McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). Payment reforms further complicate application of the Stark and fraud and abuse laws to physician compensation arrangements, but health systems have no choice but to adapt and make hard choices.

The good, reassuring news about that “old dog” fraud and abuse as it enters an age of payment reform is that criminal liability for fraud still requires a specific intent to defraud the federal health care programs, anti-kickback liability still requires actual knowledge of at least the wrongfulness, if not the illegality, of the financial transaction with a referral source, and civil False Claims Act liability for Stark Law violations still requires actual knowledge, a reckless disregard for, or deliberate ignorance of the Stark Law violation. This should mean that good faith and diligent efforts to comply with law, including seeking and following legal counsel, still go a long way in managing an organization’s and individual executive’s risk under the fraud and abuse laws. The bad, unsettling news about fraud and abuse in an age of payment reform, however, is that (1) anxiety about reform and stagnating and declining physician incomes are propelling a spike in transactions between health systems and physicians at a time when qui tam plaintiffs and the law firms that represent them are aggressively challenging the legitimacy and common structures for these transactions; and (2) the Stark Law is largely indifferent to the good faith intentions of health systems to integrate and enter into coordinated care arrangements with physicians, and continues to impose on health systems heavy burdens of proof that the arrangements comply with ambiguous standards like fair market value, volume or value and commercial reasonableness. While financial transactions incident to the Centers for Medicare and Medicaid Services’ (CMS) innovative care delivery and payment initiatives, such as accountable care organizations (ACOs), medical homes and bundled payment arrangements can be protected by the fraud and abuse/Stark waivers discussed in Part B below, there are many other common transactions and arrangements with physicians still operating in a fee-for-service environment (such as practice acquisitions, employment, “gainsharing,” service line co-management, pay-for-quality and non-ACO clinically integrated networks) that are not protected by the waivers. During this period of transition to transformation of the health delivery and payment system, the key areas of risk for health systems are their burdens of proof on the ‘big three” issues of:

• Fair market value,
• Volume or value, and
• Commercial reasonableness.

Each is discussed separately below, and the industry practices for managing these risks. Please note that none of these practices are necessarily “best” or “normative” practices, but are what we have observed.

A. Key Risk Areas

1. Fair Market Value Risk

When the federal government first adopted “fair market value” as a fundamental element of anti-kickback safe harbors and Stark Law compensation exceptions, it must have seemed at the time like a “bright line” requirement that would help safeguard the federal health care programs from kickbacks and other abuse. When it turned out to be anything but a “bright line,” CMS tried to help matters by defining “fair market value” and, for a time, even adopted a “fair market value” safe harbor for physician compensation. Although the policy rationale for the “fair market value” requirement makes perfect sense—preventing payments to physicians for their assets and personal services from disguising payments for the value of their referrals—determining the fair market value of a physician’s business assets and services has turned out to involve far more subjective judgment and “art” than was originally thought. Today, a health care system can find two reputable valuators who will reach significantly different opinions regarding the market value of a physician’s or physician-owned company’s business assets and personal services. And, in fact, there are valuators who purport to be able to determine the fair market value of achievements in “quality” and “cost savings,” the very outcomes that CMS wants to incentivize, that is arguably more speculation than valuation.

Further complicating matters is that health systems can have a proper and legitimate need in certain cases to pay compensation that is in excess of local market rates, or that will not be supported by productivity. For example, recruitment to meet a community need may require paying a physician what he or she is currently making in a different market with higher rates of compensation, and, notwithstanding the community need for the physician, the market may not be able to keep the physician as busy as he or she was in a different market, creating a misalignment between the physician’s compensation and productivity. While such compensation may be commercially reasonable or mission-motivated, it can arguably be above fair market value. So, as it turns out, it is not equitable or sound policy to hold a health system to a fair market value standard in every case, but for the Stark Law’s compensation exceptions fair market value is a required element in every case.

This state of affairs would not be nearly as concerning if plaintiffs bore the burden of proving that amounts paid a practice or physician were above fair market value, or if the Office of Inspector General (OIG) and CMS would issue advisory opinions on the fair market value of a proposed transaction that presents significant potential risk for a health system. The health system, hospital or affiliated medical practice making the payments, however, bears the burden of proving that the fair market value requirement of Stark compensation exceptions (and OIG safe harbors if a safe harbor is asserted as a defense) are met, and the risk of not meeting this burden of proof is only exacerbated by the recent uptick in practice acquisitions, physician employment, “gainsharing,” hospital service line co-management, pay-for-quality and clinically integrated networks (unprotected by the waivers for ACOs). Even if good faith reliance on the fair market value opinion of a reputable valuator usually (and should) protect a health system from possessing the “state of mind” or “scienter” required for liability under the civil False Claims Act, if the fair market value issue becomes a “battle of the experts” in an investigation or litigation, the health system still has to win the battle to avoid potentially draconian overpayment refund liability under the Stark Law and equitable claims of “payment by mistake” or “unjust enrichment.”

What is a health system to do to manage this risk? There is no easy answer, but some practices have emerged that merit consideration. First, health systems are rationalizing their use of valuators, assuring that the system is receiving consistent valuation analysis and advice over time and across transactions. This not only avoids the risk of an allegation that the system has gone “opinion shopping,” which can cast doubts on the integrity of the valuation process, it also safeguards against inconsistent “pricing” that could later serve as evidence of an improper intent or that could undermine the credibility of the valuations.

Second, fewer health systems are permitting business consultants to value their own business models. The avoidance of even the appearance of a conflict of interest better manages the risk of defending a valuation. Valuation firms, however, can provide helpful assistance in designing physician compensation models because such modeling is intertwined with fair market value considerations.

