II. SHARED SAVINGS PROGRAM AND COST-REDUCTION INCENTIVES

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1 E-ALERT Health Care April 15, 2011 ACCOUNTABLE CARE ORGANIZATION BASICS The Affordable Care Act establishes the Medicare Shared Savings Program ( Program ), which provides for the development of accountable care organizations (ACOs) in an effort to both reduce costs and improve health outcomes in the Medicare Program. ACOs are groups of physicians, hospitals, long-term care facilities, and other health care providers that work together to serve patients. The Program provides incentives for the formation of ACOs. In turn, ACOs are intended to improve coordination of patient care, increase accountability through quality measurements, and encourage investment in new methods of health care delivery. On March 31, 2011, several agencies issued publications regarding ACOs. The Centers for Medicare & Medicaid Services (CMS) issued the proposed rule for the Program. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) and CMS issued proposed waivers of federal fraud and abuse laws as applied to ACOs. The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) issued a statement of proposed antitrust enforcement policy. Finally, the Internal Revenue Service (IRS) issued a Notice regarding the tax-exempt status of organizations participating in ACOs. All the agencies have invited public comments on their proposals, the earliest due date for which is May 31, I. FORMATION OF AN ACCOUNTABLE CARE ORGANIZATION A. Application Requirements Under the rule proposed by CMS, an ACO is comprised of a group of participants that will provide care to select Medicare beneficiaries. ACO participants may include: ACO professionals (i.e., physicians and hospitals in a group practice arrangement); networks of individual practices of ACO professionals; partnership or joint venture arrangements between hospitals and ACO professionals; hospitals employing ACO professionals; and other Medicare providers and suppliers. Both existing and newly-formed ACOs must apply to participate in the Program. To qualify for participation, ACOs must serve at least 5,000 Medicare beneficiaries. The ACO must have a governing body comprised of providers, suppliers, and beneficiaries. It must also have an accountability plan that consists of: providing quarterly and annual reports, surveying beneficiaries, analyzing claims and financial/quality data, and performing site visits. It must identify high-risk patients and develop individual care plans for target populations. The ACO must maintain a database of all its participants and a means to screen participants based on conflicts of interest, and any changes in ACO provider participants must be approved by CMS. B. Risk-Sharing The rule provides that ACOs must enter into 3-year agreements with CMS. The first of these agreements will begin on January 1, The agreements may be structured in one of two ways. BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON

2 The ACO may agree to a two-sided risk model, in which it will bear the risk of both savings and higher than anticipated expenditures for the year. This will entitle the ACO to a greater portion of the savings attained but will also make it subject to a penalty for high expenditures. This option is recommended for ACOs with established programs that are confident in their ability to achieve savings. The ACO may also agree to a one-sided risk model, in which it will accept a smaller portion of what savings it does attain, in exchange for avoiding any penalty for high expenditures. This structure is intended to encourage participation by ACOs that are less established and thus less certain of their ability to generate savings. The one-sided risk model will apply for the first two years of the ACO s existence, and the final year will follow the two-sided model. After the first three years of the agreement, the ACO must use the two-sided risk model. C. Assignment of Beneficiaries to an ACO Medicare beneficiaries will be assigned to (or, as the rule states, aligned with ) an ACO retrospectively, at the end of a performance year. The beneficiary does not elect enrollment in an ACO and can choose to receive services from non-aco as well as ACO providers. At the end of the year, Medicare will assign a beneficiary to an ACO if a Medicare beneficiary has received a plurality of his or her primary care services (based on allowed charges) from an ACO professional. Thus, an ACO will not know, until the end of the year, which of the patients it serves are subject to the Program. II. SHARED SAVINGS PROGRAM AND COST-REDUCTION INCENTIVES A. Benchmarks According to the proposed rule, providers and suppliers that participate in ACOs will continue to be reimbursed by Medicare in the same way they are under the current system. Under the Program, CMS will create benchmarks for each ACO that are an estimate of the total fee-for-service payments that would have