New Stark Exceptions Mark Shift to Value-Based Care

On November 20, 2020, the Department of Health and Human Services (HHS) Centers for Medicare and Medicaid Services (CMS) issued the final rule “Modernizing and Clarifying the Physician Self-Referral Regulations” (Final Rule). HHS Deputy Secretary Eric Hargan described the new rules as “historic reforms, and come as part of the regulatory sprint to coordinated care …“ The new rules give great flexibility for providers to participate in value-based payment (VBP) and care delivery models, and to provide coordinated care for patients. The Final Rule is aimed at reducing regulatory barriers to care coordination and accelerating the transformation of the healthcare delivery system into one that rewards value instead of volume. HHS describes the new Stark exceptions to encourage four key improvements in healthcare delivery:

• Help patients to better understand their treatment plans and empower decision making
• Encourage provider alignment along an end-to-end entire care continuum
• Improve incentives for providers to collaborate and encourage patient involvement
• Encourage information sharing among providers, while protecting patients’ access to data

HHS notes that in 1989, when the Stark laws were first enacted, the healthcare delivery system was almost entirely fee-for-service, and rewarded care models that were tied to utilization rather than outcomes. The original Stark rules were designed to prevent physicians self-dealing and ordering unnecessary services. With the passage of the Affordable Care Act in 2008, CMS introduced several new care delivery and payment models designed to promote better patient outcomes and reduced cost. The programs, including the Medicare Shared Savings Program and the Next Generation ACO model, are designed to promote accountability, coordinate services by providers under Parts A and B of Medicare and encourage investment in infrastructure and care redesign. Many in the healthcare industry view the existing Stark and Anti-Kickback regulations as inhibiting beneficial arrangements that could advance the transition to value-based care and coordination of care among providers under both government and commercial insurance programs.

The three new Stark exceptions are designed to protect VBP arrangements between providers at varying degrees of risk assumption: full risk, material risk, and no risk/VBP arrangements. As one would imagine, the full risk value-based arrangement exception has far fewer regulatory requirements, or what CMS refers to as “traditional” requirements, than do the material risk and no risk exceptions. Key features of each of these new value-based arrangement exceptions are described below.

Protection for Commercial Arrangements

The new value-based arrangement exceptions share multiple commonalities with the Fraud and Abuse Waivers (Waivers) which have been issued by CMS and the OIG in connection with several value-based and shared savings programs, such as the Medicare Shared Savings Program (MSSP), the Comprehensive Joint Replacement model (CJR), the Next Generation ACO model and several others. The Waivers give broad protection to financial arrangements between and among participants in many CMS and CMMI payment models. The Waivers applicable to the MSSP include a pre-participation waiver, a participation waiver, a shared savings waiver and others. Unlike the Waivers, which apply only to arrangements under CMS and CMMI models, the new value-based arrangement exceptions will provide protection for qualified financial arrangements between participants in both government and commercial VBP arrangements. It is important to note the value-based arrangement exceptions do not apply to financial arrangements between payers and providers, but rather to the financial relationships between and among value-based arrangement participants and VBP entities (further described below). Thus, participants in commercial value VBP arrangements which implicated the Stark Law (i.e., because the target payor population included beneficiaries for whom Medicare was primary) had to fit within one of the other Stark Law exceptions, e.g., the shared risk exception. The Stark Law can be implicated in commercial arrangements applicable to beneficiaries who have both commercial and Medicare coverage.

The new value-based arrangement exceptions do not replace the existing Waivers, but rather are another potential safe haven for both Medicare-sponsored and commercially sponsored VBP arrangements. Given the complexity of some of the requirements under the new VBP exceptions, it may make sense for some VBP participants under Medicare-sponsored VBP arrangements to continue to seek participation under one of the Waivers, and/or under the new CMS-Sponsored Program OIG safe harbor discussed separately. For participants involved in commercial VBP arrangements that include Medicare beneficiaries, the parties will have to ensure compliance with one of the three new VBP exceptions.