Third, more than ever a health system’s regular health care regulatory counsel is being involved in the transaction structuring and valuation process, rather than being consulted near the end of the process. Not only is this a more efficient and effective use of regulatory counsel in the long run, health care regulatory attorneys are, by experience and training, knowledgeable regarding how courts and regulators define “fair market value,” especially the extent to which considerations of anticipated or projected referral volume or value are or are not permissible. Additionally, a valuator’s approach to issues such as the value of “good will” or future cash flow in practice and ancillary services acquisitions, or the value of an exclusivity or covenant not to compete, implicate sensitive and close legal questions under both the federal Anti-Kickback Statute and the Stark Law. The best outcome for a health system is to have health care regulatory counsel that has, or builds, a good working relationship with the health system’s key business consultants and valuators.

Fourth, health systems are increasingly focused on the “garbage in, garbage out” problem that can render useless what was believed to be a sound valuation, especially the valuation of physician employee compensation. Valuations will often turn on an assumption that the employed physician has personally performed every service for which a work Relative Value Unit (RVU) has been assigned in the course of billing and coding for the service. Accordingly, the contribution of physician assistants, nurse practitioners, residents and fellows to the volume of work RVUs billed under a physician’s billing number is under increasing scrutiny by compliance and legal departments, as “compensation per work RVU” has come to predominate physician employee compensation.

Fifth, health systems and their valuators and legal counsel are paying increasing attention to the role of local market payor rates and the local ratios of compensation to collections in the determination of the fair market value compensation. While so-called “losses” (or costs) associated with employment of a physician is usually (but not exclusively) an issue raised in the context of evaluating the commercial reasonableness of the compensation, there is a growing recognition that a disparity between the level of clinical compensation earned by health system-employed physicians and private practice physicians in the same local market calls into question the established reliance (or over-reliance) on physician compensation survey data and compensation to work RVU ratios at the median to 75th percentiles. Accordingly, some health systems are paying greater attention to, and showing much less tolerance for, practice “losses” (or costs) that are not justified by legitimate commercial or mission-related considerations. Managing “losses” (or costs), however, is very challenging and made all the more difficult because local private practice physicians can participate in ancillary income that health system-employed physicians cannot participate in under the Stark Law. When these local practices with robust ancillary services are acquired, matching the physicians’ historical compensation levels will, by necessity, result in “losses” (or costs).

Finally, while capping total physician employee cash compensation at the 75th or 90th percentile of the blended compensation benchmark data is a common “hedge” against paying excessive compensation, at least one large health system’s physician employment agreements cap total annual physician employment compensation at fair market value and tasks a physician compensation committee with performing retrospective reviews to enforce and be accountable for enforcement of the fair market value cap before the compensation for the year is finally reconciled. With most physicians being paid today on a “compensation per work RVU” basis, this retrospective review gives the organization an opportunity to confirm the integrity of the reported work RVUs and assess whether the “compensation per work RVU” or other productivity compensation methodology has, for whatever reason, resulted in an unanticipated “windfall” to the physician and cost to the system. (It also has the benefit of not arbitrarily capping compensation a percentile based on survey data that could disincentivize productivity.) This approach to managing the organization’s risk of paying above-market compensation does not change the health law bar’s general consensus that fair market value is to be judged at the commencement of the compensation arrangement, nor does it eliminate the need for a sound prospective review of compensation methodologies and amounts. However, because the government and whistle-blowers are highly motivated to perform and rely on retrospective fair market value analyses—and the courts have yet to rule on the issue—there is arguably risk-management value in a health system subjecting physician compensation to retrospective fair market value review and enforcing caps based on such assessments.

Notwithstanding the above measures for managing the risk, the fair market value status and risk associated with certain transactions is simply unclear. What about a health system’s funding of a clinically integrated network? What does it mean for such an arrangement to be on fair market value (and commercially reasonable) terms? What about a health system’s payments to physicians for quality, cost-savings or “co-managing” a health system’s service line? Are fair market value opinions for such payments too speculative or, in certain cases, even possible, and thus vulnerable to attack? These and other questions will continue to call into question whether the fair market value standard was ever sustainable, equitable and compatible with health care reform.

2. Volume or Value Risk

It was not all that long ago that the clear consensus within the health law bar was that compensation to a physician had to fluctuate or vary with the volume or value of the physician’s referrals to “take into account” the volume or value of referrals. This interpretation of the “volume or value” standard proved difficult enough to comply with in every case, but at least it was a reasonably bright line. That has changed. While CMS guidance and case law still support the position that proof of intent to recognize and pay for the value of referrals, alone, is insufficient to prove a violation of the “volume or value” standard, once evidence of intent became legally relevant to the “volume or value” issue the litigation risk for health systems changed dramatically. If intent is relevant to the question of whether compensation takes into account the “volume or value” of referrals, then the government and other plaintiffs can draw adverse inferences regarding intent from facts such as practice “losses” (or costs) and/or a health system’s internal analysis of the financial implications of a physician’s practice for the health system.

The advent and proliferation of a variety of health system-physician alignment and integration initiatives operating outside the regulatory waivers, ranging from “gainsharing” to non-ACO clinically integrated networks (“integrative arrangements”), have also called into question whether, even absent an intent element, the “volume or value” standard is compatible with the health care reform policies. The especially thorny “volume or value” issues health systems are facing while third-party payment straddles fee-for-service and value-based purchasing arise from case and/or patient referral volume-sensitive compensation to physicians under integrative arrangements. How are health systems managing the risk of failing the “volume or value” standard when no regulatory waiver is available?

First, many health systems are comfortable proceeding in reliance on the fact that the OIG has issued advisory opinions to other health systems on the applicability of the federal Anti-Kickback Statute to “gainsharing,” “pay for quality” and service line co-management arrangements. Although the legal protection of an advisory opinion is expressly limited to the particular arrangement and requestors of the advisory opinion, and the OIG does not address the “volume or value” issue raised by such payments under the Stark Law, these health systems have taken comfort in the fact that the OIG has issued favorable advisory opinions on these integrative arrangements. Some health systems have even been comfortable departing from strict adherence to the limitations in the arrangements that were the subject of favorable OIG advisory opinions. Most, however, appear to adhere to these limitations, such as (1) distributing the incentive pool to participating physicians on an equal per capita basis; (2) restricting participation to physicians who have been on the medical staff for at least one year; (3) restricting the patient volume that can be counted for purposes of measuring performance to the volume in the base year; (4) limiting the duration of the arrangement; and (5) disclosing the arrangement to patients.

