What changes to Stark, Anti-Kickback Statute mean for healthcare providers

January 7 2021

Late last year, HHS further signaled the shift to a value-based care model with the first major overhaul of both the Stark Law and Anti-Kickback Statute since they were introduced three decades ago. In this episode, Patsy Powers - the co-leader of Waller's healthcare industry team - gives an overview of the changes and what they mean for healthcare providers.

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A transcript of the conversation is below:

Morgan Ribeiro: Welcome to PointByPoint. This is Waller's Chief Business Development Officer and the host of the podcast, Morgan Ribeiro. On today's episode, we will take a look at the latest changes to the Stark Law and Anti-Kickback Statute and the most significant changes to those regulations since they were first introduced. These updates will greatly impact the operations of our healthcare provider clients, particularly, but health systems, ambulatory surgery centers and physician practices. Joining me today is Patsy Powers, a 30-year veteran of Waller's healthcare compliance and operations group that many hospitals and health system leaders rely on for counsel and complex matters, involving Stark and Anti-Kickback Statute. Welcome to the show, Patsy.

Patsy Powers: Thank you. Thanks for having me.

Morgan: I think it would make sense for me to maybe set the stage for our listeners on how we got to where we are today and what was announced by HHS recently. In June 2018, HHS deputy secretary Eric Hargan announced a regulatory reform initiative called The Sprint to Coordinated Care. And that is now referred to as "The Sprint." The purpose was to reduce regulatory burdens and incentivize coordinated care. And as part of that initiative, the Centers for Medicare and Medicaid Services and the Office of the Inspector General assessed regulations that negatively impact the transition to value-based care.

In October 2019, they issued proposed rules to significantly modify the two anti-fraud laws – the physician self-referral law, also known as the Stark Law, and the federal Anti-Kickback Statute. The Stark Law governs patient referrals and prohibits providers of designated health services from submitting a claim for payment for a patient referred by a physician with whom the entity has a financial relationship. And then the Anti-Kickback Statute is a criminal law that prohibits payments in exchange for the referral of patients or the purchase of items or services reimbursable by a federal program.

One year later – after all of this was proposed and we've been anxiously awaiting for the government to announce what would happen here – the administration released its final rule at the end of November marking what is the most significant changes to Stark and Anti-Kickback Laws. The bulk of these changes will go into effect in late January. So with that rather long introduction, I would love to hear from you and to better understand what it is and the new rules and how they will impact our clients.

The revised rules are designed to provide greater flexibility to providers. It's, overall, celebrated as a win for them and engaging in this value-based healthcare payments and delivery system models that we've been talking about for quite some time.

The hope is that the healthcare industry overall is moving in that direction. From your experience in counseling clients, how were Stark and Anti-Kickback Statutes limiting providers and their ability to engage in these value-based models?

Patsy: The Stark and Anti-Kickback Statutes both had provisions where the payments had to be fair market value for the services rendered and the value-based arrangements, CMS had some innovative models that allowed payments to participants to be based on certain value achieved.

But aside from those models, there was no way to be comfortable that the payments between – say a hospital and a physician practice – would comply with Stark because there was no way to measure the fair market value payments, unrelated to the volume or value of referrals, in connection with a value-based payment, where the payment might be for not taking a certain action, not over-providing care.

It goes to the broader concept of payment on a value-based arrangement versus payment on volume-based. And so these are welcome sort of regulations that are too late and too early at the same time. Too late in that, it's not too late, but tardy in the sense that we've been really needing something to come into effect to allow for these alternative payment arrangements and care coordination payments and value-based arrangements. But then at the same time, they came fairly quickly, and now we're grappling with trying to understand and implement and put changes in place that will comply and understand now the new options that are available to structure value-based arrangements.

Morgan: I think that's a good segue into my next question, which is on the timing. Timing is a key question with these new rules. There's another big event happening in Washington at the end of January, and the rules are most likely going into effect on January 19th and then the presidential inauguration for Joe Biden is on January 20th.

How will the incoming Biden administration approach or modify these rules? Do you have any thoughts or any insight into how they might change and when that might occur?

Patsy: Of course, it's impossible to predict what will happen in the future, but I do think that for the most part, these rules are not that political. They allow for the flexibility for value-based arrangements that all participants in the healthcare industry welcome and some clarification on a number of the Stark restrictions that also are welcome modifications. It's unlikely that there would be any pullback of these regulations with the new administration.

Morgan: You mentioned that healthcare attorneys like yourself are trying to digest the more than 2,000 pages of rules and commentary that were released back at the end of November. While there is a lot in there under each law, I think it might be helpful for our listeners to just give us an overview of some of the key changes that are within those rules. Talk about value-based payments. Is there kind of anything particular in there that you would note for our listeners, whether or not they're up the hospital or health system or ambulatory surgery center, physician practice and a shift there specifically that will impact their ability to really engage in more of these value-based arrangements?

Patsy: The Stark exception and the Anti-Kickback safe harbors are similar, but not identical. And so obviously the compliance with the Stark exception is essential but the regulations are also quite similar to the proposed regulation. So to the extent that an organization became very comfortable with understanding the proposed regulations they're quite similar, there are some deviations with respect to the amount of risk that has to be assumed, but in general, there's a full financial risk exception. There's a partial financial risk exception. And then there's just a value-based arrangements exception under Stark. And then under the kickback, full financial partial financial, and care coordination.

There's a lot there that and there's a lot available for the participants to determine whether or not they can meet one of the several different options. For example, under the care coordination – that safe harbor is a safe harbor for participants to work together, to coordinate the care of a patient and entity, for example, a hospital could contribute non-in-kind remuneration to another organization and that was designed to maximize or facilitate care coordination of a patient's subsequent care. The recipient is to pay up to 15% of the value of whatever is contributed so that they have some demonstrated need and use and it's going to be important and they're going to use it, or they're going to pay some portion of the value for that in-kind contribution.