New Exceptions – Generally

The three new VBP exceptions fall under the “compensation arrangement” set of exceptions to Stark. The new exceptions are designed to address a broad range of the VBPs, from those involving full risk, to those involving no risk. Obviously, the more risk that a provider or provider entity assumes from the payor, the less likely the provider is to engage in activities that have the potential to result in higher utilization and higher costs of care to CMS. As a result, the full risk exception has far fewer requirements than the meaningful risk and value-based arrangement exceptions.

Like the Waivers, the exceptions generally follow the evolutionary track of a VBP arrangement or accountable care arrangement as it prepares to participate, and ultimately becomes, operational in downside risk arrangements. For instance, the pre-participation Waiver protects Medicare ACO participants from prosecution for a multitude of types of financial relationships as long as the activity is reasonably related to the MSSP purposes. Likewise, the so-called “transition” phase of the full risk exception is targeted at preparatory processes engaged in by VBP participants as they prepare to launch the VBP arrangement. This could cover such things as exchanging remuneration for a common EMR platform, or for paying the party to which the physician refers Medicare beneficiaries for designated health services (“DHS”), care coordination or management fees. As mentioned above, there generally are not Stark violation concerns with respect to financial arrangements between providers and payors unless the payor is also a provider of DHS.

The Definitions

As mentioned above, the value-based arrangement exceptions apply regardless of whether the arrangement relates to care to Medicare beneficiaries, non-Medicare patients or a combination of both. In the Final Rule, CMS finalized the definitions which are the foundation of the actual exceptions themselves. That is, in order to qualify for an exception, the value-based arrangement must first meet all the definitional requirements of the applicable exception. Together, the definitions and exceptions create the requirements needed for an arrangement to be protected under one of the three exceptions.

The “value-based activity” and “value-based purpose” definitions are at the core of these exceptions:

• Value-based activity is defined as: “any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise: (1) the provision of an item or service; (2) the taking of an action; or (3) refraining from taking action.” The definition of value-based activity requires that the activity be “reasonably designed” to achieve at least one value-based purpose of the value-based enterprise. The Final Rule provides the following example to illustrate: “If a value-based purpose of the enterprise is to coordinate and manage the care of patients who undergo lower extremity joint replacement procedures, a value-based activity might require routine post discharge meetings between the hospital and the physician primarily responsible for the care of the patient following discharge. The value-based activity - that is, the physician’s participation in the post discharge meetings would be reasonably designed to achieve the enterprise value-based purpose.” CMS notes the parties must have a “good-faith belief” that the activity would lead to achievement of one or more value-based purposes of the value-based enterprise, but notes that success in achieving the value-based purpose is not required in order for the arrangement to meet the exception. If the parties become aware that any item, service, action or inaction is not furthering the value-based purpose of the value-based enterprise, it will cease to qualify as a value-based activity, and the parties may need to amend or terminate their agreement as further described below.
• Value-based purpose is defined as: “(1) coordinating and managing the care of a target population; (2) improving the quality of care for a target population; (3) appropriately reducing costs to, or growth in expenditures of, payors without reducing the quality of care for a target population; or (4) transitioning from healthcare 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 Commentary, CMS notes one of the four core goals which comprise the value-based purpose definition must anchor the activities underlying every compensation arrangement that qualifies as a value-based arrangement to which the value-based payment exceptions apply. CMS reiterates in the Final Rule its belief that “transitioning” from fee-for-service reimbursement to value-based reimbursement and delivery is an activity that should be considered as a value-based purpose. CMS defines “transitioning” as “undergoing the process of moving from fee-for-service volume-based system, to furnishing patient care on a value-based delivery and payment system … It would include things during the startup/preparatory phase of the value-based enterprise, such as establishing infrastructure, preparing to accept risk, informal agreements moving toward formal legal structures, and preparing VBE participants to furnish services on a VBP basis.”