Second, some health systems have, on the advice of counsel, refrained from engaging in certain integrative arrangements that are sensitive to physician referral volume pending an express Stark Law exception for such arrangements or clearer and favorable CMS guidance on how the “volume or value” standard applies to such arrangements, while other health systems have, on the advice of counsel, relied on the argument that the Stark Law’s special “volume or value” rule on unit-based compensation protects the bonus or risk pool distributions under certain of these arrangements. In some cases, such as in-network referral incentives incident to coordinated care arrangements, the Stark risk-sharing exception may be applicable if the payments are, in fact, payments for services to health plan enrollees.

The variability of legal positions being taken by health systems and their legal counsel on the “volume or value” issue raised by certain integrative arrangements is concerning, however, because it means that a plaintiff or court could disagree with the health system’s position. Consequently, it is hoped that Congress will give CMS greater flexibility to address this situation.

3. Commercial Reasonableness

The requirement that employed physician compensation arrangements be commercially reasonable even if the employee makes no referrals to the employer has received increased attention since North Broward Hospital District paid $69.5 million to settle, among other things, allegations that the practice “losses” (or costs) incurred from employment of certain physicians meant the arrangements would not have been commercially reasonable in the absence of referrals to the hospital. There are legal defenses to these allegations, but the North Broward settlement points up the litigation risk. Physician employment, however, is not the only context where health systems incur “losses” (or costs) from entering into transactions with physicians. “Gainsharing” is the only integrative arrangement that clearly “pays” for itself. While integrative arrangements with independent, non-employed physicians, are usually not, literally, subject to the same “commercial reasonableness” standard as direct employment arrangements, there is a meaningful litigation risk that “losses” (or allegedly unjustified costs of compensation or other financial benefits) to physicians could be cited in support of a plaintiff’s allegation that the benefits take into account the volume or value of the physicians’ referrals, or why else would the health system incur the cost of the compensation? Like unneeded medical directorships, integrative arrangements that cannot demonstrate their necessity or value can create an inference of an improper intent to pay and account for the value of the physicians’ referrals.

While health systems are applying greater financial and legal rigor and scrutiny to their practice acquisition and physician employment arrangements that increase system costs, it does not appear to be as easy for them to do for their integrative arrangements. There are not the same guideposts and historically accepted standards for integrative arrangements as there are for practice acquisitions and employment arrangements. Health care reform and health systems certainly have a keen interest in making alignment and integration initiatives as easy as possible for the physicians to participate in (to incentivize participation), but, outside the regulatory waivers, no health system has received a free pass on demonstrating value received from the “losses” (or cost) of these initiatives. And while fair market value is obviously important, some health systems appear to place too much reliance on valuations, paying less attention to the challenging factual and legal work of assessing whether the cost of the arrangement is justified by the work and benefits of the arrangement (apart from referrals), and differentiating between commercial contracting arrangements with physicians (for which there may be a clear Stark exception) and integrative arrangements extending to the care of traditional Medicare fee-for-service beneficiaries (for which there may not be a Stark exception). Some health systems, however, have made board or board committee review and authorization a condition of entering into and renewing integrative arrangements, and others are involving regulatory counsel earlier in the process to help bring more rigor to the system’s management of the commercial reasonableness issue. There is something to be said for these approaches in light of the heightened litigation risk associated with health system-physician transactions.

We turn now to the important topic of the nature and scope of CMS’s and OIG’s regulatory waivers for specified alternative payment models.

B. Regulatory Waivers for Innovative Care Delivery and Payment Initiatives

The Department of Health and Human Services (HHS) has issued numerous regulatory waivers from the Stark Law and other fraud and abuse laws for innovative care delivery and payment initiatives. The most notable waivers include those developed for the Medicare Shared Savings Program (MSSP), which are discussed in detail below. Unique waivers also exist for arrangements involving the following Center for Medicare and Medicaid Innovation (Innovation Center) models: Pioneer ACO, Bundled Payment for Care Improvement, Health Care Innovation Awards Round Two for patient engagement, Comprehensive ESRD Care, Comprehensive Care for Joint Replacement, Next Generation ACO, and Oncology Care for participating ACOs. Like the MSSP waivers, each Innovation Center model waiver has specific eligibility requirements and conditions that must be satisfied in order for it to apply.

The following five waivers apply to arrangements involving ACOs participating in the MSSP, their participating providers and certain other non-participating providers, and the Medicare beneficiaries assigned to the ACO.

1. ACO Pre-Participation Waiver

The ACO pre-participation waiver protects pre-participation start-up arrangements involving an ACO, ACO participants or ACO providers/suppliers, and all of the parties to the arrangements, from liability under the Stark Law and the federal Anti-Kickback Statute. Start-up arrangements mean items, services, facilities and/or goods provided by the ACO, an ACO participant, or ACO provider/supplier, and used to create or develop an ACO. The parties to an arrangement may not include drug and device manufacturers, distributors, durable medical equipment suppliers, or home health suppliers.

The waiver comes with procedural, documentation and disclosure requirements to mitigate the risk of fraud or abuse. Specifically, the start-up arrangement must be undertaken by parties having a good-faith intent to develop an ACO and submit a completed application to participate in the MSSP in a particular year (the target year). The ACO’s governing body must make and duly authorize a bona fide determination that the start-up arrangement is reasonably related to the purposes of the MSSP, which include promoting accountability for the quality, cost and overall management for a Medicare patient population; managing and coordinating care for Medicare fee-for-service beneficiaries through an ACO; and encouraging investment in infrastructure and redesigned care processes for high quality and efficient service delivery for patients. The parties must take diligent steps to develop an ACO that would be able to participate in the MSSP in the target year, including steps to meet the MSSP’s ACO governance, leadership and management requirements. The arrangement, governing body’s determination and authorization, and steps to develop the ACO must be contemporaneously documented and retained, and made available to CMS upon request. A description of the arrangement, except the financial or economic terms, must also be publicly disclosed at a time and in a place and manner established by CMS.