 The full financial risk/partial financial risk aspects of these rules are also the ones that we'll see how they play out in the future because it really depends on the financial resources of an organization to be able to absorb the full financial risk and so it may take some time.

The full financial risk has a ramp-up period so that the benefits provided could be provided for up to 12 months prior to the commencement. So that with the recognition that it takes time to really develop the resources and the protocols of the system needed to monitor and implement a full value-based full financial risk model.

What about imperfect performance? Can you define that? And maybe some of the technicalities around that concept?

So that concept is a general notion that when CMS reviewed the Stark exceptions and the numerous comments that they received, either in the request for information in 2018, or the proposed rules in 2019, along with their numerous SRDP submissions SRDP is the self-disclosure protocol that CMS has implemented for providers to come forward to disclose potential violations of the Stark law to mitigate the penalties available that could be assessed to them under that law. And through thousands of submissions under the SRDP, it's clear that CMS developed a greater understanding of the faults that providers have experienced related to Stark. So, for example, you mentioned that Stark is a strict liability law, either you're in the four corners sort of an exception or you're not. And historically, many of the exceptions are that there's a written arrangement signed by the party, sets the compensation in advance and for a variety of reasons that are not at all illegal – or in a normal world – parties might not get an arrangement reduced to writing or might not get it signed in time. And this imperfect performance theme is where CMS has liberalized the exceptions so that a provider might not violate Stark just because they didn't get the agreement signed before 90 days. There's also a limited remuneration exception that's been added that I think of as imperfect performance because we see this a lot where hospitals have medical staff leaders or physicians that are on the board of a facility and. because it's not professional services, they don't necessarily think to put in any kind of signed agreement that sets out the compensation in advance that's signed by the parties.

And so often a physician would be paid, let's say a hundred dollars to attend a board meeting and never have anything reduced in writing. So this limited remuneration exception allows for a provider of designated health services to pay a physician up to $5,000 a year to provide services. And if there's no signed writing, it's fine. So that is a welcome exception because CMS has made it clear that they understand that the day-to-day activities and the stress associated with running a healthcare facility – and getting a document signed by the parties in place for the payment of a sum of a thousand dollars. There's really not a comparison. And so they've realized that there's not much legal risk associated with paying a physician an amount less than $5,000.

There are a number of changes related to the specific information regarding when a physician's compensation is set in advance. And so the phrase "set in advance" is a phrase that is part of many of the exceptions that the physician agreement is for a term of a year and the compensation is set in advance. It can be a method. It can be a formula, but it should be set in advance for the term of a year.

 This "imperfect performance" bucket of changes includes the concept that even though it's set in advance, but then they've also added the concept that the compensation arrangement can be modified numerous times throughout the term of the contract. That is welcome because, for example, let's say a hospital leases some space to a physician, and then the amount of space needed is changed for whatever reason. Let's say the group has a physician leave and they don't need as much space and they want to reduce to a smaller suite. And so while there were ways that we had been able to accommodate such a change based on cobbling together commentary from prior rulemakings, there's a specific provision now that says you can change it as long as it's set forth in advance and the parties agree to it in advance. So that is very helpful.

Morgan: There are a slew of new definitions in the Stark rules that are impactful to an end positive for providers of designated health services. And those physicians with whom they have a financial relationship. The first is fair market value. The second is commercial reasonableness. And the third concept is that of volume and value of referrals which is now separate from fair market value. Anything you would note for our listener about those three new definitions anything particularly exciting for you

Patsy: I think that the commercial reasonableness definition is very exciting because we haven't had a definition of commercial reasonableness before. And so I'm gonna just read it because I think it's good – it means that if a particular arrangement furthers legitimate business purpose of the parties and to the arrangement and is sensible considering the characteristics of the parties, their size, scope and specialty and arrangement may be commercially reasonable, even if it does not result in a profit for one or more of the parties. That's a very important sentence. That lesson is that it doesn't result in a profit because commercial reasonableness is a component of many Stark exceptions. Lease exception, employment exception come to mind immediately. And with respect to the employment exception, there was a concern that if a, let's just say, a physician and the hospital did not collect as much money for the physician's professional services as it paid to the physician in salary. And that net loss – was that an indication that the arrangement was commercially unreasonable? And so there was a lot of concern about that. The plaintiff's bar has been trying to push the concept that, but for the referrals, no employer would employ somebody when they can't make money off of them. So this allowance for not requiring the entity to make a profit is significant because they recognize that there are a number of different reasons that an entity might not need to make a profit that's completely unrelated to the volume or value of referrals. It could be that it's associated with their nonprofit mission, or it could be that the conditions of participation require a certain arrangement and their profitability is not an aspect of it. Alternatively, especially with rural providers, oftentimes the fair market value is lower because of the geographic area and the fair market value might be less than the amount that it would cost to build the building and so is it commercially reasonable to lose money on the development of a medical office building? And now we know that it's still fine. It's still commercially reasonable because the facility might need to have a medical office building for physicians to set up their practice and they wouldn't be there if they had to pay exorbitant rent simply to cover the cost of developing the building.

Morgan: You mentioned fair market value having a new definition, new implications. Can you speak specifically to that?

Patsy: It wasn't really a huge surprise as far as the changes to fair market value. I think they broke it down to a definition of general fair market value in arms-length transactions, consistent with the general market, but they added the clause of the subject transaction, and the concept being that it's not just this esoteric number out there, comparing like things, but it's of your particular relationship, your particular transaction. So that helps pull it back into sort of a realm of reality. Likewise, the general market definition has been revised with respect to say a sale of assets – the purchase of an asset that would bring on the date of the acquisition of the asset between well-informed buyers and seller, not otherwise in a position to generate referrals.

