Understanding Regulations of ACO’s July 14, 2011

Understanding Regulations of ACO’s

July 14, 2011

Speakers

• Todd I. Freeman, Larkin Hoffman (Minneapolis, MN)

• Sheri Dacso, Seyfarth Shaw, LLP (Houston, TX)

• James Egleston, Waldheger-Coyne (Cleveland, OH)

• Adam J. Tutaj, Esq., Meissner Tierney Fisher & Nichols S.C. (Milwaukee, WI)

Presentation Overview

1. Stark Law Waiver2. Anti-kickback Law Waiver3. Antitrust Safety Zones and Ruling

Process4. Tax-Exempt ACO Member Issues

Stark Law Waiver

Section Overview

1.Official Guidance2.Authority granted under the

Affordable Care Act3.Scope of Stark Waiver4.Topics to which CMS sought comment

Official Guidance

–Notice dated March 24, 2011 from CMS and OIG.

Authority granted under the Affordable Care Act

– authorize the Secretary to waive provisions of the Stark Law to accommodate creation and operation of ACOs.

A.Application of Waivers1. Qualified ACOs – Undefined 2. ACO participants3. ACO providers/suppliers4. Requirement to be “qualified” may or may not apply

to ACO participants/Suppliers

Authority granted under the Affordable Care Act

B. While waiver applies to ACO participants and providers/suppliers, there is no provision for applying to the owners of such participants and providers/suppliers

C. Waiver only applies to those participating in the Shared Savings Program – if the ACO ceases to participate in the Program, it may need to dissolve or be restructured to comply with Stark

Scope of Stark Waiver

A. Distributions of shared savings from the Shared Savings Program to ACO participants and providers/suppliers

B. Distributions of shared savings from the Shared Savings Program to individuals and entities that were ACO participants or providers/suppliers during the year in which the shared savings were earned by the ACO – given that shared savings are received in the year following participation, this requirement seems nonsensical and impossible to meet


C. Activities necessary for or directly related to the ACO’s participation and in operations under the Shared Savings Program1. “Necessary for” requirement sets an almost

impossible threshold 2. “Directly related” also creates factual issues that

would give pause to rely on a waiver


D. Other problems with the scope of the waiver1. Tracking dollars from shared savings

a. If ACO receives other funds, then shared savings funds need to be earmarked

b. Are dollars able to be distributed in gross without assessment of ACO overhead?

c. Offset for prior year’s losses?


2. Dollars distributed from private arrangements not waived possibly necessitating separate ACO for private arrangements

3. Waiver only applies to ACO participant and not to a redistribution of funds to the owners and employees of the ACO participants

4. Payments made to referring physicians that are not ACO participants are not included in the waiver


5. Stark violation is based on a financial relationship, which is not cleansed by the waiver, only distributions are cleansed

6. Stark violation is the referral to an entity to which a physician has a financial relationship – not the payment pursuant to that relationship

Topics to which CMS sought comment

A. Arrangements related to the establishment of the ACO to finance the ACO

B. Arrangements between and among ACO participants and/or ACO providers/suppliers related to achieving ACO goals

C. Arrangements between the ACO, its participants and providers/suppliers and outside entities

Topics to which CMS sought comment

D. Distribution of shared savings or similar payments received from private payors

E. Requirement of “necessary for or directly related to the ACO’s participation and in operations under the Shared Savings Program”

Anti-kickback Law Waiver

Section Overview

1.What is the anti-kickback (“AKS”) statute?

2.How do the AKS laws affect ACOs?3.What steps has the federal

government taken to mitigate the draconian effect of AKS on ACOs?