The waiver only protects start-up arrangements occurring one year preceding the application due date for the ACO’s target year unless an extension is granted. If the ACO enters into a participation agreement with CMS for the target year, the ACO pre-participation waiver ends on the ACO’s participation agreement start date. Thereafter, the ACO must rely on the ACO participation waiver (see below). The pre-participation waiver may only be used once by an ACO.

2. ACO Participation Waiver

The ACO participation waiver is very similar to the ACO pre-participation waiver, but covers arrangements occurring or commencing after the ACO has entered into a participation agreement. Specifically, the ACO participation waiver protects arrangements involving an ACO, one or more of its ACO participants or ACO provider/suppliers, or a combination of thereof, and the parties to the arrangements, from liability under the Stark Law and the federal Anti-Kickback Statute.

To qualify for the waiver, the ACO must have entered into a participation agreement and be in good standing under its agreement. The ACO must also satisfy the MSSP’s ACO governance, leadership and management requirements, and the governing body determination, documentation and public disclosure requirements described above. The waiver expires six months following the expiration of the participation agreement (including any renewals thereof) or the date the participation agreement terminates, whichever comes first.

3. Shared Savings Distributions Waiver

The shared savings distributions waiver protects “distributions or use of” shared savings earned by an ACO during the term of, and pursuant to, the ACO’s participation agreement, including funds distributed after the agreement expires, from liability under the Stark Law and the federal Anti-Kickback Statute. To qualify for the waiver, the ACO must be in good standing under its participation agreement, and the shared savings must be (1) earned pursuant to the MSSP and during the term of the participation agreement, and (2) used for activities that are either reasonably related to the purposes of the MSSP or distributed to or among the ACO participants, its ACO providers/suppliers, or individuals or entities that were its ACO participants or its ACO providers/suppliers during the year in which the shared savings were earned by the ACO. Distributions to parties outside the ACO are protected by the waiver if the distribution is compensation (using shared savings) for activities reasonably related to the purposes of the MSSP.

4. Compliance with Stark Law Waiver

The compliance with Stark Law waiver protects financial relationships between or among the ACO, its ACO participants, and its ACO providers/suppliers that implicate the Stark Law from liability under the federal Anti-Kickback Statute, provided that the ACO has entered into a participation agreement and remains in good standing under the agreement, the financial relationship is reasonably related to the purposes of the MSSP, and the financial relationship fully complies with one of the Stark Law’s DHS, ownership/investment, or compensation exceptions (42 C.F.R. § 411.355 – § 411.357). The waiver period commences on the start date of the ACO’s participation agreement and ends on the earlier of the expiration of the participation agreement’s term (including renewals thereof) or the date the participation agreement is terminated.

5. Patient Incentives Waiver

The patient incentives waiver protects the provision of free or below fair market value items and services offered by an ACO, its ACO participants, or its ACO providers/suppliers to Medicare beneficiaries from liability under the civil monetary penalties law provisions addressing inducements to Medicare beneficiaries and the federal Anti-Kickback Statute if all of the following requirements are met:

• The ACO has entered into a participation agreement and remains in good standing.
• There is a reasonable connection between the items or services and the medical care of the beneficiary.
• The items or services are in-kind.
• The items or services are either (1) preventive care items or services or (2) advance one or more of the following clinical goals: adherence to a treatment regime, adherence to a drug regime, adherence to a follow-up care plan or management of a chronic disease or condition.

The patient incentives waiver period commences on the start date of the ACO’s participation agreement and ends on the earlier of the expiration of the participation agreement’s term (including renewals thereof) or the date the participation agreement is terminated. However, the beneficiary may keep items received before the participation agreement expired or terminated, and receive the remainder of any service initiated before the participation agreement expired or terminated.

While the waivers discussed above can offer broad protection against certain fraud and abuse laws, they only apply to specific innovative care delivery and payment initiatives. Further, each model waiver has specific eligibility requirements and conditions that must be satisfied and, as a result, may not be available to all participants in a given model. This limits a health system’s ability to provide uniform and consistent incentives to key stakeholders across all patient populations. During this period of transition to transformation of the health delivery and payment system, health systems should be mindful and take advantage of the waivers that may be available to them and be cognizant of the key areas of risk for arrangements that do not qualify for existing waivers.

McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). This article discusses the key stakeholder groups and perspectives involved in quality and payment reform.

Linking payment for health care services to quality, value and outcomes rather than the mere provision of the services themselves has been a feature of health reform proposals in one form or another for decades. However, only now has the link been forged with an alliance of purpose among payors—federal health care programs, private insurers and consumers—and providers whose participation in such programs holds the promise of sharing in incentive programs designed to reward high quality over high volume.

Federal Health Care Programs

Over 55 million Americans are Medicare beneficiaries. National spending on Medicare grew 5.5 percent to $618.7 billion in 2014, while Medicaid spending grew 11 percent to $495.8 billion in the same time period. Health spending over the next ten years is projected to grow at an average rate of 5.8 percent per year, which will outpace the growth in the Gross Domestic Product (GDP) by 1.3 percentage points. The costs for health care attributable to Medicare, Medicaid and other federal health care programs, and the volume of beneficiaries, have put these programs front and center in the shift to predicating payment on achieving quality and outcomes measures.

The largest of the federal health care programs, Medicare has implemented and continues to pilot numerous quality-focused payment reform programs that move payment ever further from fee-for-service (FFS) models. Among those programs specifically targeting hospital payments, the Hospital Readmissions Reduction Program, the Hospital VBP (value-based purchasing) Program and the Hospital-Acquired Condition (HAC) Reduction Program are designed to improve the quality of care, promote improved clinical outcomes and enhance patient safety. The mechanism for improvement is essentially negative reinforcement, as each program functions to reduce reimbursement to hospitals that fail to meet certain performance and quality metrics and reporting requirements. As these programs have been rolled out more fully, hospitals have debated whether they adequately factor in regional differences and variability in patient populations, the impact of which are said to unfairly penalize hospitals, or if the metrics at issue adequately measure quality. While there may eventually be modifications to the programs to account for such factors, the trend in linking reimbursement to achieving quality and clinical outcomes goals is anticipated to grow.