And so the general market value also breaks it down between the purchase or sale of assets, compensation for services and the rental of equipment or office space. And likewise has definitions that are more tailored to the arrangement. And so it does provide a little bit more, and I don't think it's a huge surprise to parties, because I do think that common sense has dictated the market value numbers over the years. Such that, for example, let's say the MGMA median for a particular physician's compensation is $250,000, but that this physician is really a superstar and could make more money anywhere else but wants to live in this particular area. I think that valuators have traditionally allowed for additional compensation as being reasonable and under a fair market value rubric with the notion that – particularly if they're a productive physician – that can generate more and that the resume of that physician does count for in there black box methodology of fair market value. That there are some objective factors that would push it above the MGMA median. And this language codifies that concept that you're not restricted to looking just at the survey data, but can look at the broader objective factors that can influence the appropriate number and where the results should land.

Morgan: So on the Anti-Kickback law, On the revisions to the safe harbor provisions. Can you explain? Most of our listeners probably know this, but just in case, the safe harbor and how these value-based arrangements are different and for whom, in particular.

Patsy: The Anti-Kickback Statute prohibits the payment of any remuneration to another party, not just a physician, to induce that person to purchase or sell an item or service reimbursable under a federal healthcare program or to make a referral. So if I'm putting together a value-based arrangement, and it includes physicians, then the arrangement has to fit in a Stark exception. No, if ands or buts about it, it has to fit into an exception. Now the safe harbor, there's also, value-based enterprise safe harbors as well. And so then would look to the safe harbor to see whether that arrangement can also fit. Now, if it doesn't fit into a safe harbor, it doesn't mean that it's illegal. It just means that it's not protected, meaning it's not safe. And so some of the safe harbors are intended to be a little bit more difficult to comply with because Anti-Kickback is a criminal statute, and the government wants to make sure that it only protects arrangements that have very limited risk of violating the law or inducing a participant to order items or services or refer patients in exchange for referrals. Got to fit the Stark exception. Don't have to be in a safe harbor, but obviously, you want to get as close as you can to complying with the safe harbor to demonstrate that the parties aren't intending to violate it. The parties are trying to do exactly what is permitted under the law, which is structure an arrangement to pay for value and not volume.

Morgan: What should healthcare providers be doing right now to understand the regulations and determine how that impacts strategy?

 Patsy: I think to the extent that there are value-based arrangements being negotiated with independent parties, obviously these new rules are essential. And so counsel for any value-based arrangement needs to really run the terms through these new rules. As far as arrangements that aren't necessarily intended to be value-based arrangements, there is some liberalization, but I don't think that there's a great need to spring into action to comply with new exceptions. There are two exceptions to that. Number one, under the new Stark rules, there's a new definition for transaction and isolated transaction exception and the isolated transaction exception has been a useful tool for practitioners over the years because generally, it was intended to be for hospitals purchasing a physician's practice, and it would pay fair market value for the purchase of the practice.

It has been useful in the sense that sometimes parties might not have been able to document the arrangement timely. And so for example, a physician would provide services for a year and then the parties would realize, “Oh, there wasn't a written arrangement in place.” And so they would enter into a settlement agreement to pay for the services that were rendered over the prior 12 months.' And that payment would be a one-time settlement under the isolated transactions exception. CMS has said in this rulemaking, that is no longer an option They do not believe it is appropriate to make up for the failure to have a written arrangement through a single payment. So today, if an entity has a financial compensation arrangement with a physician and it's not properly documented, there's no fallback to fix it under the isolated transaction unless it's only been going on for 90 days or less and so it can fit into one of the technical non-compliant arrangements or it's limited remuneration.

The other thing they gave back, which I think is also helpful, is that sometimes the isolated transaction was used for a settlement of a dispute. And so they have said that you can still use it to settle a genuine dispute that's unrelated to a contract. So that still can be used for that. However, if there is a contract in place and the parties just haven't administered it correctly. So let's say, for example, there's a five-year lease that's been in place – we're four years into it between a hospital and a physician, and for whatever reason, the landlord did not charge an annual increase that's set forth in the lease. Let's say the rent is supposed to go up 3% every year. And they haven't charged it. And so under the new rules, there is a provision that the parties can fix it as long as they can collect the money during the term of the agreement and for 90 days after the termination. We're, within the term of the agreement. You can go back and say, Oh, by the way, you owe us X amount of money, which is doing the math on 3% over the last three years. And we're going to increase it by 3% for the next year under the terms of the lease. You can do that now and that's not viewed as a violation. Before there was some concern like does that lease fail to comply with the lease exception because you haven't followed the terms of the lease. And likewise, under any agreement that requires a written arrangement set in advance, if you haven't collected the money or paid the money properly under the terms of the agreement, is that non-compliance with the Stark exception? And so here, they've been very specific to say, you can fix it. You can clean it up as long as it's during the term of the agreement or within 90 days after the termination. And so that's a big relief too because we're no longer grappling with the idea of, “Is that a violation? Do I need to report it? If so, how much do I owe? And what's the term of the non-compliance?” So that is very helpful.

 Morgan: Your practice focuses primarily on counseling hospitals and health systems and other providers. How will these regulatory changes impact hospital M&A and the due diligence process?

Patsy: The rules are not retroactive. And so they're only prospectively helpful. So to the extent that there is a problem historically that's identified, then I think that the parties will need to really vet those issues and determine the extent to which that is a problem.

Now, the issue is then, so you determined that there's a problem under the old rules, but maybe not a problem under the new rules. And then is that something that is for disclosure to CMS because it didn't comply with the old rules. I don't know the answer to that. I would imagine that the answer is “yes” and then let CMS come back and say, that's okay. We don't need to know about that. So I do think that even their statement that this is they're leaving some language in because of the historical impact. I think that they believe that the old rules still govern today and so you need to comply with them today.

