants with value-based arrangements that meet all of the safe harbor’s requirements. Because this proposed safe harbor does not require the participants to assume downside financial risk, the OIG has built in a variety of conditions and safeguards to mitigate the risk of fraud and abuse. For example, the value-based arrangement would need to be commercially reasonable, with the terms of the arrangement set out in writing. The offeror of the remuneration could not take into account the volume or value of patient referrals or business generated that is not covered under the value-based arrangement. VBE participants would need to establish specific, evidence-based outcome measures against which the recipient of remuneration would be measured, and the remuneration exchanged would need to be used primarily to engage in value-based activities related to care coordination and management for the target patient population. The conditions for this safe harbor also include a requirement that the recipient of the in-kind remuneration pay at least 15% of the offeror’s cost for the remuneration.

Monitoring, assessment, and reporting requirements would also apply in order for the value-based arrangement to receive protection. It is worth noting that the VBE participants would be required to terminate their value-based arrangement if the required monitoring and assessment activities resulted in a determination by the VBE that the arrangement: (1) is unlikely to further the coordination and management of care for the target patient population; (2) has resulted in material deficiencies in quality of care; or (3) is unlikely to achieve the evidence-based, valid outcome measure(s).

This care coordination safe harbor would not protect ownership or investments interests in the VBE, or remuneration funded by or resulting from contributions of third parties who are not in the VBE. Additionally, to be protected, the remuneration cannot induce limitations on, or reductions of, medically necessary items or services furnished to any patient.

Proposed safe harbor for value-based arrangements with substantial downside financial risk

Unlike the proposed care coordination arrangements safe harbor above, the value-based arrangements with substantial downside financial risk safe harbor would protect both in-kind and monetary remuneration. As its name indicates, this proposed safe harbor is designed to provide more flexibility for arrangements where the VBE assumes substantial downside financial risk and the VBE participants meaningfully share in that risk. The proposed rule sets out several methodologies for determining whether a VBE is at substantial downside financial risk, along with criteria for what constitutes “meaningfully sharing” in that risk. For example, “meaningfully sharing” could include (subject to certain exceptions) an arrangement that provides for a partial or full capitated payment to the VBE participant.  

Remuneration would only be protected under this proposed safe harbor if: (1) the VBE participant receiving the remuneration primarily uses it to engage in value-based activities that are directly connected to the items and services for which the VBE is at substantial downside financial risk; and (2) the remuneration is directly connected to one or more of the VBE’s value-based purposes. Like the first safe harbor above, the remuneration could not encourage limitations on, or reductions of, medically necessary items or services furnished to patients.

Ownership or investment interests in the VBE or related distributions would not be protected under this proposed safe harbor. Remuneration from, or generated by contributions from, parties outside the VBE would also be excluded from protection.   

Proposed safe harbor for value-based arrangements with full financial risk

Of the three new proposed safe harbors, the value-based arrangements with full financial risk safe harbor is designed to afford the most flexibility to VBEs and VBE participants. It would protect monetary or in-kind remuneration from a VBE to a VBE participant, but not remuneration between or among VBE participants who are part of the same VBE or remuneration from a VBE participant to downstream contractors. To qualify for protection under this proposed safe harbor, a VBE would need to: (1) assume financial responsibility for the cost of all items and services covered by a payor for each patient in the target population; and (2) be paid prospectively by the payor.

A VBE at full financial risk could be, for example, a VBE that contracts with a Medicaid managed care organization, where the VBE is paid a fixed PMPM amount that covers the cost of all items and services covered by Medicaid and furnished to the target patient population. Arrangements whereby the VBE receives a partial capitated payment would not be protected. Additionally, an arrangement would not qualify for protection if the VBE participant could seek additional payment from a payor for items or services furnished to the target patient population.

As with the other two proposed value-based safe harbors, this safe harbor would not protect ownership or investment interests or remuneration from third parties outside the VBE. However, OIG is considering for the final rule whether to protect ownership or investment interests relating to VBEs that must contract with a payor on behalf of VBE participants for purposes of value-based arrangements with full financial risk.

Proposed New Stark Law Definitions and Exceptions

The value based portion of the proposed rule issued by CMS largely mirrors the OIG’s proposed safe-harbors and corresponding definitions and creates three new exceptions to the physician self-referral law. The exceptions would apply to value-based arrangements between a VBE and one or more of its VBE participants or between parties in the same VBE. It is also notable that CMS is considering following the OIG’s lead and excluding the following providers, suppliers, and other persons from the definition of “VBE participant”: laboratories; pharmaceutical manufacturers; manufacturers, suppliers, and distributors of DMEPOS; pharmacy benefit managers; wholesalers; and distributors.

Only arrangements reasonably designed to achieve at least one value-based purpose related to a target patient population may qualify as a value-based arrangement under the proposed exceptions. However, the proposed exceptions would not protect payments for referrals or any other actions or business unrelated to the target patient population.

CMS believes that arrangements where a physician is at meaningful financial risk for achieving quality and performance based goals contain “certain inherent protections against program or patient abuse.” As a result, similar to the OIG proposal, value-based arrangements that assume greater risk are given increased regulatory flexibility.

Proposed exception for full financial risk

The full financial risk exception would apply to value-based arrangements between VBE participants in a VBE that has assumed “full financial risk” for the cost of all patient care items and services covered by the applicable payor for each patient in the target patient population during the entire duration of the value-based arrangement. The financial risk must be prospective, which prohibits any additional payment to compensate the VBE for costs incurred in providing items and services to the target patient population.