In addition to programs targeted at hospitals, the link between quality and payment is also being forged in relation to physician payments. The Medicare Access and CHIP Reauthorization Act (MACRA) legislation will repeal the Sustainable Growth Rate that directly impacts physician payments and instead link physician payments to quality and value for services, rather than volume of services provided. MACRA will also consolidate existing value-based payment initiatives, including the Physician Quality Reporting System (PQRS) into a single program called the Merit-Based Incentive Payment System (MIPS). MIPS is designed to factor elements like quality of care, improvements in clinical care and use of resources into the payment formula.

Likewise, in the post-acute care space, the Improving Medicare Post-Acute Care Transformation (IMPACT) Act of 2014 endeavors to improve care for Medicare beneficiaries through the implementation of quality metrics and resource utilization tracking by post-acute care providers, bringing these quality-based principles to the continuum of care.

Private Insurers

Private insurers have also forged ahead with efforts to tie quality to payment. While risk-based contracts are still less common, some of the largest companies have formed working groups and task forces with regional health care systems to help plan for the insurance companies to meet with goal of shifting 75 percent of their business by 2020 to contract types that incentivize providers to meet quality and cost metrics. Private insurers have also increased efforts to partner with health care systems and hospitals to coordinate care with the aim of delivering higher quality at lower costs. For example, private insurers have worked with health systems to develop programs to more fully engage patients with chronic conditions or complex diagnoses in their health care, allowing physicians and other health care providers to more closely monitor treatment, help them manage their condition and prevent further complications. Such programs bring together the interests—and can yield positive results—for private insurers, providers and patients.

The cumulative effect of these actions by federal health care programs and private insurers is that almost all providers will be subject to, and need to keep pace with, the varying demands of such programs in addition to the burden of existing regulatory requirements.

Patients/Consumers

Patients have historically been the most forgotten part of the health care equation. Indeed, they are not referred to as consumers as they are in other industries; rather, health care is something that happens to patients. However, there has been a growing trend over the past several years to make patients the focus of the health care encounter. Patient-centered care is one of the primary goals of CMS and, when it passed MACRA, CMS explained that it created both the Alternative Payment Model (APM) requirement and MIPS to drive patient-centered healthcare and continue the development of patient engagement as a fundamental component of health care.

Patients have long desired greater transparency in health care settings. Imagine walking into a store, being told that a particular item is what you must take, and then leaving the store with the clerk saying, ‘We will figure out what that costs for you in particular and bill you later.’ This is precisely what happens any time a patient without a fixed co-pay insurance product (as more and more Americans are opting for) visits a hospital in the fee-for-service model. Unlike other industries, patients rarely know what they will pay for services until after they have received them. Given the immediacy with which a consumer can price almost any product or service, it is critical that the medical industry begin viewing patients as consumers and treating them accordingly.

In addition to transparency on costs, patients would of course like the actual costs to be lower. In 2016, the health care costs for an average American family of four covered by an employer sponsored preferred provider plan rings up at $25,826, triple what it cost in 2001 according to the Milliman Medical Index.

From a patient perspective, payment reform tied to quality metrics would link lower costs with higher quality services and better outcomes, giving patients more of a voice and ability to act like consumers in any other industry segment.

Physicians/Providers

The shift from a fee-for-service model to a quality- and value-based model is being driven by forces far beyond the control of the average physician. Physicians appear to be caught in the machinations of this shift and are seemingly unprepared for the vast impact that MACRA will have on them. Indeed, a recent national survey of 523 primary care and specialty physicians found the following:

• Fifty (50) percent of surveyed physicians have never heard of MACRA and 32 percent recognize it by name but are not familiar with its requirements;
• Eight-in-ten of surveyed physicians say they prefer traditional FFS or salary-based compensation as opposed to value-based payment models, some of which qualify under MACRA’s APM track; and
• Seventy-four (74) percent of surveyed physicians believe that performance reporting is burdensome and 79 percent do not support tying compensation to quality, both requirements under MACRA.

Despite the preferences of physicians, MACRA will directly affect how CMS pays physicians for services provided to Medicare beneficiaries by substantially linking such payments to performance metrics and incentivizing physicians to reduce hospital utilization and to participate in alternative payment models that bear substantial financial risk. MACRA will undoubtedly create incentives that reshape how physician services are provided, including encouraging physicians to consolidate into larger groups, entering into arrangements with physician specialty management companies, or, most likely, becoming employed by or otherwise contractually aligned with health systems in order to have access to the information technology and other care management infrastructure that they will need to achieve the MACRA metrics.

The key question to consider is whether physicians will ultimately prefer the new system to the fee-for-service model. Under the fee-for service model, physicians are constantly overtaxed and have limited time to spend with each patient. Indeed, 40 percent of patients feel rushed during their actual visit with the average office visit lasting only twelve minutes. Much of the allure of practicing medicine probably quickly dissipated for most new doctors upon graduation once they realized the sheer volume of patients they would need to see on a daily basis.

Part of the promise of MACRA is that both physicians and patients will receive a benefit. Ideally, physicians will get a significant benefit by being able to practice medicine in the thoughtful way they originally sought to, with the quality of their work determining their pay instead of the sheer number of patients seen. From the patient perspective, if MACRA is properly implemented, it can promote more flexible care that is tailored to the needs of patients.

Conclusion

Federal health care programs and legislative changes are leading the paradigm shift toward quality-focused payment reform. By tying payments to quality metrics, federal health care programs (through legislation such as MACRA), aim to create the necessary incentives to realize their goal of making patient-centered care the new standard in the health industry. Involvement of and collaboration by private insurers, physicians and consumers will continue, and together these constituencies will help further the transition to transformation of health care.

McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). This article discusses the trends and considerations driving many health systems to consider developing or acquiring provider sponsored health plans.