Morgan: I imagine the same thing goes for the work that you do and advising clients on sort of day to day operational challenges of running a healthcare facility and staying in compliance with the variety of regulations. So, do you see that these regulations would impact the day-to-day operations of hospitals and health systems?

 Patsy: I think that certainly systems should review their policies. I don't think, for example, the liberalization of the exceptions for technical non-compliance or remuneration or fixing the remuneration during the agreement that doesn't really merit any change in policy because a system's policy should still require that an arrangement be documented and that payments shouldn't be made until there's a signed agreement. And so I would imagine most systems have those policies. And so those policies probably don't need to change, but it might not be a bad idea to look through them and make sure that they're still current, so that's not as big of an issue. I think with respect to the value based going forward, I do think that there are a number of different ways that parties might think about how to use those new flexible exceptions and safe harbors. And I think the biggest thing is understanding what can we implement? What can we monitor? What can we administer effectively?

And what are the problems that we're trying to address? So whether it's bundled payments associated with knee replacements or cardiac care for chronic cardiac patients, what's the medical evidence that demonstrates improving quality and how do we reduce that to writing and what are the benchmarks for indicating that quality has improved and therefore pay additional for it or that the costs to the payor are less and therefore we can distribute some of those savings. It's a very data-driven process going forward for a system to understand "What can I do? What's a value-based purpose that I can use to pull together constituents to improve care?” So the value-based purposes are coordinating and managing care of a target patient population, improving the quality of care, reducing the cost to the payors without reducing the quality or transitioning from a delivery based on the volume to a delivery based on improving the quality and costs and controlling the costs for the target population.

And so I think there's a lot to grapple with there as far as "Okay. I have a purpose I want to achieve. I'm going to pull together my participants who were most important to achieving that purpose. And then how do I how do I measure it and how do I pay for that?

Obviously, organizations have been doing this for a long time with respect to commercial payers, they have contractual provisions that require adherence to certain threshold activities and will pay bonuses based on the achievement of those activities.

So it could be that it's derived from extrapolating from existing arrangements, but it also can be that an organization has always wanted to be able to coordinate care for a particular patient population, but hasn't felt that they had the permission or liberty under the law to pay for value, pay for a certain activity that they know will help coordinate care.

So there's a lot here to unpack, and I think they will be very welcome changes.

 Morgan: I think that is a good summary here at the end of our conversation.

As you have more time to digest this, but also once these go into effect, we really start to work with clients on the changes and, begin to see them roll out, I think we'll have more to ask with our clients and a greater understanding of the implications of the changes. I appreciate your time.

 Patsy: Thank you. I appreciate you.

Late last year, the Department of Health and Human Services further codified the shift to a value-based care model with the first major overhaul of both the Stark Law and Anti-Kickback Statute since they were first introduced three decades ago. In this episode, Patsy Powers - the co-leader of Waller's healthcare industry team, gives an overview of the changes and what they mean for healthcare providers.



A transcript to the conversation is below:

Morgan Ribeiro: Welcome to PointByPoint. This is Waller's Chief Business Development Officer and the host of the podcast, Morgan Ribeiro. On today's episode, we will take a look at the latest changes to the Stark Law and Anti-Kickback Statute and the most significant changes to those regulations since they were first introduced. These updates will greatly impact the operations of our healthcare provider clients, particularly, but health systems, ambulatory surgery centers and physician practices. Joining me today is Patsy Powers, a 30-year veteran of Waller's healthcare compliance and operations group that many hospitals and health system leaders rely on for counsel and complex matters, involving Stark and Anti-Kickback Statute. Welcome to the show, Patsy.

Patsy Powers: Thank you. Thanks for having me.

Morgan: I think it would make sense for me to maybe set the stage for our listeners on how we got to where we are today and what was announced by HHS recently. In June 2018, HHS deputy secretary Eric Hargan announced a regulatory reform initiative called The Sprint to Coordinated Care. And that is now referred to as "The Sprint." The purpose was to reduce regulatory burdens and incentivize coordinated care. And as part of that initiative, the Centers for Medicare and Medicaid Services and the Office of the Inspector General assessed regulations that negatively impact the transition to value-based care.

In October 2019, they issued proposed rules to significantly modify the two anti-fraud laws – the physician self-referral law, also known as the Stark Law, and the federal Anti-Kickback Statute. The Stark Law governs patient referrals and prohibits providers of designated health services from submitting a claim for payment for a patient referred by a physician with whom the entity has a financial relationship. And then the Anti-Kickback Statute is a criminal law that prohibits payments in exchange for the referral of patients or the purchase of items or services reimbursable by a federal program.

One year later – after all of this was proposed and we've been anxiously awaiting for the government to announce what would happen here – the administration released its final rule at the end of November marking what is the most significant changes to Stark and Anti-Kickback Laws. The bulk of these changes will go into effect in late January. So with that rather long introduction, I would love to hear from you and to better understand what it is and the new rules and how they will impact our clients.

The revised rules are designed to provide greater flexibility to providers. It's, overall, celebrated as a win for them and engaging in this value-based healthcare payments and delivery system models that we've been talking about for quite some time.

The hope is that the healthcare industry overall is moving in that direction. From your experience in counseling clients, how were Stark and Anti-Kickback Statutes limiting providers and their ability to engage in these value-based models?

Patsy: The Stark and Anti-Kickback Statutes both had provisions where the payments had to be fair market value for the services rendered and the value-based arrangements, CMS had some innovative models that allowed payments to participants to be based on certain value achieved.