Each of the remaining definitions for the value-based arrangement exceptions tie back to value-based activity and value-based purpose(s). These include:

• Value-based arrangement: “An arrangement for the provision of at least (1) value-based activity for a target population between or among: the value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise.” CMS notes in the commentary that the definition of a value-based arrangement relates to this compensation arrangement between a physician and an entity that participate in the same value-based enterprise. It does not cover compensation arrangements between the payor and a physician. Moreover, the arrangement must be between a physician (or immediate family member) and an entity to which the physician makes referrals for designated health services. CMS gives an example of an arrangement between a physician group practice and a hospital pursuant to which the physicians agree to adopt the hospital’s care protocols for a period of two years and are paid remuneration to implement those protocols.
• Value-based enterprise(“VBE”): Two or more VBE participants: (1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other, or at least one other VBE participant in the same value-based enterprise. A value-based enterprise must also have an accountable body or person responsible for the financial and operational oversight of the value-based enterprise, and it must have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purposes. As stated in the Proposed Rule, CMS indicates that an “enterprise” may be “… a distinct legal entity, such as an ACO, or clinically integrated network with a formal governing body operating agreement and bylaws, or it may be an informal arrangement between two providers where the written documentation recording the arrangement serves as the governing document that describes the enterprise and how the parties intend to achieve its value-based purposes. Regardless, a value-based enterprise is essentially a network of participants that have agreed to collaborate with regard to a target population to put the patient at the center of care through coordination, increased efficiencies in the delivery of care, and improved outcomes for patients.” The definition is focused on the activities or functions of the enterprise, not on its legal structure.
• VBE participant: An individual or entity that engages in at least one value-based activity as part of a value-based enterprise.
• Target patient population: An identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the value-based enterprises’ value-based purposes. CMS affirms in the Final Rule that “legitimate and verifiable criteria” may include medical or health characteristics (e.g., patients undergoing knee replacement surgery or patients with new diabetes diagnoses), geographic characteristics (e.g., patients in an identified county or set of zip codes), payor status (e.g., all patients with a particular type of insurance plan) or other defining characteristics. CMS reiterates in the Final Rule that selecting a target population consisting of only lucrative or adherent patients (cherry-picking) or avoiding costly or noncompliant patients (lemon-dropping) would not be permissible under most circumstances, and CMS would not consider those selection criteria to be legitimate even if they were verifiable. In order to be compliant with the legitimate and verifiable standard, CMS indicates parties to VBP arrangements still need to ensure the payor’s attribution model complies with the value-based BP exceptions requirements. Thus, a VBP arrangement where the payor determines attribution would not meet the requirements of the exceptions unless the value-based enterprise or VBE participant(s) collaborate with the payor to ensure that they comply.

THE EXCEPTIONS (Full text of the exceptions is available online.)

As noted previously, in order to qualify for protection under any of the three new Value-Based Arrangement exceptions, the compensation arrangement must meet both the definitional criteria of Value-Based Arrangements discussed above and all requirements of the applicable exception discussed below. The exceptions apply regardless of whether the compensation arrangement relates to care furnished to Medicare beneficiaries, non-Medicare patients or a combination of both. Again, it is important to note none of the value-based exceptions protect the financial arrangement between the payor and value-based enterprise (unless the payor is also the DHS entity to which a physician referral is being made), but rather, they protect financial arrangements between and among VBE participants where Medicare patients are being referred for DHS. (The existing Stark exception for Risk Sharing arrangements applies to risk-based compensation arrangements between managed care organizations or IPAs and referring physicians.)

Full Financial Risk Exception

The full financial risk exception applies to value-based arrangements between VBE participants in a value-based enterprise 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 for a specified period of time; that is, the value-based enterprise is financially responsible (or is contractually obligated to be financially responsible within the twelve months following the commencement date of the value-based arrangement) on a prospective basis for the cost of such patient care items and services.