The Anti-Kickback Statute (“AKS”)

• Criminal statute which prohibits the giving, accepting, soliciting, or arranging items of value in any form (gifts, certain discounts, cross-referrals between parties), either directly or indirectly for the purpose of inducing or rewarding another party for referrals of services paid for by a federal government health care program

The Anti-Kickback Statute (“AKS”)

• Also covers purchasing, ordering, leasing, or arranging for or recommending the purchase, leasing, or ordering of services paid for by a federal health care program in exchange for any item of value

• Violations of the AKS could implicate Civil Monetary Penalty liability as well

• Exist in many state statutes

How AKS in Implicated

• Fraud and Abuse laws prohibit the activities related to ACOs which allow distributions of shared savings received from CMS in relation to the delivery of healthcare to ACO participants, ACO providers and ACO suppliers.

• Because of this, CMS intends to issues waivers to protect these financial relationships created by shared savings both within and outside of an ACO

Qualification for Waivers

• A qualified ACO must enter into an agreement with CMS to participate in the Medicare Shared Savings Plan (“MSSP”)

• An ACO must assure compliance of all ACO participants, providers and suppliers with the final provisions of the MSSP.

• Once qualified, the ACO may request a waiver for the Fraud and Abuse laws.

New ACO Rules Propose AKS Waiver• The proposed AKS waiver would waive

application of the AKS with respect to the following two scenarios:

Scenario One

• Distributions of shared savings received by an ACO from CMS under the MSSP– to or among ACO participants, providers/suppliers

and individuals/entities that were ACO participants or ACO providers/suppliers during the year in which the shared savings ere earned by the ACO

– for activities necessary for and directly related to the ACO’s participation in and operations under the MSSP

Scenario Two

• Any financial relation between or among the ACO, ACO participants, and ACO providers/suppliers necessary for and directly related to the ACO’s participation in and operations under the Medicare Shared Savings Program that implicates the Stark Law and fully complies with a Stark Law regulatory exception.

Scenario Two

• Because, ordinarily, compliance with an exception to the Stark Law does not necessarily immunize an arrangement under the AKS, OIG and CMS included this language in the waiver in order to minimize the burden on entities establishing ACOs in a manner consistent with the Stark Law regulatory exceptions (e.g., the exception for certain physician incentive plans (42 C.F.R. § 411.357(d)(2))

Affect of Waivers on Civil Monetary Penalties• Scenario Two:

– Any financial relationship between or among the ACO, its ACO participants, and its ACO providers/suppliers necessary for and directly related to the ACO’s participation in and operations under the Medicare Shared Savings Program that implicates the Stark law and fully complies with an exception

Waiver Duration

• The waiver of Stark law related to shared savings applies for the term of the agreement with CMS even if actual distributions occur after the expiration of the agreement.

• For AKS and CMP, for arrangements that are compliant with a Stark exception, the waiver only applies during the period of time of the CMS contract.

Open Items – CMS Still Seeking Comment• Whether the waiver provisions provide

protection for:– ACO formation, including start-up expenses and initial

investments to cover same– ACO governance requirements– ACO administrative requirements– ACO IT requirements– ACO participants, providers/suppliers (inside ACO)– ACO participants, providers/suppliers (outside ACO)– Distribution from private payors

ACO Development Strategies

1. Always try to structure entities and relationships to fall within existing safe harbors

2. Take advantage of safe harbors for certain managed care plans established under the Medicare and Medicaid Patient and Program Protection Act of 1987

3. Establish and monitor compliance at all levels.

Antitrust Safety Zones and Ruling Process

Section Overview1. Antitrust Risks2. Antitrust Basics3. Proposed Statement of Antitrust Enforcement Policy4. ACOs to which the Rule of Reason analysis will be applied5. Safety Zone for ACOs6. Mandatory Antitrust Review7. ACOs outside the safety zone but below the mandatory review threshold8. How to Calculate the ACO’s PSA share for each common service9. The Antitrust Review Submission (if desired or necessary)10.Five Types of Conduct FTC and DOJ Suggest ACOs Avoid

Antitrust Risks

• Despite the potential savings ACOs could produce within Medicare, by their very nature, ACOs also present very significant Antitrust Risks as they relate to the commercial insurance market:a. ACOs are potentially very large organizations that

could dominate a market and lessen competition.b. ACOs are collaborations among competitors that

could engage in myriad anticompetitive conduct.