Based in large part on the changing dynamics in health care delivery being driven by the shift from the traditional fee-for-service payment system to alternative value-based, bundled and/or population-based payment models, the phenomenon of the Provider-Sponsored Health Plan (PSHP) that was so prevalent in the 1980s and 1990s, but largely fizzled out in the 2000s, has re-emerged as a viable option for health systems. While many of the factors that drove hospitals and health systems to establish PSHPs are again present in today’s health care market, the drive to move away from fee-for-service payment systems has heightened the desire of many hospitals and health systems move back into the PSHP business in order to gain control of the full premium dollar. As discussed in a prior Managing the Transition to Transformation article, hospitals and health systems have already actively engaged in developing and implementing strategies to change the way care is delivered and coordinated in order to adapt to rapidly changing reimbursement models. As illustrated by the chart below, it is a natural progression for many of them to take the next step to more fully integrate and align delivery of care and reimbursement through the development or acquisition of a PSHP:

What Was Old is New Again

In the 1980s and 1990s, several hundred PSHPs were being operated by hospitals and health systems across the county. By the 2000s, the prevalence of PSHPs had dropped significantly. Many factors impacted the ability hospitals and health systems had to successfully operate a PSHP, including a fundamental lack of experience and understanding of the business of insurance (e.g. underwriting and risk management), the advent of risk based capital (RBC) requirements that required providers to maintain significant cash reserves and the inability to achieve scale and develop a cohesive provider network in the markets served. In regard to this last factor, most provider-based networks exhibited many of the following factors, which were antithetical to the success of a PSHP:

• Scrum among providers for the largest share of revenue
• Fee-for-service focused reimbursement creating incentives to do more
• Focus on achieving negotiating leverage with the payor
• Episode of care rather than population or outcome focus
• Interventional not preventive care
• Clinical integration to achieve antitrust compliance, not patient care improvement

While some PSHPs were able to succeed and thrive, most exited the health plan market by the end of the 2000s. However, a 2015 report by McKinsey & Company found that 107 health systems were operating PSHPs, and more recently, research by Atlantic Information Systems, Inc. has identified 270 PSHPs currently operating across the country. This is clear evidence that health systems have jumped back into the PSHP game with both feet.

What makes the modern PSHP experiment more likely to succeed than the PSHPs of the 1980s and 1990s? While many of the conditions that led to the rise of the PSHP in the past are present again in today’s market place (including the presence of several dominant players making a concerted effort to continue consolidation and a radically changing reimbursement system), there are some key additional factors to consider:

• Unlike in the past, health systems are much further along in the process of developing true clinical alignment with other providers across the continuum of care. Many health systems have established expansive and integrated physician organizations and developed strong alignment (either through acquisition or contractual arrangement) with ancillary providers in their service areas that now exhibit many of the following factors:
  • Management of performance risk (based on what is done to mitigate diseases including the efficacy and types/place of treatments rendered)
  • Population focused, not individual focused
  • Rational allocation of revenue and resources
  • Value-based reimbursement and pay for quality
  • Patient-centric focused with care coordination, prevention and wellness
  • Meaningful physician leadership
  • Clinical integration to achieve efficiencies and quality improvement

• The implementation of health information technology (HIT) and care management processes and protocols, combined with the expanded clinical network and alignment has put health systems in a better position to control cost and coordinate care than they have ever been before.
• The rise of alternative payment models in combination with consumerism and the infiltration of the digital age into the provision of health care have forced health systems to learn how to better manage patients through the continuum of care, and have also helped health systems to focus in on managing care for specific patient populations.
• As a result of the growing adoption of the Triple Aim by health systems, many administrative and care management costs that traditional payors are forced to incur in managing their health plans and networks are already in place thus creating a potential reduction in the PSHP’s administrative costs. These cost savings can be passed along to PSHP members in the form of lower premiums and can create a competitive advantage for PSHPs.
• With the growth of narrow networks, health systems (and providers generally) can leverage brand and reputation with health care consumers, which can be a competitive advantage when marketing a PSHP to potential new members. The PSHP can also leverage its health system relationship.

Health systems have also learned lessons from the failures of the past. They recognize and understand that running a successful PSHP requires a very different skill set than running a provider organization. While it can be a challenging hurdle to overcome given the traditional adversarial relationship between payors and providers, the leadership of successful PSHPs (both on the health system and the PSHP sides of the fence) are aligned and understand that the purpose of a PSHP is to support the mission of the broader health system.

Build, Buy or Something Else?

There are a number of different ways for a health system to enter the PSHP market. No matter what approach a health system ultimately chooses to move forward with, it is absolutely critical to have a well-planned strategy and business plan in place before moving down the pathway to the development or acquisition of a PSHP. It is important to establish clear goals and objectives (e.g., expanding the health system’s mission, increasing ability to succeed in population health management and leveraging HIT) and to develop a strategy for the focus of the PSHP (e.g., geographic scope, market segment focus, potential product offerings).

While building a PSHP from the ground up offers a health system with the maximum control and influence over how the PSHP is structured and operates, it comes with a host of challenges and can result in a long runway to operationalizing the PSHP. For example, the licensing and regulatory process for establishing a new PSHP and developing Medicare Advantage and Medicaid products can be long and cumbersome. Additionally, if the past is a guide, health systems typically do not have the necessary skills and expertise required to operate a successful PSHP and will need to invest heavily on the infrastructure and human capital required to run the PSHP.

Buying (either in whole or in part) an existing health plan is a much easier proposition from a timing and regulatory standpoint, and typically allows a health system to get into the PSHP market much quicker. However, particularly in the current market, buying an existing health plan can be a costly endeavor. The ultimate success of an acquired PSHP is also linked closely to the ability of the health system’s leadership team to manage the integration of the PSHP into the broader health system and get buy-in and alignment from the PSHPs leadership team on the PSHP’s role in achieving broader mission of the health system. Aligning financial incentives for the PSHP and shifting the culture away from the traditional adversarial payor/provider relationship is critical to both the short and long-term success of the PSHP.