CMS does not prescribe specific methods through which a value-based enterprise must assume full financial risk, but instead lists capitation payments, global budgets, and percent of premium arrangements as possible examples. Neither does CMS prescribe the legal manner in which a value-based enterprise can assume risk. For instance, contractual arrangements where an intermediary entity such as an IPA, CIN or PHO assumes full risk from the payor would all be permissible, as would arrangements where the VBE participants apportion risk between themselves directly, whether jointly or severally. It is not necessary for the VBE participants themselves to be at risk, as long as full risk is assumed at the value-based enterprise level for the target population. Further, CMS stated that financial arrangements involving common catastrophic risk mitigation techniques such as risk corridors, stop-loss insurance and reinsurance would still qualify for protection, as would full risk arrangements that include a shared savings, gainsharing and/or quality incentive component. Carve-outs of services, however, are not permitted.

Insofar as assuming full risk “for all patient care items and services” is concerned, the Final Rule requires that the at-risk party is financially responsible for all patient care items and services covered by the applicable payor. With respect to a target patient population comprised of Medicare beneficiaries, CMS interprets this to mean all Part A and Part B covered services, and for a commercial target population, to mean all items and services covered under the patient’s insurance policy. Thus, value-based arrangements where the value-based enterprise only assumes partial risk or is only at risk for a specified sub-set of covered services would not qualify for this exception. However, those types of arrangements may qualify under one of the other value-based exceptions.

CMS indicates it expanded the window of the “transition period” within which the value-based enterprise must be at full risk from six months (per the Proposed Rule) to 12 months, in recognition of the time and resources necessary for providers to convert from volume-based methods of care delivery and payment, to value-based, and to ensure sufficient time to build the necessary infrastructure. CMS also notes that the 12-month “transition period” corresponds with the MSSP Fraud & Abuse Pre-Participation Waiver. After the initial 12-month transition period, the value-based enterprise must be all full risk for the “entire duration” of the value-based arrangement. This means the value-based arrangement cannot ‘convert’ to something other than a full-risk arrangement at any other time during the term of the arrangement. Otherwise, it would need to qualify under one of the other value-based exceptions (or some other Stark exception) in order to be protected.

In addition to the foregoing, the full financial risk exception shares the following requirements in common with the other two new value-based arrangement exceptions, which CMS said it would interpret consistently across all three exceptions:

• The remuneration must “be for, or result from” value-based activities undertaken by the physician recipient VBE participant. CMS indicates that this does not require a “one-to-one” correlation between the activity and the remuneration, but remuneration for activities such as marketing or sales would not be protected.
• The remuneration to the physician cannot be an inducement to reduce or limit medically necessary services to any target population or non-target population patient.
• If the remuneration paid to a physician is conditioned on the physician’s referrals of patients to a particular provider, practitioner or supplier, any such requirement must be set out in writing and signed by the parties. In addition, such a referral requirement cannot apply in instances where the patient expresses a preference for a different provider, practitioner, or supplier; the patient’s insurer determines the provider, practitioner, or supplier; or the referral is not in the patient’s best medical interests in the physician’s judgment.
• The 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.
• Records of the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least six years and made available to the Secretary upon request.

Physician at Meaningful Risk Exception

Even though large segments of the healthcare industry have made significant advances in moving toward a value-based delivery and payment system, CMS acknowledged in the Final Rule Commentary that many physicians and providers are not yet prepared (or willing) to take on financial responsibility for the total cost of care of target populations. However, CMS received multiple comments from industry stakeholders that many providers are at least considering participation in alternate payment models that provide for potential financial gain in exchange for taking on some level of downside risk. CMS states it “… believes that financial risk tied to the achievement, or failure to achieve, value-based purposes incents the type of provider behavior needed to transform the healthcare delivery system from volume-based to value-based.”