However, any remuneration cannot serve as an inducement to reduce or limit medically necessary items or services to any patient. Moreover, the exception would only protect value-based arrangements where remuneration is not conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement.

In the proposed rule, CMS outlines a number of ways a VBE may assume legal obligations, which include, but are not limited, to the following options: (i) VBE participants could each sign a contract for the VBE to assume full financial risk from a payor; (ii) VBE participants could have contractual arrangements among themselves that assign risk jointly and severally; or (iii) VBE participants could also vest the authority to bind all VBE participants in a designated individual who contracts for the assumption of full financial risk on behalf of the VBE and the VBE participants.

Proposed exception for meaningful downside financial risk

This proposed exception would protect remuneration paid under a value-based arrangement where the physician is at “meaningful downside financial risk” for failure to achieve the value-based purpose of the VBE for the entire term of the value-based arrangement. Under the proposed rule “meaningful downside financial risk” means that the physician is responsible to pay a minimum of 25 percent of the value of the remuneration the physician receives under the value-based arrangement.

In addition to the applicable requirements set forth in the exception for full financial risk, the nature and extent of the physician’s financial risk must be set forth in writing. In addition, the methodology used to determine the amount of the remuneration must be set in advance prior to the furnishing of the items or services for which the remuneration is provided.

Proposed exception for value-based arrangements

The proposed exception for value-based arrangements would protect compensation arrangements that qualify as value-based arrangements, regardless of the level of risk undertaken by the VBE or any of the VBE participants. However, given that the exception could potentially protect arrangements where neither party has assumed any financial risk, CMS has stated that there is a need for safeguards in addition to those found under the exception for meaningful downside financial risk in order to guard against patient and program abuse.

As a result, the value-based arrangement is required to be set forth in a writing and signed by the parties, which includes a description of: (i) the value-based activities; (ii) how the value-based activities are expected to further the value-based purpose of the VBE; (iii) the target patient population for the arrangement; (iv) the type or nature of the remuneration; (v) the methodology used to determine the amount of the remuneration; and (vi) the performance or quality standards against which the recipient of the remuneration will be measured, if any.

In addition, CMS is considering whether to prohibit non-monetary remuneration as well as remuneration that is conditioned on the volume or value of referrals of any patients or the volume or value of any other business generated by the physician under the exception. Further, CMS notes that the exception would not protect a “side” arrangement between two VBE participants that is unrelated to the value-based purposes of the VBE, even if such arrangement serves a value-based purpose.

Indirect Compensation Arrangements

The prohibitions found under the Stark Law apply to compensation arrangements involving direct remuneration as well as indirect remuneration. Under the current regulations, if an indirect compensation arrangement exists, the only exception that would protect the compensation arrangement is the “indirect compensation exception.” CMS anticipates that an “unbroken chain of financial relationships” that includes a value-based arrangement could form an “indirect compensation arrangement” under the Stark Law. However, an indirect compensation arrangement that includes a value-based arrangement may not satisfy the requirements of the indirect compensation exception because the compensation paid to a physician may take into account the volume or value of referrals or other business generated by the physician or the compensation may not meet fair market value standards.

Under the proposed rule, when the value-based arrangement is the link in the chain closest to the physician, where the physician is a direct party to the value-based arrangement, the indirect compensation arrangement would qualify as a value-based arrangement for purposes of applying the proposed value-based exceptions. Under this proposal, parties would determine if an indirect compensation arrangement exists and, if it does, determine whether the compensation arrangement to which the physician is a direct party qualifies as a value-based arrangement. If so, the exceptions proposed at 42 C.F.R. § 411.357(aa) for value-based arrangements would be applicable to protect indirect compensation arrangements.

As an alternative option, CMS is proposing to create a new definition referred to as an “indirect value-based arrangement” and specify that the exceptions proposed would be available to protect the arrangement. Under such an approach, an indirect value-based arrangement would exist if: (1) between the physician and the entity there exists an unbroken chain of any number of persons that have financial relationships between them; (2) the financial relationship between the physician and the person with whom he or she is directly linked is a value-based arrangement; and (3) the entity has actual knowledge of the value-based arrangement. If an unbroken chain of financial relationships between a physician and an entity qualifies as an “indirect value-based arrangement,” the three value-based exceptions be applicable.

Key Takeaways

  • No Protection for Arrangements with Pharmaceutical Manufacturers, Labs, and DMEPOS Suppliers

As discussed above, the OIG’s VBE participant exclusions leave pharmaceutical manufacturers, laboratories and DMEPOS Suppliers out in the cold. However, HHS may address value-based arrangements with pharmaceutical manufacturers in future rulemaking, and HHS Secretary Alex Azar has publicly stated that the OIG is working on protections for value-based outcome payments for pharmaceutical products. The OIG’s request for additional comments means that pharmacies, device manufacturers, PBMs, and wholesalers also may risk exclusion. We would expect that representatives and stakeholders for these industries will provide vigorous comments on the final rule addressing these exclusions and proposed exclusions. 

  • Technical Requirements and Monitoring and Oversight Responsibilities

While the proposed rules represent welcome relief and guidance to further the adoption of value-based arrangements, the detailed compliance requirements, monitoring, and oversight required by the rules may present challenges for providers. Many of the requirements and protections imposed by the OIG may prove to be difficult to implement in practice, and we expect that many stakeholder comments will focus on a need for increased flexibility.


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Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.
Rachel Yount is a Mintz attorney who focuses her practice on health care industry transactions. Her clients include hospitals, health systems and plans, physician organizations, and pharmacy benefit managers.