Antitrust Basics

• Primarily concerned about Section 1 of the Sherman Act.a. Section 1 of the Sherman Act - Prohibits concerted

conduct among competitors that unreasonably restrains trade (price fixing, group boycotting, tying arrangements etc.).

Antitrust Basics

b. Price agreements among competing, independent health care providers are usually per se illegal (i.e. – there is no defense). However:• Financially or clinically integrated organizations of

independent health care providers • Where price agreements are reasonably related to

attainment of procompetitive effects • Are analyzed under the Rule of Reason (the benefits

are weighed against risks)

Antitrust Basics

• Violations of Antitrust Law carry extensive criminal and civil penalties. Enforcement actions can come from the FTC, the DOJ or by private parties who, if successful, are entitled to treble damages. So, the stakes are very high.

Proposed Statement of Antitrust Enforcement Policy

• March 31, 2011 FTC and DOJ Proposed Statement of Antitrust Enforcement Policy.a. Applies to:

i. Collaborations among otherwise independent providers and provider groups

ii. Formed as ACOs after March 23, 2010 iii. That seek to or have been approved to participate in the Shared

Savings Programb. Describes ACOs to which the Rule of Reason analysis will be appliedc. Establishes an antitrust safety zone for ACOsd. Mandates FTC or DOJ review of some ACOs e. Offers options for ACOs outside the safety zone but below the

mandatory review threshold

ACOs to which the Rule of Reason analysis will be applied

a. ACOs that are clinically integratedi. ACOs that meet CMS’s eligibility criteria are

“deemed” clinically integratedii. ACO may propose alternate ways to clinically

integrate

b. ACOs that achieve significant procompetitive efficienciesi. Participating in the Shared Savings Program allows

CMS to collect cost, utilization and quality data –

Safety Zone for ACOs

a. Multiple providers of same service must have a combined share of 30 percent or less of each common service in each provider’s primary service area (“PSA”) (does not apply to single providers or single groups – subject to dominant provider limitation)

b. All hospital and ASC participants must be non-exclusive (i.e. the must have the right and ability to contract with payors outside of the ACO)

c. Rural Exception (allows an ACO to exceed the 30 percent limitation) - ACOs may include, on a non-exclusive basis, one physician per specialty from each rural county and Rural Hospitals

Safety Zone for ACOs

d. Dominant Provider Limitationi. Applies to ACOs with a participant with greater than

a 50 percent share in its PSA in any service that no other ACO participant provides in that PSA

ii. The ACO may include that participant on a non-exclusive basis

iii. The ACO cannot require payors to contract with it exclusively or restrict payors from dealing with other ACOs or networks

Mandatory Antitrust Review

• ACOs that have a PSA share over 50% for any common service (two or more providers) must undergo a mandatory review by either FTC or DOJ to participate (must give CMS the letter)

ACOs outside the safety zone but below the mandatory review threshold

a. ACOs that have a PSA share over 30 percent and less than 50 percent for any common service (two or more providers) may be okay but have the option to submit to an antitrust review

b. If the ACO submits to a voluntary antitrust review and antitrust concerns are identified, they may be excluded from the Shared Savings Program

How to Calculate the ACO’s PSA share for each common service

a. Identify each “common service” (a service provided by more than one independent ACO participant)i. For a physician, a service is the primary specialtyii. For inpatient facilities, a service is a major diagnostic

category (MDC)iii. For ASCs and hospital outpatient departments, a

service is an outpatient category


b. Identify the PSA for each common service for each independent participanti. the lowest number of contiguous postal zip codes

from which the participant draws at least 75% of its patients for the service


c. Calculate the ACO’s share of Medicare fee-for-service payments for the common service in the PSAi. Medicare allowed charges for most-recent calendar

year for physiciansii. Medicare payments for most-recent calendar year

for outpatient servicesiii. Medicare discharges for most-recent calendar year

for inpatient services or Medicare payments if discharge data is not available

CMS to publish aggregate Medicare data (allowed charges and payments) by zip code

