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HHS Finalizes Highly Anticipated Final Rules Amending AKS and Stark Law Regulations, Part III: Value-Based Arrangements

As promised, our team has been studying the two final rules published by the Department of Health & Human Services (HHS) (one by the Office of Inspector General (OIG) and one by the Centers for Medicare & Medicaid Services (CMS)) on December 2 that finalize important changes to the regulations implementing the Anti-Kickback Statute (AKS), the Physician Self-Referral Law (Stark Law), and the civil monetary penalty rules regarding beneficiary inducements (Beneficiary Inducements CMP).  For more information on these historic changes, check out our comparison charts – one on the AKS and the Beneficiary Inducements CMP regulations and one on the Stark Law – that offer an easy-to-read comparison between the current, proposed, and final regulations. 

This third post in our multi-part series on the rules will examine the new value-based arrangements safe harbors and Stark Law exceptions included in the final rules. (For a quick refresher on the proposed rules issued in October 2019, check out our previous blog post.)  The primary goal of these final rules is to reduce regulatory barriers and advance the health care industry’s transition to value-based care.  Value-based care, often referred to as pay-for-performance, is a payment model that offers health care providers and suppliers financial incentives to meet certain performance measures that improve quality of care or appropriately reduce costs, as opposed to traditional fee-for-service or capitated payments healthcare reimbursement.  For example, payors might withhold a certain percentage of a hospital’s reimbursement and then use the reduction to fund a value-based incentive awarding the hospital for reducing adverse events. Hardly a new concept, value-based care has been commonly used in the healthcare industry for the past couple of decades, and CMS and the OIG are just now catching up.

The rules establish three new AKS safe harbors and four new Stark Law exceptions that offer protection for remuneration exchanged between eligible participants in a qualifying value-based arrangement.  Both the safe harbors and the Stark Law exceptions are broken down by the amount of financial risk assumed under the value-based arrangement, and the more risk assumed, the more flexibility offered under the safe harbors and exceptions.  Hospitals and physician groups are the big winners under the new value-based safe harbors and exceptions, while manufacturers, pharmacy benefit managers, laboratories, and pharmacies have been largely left out, since they are ineligible for protection under the value-based safe harbors and exceptions.

Value-Based Terminology from the OIG and CMS Final Rules

Despite comments requesting clearer definitions that do not incorporate and rely on other defined terms, the agencies finalized a complicated set of definitions for the value-based terminology that is difficult to wade through, but it is necessary to do so in order to understand the safe harbors and exceptions.  Fortunately, however, the value-based definitions finalized by the OIG and CMS are aligned in nearly all respects.

A value-based arrangement is an arrangement entered into between a value-based enterprise (VBE) and one or more of its participants, or among VBE participants in the same VBE, for the provision of one or more value-based activities for a target patient population. The final rule defines a VBE participant as an individual or entity that engages in at least one value-based activity as part of a value-based enterprise, other than a patient acting in their capacity as a patient.

For purposes of the OIG’s new safe harbors, a VBE is two or more participants that: (1) are collaborating to achieve at least one value-based purpose; (2) are each a party to a value-based arrangement with the other (or at least one other participant in the same VBE); (3) have an accountable body or person responsible for financial and operational oversight of the VBE; and (4) have a governing document describing the VBE and how its participants intend to achieve the VBE’s value-based purpose(s). 

The size and structure of a VBE can vary greatly from a large network of providers and suppliers; a separate legal entity, like an Accountable Care Organization (ACO); or just two providers contracting together to form a value-based arrangement.

Finally, a value-based purpose is (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.