In recognition of this, CMS proposed (and now finalized) a value-based arrangement exception that would protect remuneration paid to a physician where the physician is at “meaningful” downside risk for failure to achieve the value-based purpose(s) of a value-based enterprise. This exception “… covers individual compensation arrangements that qualify as value-based arrangements between an entity and a physician that are VBE participants in the same value-based enterprise, regardless of whether the value-based enterprise or the entity has assumed financial risk from a payor.” It protects value-based arrangements where the physician has assumed financial risk from the entity that is a party to the arrangement, and where such risk is tied to the achievement of the value-based purpose(s) of the value-based enterprise of which the entity and the physician are VBE participants.”

In the Proposed Rule, CMS suggested that “meaningful” risk should be set at 25% of the physician’s compensation under the arrangement, and this would be consistent with the level of risk required under the physician incentive plan rules applicable to managed Medicare and Medicaid managed care plans. However, citing — among other reasons — a 2018 Deloitte Survey of U.S. physicians, CMS finalized the level of “meaningful” risk at 10%. CMS states, “we believe the assumption by a physician of 10% downside risk is sufficient to curb the influences of traditional FFS [fee-for-service] payment systems.”

To meet the exception, the physician must be obligated to “repay or forgo” at least 10% of the value of the remuneration payable to the physician under the arrangement. CMS indicates that withholds, repayment mechanisms and incentive payments would all be appropriate methods of obligating a physician to “repay or forgo” the at-risk remuneration. Like the full financial risk exception, the meaningful financial risk exception also requires the physician to be at meaningful risk for the entire duration of the value-based arrangement.

CMS states that because the exception applies to both monetary and non-monetary remuneration (e.g., subsidies for infrastructure costs), it is the value of the remuneration that is determinative, not the actual dollar amount. CMS cites as a compliant example a value-based arrangement between an entity and a physician where $20,000 of the physician’s $100,000 total compensation is withheld pending the physician’s successful completion of the value-based activities under the arrangement.

As additional safeguards against potential program abuse, the Meaningful Risk exception includes these more “traditional” requirements, which are present in other current Stark exceptions:

• A description of the nature and extent of the physician’s downside risk is set forth in writing.
• The methodology used to determine the amount of the remuneration is set in advance of the undertaking of value-based activities for which the remuneration is paid.

Value-Based Arrangements Exception (No-Risk Exception)

The third new value-based exception applies to value-based arrangements regardless of the level of risk assumed by the value-based enterprise or physician. In fact, this exception protects value-based arrangements that may have no risk component at all. CMS indicated the need for “… bold reforms to the physician self-referral regulations …”, and that such an exception “… would encourage more physicians to engage in care coordination activities now, while they continue toward entering into two-sided risk share arrangements.” However, CMS further indicated that, because this exception would apply to arrangements “… where neither party, but especially not the physician, has undertaken any downside financial risk … safeguards beyond those included in the meaningful risk exception are necessary to protect against program or patient abuse.” In that regard, the following additional requirements apply to the value-based arrangement exception:

• Outcome Measures. Although CMS is not requiring outcome measures to be used in order to gain protection under this exception, if they are used, they must be objective, measurable and may be applied only on a prospective basis. For example, if the parties to the value-based arrangement determine midway through a measurement period that the measures they have selected are not as informative as anticipated, they may not apply any changes to the measures retrospectively. CMS defines “outcome measures” as “benchmarks” which quantify either: improvements in or maintenance of quality of patient care; or reductions in the costs or reduction in the growth of expenditures of payors while maintaining or improving quality of care.
• Monitoring. The parties to a value-based arrangement must monitor the value-based arrangement at least once annually (or once during a term shorter than a year) for two indicators:
  • Have the parties been performing the value-based activities, and whether and how continuation of the activities is expected to further the value-based purpose(s) of the enterprise
  • Progress toward attainment of the outcome measure(s), if any, against which the recipient of the remuneration is being assessed

If, as a result of required monitoring, the parties determine:

With regard to the activities furthering the purpose(s): that any value-based activity is ineffective in furthering the value-based enterprises purpose(s), they must either: terminate the entire value-based arrangement within 30 days of the completion of monitoring; or, eliminate or replace the ineffective activity(ies) within 90 days of completion of monitoring.