The Antitrust Review Submission (if desired or necessary)

a. Application and supporting documents submitted or to be submitted to CMS

b. Documents relating to provider contracting rights (i.e. – exclusivity)

c. Documents relating to business strategies or plans to compete in the Medicare and commercial markets and the likely impact on prices, cost, or quality of any service to be provided

d. Formation documents – articles, certificates, state filings etc

The Antitrust Review Submission (if desired or necessary)

e. Information sufficient to show the following:i. PSA share calculations for each common serviceii. ACO plans to protect pricing information of individual

participantsiii. The identity of and contact information for the 5

largest health plans or payors for the ACO’s servicesiv. The identity of any other existing or proposed ACOs

in any PSA in which the ACO will operate

Five Types of Conduct FTC and DOJ Suggest ACOs Avoid

a. Preventing or discouraging payors from directing or incentivizing patients to choose certain providers (anti-steering, guaranteed inclusion, product participation, price parity, etc.)

b. Tying ACO services to ACO provider servicesc. Requiring exclusivity of any provider or participant other than

PCPs d. Restricting ability of commercial payors to make available to

enrollees cost, quality, efficiency, and performance information regarding ACO participants

e. Sharing among the participants individual’s competitively sensitive pricing or other information that could restrict competition outside the ACO

Tax-Exempt ACO Member Issues

Section Overview

1.IRS Notice 2011-202.Preliminary Comments and Issues

IRS Notice 2011-20On March 31, 2011, the Internal Revenue Service (IRS) issued Notice 2011-20,

regarding the implications under the Internal Revenue Code for hospitals and other health care organizations recognized as 501(c)(3) organizations that participate in the Medicare Shared Savings Program (MSSP) through an accountable care organization (ACO).

The Notice is long on requests for commentary and short on actual guidance – rather, what is offered is really a summary of what the Service “anticipates” and “expects” in terms of how the rules regarding private benefit, private inurement and unrelated business income tax (UBIT) might be applied, at least with respect to MSSP operations.

IRS Notice 2011-20

A. Private Inurement/Private Benefit ConsiderationsIn order to preserve its exempt status, a 501(c)(3) organization must ensure that its participation in the MSSP through an ACO is structured so as not to result in its net earnings inuring to the benefit of its insiders or in its being operated for the benefit of private parties participating in the ACO. Whether prohibited inurement or impermissible private benefit has occurred must be determined by the IRS on a case-by-case basis, based on all the facts and circumstances. Because of CMS regulation and oversight of the MSSP, as a general matter, the IRS expects that it will not consider a tax-exempt organization’s participation in the MSSP through an ACO to result in inurement or impermissible private benefit to the private party ACO participants where:

IRS Notice 2011-201. The terms of the tax-exempt organization’s participation in the MSSP through the ACO

(including its share of MSSP payments or losses and expenses) are set forth in advance in a written agreement negotiated at arm’s length.

2. CMS has accepted the ACO into, and has not terminated the ACO from, the MSSP.3. The tax-exempt organization's share of economic benefits derived from the ACO (including

its share of MSSP payments) is proportional to the benefits or contributions the tax-exempt organization provides to the ACO.

4. If the tax-exempt organization receives an ownership interest in the ACO, the ownership interest received is proportional and equal in value to its capital contributions to the ACO and all ACO returns of capital, allocations and distributions are made in proportion to ownership interests.

5. The tax-exempt organization's share of the ACO's losses (including its share of MSSP losses) does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled.

6. All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO's participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.