been made for ACO beneficiaries in the absence of the ACO. The benchmarks will be based on Medicare beneficiaries who have received a plurality of their primary care services from the ACO providers in the most recent three years; it will not be based on the actual beneficiaries assigned to the ACO in the performance year. The benchmark will be updated annually. The performance of an ACO will be measured against its benchmark to determine whether it will receive a shared savings payment or, if applicable, a penalty. ACOs that achieve savings compared to their benchmarks will receive a shared savings payment from CMS. The payment will be made to the ACO itself, which will decide how it will be distributed. B. Minimum Savings Rate CMS has proposed a minimum savings rate (MSR) to account for small variations in health care spending. For ACOs using a two-sided risk model, the MSR would be 2 percent of the benchmark. The ACO would have to save more than 2 percent of the benchmark to qualify for a shared savings payment and would have to exceed the benchmark by more than two percent to be assessed a penalty. There is also a shared loss cap of 5 percent in the first year, 7.5 percent in the second year, and 10 percent in the third year. For ACOs using a one-sided risk model, the MSR would be based on the number of beneficiaries in the ACO; those with smaller populations would have a larger MSR percentage due to the anticipated 2

3 larger variations in expenditures, starting at 3.9 percent for the minimum beneficiary number: 5,000. ACOs with larger populations would have a smaller MSR due to anticipated smaller variations. III. QUALITY MEASURES A. Operation of Quality Measures In order to receive any payments for shared savings under the Program, an ACO must meet certain quality measures. Performance measures will be conducted once per year. Shared savings payments will be based in part on quality scores; the higher an ACO s score, the higher the shared savings payment for which it is eligible. This way, ACOs will not achieve cost savings by compromising patient care. The maximum proportion of shared savings an ACO using a two-sided risk model can receive is 60 percent; the maximum proportion for an ACO using a one-sided risk model is 50 percent. For the first year, the only quality measure an ACO must meet is to accurately report on quality measures. This functions as both a grace period for ACOs and a way for CMS to establish what benchmarks are appropriate for quality measures. B. Categories of Quality Measures There are 65 quality measures that CMS proposes ACOs will be evaluated on in the first year of their operation. The measures fall into five general categories: Patient Experience of Care, Care Coordination, Patient Safety, Preventive Health, and At-Risk Population/Frail Elderly Health. These measures will be reported to CMS through surveys, claims submission and data collection. ACOs will be given points for performance on each measure, and each category will have its own score. The weighted score will determine the maximum sharing rate for which the ACO is eligible. Patient survey results and quality measures will be made available to the public by the ACO in a standardized format that will be issued in subregulatory guidance. Specifications for the proposed quality measures will be available on CMS website prior to the start of the Program. Quality measures for the remaining two years of an ACO s three-year agreement will be proposed in future rulemaking. IV. PATIENTS RIGHTS AND IMPACT OF ACOS ON PATIENT CARE A. Patient Notification and Information One purported benefit of ACOs is that they will enable information-sharing across all of a beneficiary s providers, which will lead to better care. Under the proposed rule, if a Medicare beneficiary s provider participates in an ACO, the provider must notify beneficiaries that it participates in the ACO and offer information about the ACO. Providers must also post signs in their facilities indicating their ACO participation and make available written information about the ACO. While an individual is informed that the provider is participating in an ACO, he or she does not elect to participate and is free to seek services from non-aco providers. However, the beneficiary may opt out of sharing claims data (see below). ACOs may not use prior authorization, utilization management, or otherwise limit the services their beneficiaries receive. B. Request for Medicare Claims Data ACO providers may request claims information about a beneficiary from CMS. The ACO must inform the patient in writing that it may share claims data, and the beneficiary may opt out of having his or 3