In the proposed rules, both the OIG and CMS sought comments on whether to exclude certain entities, such as pharmaceutical manufacturers and laboratories, from the definition of a VBE participant due to such entities’ respective roles in the health care system. Although the VBE participant definition in the OIG final rule has been modified such that it no longer excludes any particular entity types, the value-based arrangements safe harbors as finalized indeed exclude a number of stakeholders in the health care supply chain. Pharmaceutical manufacturers, distributors, and wholesalers; pharmacy benefit managers; laboratory companies; pharmacies that primarily compound drugs or primarily dispense compounded drugs; manufacturers of devices or medical supplies; entities or individuals that sell or rent durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) (other than a pharmacy or a physician, provider, or other entity that primarily furnishes services); and medical device distributors and wholesalers are all ineligible to use these new safe harbors. The OIG final rule does, however, set forth a separate pathway under the care coordination safe harbor for manufacturers of devices or medical supplies and DMEPOS to receive protection of certain digital technology arrangements, as discussed below.  CMS, on the other hand, decided not to exclude any types of entities from qualifying as a VBE participant under any of its Stark Law exceptions for value-based arrangements.

OIG Safe Harbors for Value-Based Arrangements

The OIG implemented the following three new AKS safe harbors, all designed to protect certain arrangements entered into with or by a VBE. Below is a summary of each of these safe harbors along with some key takeaways.

Care Coordination Arrangements to Improve Quality, Health Outcomes, and Efficiency Safe Harbor

The care coordination safe harbor protects in-kind remuneration exchanged between VBE participants of a VBE that assumes no or less than substantial downside financial risk, provided that the remuneration is used predominately to engage in value-based activities that are directly connected to care coordination for a target patient population.  For example, a hospital and a physician group could engage in a care coordination arrangement pursuant to which the hospital provides the physician group with care managers to ensure patients receive appropriate care post-discharge and remote monitoring technology to alert the group when a patient needs a health care intervention to prevent an unnecessary emergency room visit or hospital readmission. The VBE participants would have to establish evidence-based outcome measures against which the recipient of the in-kind remuneration would be measured.

While conceding that some parties may view the criteria for satisfying the safe harbor to be “administratively burdensome, overly complex and subjective,” the OIG nevertheless finalized a variety of conditions, including requirements for written documentation, record retention, and monitoring of outcomes measures, in order to mitigate the risk of fraud and abuse.  The safe harbor also includes a contribution requirement that calls for recipients to pay at least 15% of either the offeror’s cost of the remuneration or the fair market value of the remuneration. The writing requirements are particularly challenging: In addition to describing the value-based activities to be undertaken by the parties, the term, target patient population, and the specific outcome measure(s), the writing must also include: (i) either the fair market value of the remuneration or the offeror’s cost of the remuneration; and (ii) the percentage and amount contributed by the recipient.

Although medical device and supply manufacturers and DMEPOS suppliers are excluded from the safe harbors for value-based arrangements involving substantial downside and full financial risk, these entities are eligible for protection under the care coordination safe harbor as “limited technology participants” that exchange “digital health technology” with a VBE or VBE participant.  The term “limited technology participant” is defined as a VBE participant that exchanges “digital health technology” with another VBE participant or a VBE, and is either a DMEPOS supplier or a manufacturer of a device or medical supply, except for physician-owned distributorships (“PODs”), which the OIG carved out from the definition, citing its long-standing concern that PODs pose AKS risks.  “Digital health technology” is broadly defined as hardware, software or services that electronically capture, transmit, aggregate or analyze data and that are used for the purpose of coordinating and managing care. The exchange of remuneration by a limited technology participant must not be conditioned on any recipient’s exclusive use or minimum purchase of any item or service manufactured, distributed or sold by the limited technology participant.

To illustrate how manufacturers and DMEPOS suppliers could take advantage of this safe harbor, the OIG described an arrangement whereby a medical technology company partners with a physician practice to coordinate and manage care for hospital-discharged patients by providing the practice with digitally equipped devices that collect and transmit data in order to monitor the patients’ recovery and flag the need to intervene in real time.