With regard to outcome measure(s) being attainable during the remaining term: that the outcome measures are unattainable during the remaining term, the parties must eliminate or replace the unattainable measure within 90 days after completion of monitoring.

If the parties take the pertinent action described above within the applicable time frames, then the activity and/or outcome measure is deemed to be “reasonably designed to achieve at least one value-based purpose of the enterprise” for the entirety of the period during which it was undertaken, i.e., the arrangement will not have failed to satisfy the requirements of this exception.

In addition to requirements discussed above, the following requirements must also be met under the Value-Based Arrangements exception:

• The arrangement is set forth in writing and signed by the parties, and the writing includes a description of:
  • The value-based activities to be initiated under the arrangement
  • How the value-based activities are expected to further the value-based purpose(s) of the value-based enterprise
  • The target patient population for the arrangement
  • The type or nature of the remuneration
  • The methodology used to determine the remuneration
  • The outcome measures against which the recipient of the remuneration will be assessed, if any
• The outcome measures against which the recipient will be assessed, if any, are objective and measurable, and any changes to the outcome measures must be made prospectively and set forth in writing.
• The arrangement is commercially reasonable. Given the increased flexibility in the Final Rule’s definition of “commercially reasonable,” this requirement may be more easily met than previously, particularly in that CMS indicated some arrangements could be considered commercially reasonable even though the arrangement may not be profitable for one or more of the parties.

CMS did not finalize a requirement with respect to non-monetary remuneration that would have required the recipient to contribute at least 15% of the donor’s cost, though that remains a requirement under the exception for EHR items and services. Neither did it finalize a requirement that outcome measures be designed to drive meaningful improvements in physician performance, quality, health outcomes or efficiencies in care delivery.

Indirect Compensation Arrangements to Which the Value-Based Arrangement Exceptions Apply

In its Proposed Rule, CMS explored the idea of allowing indirect compensation arrangements, in which the link in the chain closest to the physician is a value-based arrangement, to qualify as a “value-based arrangement” for purposes of applying the various exceptions described above. In allowing such indirect compensation arrangements to qualify as a “value-based arrangement,” physicians who participate in indirect compensation arrangements would not be in violation of the Stark Law so long as the value-based arrangements would qualify for protection under the new exceptions described above.

Final Rule expressed that “in order to fully support the transition to a value-based health care delivery and payment system,” CMS felt it would be important to make the various exceptions described above applicable to certain indirect compensation arrangements that include a value-based arrangement in the unbroken chain of financial relationships, and therefore finalized their proposal to do so. Thus, the various exceptions described above are available to protect a physician’s referrals to an entity when an indirect compensation arrangement includes a value-based arrangement to which the physician is a direct party. In order to analyze a potential indirect compensation arrangement and determine that a physician’s referrals to an entity with which the physician has an indirect compensation arrangement do not violate the Stark Law, the parties would first determine if an indirect compensation arrangement exists, and if so, determine whether the compensation arrangement to which the physician is a direct party qualifies as a value-based arrangement.

It is important to note the link closest to the physician cannot be an ownership interest but must instead be a compensation arrangement that meets the definition of a value-based arrangement. Additionally, CMS did not place any restrictions on the identity of the parties to the financial relationships in the unbroken chain of financial relationships between an entity and a physician.

Price Transparency

In the Proposed Rule, continuing its objectives to improve price transparency, CMS considered whether to add to all proposed value-based arrangement exceptions a requirement that physicians provide notice or have a policy requiring physicians to alert patients that their out-of-pocket costs for items and services referred by their physicians may vary based on the site where the services are furnished and based on the type of insurance they have.

In the Final Rule, CMS stated it received comments from both health care consumers and entities that provide health care services, and that nearly all commenters were united in their support that patients have access to clear, accurate cost-sharing information. However, CMS did not finalize any price transparency provisions in the Final Rule.

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