But aside from those models, there was no way to be comfortable that the payments between – say a hospital and a physician practice – would comply with Stark because there was no way to measure the fair market value payments, unrelated to the volume or value of referrals, in connection with a value-based payment, where the payment might be for not taking a certain action, not over-providing care.

It goes to the broader concept of payment on a value-based arrangement versus payment on volume-based. And so these are welcome sort of regulations that are too late and too early at the same time. Too late in that, it's not too late, but tardy in the sense that we've been really needing something to come into effect to allow for these alternative payment arrangements and care coordination payments and value-based arrangements. But then at the same time, they came fairly quickly, and now we're grappling with trying to understand and implement and put changes in place that will comply and understand now the new options that are available to structure value-based arrangements.

Morgan: I think that's a good segue into my next question, which is on the timing. Timing is a key question with these new rules. There's another big event happening in Washington at the end of January, and the rules are most likely going into effect on January 19th and then the presidential inauguration for Joe Biden is on January 20th.

How will the incoming Biden administration approach or modify these rules? Do you have any thoughts or any insight into how they might change and when that might occur?

Patsy: Of course, it's impossible to predict what will happen in the future, but I do think that for the most part, these rules are not that political. They allow for the flexibility for value-based arrangements that all participants in the healthcare industry welcome and some clarification on a number of the Stark restrictions that also are welcome modifications. It's unlikely that there would be any pullback of these regulations with the new administration.

Morgan: You mentioned that healthcare attorneys like yourself are trying to digest the more than 2,000 pages of rules and commentary that were released back at the end of November. While there is a lot in there under each law, I think it might be helpful for our listeners to just give us an overview of some of the key changes that are within those rules. Talk about value-based payments. Is there kind of anything particular in there that you would note for our listeners, whether or not they're up the hospital or health system or ambulatory surgery center, physician practice and a shift there specifically that will impact their ability to really engage in more of these value-based arrangements?

Patsy: The Stark exception and the Anti-Kickback safe harbors are similar, but not identical. And so obviously the compliance with the Stark exception is essential but the regulations are also quite similar to the proposed regulation. So to the extent that an organization became very comfortable with understanding the proposed regulations they're quite similar, there are some deviations with respect to the amount of risk that has to be assumed, but in general, there's a full financial risk exception. There's a partial financial risk exception. And then there's just a value-based arrangements exception under Stark. And then under the kickback, full financial partial financial, and care coordination.

There's a lot there that and there's a lot available for the participants to determine whether or not they can meet one of the several different options. For example, under the care coordination – that safe harbor is a safe harbor for participants to work together, to coordinate the care of a patient and entity, for example, a hospital could contribute non-in-kind remuneration to another organization and that was designed to maximize or facilitate care coordination of a patient's subsequent care. The recipient is to pay up to 15% of the value of whatever is contributed so that they have some demonstrated need and use and it's going to be important and they're going to use it, or they're going to pay some portion of the value for that in-kind contribution.

 The full financial risk/partial financial risk aspects of these rules are also the ones that we'll see how they play out in the future because it really depends on the financial resources of an organization to be able to absorb the full financial risk and so it may take some time.

The full financial risk has a ramp-up period so that the benefits provided could be provided for up to 12 months prior to the commencement. So that with the recognition that it takes time to really develop the resources and the protocols of the system needed to monitor and implement a full value-based full financial risk model.

What about imperfect performance? Can you define that? And maybe some of the technicalities around that concept?

So that concept is a general notion that when CMS reviewed the Stark exceptions and the numerous comments that they received, either in the request for information in 2018, or the proposed rules in 2019, along with their numerous SRDP submissions SRDP is the self-disclosure protocol that CMS has implemented for providers to come forward to disclose potential violations of the Stark law to mitigate the penalties available that could be assessed to them under that law. And through thousands of submissions under the SRDP, it's clear that CMS developed a greater understanding of the faults that providers have experienced related to Stark. So, for example, you mentioned that Stark is a strict liability law, either you're in the four corners sort of an exception or you're not. And historically, many of the exceptions are that there's a written arrangement signed by the party, sets the compensation in advance and for a variety of reasons that are not at all illegal – or in a normal world – parties might not get an arrangement reduced to writing or might not get it signed in time. And this imperfect performance theme is where CMS has liberalized the exceptions so that a provider might not violate Stark just because they didn't get the agreement signed before 90 days. There's also a limited remuneration exception that's been added that I think of as imperfect performance because we see this a lot where hospitals have medical staff leaders or physicians that are on the board of a facility and. because it's not professional services, they don't necessarily think to put in any kind of signed agreement that sets out the compensation in advance that's signed by the parties.

And so often a physician would be paid, let's say a hundred dollars to attend a board meeting and never have anything reduced in writing. So this limited remuneration exception allows for a provider of designated health services to pay a physician up to $5,000 a year to provide services. And if there's no signed writing, it's fine. So that is a welcome exception because CMS has made it clear that they understand that the day-to-day activities and the stress associated with running a healthcare facility – and getting a document signed by the parties in place for the payment of a sum of a thousand dollars. There's really not a comparison. And so they've realized that there's not much legal risk associated with paying a physician an amount less than $5,000.

There are a number of changes related to the specific information regarding when a physician's compensation is set in advance. And so the phrase "set in advance" is a phrase that is part of many of the exceptions that the physician agreement is for a term of a year and the compensation is set in advance. It can be a method. It can be a formula, but it should be set in advance for the term of a year.

 This "imperfect performance" bucket of changes includes the concept that even though it's set in advance, but then they've also added the concept that the compensation arrangement can be modified numerous times throughout the term of the contract. That is welcome because, for example, let's say a hospital leases some space to a physician, and then the amount of space needed is changed for whatever reason. Let's say the group has a physician leave and they don't need as much space and they want to reduce to a smaller suite. And so while there were ways that we had been able to accommodate such a change based on cobbling together commentary from prior rulemakings, there's a specific provision now that says you can change it as long as it's set forth in advance and the parties agree to it in advance. So that is very helpful.

