Federal Agencies Propose Waivers and Modifications to Facilitate ACOs

04 May 2011 Publication
Authors: C. Frederick Geilfuss II Maria E. Gonzalez Knavel Chris E. Rossman

Legal News Alert: Health Care

On March 31, 2011, the Centers for Medicare and Medicaid Services (CMS) published a Proposed Rule to implement Section 3022 of the Patient Protection and Affordable Care Act (ACA), which requires the Secretary of the Department of Health and Human Services to establish a Medicare Shared Savings Program (SSP). Under the Proposed Rule, eligible providers, hospitals, and suppliers that participate in the SSP by creating or joining accountable care organizations (ACOs) can continue to receive traditional Medicare fee-for-service payments under Medicare Parts A and B, and be eligible for additional payments based upon specified quality and savings requirements.

The development and operation of ACOs implicate a number of laws and legal principles. There has been widespread concern that such laws will impede development of ACOs, require ACOs to follow a narrow and burdensome path, and place irreducible risk on providers even if they follow the narrow path. Moreover, as ACOs move the payment system from rewarding more services to rewarding more efficient and higher quality care, the purposes underlying certain of those laws are affected in a very different manner.

In recognition of these factors, the ACA authorized CMS to consider and implement waivers to the Stark Law (42 U.S.C. § 1395nn), the   Anti-Kickback Statute (42 U.S.C. § 1320a 7b(b)), and the Civil Monetary Penalty Law (42 U.S.C. § 1320a-7a(a)(7)) (CMP Law) (which makes illegal hospital payments to reduce or limit health care services). In addition, the agencies that regulate the antitrust laws, the FTC and the Antitrust Division of the Department of Justice (DOJ), and the IRS, which regulates tax-exempt entities, have recognized that there must be better guidance and more flexibility for ACOs to form and realize their desired benefits.

Simultaneously with issuance by CMS of the Proposed Rule, CMS and the Office of Inspector General of the Department of Health and Human Services (OIG) issued a proposed rule covering waivers of the application of the Stark Law, the   Anti-Kickback Statute, and the CMP Law (collectively referred to as the “Fraud and Abuse Laws”) to the SSP; the FTC and DOJ issued a proposed Policy seeking comments concerning the application of the antitrust laws to ACOs; and the IRS issued a Notice concerning tax-exempt entity participation in the SSP.

CMS/OIG Proposed Rule on Waivers of Fraud and Abuse Laws

In the Proposed Waiver Rule, CMS and OIG focus their waiver authority solely on how the ACO distributes the shared savings received by an ACO from CMS in the SSP. They propose to provide waivers to ACOs that have entered an agreement with CMS to participate in the SSP and to ACOs and ACO participants who comply with the shared savings agreement between the ACO and CMS and all requirements related to ACO participation. An ACO that does not have such an agreement with CMS will not receive the benefit of the proposed waivers.

Stark Law. CMS’ proposed waiver under the Stark Law (which is applicable to financial relationships involving physicians or physicians’ family member involvement) would apply to any distribution by the ACO to physicians of shared savings received by the ACO from CMS:

  • To or among ACO physician participants that were ACO physician participants during the year in which the shared savings were earned
  • For activities necessary for and directly related to the ACO’s participation in and operation under the SSP

The waiver would allow the ACO to distribute the shared savings in any manner the ACO determines appropriate. Without the waiver, ACOs would have to comply with an existing Stark Law exception and/or await finalization of the July 2008 Stark proposed exception, which proposed a new pay-for-performance and pay-for-quality exception to the Stark Law.

CMS and OIG have not proposed waivers with respect to other financial relationships regulated by the Stark Law. All other financial relationships would have to come within with an exception to the Stark Law.

Anti-Kickback Statute. With respect to the Anti-Kickback Statute, CMS and OIG propose to waive application of the statute for:

  • Distributions of shared savings received by an ACO from CMS under the SSP (a) to or among ACO participants or ACO providers/suppliers during the year in which the shared savings were earned; or (b) for activities necessary for and directly related to the ACO’s participation in the operation under the SSP
  • Any financial relationship between or among the ACO and ACO participants necessary for and directly related to the ACO; participation in and operation under the SSP that implicates the Stark Law and fully complies with an exception to the Stark law

Other financial relationships would need to fit in an Anti-Kickback Statute safe harbor or otherwise comply with the Anti-Kickback Statute.