Value-Based Arrangements with Substantial Downside Financial Risk Safe Harbor

In line with the proposed rule, the OIG’s final rule includes two new safe harbors addressing value-based arrangements with financial risk assumed by the VBE participants from a payor, which protect both in-kind and monetary remuneration. The value-based arrangements with substantial downside financial risk safe harbor protects payments or anything of value exchanged between a VBE and a VBE participant under a value-based arrangement if a number of criteria are met. The final rule provides three methodologies for calculating whether a VBE is assuming substantial downside financial risk, which have been modified from the methodologies identified in the proposed rule. Importantly, remuneration is not protected if it is exchanged by any of the specifically-excluded entities listed above.

To satisfy the requirements of this safe harbor, the VBE must generally have assumed (through a written contract or value-based arrangement) substantial downside financial risk from a payor for at least one year, and the VBE participant is at risk for a “meaningful share” (as defined in the final rule) of the VBE’s substantial downside financial risk. Remuneration provided by or shared among the VBE and VBE participant must be directly connected to at least one of the VBE’s value-based purposes and, with limited exceptions, must be used to engage in value-based activities directly connected to the items and services for which the VBE has assumed substantial downside financial risk. Such remuneration may not include the offer or receipt of an ownership or investment interest in an entity or any distributions related to such an interest, and it may not be exchanged or used to market items or services furnished by the VBE or a VBE participant to patients or for patient recruitment activities.

This safe harbor also requires that the value-based arrangement is set out in a signed writing specifying all material terms before or contemporaneously with beginning the value-based arrangement and any material changes thereto. The VBE or VBE participant offering remuneration may not take into account the volume or value of, or condition remuneration on, referrals of patients outside of the target patient population or business not covered by the value-based arrangement. To qualify for protection, a value-based arrangement cannot limit a VBE participant’s ability to make decisions in the best interest of its patients, or direct or restrict referrals to a particular provider, practitioner, or supplier in certain circumstances.

Notably, this safe harbor does not include any fair market value (FMV) requirements, which some number of commenters took issue with, according to the OIG’s commentary in the final rule. According to the OIG, fraud and abuse concerns that may be addressed by FMV requirements elsewhere are instead mitigated here by the downside risk-sharing requirement itself, the prohibition on taking into account the volume or value of referrals outside of the target patient population, and other safeguards built into the safe harbor.

Entities wanting to protect their arrangements under this safe harbor will also be subject to record retention requirements outlined in the final rule. VBEs and VBE participants utilizing the safe harbor will need to make compliance-related records available to HHS for at least six years.

Value-Based Arrangements With Full Financial Risk Safe Harbor

This safe harbor protects monetary or in-kind remuneration from a VBE to a VBE participant, provided that the VBE assumes full financial responsibility for the costs of all items and services covered by a payor for each patient in the target population for a term of one year and is paid prospectively.  This safe harbor is designed to afford the most flexibility.  But there is a very limited number of providers that currently assume the level of risk required by this safe harbor, and so this safe harbor may have limited utility. 

Stark Law Exceptions for Value-Based Arrangements

CMS implemented three new exceptions to the Stark Law for value-based arrangements that apply based on the level of risk assumed by the VBE or physician, and one new exception that makes all three value-based arrangements applicable to indirect compensation arrangements that include a value-based arrangement to which the physician or physician organization is a direct party.  Broadly-speaking, the Stark Law exceptions for value-based arrangements align with the OIG’s new value-based safe harbors with some intentional differences that allow the AKS to “provide ‘backstop’ protection for Federal health programs and beneficiaries against abusive arrangements.”

For all of these exceptions, CMS did not include the typical Stark Law requirements that compensation be set in advance, consistent with fair market value, and not determined in any manner that takes into account the volume or value of a physicians’ referrals or other business generated by the physician for the entity.  However, these exceptions do require that the compensation arrangement be commercial reasonable. Note that CMS also added a definition for commercially reasonable – a key Stark Law term not previously defined.

The three value-based arrangements have several requirements in common.  Under all three, the remuneration provided to the recipients must be for or result from value-based activities undertaken by the physician for patients in a target patient population; the remuneration cannot be provided as an inducement to reduce or limit medically necessary items or services to patients; and records for the methodology for determining and the actual amount or remuneration paid under the value-based arrangement must be maintained for a period of at least six years.