Morgan: There are a slew of new definitions in the Stark rules that are impactful to an end positive for providers of designated health services. And those physicians with him they have financial relationship. The first is fair market value. The second is commercial reasonableness. And the third concept is that of volume and value of referrals which is now separate from fair market value. Anything you would note for our listener about those three new definitions anything particularly exciting for you

Patsy: I think that the commercial reasonableness definition is very exciting because we haven't had a definition of commercial reasonableness before. And so I'm gonna just read it because I think it's good – it means that if a particular arrangement furthers legitimate business purpose of the parties and to the arrangement and is sensible considering the characteristics of the parties, their size, scope and specialty and arrangement may be commercially reasonable, even if it does not result in a profit for one or more of the parties. That's a very important sentence. That lesson is that it doesn't result in a profit because commercial reasonableness is a component of many Stark exceptions. Lease exception, employment exception come to mind immediately. And with respect to the employment exception, there was a concern that if a, let's just say, a physician and the hospital did not collect as much money for the physician's professional services as it paid to the physician in salary. And that net loss – was that an indication that the arrangement was commercially unreasonable? And so there was a lot of concern about that. The plaintiff's bar has been trying to push the concept that, but for the referrals, no employer would employ somebody when they can't make money off of them. So this allowance for not requiring the entity to make a profit is significant because they recognize that there are a number of different reasons that an entity might not need to make a profit that's completely unrelated to the volume or value of referrals. It could be that it's associated with their nonprofit mission, or it could be that the conditions of participation require a certain arrangement and their profitability is not an aspect of it. Alternatively, especially with rural providers, oftentimes the fair market value is lower because of the geographic area and the fair market value might be less than the amount that it would cost to build the building and so is it commercially reasonable to lose money on the development of a medical office building? And now we know that it's still fine. It's still commercially reasonable because the facility might need to have a medical office building for physicians to set up their practice and they wouldn't be there if they had to pay exorbitant rent simply to cover the cost of developing the building.

Morgan: You mentioned fair market value having a new definition, new implications. Can you speak specifically to that?

Patsy: It wasn't really a huge surprise as far as the changes to fair market value. I think they broke it down to a definition of general fair market value in arms-length transactions, consistent with the general market, but they added the clause of the subject transaction, and the concept being that it's not just this esoteric number out there, comparing like things, but it's of your particular relationship, your particular transaction. So that helps pull it back into sort of a realm of reality. Likewise, the general market definition has been revised with respect to say a sale of assets – the purchase of an asset that would bring on the date of the acquisition of the asset between well-informed buyers and seller, not otherwise in a position to generate referrals.

And so the general market value also breaks it down between the purchase or sale of assets, compensation for services and the rental of equipment or office space. And likewise has definitions that are more tailored to the arrangement. And so it does provide a little bit more, and I don't think it's a huge surprise to parties, because I do think that common sense has dictated the market value numbers over the years. Such that, for example, let's say the MGMA median for a particular physician's compensation is $250,000, but that this physician is really a superstar and could make more money anywhere else but wants to live in this particular area. I think that valuators have traditionally allowed for additional compensation as being reasonable and under a fair market value rubric with the notion that – particularly if they're a productive physician – that can generate more and that the resume of that physician does count for in there black box methodology of fair market value. That there are some objective factors that would push it above the MGMA median. And this language codifies that concept that you're not restricted to looking just at the survey data, but can look at the broader objective factors that can influence the appropriate number and where the results should land.

Morgan: So on the Anti-Kickback law, On the revisions to the safe harbor provisions. Can you explain? Most of our listeners probably know this, but just in case, the safe harbor and how these value-based arrangements are different and for whom, in particular.

Patsy: The Anti-Kickback Statute prohibits the payment of any remuneration to another party, not just a physician, to induce that person to purchase or sell an item or service reimbursable under a federal healthcare program or to make a referral. So if I'm putting together a value-based arrangement, and it includes physicians, then the arrangement has to fit in a Stark exception. No, if ands or buts about it, it has to fit into an exception. Now the safe harbor, there's also, value-based enterprise safe harbors as well. And so then would look to the safe harbor to see whether that arrangement can also fit. Now, if it doesn't fit into a safe harbor, it doesn't mean that it's illegal. It just means that it's not protected, meaning it's not safe. And so some of the safe harbors are intended to be a little bit more difficult to comply with because Anti-Kickback is a criminal statute, and the government wants to make sure that it only protects arrangements that have very limited risk of violating the law or inducing a participant to order items or services or refer patients in exchange for referrals. Got to fit the Stark exception. Don't have to be in a safe harbor, but obviously, you want to get as close as you can to complying with the safe harbor to demonstrate that the parties aren't intending to violate it. The parties are trying to do exactly what is permitted under the law, which is structure an arrangement to pay for value and not volume.

Morgan: What should healthcare providers be doing right now to understand the regulations and determine how that impacts strategy?

 Patsy: I think to the extent that there are value-based arrangements being negotiated with independent parties, obviously these new rules are essential. And so counsel for any value-based arrangement needs to really run the terms through these new rules. As far as arrangements that aren't necessarily intended to be value-based arrangements, there is some liberalization, but I don't think that there's a great need to spring into action to comply with new exceptions. There are two exceptions to that. Number one, under the new Stark rules, there's a new definition for transaction and isolated transaction exception and the isolated transaction exception has been a useful tool for practitioners over the years because generally, it was intended to be for hospitals purchasing a physician's practice, and it would pay fair market value for the purchase of the practice.

