Managing the Transition to Transformation: Old Dog, New Tricks: Fraud and Abuse in the Age of Payment Reform - McDermott Will & Emery

Managing the Transition to Transformation: Old Dog, New Tricks: Fraud and Abuse in the Age of Payment Reform



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

In Depth

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

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

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

A. Key Risk Areas

1. Fair Market Value Risk

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

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

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

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

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

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

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

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

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

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

2. Volume or Value Risk

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

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

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

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

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

3. Commercial Reasonableness

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

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

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

B. Regulatory Waivers for Innovative Care Delivery and Payment Initiatives

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

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

1. ACO Pre-Participation Waiver

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

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

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

2. ACO Participation Waiver

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

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

3. Shared Savings Distributions Waiver

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

4. Compliance with Stark Law Waiver

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

5. Patient Incentives Waiver

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

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

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

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