4 her data shared with other ACO providers. However, the beneficiary may still be assigned to the ACO, and his or her information will still be used in evaluating the ACO s quality measures. V. ANTITRUST ENFORCEMENT A. Potential Antitrust Issues Surrounding ACOs Because ACOs are by definition agreements among various health care providers, they may in some circumstances raise concerns under the federal antitrust laws. The FTC and DOJ share jurisdiction over enforcement of the federal antitrust laws in the healthcare sector. In monitoring the formation and operation of ACOs, these agencies wish to strike a balance between providing clear guidance for ACO participants and retaining the ability to protect consumers from anticompetitive practices. Thus, the agencies have issued a Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations (Policy Statement), which is applicable to otherwise independent providers and provider groups that seek to participate or do participate in the Program. The agencies are accepting public comments on the Policy Statement through May 31, B. ACOs That Meet the CMS Criteria for Program Participation Will Be Analyzed Under the Rule of Reason Naked price-fixing and market allocation agreements are per se illegal under the antitrust law. However, certain agreements among competitors will be analyzed under the more lenient rule of reason if the collaboration includes financial or clinical integration among the participants and such integration is reasonably necessary to the purpose of the collaboration. Rule of reason analysis examines the potential anticompetitive effects of a potential collaboration and weighs those against the procompetitive benefits from decreased costs, increased innovation or other efficiencies. The Policy Statement provides that ACOs that qualify for participation in the Program will be deemed sufficiently integrated to be analyzed under the rule of reason. As justification for that policy, the agencies relied on the rigorous requirements that CMS imposes for Program participation and the extensive monitoring of Program participants cost savings. Further, if the ACO s activities in the commercial market utilize the same structure developed for participation in the Program, it will be considered clinically integrated with respect to those activities as well. C. Analysis of ACOs Eligible for Program Participation The agencies look to the ACO s market share on a service-by-service basis in each ACO participants Primary Service Area (PSA) as an initial screen for potential competitive concerns. A PSA consists of the lowest number of contiguous postal zip codes from which the ACO participant draws 75 percent of its patients. In general, the Policy Statement notes that higher market shares are more likely to lead to anticompetitive concerns. The initial market share screen determines what further review, if any, is required before an ACO may participate in the Program. D. Safety Zones for ACOs with Limited Market Share The Policy Statement establishes a proposed safety zone for ACOs. If an ACO falls within the safety zone, the agencies will not challenge the ACO, absent extraordinary circumstances. To be in the safety zone, an ACO s independent participants that provide the same service must together command 30 percent or less of the market for that service in each participant s PSA. ACOs in rural areas may exceed the 30 percent threshold and still qualify for the safety zone under certain conditions. Any hospital or ambulatory surgery center must be non-exclusive to the ACO, regardless 4

5 of market share, for the ACO to fall within the safety zone. Likewise, a dominant provider (with a market share of over 50 percent) must be non-exclusive to the ACO in which it participates in order for the ACO to be in the safety zone. The Policy Statement explicitly notes that the safety zone is merely intended to identify ACOs that are highly unlikely to raise significant competitive concerns and that ACOs outside the safety zone are not presumptively unlawful. E. Mandatory Review of ACOs with Greater than 50 Percent Market Share CMS regulations provide that an ACO may not participate in the Program if it has two or more providers whose share in the same PSA exceeds 50 percent for any common service, unless that ACO provides a letter from the FTC or DOJ saying it has no present intent to challenge the ACO under the antitrust laws. Thus, such ACOs are subject to mandatory antitrust review before participating in the Program. In conducting the review, the agencies will consider information indicating that the PSA shares do not accurately reflect market power. The Policy Statement requires the agencies to render an initial decision with 90 days of receiving specified documentation regarding the ACO s business plans, structure, and commercial arrangements.. The FTC and DOJ share authority to review proposed ACOs and the decisions as to which agency will conduct the review will be made on a caseby-case basis. F. Activities for ACOs to Avoid to Prevent Antitrust Violations ACOs that are not subject to the mandatory review, but fall outside the safety zone can request an expedited review on the same terms as the mandatory review process (i.e., 90 days