Without this exercise of the waiver authority, distributions of shared savings would have to comply with criteria similar to those approved by OIG in Gainsharing Advisory Opinions that have been issued or otherwise be compliant with a safe harbor or the   Anti-Kickback Statute.

CMP Law. CMS and the OIG propose to waive application of the CMP Law with respect to distributions of shared savings received by an ACO from CMS under the SSP for distributions from a hospital to a physician, as long as:

  • The payments are not made knowingly to induce the physician to reduce or limit medically necessary items or services
  • The hospital and physician are ACO participants during the year in which the shared savings were earned by the ACO

The waiver would also apply to distributions among the ACO and its ACO participants necessary for and directly related to the ACO’s participation in and operations under the SSP that implicates the Stark Law and fully complies with an exception to the Stark law.

The addition of language that the payments be made “knowingly” to induce a limitation on “medically necessary” items or services would be new to the CMP Law and additional elements to constitute a violation. This language suggests a limited waiver and may still provide for some limits on how the shared savings are distributed. The CMP Law also requires that the hospital to be the entity making the payment for there to be a violation.

Duration of Waivers. The Proposed Rule provides that waivers will apply to distributions of shared savings earned during the term of the ACO’s agreement with CMS even if the distribution occurs after the expiration of the agreement.

Discussion of Proposed Waivers

The proposed waivers provide broad flexibility for ACOs that earn shared savings from CMS to distribute such shared savings among ACO participants. Without such waivers, ACOs would need to comply with the requirements suggested by OIG under the various Gainsharing Advisory Opinions issued under the Anti-Kickback Statute and the CMP Law, or with respect to the Stark Law, meet the requirements of a Stark Law exception, or await finalization of the proposed Stark Law exception for payment for performance or quality. Existing Stark Law exceptions would require that payments distributed (a) be set in advance, (b) be at fair market value, and (c) not be reflective of the volume or value of the designated health services. The new waivers, if they become effective, will allow greater flexibility and significantly reduce the risk to providers in distributing shared savings.

There are a number of potential financial relationships that are not addressed in the Proposed Rule and thus there will be no new protection for them. For example, the waivers relate only to sharing the savings received from CMS under the SSP. As such, the waivers have no application to any distribution by an ACO of any payment received from any third-party payer or from any other source (including any Part A or Part B payments).

Limiting the waiver to distributions of shared savings precludes any utilization of Part A or Part B payments to help further the purposes of the ACO. Moreover, since the shared savings will not be known until the conclusion of the shared savings period, an ACO that advances any payment to its participants for ACO infrastructure and/or to better participate in the ACO will do so at its own risk, as there is no certainty that shared savings will be realized.

In the Proposed Waiver Rule, the CMS and OIG solicit comments on the need for broader waivers. In particular, they seek comments as to whether waivers should be provided:

  • For other financial arrangements related to operating the ACO and achieving savings
  • For financial arrangements related to financing the ACO and achieving ACO goals
  • For distributions received from private payers
  • In other areas where a safe harbor or exception may not be sufficient
  • With respect to the prohibition on inducements offered to Medicare beneficiaries
  • With respect to authority granted to activities through the Center for Medicare and Medicaid Innovation

Proposed Statement of Antitrust Enforcement Policy Regarding ACOs

The FTC and the Antitrust Division of the DOJ (collectively, the “Agencies”) are proposing an enforcement policy, the Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (Proposed Policy) regarding the application of the antitrust laws to health care collaborations among independent providers that seek to participate in an ACO under the SSP. In issuing the Proposed Policy, the Agencies recognize that ACOs may generate opportunities for health care providers to be innovative in Medicare and commercial markets and claim the benefit of higher quality and more efficient care.

The notice of the Proposed Policy (issued with a solicitation of public comments) applies to collaboration of independent providers formed after March 23, 2010 (the date of enactment of the ACA) that seek to participate or are approved to participate in the SSP.