IRS Notice 2011-20B. Unrelated Business Income Tax (UBIT) Considerations

Whether the MSSP payments will be subject to UBIT depends on whether the activities generating the MSSP payments are substantially related to the exercise or performance of the tax-exempt organization’s charitable purposes.The IRS expects that, absent inurement or impermissible private benefit, any MSSP payments received by a tax-exempt organization from an ACO would derive from activities that are substantially related to the performance of the charitable purpose of lessening the burdens of government within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2) – provided that the ACO meets all of the eligibility requirements established by CMS for participation in the MSSP. However, in contrast to activities conducted as part of the MSSP, the IRS anticipates that many non-MSSP activities conducted by or through an ACO are unlikely to lessen the burdens of government within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2). While the IRS acknowledges that shared savings arrangements with Medicaid might further or be substantially related to an exempt purpose – inasmuch as such arrangements would appear to further the charitable purpose of relieving the poor and distressed or the underprivileged – the Notice does not address whether and under what circumstances a tax-exempt organization’s participation in non-MSSP activities through an ACO would be consistent with an organization’s tax-exemption under § 501(c)(3) or not result in UBIT.

IRS Notice 2011-20C. Request for Comments

The IRS requested comments (on or before May 31, 2011) regarding what guidance, if any, is necessary or appropriate regarding a tax-exempt organization’s participation in non-MSSP activities through an ACO. In so doing, the IRS emphasized that comments should take into account two guiding principles:

1. Although the promotion of health has been recognized as a charitable purpose, not every activity that promotes health supports tax exemption under § 501(c)(3). (Citing IHC Health Plans Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003) and Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff’d 625 F.2d 804 (8th Cir. 1980).)

2. If a tax-exempt organization is a partner (or member, in the case of an LLC) of an ACO treated as a partnership for federal tax purposes, the ACO’s activities will be attributed to the tax-exempt organization for purposes of determining both whether the organization operates exclusively for exempt purposes and whether it is engaged in an unrelated trade or business. (Citing Rev. Rul. 2004-51, 2004-1 C.B. 974 and Rev. Rul. 98-15, 1998-1 C.B. 718.)

Preliminary Comments and Issues

• A number of comments have been submitted to the IRS in response to the Notice. Unsurprisingly, many of these were from hospital systems and other tax-exempt health care organizations seeking greater certainty than the “case by case” scrutiny the IRS suggests would be required – and, ideally, an actual “safe harbor” that would simply turn on compliance with the final MSSP regulations. However, there were some more specific concerns with the contours of the IRS’s “anticipations” and “expectations” as set forth in the notice.

Preliminary Comments and IssuesA. Private Inurement/Private Benefit Considerations

1. Proportionality Requirement

The IRS’s approach to proportionality of gains and losses – at least in the joint venture context – has typically been determined by reference to ownership interests (which, in turn, is determined by the capital contributions of the respective venturers). Some commentators noted that the “proportionality” proposed by the IRS in the Notice would need to be reconciled with the MSSP regulations, which appear to contemplate the distribution of savings and losses on the basis of the relative contribution of the ACO participants towards the attainment (or failure to attain) the quality performance and savings goals – without reference to any particular ownership interests.

Preliminary Comments and IssuesThe Catholic Health Association of the United States, in its Comments, expressed this consideration (and its position) quite clearly:This [proportionality requirement] appears to be based on some confusion about the types of payments that an exempt hospital might received from an ACO participating in the MSSP. In most cases, it is likely that a hospital will have two relationships with an ACO: (1) as an owner; and (2) as a contractual provider of health care services. Thus, there will be two streams of income that the hospital may receive from the ACO: (1) as an owner, distributions; and (2) as a provider, payments for services rendered, which will likely include “incentive” payments based on MSSP savings under a methodology spelled out in the contract. While we understand analyzing the ownership distribution stream under the ‘proportional’ benefits test, such test should not apply to the hospital’s stream of income derived from services provided, regardless of whether such includes a component based on MSSP savings.See Letter from Lisa J. Gilden to Commissioner of Internal Revenue (May 31, 2011)