For all three exceptions, remuneration cannot be conditioned on referrals of patients who are not part of the target patient population. VBEs can, however, require physicians direct referrals for patients within the target patient population to particular providers or suppliers, in which case the arrangements must comply with the existing directed referral requirement that applies to the exception for employment arrangements, personal services arrangements, or managed care contracts that restrict or direct physician referrals. Under the directed referral requirement, any requirement for physicians to make referrals to a particular provider or supplier must be set out in a signed writing and the requirement cannot apply if the patient expresses a preference for a different provider or supplier or the referral is not in the patient’s best interests.

Below is a summary of each exception with some key takeaways.

Full Financial Risk Exception

This exception applies 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. Because the risk of ordering unnecessary services or steering patients to higher-costs sites of service are low when a VBE bears full financial responsibility for patient care, this exception includes fewer technical requirements compared to the other value-based exceptions. Also, VBE participants can rely on this exception during the “pre-risk period” which is 12 months prior to the VBE assuming the financial risk. While the VBE is required to retain records related to the methodology for determining remuneration and the actual amount of remuneration paid under the value-based arrangement, there is no documentation requirements under this exception.

Meaningful Downside Financial Risk to the Physician Exception

This exception applies to 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.  While the proposed rule set “meaningful downside financial risk” to mean that the physician is responsible to pay or forgo no less than 25% of the total value of the remuneration the physician receives under the value-based arrangement, CMS recognized that most physicians would be reluctant to put as much as 25% of their compensation at risk and, therefore, lowered the threshold to 10%.

This exception imposes more onerous technical requirements as opposed to the full financial risk exception.  The nature and extent of the physician’s financial risk must be set forth in writing and the methodology for determining the amount of the remuneration must be set in advance.  An example of an arrangement that could qualify under this exception is a hospital and a physician could enter into a value-based arrangement under which the total remuneration paid to the physician is $300,000, but $30,000 is withheld by the hospital and payable only upon successfully completing the value-based activities called for under the arrangement.

Exception for Value-Based Arrangements Regardless of the Level of Risk Undertaken by the Physician

This exception applies to value-based arrangements, regardless of the level of risk undertaken by the physician.  Because the exception potentially applies to arrangements where potentially no financial risk has been assumed by the physician, CMS included a number of additional requirements to satisfy this exception compared to the exceptions for full financial risk and meaningful downside financial risk, in an effort to guard against patient and program abuse.

In particular, CMS finalized a number of monitoring requirements, ripe with potential pitfalls resulting in Stark Law noncompliance. Parties seeking to utilize the exception must monitor the value-based arrangement at least annually to determine whether the parties have furnished the value-based activities required under the arrangement, and whether continuation of the value-based activities is expected to further the value-based purpose(s) of the VBE. If the monitoring indicates that a value-based activity is not expected to further the value-based purpose(s) of the VBE, the parties must terminate the value-based arrangement or modify it to terminate the ineffective value-based activity. In addition, during the same timeframes, either the VBE or one of the parties to the arrangement must monitor progress toward achieving the outcome measure(s), if any, that the physician is being assessed.  If the monitoring indicates that an outcome measure is unattainable during the remainder of the arrangement, the parties must terminate or replace the unattainable outcome measure within 90 days.  

Exception for Indirect Compensation Arrangements that Include a Value-Based Arrangement

CMS finalized its proposal to make value-based exceptions applicable to indirect compensation arrangements that include a value-based arrangement to which the physician or physician organization is a direct party.


Stay tuned for three more installments in this blog series covering (i) a new safe harbor and corresponding exception for cybersecurity technology and changes to the existing safe harbor and exception for electron health records; (ii) new Stark Law exceptions and changes to modifications to existing Stark Law exceptions and safe harbors; and (iii) changes to fundamental Stark Law terminology.

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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.