Rule of Reason Treatment for CMS-Approved ACOs. In the Proposed Policy, the Agencies propose that the rule of reason analysis, as opposed to per se illegality, will apply to collaborations between or among entities that are part of an ACO approved for participation in the SSP. The rule of reason treatment will also apply in commercial markets as long as the ACO uses the same governance and leadership structure and the same clinical and administrative policies that it uses to qualify for and participate in the SSP. The rule of reason treatment applies for the duration of an ACO’s participation in the SSP.

The Agencies made the decision to include this provision in the Proposed Policy based on their analysis that the requirements of the SSP are generally consistent with the type and degree of financial and clinical integration typically seen in collaborations deemed to pass muster under the antitrust laws.

Safety Zones for ACOs That Meet CMS Requirements. The Proposed Policy establishes safety zones for ACOs where it can be demonstrated that the characteristics of the market and participants are such that the pro-competitive benefits of the collaboration are likely to outweigh anti-competitive effects, using the rubric of a rule of reason analysis. Absent extraordinary circumstances, the Agencies will not challenge a collaboration that falls within a safety zone.

The Proposed Policy safety zones focus on the market share of common services attributable to each independent provider participating in an ACO, with the market defined as the independent provider’s Primary Service Area (PSA). To fall within the safety zone, independent ACO participants that provide the same service (for example, independent urologists) must have a combined share of 30 percent or less of each common service in each independent provider’s PSA (with the combined share calculated for each provider’s PSA). The PSA for the relevant service is defined as “the lowest number of contiguous postal ZIP codes in which the [ACO participant] draws at least 75 percent of its patients.” Hospitals will have separate PSAs for each Major Diagnostic Category (MDC) of each independent hospital that participates in an ACO.

Hospitals and ambulatory surgery centers that participate in any ACO must be non-exclusive to the ACO to fall within the safety zone, regardless of the entity’s share in the PSA. For physicians and other providers, it does not matter if the physician or provider is exclusive or non-exclusive.

Rural and Dominant Providers in an ACO. In recognition that in rural areas, the percentages may easily be exceeded, an ACO may include one physician per specialty from each rural county even if that inclusion causes the 30 percent threshold to be exceeded. Likewise, rural hospitals may be included on a non-exclusive basis without affecting the ACO’s eligibility for the safety zone. Also, if an ACO includes a dominant provider that itself has a share of more than 50 percent in its PSA for any service, it may participate in the ACO as long as no other participant in the ACO furnishes that service, and provided that the dominant provider is non-exclusive to the ACO and the ACO does not require a commercial payer to contract or deal exclusively with the ACO.

Mandatory Antitrust Review for ACOs Exceeding 50-Percent PSA Share. An ACO that does not qualify for the rural exception and that has a 50-percent share of any common service with two or more ACO participants in the same PSA may not participate in the SSP unless it has obtained written approval from either of the Agencies. The written approval must be submitted to CMS as part of the ACO application process. This mandatory approval of either the FTC or DOJ (the Agencies themselves decide which of them will perform the final review) is considered critical to limit anticompetitive harm.

The Agencies have stated that they will provide expedited review of ACOs that exceed the 50-percent PSA share threshold. The Agencies will respond within 90 days of receipt of all the required materials and data. An ACO seeking expedited review must submit the following materials:

  • The shared savings application submitted to CMS and all supporting documents
  • Documents and agreements relating to the ability of ACO participants to compete with the ACO and any incentive to encourage ACO participants to contract with CMS or commercial payers through the ACO
  • Documents discussing the ACO’s business strategies or plans to compete and the likely impact on prices, cost, or quality of any service provided by the ACO
  • Documents showing the formation of any ACO or ACO participant that was formed or otherwise affiliated with the ACO after March 23, 2010
  • Information showing:
    • The ACO’s PSA share calculations for each common service (including shares for commercial payers where those shares differ from PSA share calculations based on Medicare data (for example for pediatricians or obstetricians who will not have a Medicare PSA share))
    • Restrictions that prevent ACO participants from obtaining information regarding prices that other ACO participants charge commercial payers that do not contract through the ACO
    • The identity of the five largest commercial health plans or payers for the ACO’s services
    • The identity of other existing or proposed ACOs known to operate in any PSA in which the ACO will provide services