It has been useful in the sense that sometimes parties might not have been able to document the arrangement timely. And so for example, a physician would provide services for a year and then the parties would realize, “Oh, there wasn't a written arrangement in place.” And so they would enter into a settlement agreement to pay for the services that were rendered over the prior 12 months.' And that payment would be a one-time settlement under the isolated transactions exception. CMS has said in this rulemaking, that is no longer an option They do not believe it is appropriate to make up for the failure to have a written arrangement through a single payment. So today, if an entity has a financial compensation arrangement with a physician and it's not properly documented, there's no fallback to fix it under the isolated transaction unless it's only been going on for 90 days or less and so it can fit into one of the technical non-compliant arrangements or it's limited remuneration.

The other thing they gave back, which I think is also helpful, is that sometimes the isolated transaction was used for a settlement of a dispute. And so they have said that you can still use it to settle a genuine dispute that's unrelated to a contract. So that still can be used for that. However, if there is a contract in place and the parties just haven't administered it correctly. So let's say, for example, there's a five-year lease that's been in place – we're four years into it between a hospital and a physician, and for whatever reason, the landlord did not charge an annual increase that's set forth in the lease. Let's say the rent is supposed to go up 3% every year. And they haven't charged it. And so under the new rules, there is a provision that the parties can fix it as long as they can collect the money during the term of the agreement and for 90 days after the termination. We're, within the term of the agreement. You can go back and say, Oh, by the way, you owe us X amount of money, which is doing the math on 3% over the last three years. And we're going to increase it by 3% for the next year under the terms of the lease. You can do that now and that's not viewed as a violation. Before there was some concern like does that lease fail to comply with the lease exception because you haven't followed the terms of the lease. And likewise, under any agreement that requires a written arrangement set in advance, if you haven't collected the money or paid the money properly under the terms of the agreement, is that non-compliance with the Stark exception? And so here, they've been very specific to say, you can fix it. You can clean it up as long as it's during the term of the agreement or within 90 days after the termination. And so that's a big relief too because we're no longer grappling with the idea of, “Is that a violation? Do I need to report it? If so, how much do I owe? And what's the term of the non-compliance?” So that is very helpful.

 Morgan: Your practice focuses primarily on counseling hospitals and health systems and other providers. How will these regulatory changes impact hospital M&A and the due diligence process?

Patsy: The rules are not retroactive. And so they're only prospectively helpful. So to the extent that there is a problem historically that's identified, then I think that the parties will need to really vet those issues and determine the extent to which that is a problem.

Now, the issue is then, so you determined that there's a problem under the old rules, but maybe not a problem under the new rules. And then is that something that is for disclosure to CMS because it didn't comply with the old rules. I don't know the answer to that. I would imagine that the answer is “yes” and then let CMS come back and say, that's okay. We don't need to know about that. So I do think that even their statement that this is they're leaving some language in because of the historical impact. I think that they believe that the old rules still govern today and so you need to comply with them today.

Morgan: I imagine the same thing goes for the work that you do and advising clients on sort of day to day operational challenges of running a healthcare facility and staying in compliance with the variety of regulations. So, do you see that these regulations would impact the day-to-day operations of hospitals and health systems?

 Patsy: I think that certainly systems should review their policies. I don't think, for example, the liberalization of the exceptions for technical non-compliance or remuneration or fixing the remuneration during the agreement that doesn't really merit any change in policy because a system's policy should still require that an arrangement be documented and that payments shouldn't be made until there's a signed agreement. And so I would imagine most systems have those policies. And so those policies probably don't need to change, but it might not be a bad idea to look through them and make sure that they're still current, so that's not as big of an issue. I think with respect to the value based going forward, I do think that there are a number of different ways that parties might think about how to use those new flexible exceptions and safe harbors. And I think the biggest thing is understanding what can we implement? What can we monitor? What can we administer effectively?

And what are the problems that we're trying to address? So whether it's bundled payments associated with knee replacements or cardiac care for chronic cardiac patients, what's the medical evidence that demonstrates improving quality and how do we reduce that to writing and what are the benchmarks for indicating that quality has improved and therefore pay additional for it or that the costs to the payor are less and therefore we can distribute some of those savings. It's a very data-driven process going forward for a system to understand "What can I do? What's a value-based purpose that I can use to pull together constituents to improve care?” So the value-based purposes are coordinating and managing care of a target patient population, improving the quality of care, reducing the cost to the payors without reducing the quality or transitioning from a delivery based on the volume to a delivery based on improving the quality and costs and controlling the costs for the target population.

And so I think there's a lot to grapple with there as far as "Okay. I have a purpose I want to achieve. I'm going to pull together my participants who were most important to achieving that purpose. And then how do I how do I measure it and how do I pay for that?

Obviously, organizations have been doing this for a long time with respect to commercial payers, they have contractual provisions that require adherence to certain threshold activities and will pay bonuses based on the achievement of those activities.

So it could be that it's derived from extrapolating from existing arrangements, but it also can be that an organization has always wanted to be able to coordinate care for a particular patient population, but hasn't felt that they had the permission or liberty under the law to pay for value, pay for a certain activity that they know will help coordinate care.

So there's a lot here to unpack, and I think they will be very welcome changes.

 Morgan: I think that is a good summary here at the end of our conversation.

As you have more time to digest this, but also once these go into effect, we really start to work with clients on the changes and, begin to see them roll out, I think we'll have more to ask with our clients and a greater understanding of the implications of the changes. I appreciate your time.

 Patsy: Thank you. I appreciate you.

Late last year, the Department of Health and Human Services further codified the shift to a value-based care model with the first major overhaul of both the Stark Law and Anti-Kickback Statute since they were first introduced three decades ago. In this episode, Patsy Powers - the co-leader of Waller's healthcare industry team, gives an overview of the changes and what they mean for healthcare providers.