In addition to building and buying, health systems could elect to move forward with a hybrid approach. Several current PSHPs have been created through joint ventures with existing health plans or other health systems with pre-existing PSHPs. As is the case with buying an existing health plan outright, joint venturing with an existing health plan or PSHP typically provides for a much quicker entry into the market place and can be accomplished structurally in a variety of different ways (e.g., traditional joint ventures, virtual joint ventures, purely contractual arrangements). These hybrid models can be attractive to both health systems and existing health plans for a variety of reasons, including the ability to share risk, leverage beneficial attributes of both organizations (e.g., health plan management expertise, population health experience, health system brand) and reduce regulatory hurdles to market entry.

Conclusion

As use of alternative payment systems continue to grow and traditional fee-for-service reimbursement phases out over time, the utility of a PSHP for a health system will likely continue to increase. By keeping in mind the fundamental principles listed below during the development of a PSHP, health systems will increase their ability to effectively integrate and align their PSHPs with the broader health system organization and should be well positioned to succeed in managing the transition to the new healthcare delivery and payment systems of the future.

• • A well-designed foundation cannot assure success, but a poorly conceived foundation will almost always ensure failure.
  • Seek a shared destiny and assumed accountability.
  • Foster shared decision making.
  • Use sound business and financial modeling.
  • Promote meaningful participation in strategic and operational decision making.
  • These developments do not happen overnight.

McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). This article discusses the strategic implications of MACRA and how your organization can build a winning strategy for success.

On April 27, the Centers for Medicare and Medicaid Services (CMS) unveiled the much-anticipated (and, for some, feared) proposal to implement the physician payment reforms required under the Medicare Access to Care and CHIP Reauthorization Act of 2015 (MACRA). These reforms, once implemented, will profoundly change how and how much Medicare pays physicians for services furnished to program beneficiaries by substantially linking such payments to performance and incentivizing physicians to participate in alternative payment models. Moreover, while not expressly intended by Congress or CMS, these changes also are likely to cause a dramatic increase in physician-physician consolidation and physician-hospital consolidation and alignment.

Under the Merit-Based Incentive Payment System (MIPS) established in MACRA, and now described in detail by CMS in draft regulations, Medicare payments to physicians will be adjusted based on each physician’s performance in four performance categories: Quality, Resource Utilization, Clinical Practice Improvement Activities and Advancing Care Information. Medicare payments can be increased or decreased by as much as 9 percent once the program is fully implemented. If certain requirements are met, physicians can participate in an alternative payment model (APM), instead of MIPS, and receive a 5 percent payment bonus for doing so. Initially, status as an APM will be determined by reference to Medicare payments only. However, after a transition period, an entity can qualify for APM status based either on its Medicare participation or on its Medicare participation and its contracting in the commercial market. A more complete description of MACRA can be found here.

While Medicare payments to physicians will not be affected until 2019, the performance and reporting obligations that will determine payments in 2019 begin next year—on January 1, 2017. Consequently, health systems and independent physicians nationwide are racing to understand the new MACRA requirements, to estimate as best they can their likely effects, and to identify pathways to success in this new regime. By CMS’s own analysis, 78 percent of physicians in groups of less than 10 practitioners subject to MIPS (because they cannot or choose not to participate in an APM) are likely to see their Medicare payments negatively adjusted upon implementation of the new payment scheme (see, Table 64, Medicare Program; Merit-Based Incentive Payment System and Alternative Payment Model Incentive Under the Physician Fee Schedule, and Criteria for Physician-Focused Payment Models; Proposed Rule, 81 Fed. Reg. 28,162, 28,375 [May 9, 2016]). CMS’s estimate most likely is based on the expectation that physicians who do not figure out success strategies will subject themselves to a downward reimbursement spiral where Medicare payments deteriorate because of poor performance, and deteriorating payments beget further poor performance.

While MACRA grabbed headlines as a “fix” to the sustainable growth rate formula for Medicare payments to physicians, and the annually compounding problem it had become, MACRA will also create powerful incentives that will accelerate the reshaping of the physician services market. It will encourage physicians to consolidate into larger groups, enter into arrangements with physician specialty management companies, or, most likely, become employed by or otherwise contractually aligned with health systems. Some physicians may choose to reduce their Medicare volumes (to take advantage of a low-volume exception) or opt out of Medicare altogether. Physician organizations will need to be of a certain size to permit access to increasingly expensive information technology and other care management infrastructure, which are necessary to support the data reporting and other incremental costs associated with MIPS. However, thriving, not just surviving, under MIPS will require substantial investments in information technology and other care management infrastructure that will be beyond the capacity of all but the largest physician organizations. Avoiding MIPS altogether and seizing the opportunities presented by APMs will require even greater size, scale and resources.

Hospitals and health systems, physician specialty management companies and large, sophisticated multi-specialty group practices that make the investments now that will be needed to thrive under MACRA will be able to take advantage of the market disruption that MACRA will create, especially in the sole practitioner and small group practice portion of the physician services market. In particular, MACRA presents a once-in-a-generation strategic opportunity for physician growth and alignment for those systems, management companies and large group practices that can create physician employment and/or alignment models that: (1) offer relief from the direct burdens of MIPS compliance; (2) offer the opportunity for enhanced payments under MIPS; and/or (3) offer an APM as a superior alternative to MIPS. The further challenge will be doing this in a manner that is realistic and practical, but still sensitive to the concerns of physicians who are being driven to reluctantly give up traditional private practice.

In our view, a winning strategy for success under MACRA, and payment transformation from fee-for-service (FFS) payments to value-based payments or APMs generally, should include offering a range of options under which physicians and physician groups can effectively and efficiently align with your organization. Such options might include:

• Direct employment;
• Leased or contracted employment under a “foundation” model that enables a physician to act as a day-to-day employee of the system, but is based on a contractual, not employment, relationship and allows physicians to remain in control of individual physician compensation;
• The opportunity to join as an employee, leased employee or independent practice an APM entity sponsored by the system (in many cases, this would be a Next Generation Accountable Care Organization or a Track 2 or Track 3 Medicare Shared Savings Program ACO, though there are other options);
• The opportunity to join as an independent practice a clinically-integrated network (CIN) that contracts in the commercial payor market and takes responsibility for many of the burdens associated with independent practice (e.g., MIPS compliance); or
• The opportunity to buy services from a system-sponsored management services organization (MSO) that provides practice management support to independent practices.