PSA Share Below the 50-Percent Mandatory Review Threshold and Above the 30-Percent Safety Zone. For an ACO that has a PSA share in any common service below the 50-percent mandatory review threshold but above the 30-percent safety zone, the Agencies have identified five types of conduct that ACOs can implement to avoid the likelihood of an antitrust investigation or scrutiny. They are as follows:

  • Preventing or discouraging commercial payers from directing or incentivizing patients to choose ACO participants through anti-steering, guaranteed inclusion, product participation, price parity, or similar contract provision
  • Tying sales of the ACO’s service to the commercial payer’s purchase of other services from providers outside the ACO (including providers affiliated with an ACO participant)
  • Contracting with ACO physician specialists, hospitals, ACOs, or other providers (but not primary care providers) on an exclusive basis
  • Restricting a commercial payer’s ability to make available to its health plan enrollees cost, quantity, efficiency, and performance information if the information is similar to such measures used in the SSP
  • Sharing among the ACO’s provider participants competitively sensitive pricing or data used to set prices

ACOs in these categories also may seek expedited review from the Agencies similar to that available for the mandatory review.

Comments. The Agencies have asked for public comments on the Proposed Policy. Comments must be submitted by May 31, 2011.

IRS Notice on ACOs

In Notice 2011-20, the IRS has issued guidance regarding the participation of tax-exempt organizations in the SSP through ACOs that involve private parties, including persons that might be considered insiders with respect to the tax-exempt organization. Tax-exempt organizations must first determine if the ACO is structured so as to avoid private inurement or private benefit. The IRS has said that it will not consider a tax-exempt organization’s participation in an ACO to result in private inurement or private benefit if:

  • There is a written agreement negotiated at arm’s length and entered into in advance that sets forth the terms of the tax-exempt organization’s participation in the SSP through the ACO.
  • CMS has accepted the ACO into (and has not terminated the ACO from) the SSP.
  • The tax-exempt organization’s share of the economic benefits from the ACO is proportional to the benefits or contributions the tax-exempt organization provides to the ACO. In other words, the tax-exempt organization’s ownership interest in the ACO must be proportional and equal in value to its capital contributions to the ACO. In addition, all returns of capital, allocations, and distributions also are made in proportion to the ownership interests.
  • The tax-exempt organization’s share of losses from the ACO cannot exceed the share of ACO economic benefits to which the tax-exempt organization is entitled.
  • All arrangements between the ACO and the ACO’s participants, and by the ACO, the ACO’s participants, and any other parties, must be at fair market rates and terms.

Tax-exempt organizations also must determine if their share of the shared savings payments through the ACO is subject to unrelated business income tax (UBIT). In the Notice, the IRS has said that, absent inurement or impermissible private benefit, and so long as the ACO meets all of the eligibility requirements established by CMS for participation in the SSP, the Medicare SSP payments will be considered arising from the performance of the tax-exempt organization’s charitable purpose of lessening the burdens of government and will not be subject to UBIT.

The IRS has asked for comments regarding what additional guidance is needed to facilitate participation by tax-exempt organizations in the SSP through ACOs. For example, the IRS has asked for comments on whether non-SSP activities through the ACO will jeopardize the organization’s charitable status or result in UBIT. Comments must be submitted by May 31, 2011.


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

C. Frederick Geilfuss II
Milwaukee, Wisconsin
414.297.5650
fgeilfuss@foley.com

Maria E. Gonzalez Knavel
Milwaukee, Wisconsin
414.297.5649
mgonzalezknavel@foley.com

Maureen F. Kwiecinski
Milwaukee, Wisconsin
414.319.7325
mkwiecinski@foley.com

Lawrence B. Litwak
Boston, Massachusetts
617.502.3224
llitwak@foley.com

Shilpa S. Patel
New York, New York
212.338.3577
spatel@foley.com

Chris Rossman
Detroit, Michigan
313.234.7112
crossman@foley.com

R. Michael Scarano Jr.
San Diego, California
858.847.6712
mscarano@foley.com

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