A transcript to the conversation is below:

Morgan Ribeiro: Welcome to PointByPoint. This is Waller's Chief Business Development Officer and the host of the podcast, Morgan Ribeiro. On today's episode, we will take a look at the latest changes to the Stark Law and Anti-Kickback Statute and the most significant changes to those regulations since they were first introduced. These updates will greatly impact the operations of our healthcare provider clients, particularly, but health systems, ambulatory surgery centers and physician practices. Joining me today is Patsy Powers, a 30-year veteran of Waller's healthcare compliance and operations group that many hospitals and health system leaders rely on for counsel and complex matters, involving Stark and Anti-Kickback Statute. Welcome to the show, Patsy.

Patsy Powers: Thank you. Thanks for having me.

Morgan: I think it would make sense for me to maybe set the stage for our listeners on how we got to where we are today and what was announced by HHS recently. In June 2018, HHS deputy secretary Eric Hargan announced a regulatory reform initiative called The Sprint to Coordinated Care. And that is now referred to as "The Sprint." The purpose was to reduce regulatory burdens and incentivize coordinated care. And as part of that initiative, the Centers for Medicare and Medicaid Services and the Office of the Inspector General assessed regulations that negatively impact the transition to value-based care.

In October 2019, they issued proposed rules to significantly modify the two anti-fraud laws – the physician self-referral law, also known as the Stark Law, and the federal Anti-Kickback Statute. The Stark Law governs patient referrals and prohibits providers of designated health services from submitting a claim for payment for a patient referred by a physician with whom the entity has a financial relationship. And then the Anti-Kickback Statute is a criminal law that prohibits payments in exchange for the referral of patients or the purchase of items or services reimbursable by a federal program.

One year later – after all of this was proposed and we've been anxiously awaiting for the government to announce what would happen here – the administration released its final rule at the end of November marking what is the most significant changes to Stark and Anti-Kickback Laws. The bulk of these changes will go into effect in late January. So with that rather long introduction, I would love to hear from you and to better understand what it is and the new rules and how they will impact our clients.

The revised rules are designed to provide greater flexibility to providers. It's, overall, celebrated as a win for them and engaging in this value-based healthcare payments and delivery system models that we've been talking about for quite some time.

The hope is that the healthcare industry overall is moving in that direction. From your experience in counseling clients, how were Stark and Anti-Kickback Statutes limiting providers and their ability to engage in these value-based models?

Patsy: The Stark and Anti-Kickback Statutes both had provisions where the payments had to be fair market value for the services rendered and the value-based arrangements, CMS had some innovative models that allowed payments to participants to be based on certain value achieved.

But aside from those models, there was no way to be comfortable that the payments between – say a hospital and a physician practice – would comply with Stark because there was no way to measure the fair market value payments, unrelated to the volume or value of referrals, in connection with a value-based payment, where the payment might be for not taking a certain action, not over-providing care.

It goes to the broader concept of payment on a value-based arrangement versus payment on volume-based. And so these are welcome sort of regulations that are too late and too early at the same time. Too late in that, it's not too late, but tardy in the sense that we've been really needing something to come into effect to allow for these alternative payment arrangements and care coordination payments and value-based arrangements. But then at the same time, they came fairly quickly, and now we're grappling with trying to understand and implement and put changes in place that will comply and understand now the new options that are available to structure value-based arrangements.

Morgan: I think that's a good segue into my next question, which is on the timing. Timing is a key question with these new rules. There's another big event happening in Washington at the end of January, and the rules are most likely going into effect on January 19th and then the presidential inauguration for Joe Biden is on January 20th.

How will the incoming Biden administration approach or modify these rules? Do you have any thoughts or any insight into how they might change and when that might occur?

Patsy: Of course, it's impossible to predict what will happen in the future, but I do think that for the most part, these rules are not that political. They allow for the flexibility for value-based arrangements that all participants in the healthcare industry welcome and some clarification on a number of the Stark restrictions that also are welcome modifications. It's unlikely that there would be any pullback of these regulations with the new administration.

Morgan: You mentioned that healthcare attorneys like yourself are trying to digest the more than 2,000 pages of rules and commentary that were released back at the end of November. While there is a lot in there under each law, I think it might be helpful for our listeners to just give us an overview of some of the key changes that are within those rules. Talk about value-based payments. Is there kind of anything particular in there that you would note for our listeners, whether or not they're up the hospital or health system or ambulatory surgery center, physician practice and a shift there specifically that will impact their ability to really engage in more of these value-based arrangements?

Patsy: The Stark exception and the Anti-Kickback safe harbors are similar, but not identical. And so obviously the compliance with the Stark exception is essential but the regulations are also quite similar to the proposed regulation. So to the extent that an organization became very comfortable with understanding the proposed regulations they're quite similar, there are some deviations with respect to the amount of risk that has to be assumed, but in general, there's a full financial risk exception. There's a partial financial risk exception. And then there's just a value-based arrangements exception under Stark. And then under the kickback, full financial partial financial, and care coordination.

There's a lot there that and there's a lot available for the participants to determine whether or not they can meet one of the several different options. For example, under the care coordination – that safe harbor is a safe harbor for participants to work together, to coordinate the care of a patient and entity, for example, a hospital could contribute non-in-kind remuneration to another organization and that was designed to maximize or facilitate care coordination of a patient's subsequent care. The recipient is to pay up to 15% of the value of whatever is contributed so that they have some demonstrated need and use and it's going to be important and they're going to use it, or they're going to pay some portion of the value for that in-kind contribution.

 The full financial risk/partial financial risk aspects of these rules are also the ones that we'll see how they play out in the future because it really depends o

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