In addition to creating these options, systems will need to educate the physicians in their market about the transformative impacts of MACRA. This is not an entirely new value proposition. Physicians have been leaving small group practices for larger group practices and system employment for years for many similar reasons (e.g., better and/or more secure salary and benefits, relief from the administrative and regulatory burdens of independent practice, better clinical support, etc.). MACRA will dramatically and quickly accelerate this trend.

While our thesis is that MACRA presents an opportunity to sophisticated and forward-looking players in the market, there is no doubt that MACRA presents many challenges as well, especially to hospital systems. The most notable of these challenges is that as “value” becomes the basis for physician services reimbursement, the success of the physician enterprise will increasingly be at odds with the success of the hospital enterprise, because “value,” in the form of cost-effectiveness, will be delivered by keeping patients healthy and out of the hospital. This is not a new problem for hospitals in commercial markets already in the midst of the transition from FFS payments to value-based models and other APMs, but it will intensify their problems. For hospitals still in primarily FFS markets, MACRA will present a new and significant challenge. As Medicare and commercial payers shift to value-based and other alternative payment models, systems will need to redesign their operations and reduce costs accordingly. While that work must happen, systems should not lose sight of the fact that MACRA presents a significant opportunity to create greater alignment with physicians, and a risk of losing this opportunity to their competitors. The brave new world of MACRA will create further impetus for the creation of hospital and physician systems that are fully integrated—clinically, operationally and financially.

McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). This article discusses ways in which your organization can ready itself for this shift.

For many decades, at least since the passage of the Health Maintenance Organization Act of 1973, there have been reform efforts focused on moving the United States health care system away from fee-for-service (FFS) reimbursement and toward models designed to reward quality, value and outcomes (often grouped together under the umbrella of cost-effectiveness). We are in the midst of such an effort now, with a variety of alternative payment models (APMs) and quality-based reimbursement models (QBRs) in place or being implemented. Providers must be prepared to embrace these changes if they are to thrive. McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models.

APMs and QBRs tie financial success to improving quality and controlling costs, and weaken the relationship between volume and financial success. As a consequence, the new payment models can completely change the value proposition in a health care enterprise and transform fundamental approaches to the delivery of health care services. For example, in a population health management model, higher volumes can be financially damaging instead of accretive. The collateral consequences of these types of shifts are not difficult to imagine, as relationships among providers change to address the new incentives. Fundamental system structures, compliance efforts and board oversight functions all may be affected. Further, the shifting incentives result in new ways to think about fraud and abuse, antitrust and tax exemption laws.

This transition is not easy, however. APMs and QBRs are not one-size-fits-all propositions. Rather, they represent a variety of approaches, each with its own set of requirements and incentives (see chart below). Adding to the difficulties and challenges health care providers face is the reality that during the transition they must operate in both worlds, with contracts that present fundamentally inconsistent financial incentives. Understanding the impossibility of designing a system that can excel in both environments, health care providers will have to decide where their “tipping point” is and at what point they align organizationally and strategically to the new payment world.

Given the long history of similar efforts that have failed, some skepticism about whether the system really will transform to APMs and QBRs is understandable. There are, however, many reasons to believe that the current trend is real and that the changes, this time, will be systemic and transformational. Among the reasons to think this is not déjà vu are: (a) the nature of APMs and QBRs is not overly prescriptive, which is causing health care providers to experiment to find what works within an overall framework of lower costs and improving quality; (b) a revolution in health information technology has resulted in providers who have much more robust, real-time data to inform care management initiatives; (c) the pressure to control costs has only intensified; (d) consolidation in the provider market has created vertically integrated health systems that have the infrastructure to embrace and succeed under APMs and QBRs; and (e) APM and QBR initiatives in the recent past, albeit limited, have created a meaningful base of knowledge, on the part of providers and private and public payers, upon which to build. But perhaps the most compelling reason to think the transition will be transformative is the fact that the federal government, and in particular the Medicare program, is taking the lead.

The Department of Health and Human Services has set a goal of tying 30 percent of FFS Medicare payments to quality or value by the end of 2016, with that growing to 50 percent by 2018 (see chart below). The Medicare program has never set such goals before. In repealing the sustainable growth rate approach, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) established the Merit-Based Incentive Payment System (MIPS). Starting in 2019, MIPS will include substantial financial incentives for physicians and certain other eligible professionals to participate in APMs. On the hospital side, the Comprehensive Care for Joint Replacement requires certain hospitals to participate in retrospective bundling of acute care, post-acute care and physician services for Medicare beneficiaries receiving certain joint replacements. As a mandatory program for designated hospitals, this represents a fundamental shift in how Medicare pays for these services. This is just a small sample of a broad range of reimbursement changes being spearheaded by the Center for Medicare & Medicaid Services.

The transition from FFS to the transformative under APMs and QBRs will pose a series of questions and challenges for health care systems and other industry leaders, the primary question being: How can I prepare my organization so that it is not only competitive, but thrives under APMs and QBRs? The goal of McDermott’s Managing the Transition to Transformation series is to help answer this question.

What you can expect from the Managing the Transition to Transformation series?

• Focused, succinct and practical articles covering the range of issues and questions that will arise from the transformation to APMs and QBRs.
• Identification of indirect issues and considerations frequently overlooked when considering payment reform models.
• A resource that general counsels can use to help internal clients anticipate and address emerging issues before they arise.

Topics of individual articles will include:

• MACRA and the Government’s Role in the Transformation
• Strategies for Thriving in an Alternative Payment World
• Fraud and Abuse in the Age of Payment Reform
• Implications for Governance
• Provider-Payor Integration
• Quality and Payment Reform
• Digital Health
• Antitrust and Integrating Integrated Systems