following submission of all required documentation and no CMS approval if antitrust agencies state concerns). However, short of seeking such a review, the Policy Statement identifies five types of conduct that, if avoided, are likely to reduce the likelihood of anticompetitive concerns and thus of an investigation. The types of conduct to avoid are: (1) preventing/discouraging commercial payers from steering patients toward certain providers; (2) tying sales of the ACO s services to purchasing other services outside the ACO; (3) contracting with providers other than primary care physicians on an exclusive basis; (4) restricting a commercial payer s ability to disseminate provider quality information to its enrollees; and (5) sharing competitively sensitive pricing or other data within the ACO that could influence activities outside the ACO. G. Request for Public Comment The FTC has invited public comment on the Statement from stakeholders regarding whether the proposed Statement should be changed, whether other sources of data could be used to determine relevant PSA shares, and whether the documentation required for expedited review would be unduly burdensome to ACOs. Comments must received by May 31, Comments may be submitted online or by mail and will be posted online as soon as possible after they have been received. VI. WAIVER OF FRAUD AND ABUSE LAWS On March 28, 2011, CMS and the OIG published a notice detailing their proposed waivers of federal fraud and abuse laws as applied to providers participating in the Program. Public comments will be accepted on the following proposed waivers until June 6, A. Purpose and Background of Waiver of Fraud and Abuse Laws ACOs create new and different types of relationships between physicians, hospitals, suppliers, and patients. The application of existing fraud and abuse laws to ACOs could stifle their growth and 5

6 discourage participation. Therefore, the ACA added Section 1899(f) to the Social Security Act, which authorizes the Secretary to waive the application of the Physician Self-Referral Law, the federal Anti- Kickback Statute, and civil monetary penalties law provisions to certain ACO-related financial arrangements. In order to qualify for these waivers, ACOs must have an agreement with CMS to participate in the Program and must comply with the agreement and all other applicable laws and regulations (including transparency, reporting and monitoring requirements). Arrangements that do not qualify for a waiver but are otherwise legal will remain legal. The waivers apply to qualifying distributions of payments earned under the Program and to qualifying payments made during the duration of the ACO agreement with CMS. B. Waiver of Physician Self-Referral Law The physician self-referral law prevents physicians from referring a patient to receive services reimbursed by Medicare, Medicaid, or another government health program from an entity in which the physician or an immediate family member holds a financial interest. The proposed waiver would permit distributions of shared savings received by the ACO under the Program: (1) to participants/providers/suppliers in the ACO at the time of payment or during the year in which the shared savings were earned; and (2) for activities necessary for and directly related to the Program. C. Waiver of Federal Anti-Kickback Statute The federal Anti-Kickback Statute prohibits providing or receiving remuneration in exchange for the purchase of, or referrals relating to, items or services that will be reimbursed by Medicare, Medicaid, or another government health program. The proposed waiver would permit payments under one of two scenarios. First, it would permit an ACO to distribute shared savings received under the Program: (1) to participants/providers/suppliers in the ACO at the time of payment or during the year in which the shared savings were earned; and (2) for activities necessary for and directly related to the Program. Second, it would permit any financial relationship between members of an ACO necessary for and directly related to the ACO s participation in the Program only if the relationship implicates the Physician Self-Referral Law and fits squarely in an exception. D. Waiver of Prohibition on Hospital Payments to Physicians to Reduce/Limit Services Under federal law, hospitals generally may not make payments to physicians for the purpose of inducing them to reduce or limit items or services to be paid for by Medicare. The proposed waiver would permit such payments in one of two scenarios. First, a hospital may make a distribution of shared savings under the Program to a physician, so long as: (1) the payments are not made knowingly to induce the physician to reduce or limit medically necessary items or services; and (2) the hospital and physician are in the ACO at the time of payment or during the year in which the shared savings were earned. Second, a hospital may make payments to a physician so long as both are members of the ACO and the payments are necessary for and directly related to the ACO s participation in the Program that implicates the Physician Self-Referral Law and fully complies with an exception [to the Law]. E. Solicitation of Public Comments HHS is accepting public comments on the notice until May 31, Comments may be submitted online at by regular or overnight mail, or by delivery. In addition to comments on the above proposals, HHS invites comments on: payments related to establishing an 6