Preliminary Comments and Issues2. Fair Market Value Requirement

Some commentators have also requested further guidance on how the “fair market value” requirement will apply in the ACO context. The specific concern – as with the proportionality requirement – is that 501(c)(3) organizations contemplating the formation of an ACO will need to offer physicians and other participants tangible incentives to participate in the new structure that will likely need to be based on relative quality performance metrics and/or savings generated – which are not as easy to value as cash or property contributions in the context of a joint venture. In order avoid (or at least minimize) valuation disputes and potential inconsistencies with CMS guidance, at least one commentator has suggested that the “fair market value” requirement be replaced with a requirement that contracts and transactions be “commercially reasonable taking into consideration all of the surrounding facts and circumstances.” See Letter of Blair Childs to Commissioner of Internal Revenue (May 31, 2011).

Preliminary Comments and Issues3. Set in Advance Requirement

While the “set in advance” requirement should be relatively straightforward, inasmuch as the MSSP regulations require ACOs to submit a written description of the methodology to be employed in allocating savings and losses among the ACO, ACO participants and ACO providers/suppliers, it is not clear from the Notice how specific the agreement must be in identifying the tax-exempt participant’s “share” of savings and losses. Again, unlike joint ventures – which the IRS has typically analyzed on a clear-cut percentage ownership basis – the precise percentages in which each ACO participant will share savings and losses may not be susceptible to ready valuation and may not remain static for the term of the 3 year MSSP agreement. Thus, at least one commentator has requested that the IRS clarify that this “set in advance” requirement will be satisfied if the written agreement specifies the “methodology” by which such allocations will be made. See Letter of Blair Childs to Commissioner of Internal Revenue (May 31, 2011).

Preliminary Comments and IssuesB. UBIT and Exempt Status Generally

1. Lack of Guidance on Non-MSSP Activities

While the IRS appeared to be fairly comfortable with ACO operations and activities in connection with Medicare (as relieving a governmental burden) and Medicaid (as providing relief to the poor, distressed and underprivileged), it cast substantial doubt over the charitable bona fides of ACO operations unrelated to governmental payers. Thus, it remains to be seen whether the participation of a tax-exempt organization in a non-MSSP ACO will blow its exemption or merely subject it to UBIT.Note: This lack of guidance could be particularly problematic for the Pioneer ACO Model, under which ACO participants are expected to have entered into outcomes-based contracts with non-Medicare purchasers such that the majority of the ACO’s total revenues (including Medicare) shall be derived from such arrangementsSome commentators have analogized participation in a non-MSSP ACO to HMO arrangements of a sort that hospitals enter into regularly. Thus, the IRS has also been requested to confirm that such non-MSSP activities – if otherwise consistent with CMS regulations – will be regarded as “related” to its charitable purposes.

Preliminary Comments and Issues2. 501(c)(3) Status of ACOs

Consistent with the foregoing point, other commentators have requested that the IRS simply confirm whether or not ACO organizations might themselves be qualified as 501(c)(3) organizations. The American Hospital Association (“AHA”), in its comments, noted that granting ACOs tax-exempt status will encourage participation by tax-exempt hospitals and ensure that ACOs’ activities further a charitable purpose. See Letter from Melinda Reid Hatton to Commissioner of Internal Revenue (May 31, 2011). The AHA further observed:

The Service has previously granted tax-exempt status to similar groups of health care providers that participated in regional health information organizations (RHIOs). ... The rationale for granting tax-exempt status to RHIOs applies equally to ACOs. The purpose of an ACO is to improve accountability for care of Medicare beneficiaries, improve coordination of Medicare fee-for-service items and services and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. ACOs will be promoting health of the large section of the community, similar to RHIOs.

See id.

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