7 ACO or ongoing ACO operations, other payments made outside of an ACO, distribution of shared savings from private payers, beneficiary inducements, waivers for a two-sided vs. one-sided risk model, and the duration and timing of waivers. VII. TAX IMPLICATIONS OF ACOS On March 31, 2011, the IRS published Notice , I.R.B , regarding the application of the Internal Revenue Code (the Code ) to tax-exempt organizations participating in the Program and soliciting comments as to whether existing guidance on Section 501(c)(3) organizations is sufficient for those tax-exempt organizations planning to participate in an ACO. The IRS is accepting public comments until May 31, A. Current Law Regarding 501(c)(3) Organizations Organizations that are primarily engaged in activities with a charitable purpose are exempt from federal income tax under Section 501(c)(3) of the Code. Such organizations may include hospitals or other health care providers that may participate in an ACO. In order to qualify for the tax exemption under existing law, no part of a Section 501(c)(3) s organization s net earnings or assets may inure to the benefit of an individual or shareholder. If an organization that otherwise qualifies as taxexempt has some earnings that are not substantially related to the charitable purpose of the organization, those earnings may be subject to unrelated business income tax under Section 511 of the Code. B. Program Participation by 501(c)(3) Organizations In Notice , the IRS has published, for comment, proposed guidelines for Section 501(c)(3) organizations that wish to participate in an ACO. If the following five guidelines are satisfied, the IRS expects that it will not consider a tax-exempt organization s participation in an ACO to result in impermissible private inurement: (1) The terms of sharing payments or penalties must be set out in writing in advance and negotiated at arms length; (2) The ACO in which the organization is participating must have been accepted by CMS and not terminated; (3) The economic benefit the organization reaps from the ACO must be equal to its economic contribution; (4) The organization s share of the ACO s losses must not be greater than its share of the earnings; (5) All contracts the ACO enters into must be at fair market value. The IRS has also proposed that, since shared savings payments under the Program are substantially related to the performance of the charitable purpose of hospitals or other 501(c)(3) organizations participating in the ACO, such payments will not be subject to unrelated business income tax. C. Other ACO Activities The ACOs to which tax-exempt organizations belong may engage in activities that create earnings for the ACO other than Program participation. These include negotiating with private payers for shared savings payments, negotiating with state Medicaid programs, or other non-program activities. The IRS seeks public comment on how such activities might substantially relate to organizations charitable purposes and what safeguards should be put in place to further those purposes. Public comments may be submitted by mail or by at notice.comments@irscounsel.treas.gov, with Notice in the subject line. 7

8 VIII. PUBLIC COMMENT OPPORTUNITY CMS has requested public comment on the proposed rule implementing the Program. Public comments must be received by June 6, HHS has also requested public comments on the potential waiver of fraud and abuse laws as applied to the Program by June 6, The IRS has requested comments on the proposed guidance regarding the status of 501(c)(3) organizations under the Program, also by May 31, The FTC and DOJ have requested comments on their proposed Statement regarding ACOs, with no specified due date. If you have any questions concerning the material discussed in this client alert, please contact the following members of our health care practice group: Anna Kraus Demetrios Kouzoukas Caroline Brown James Dean Kevin Shortill Kate Sauser This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein. Covington & Burling LLP, an international law firm, provides corporate, litigation and regulatory expertise to enable clients to achieve their goals. This communication is intended to bring relevant developments to our clients and other interested colleagues. Please send an to if you do not wish to receive future s or electronic alerts Covington & Burling LLP, 1201 Pennsylvania Avenue, NW, Washington, DC All rights reserved. 8