FAQs on the final ACO regulations

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1 - 1 - December 28, 2011 FAQs on the final ACO regulations By Peter A. Egan, Linn Foster Freedman, Carolyn J. Gabbay, Christopher P. Hampton, Lindsay Maleson, David A. Martland, Michele A. Masucci, Christopher Browning, Carly B. Eisenberg, Brooke A. Lane, Regina S. Rockefeller, Michael I. Schnipper, Rebecca Simone, Scott R. Simpson, Michael J. Taubin, Stephen D. Zubiago On Thursday, October 20, 2011, The Centers for Medicare & Medicaid Services (CMS) released the long-awaited final rule regarding the formation of accountable care organizations (ACOs). The new rule makes a number of changes from the proposed rule discussed in our prior alert. Generally, the changes increase the financial incentives, reduce financial risks, and mitigate some compliance burdens for ACOs. Below we have included FAQs drafted by Nixon Peabody attorneys addressing major topics including: Eligibility for participation Governance requirements Potential benefits and risks of participating in the MSSP Two shared savings options ( Tracks 1 & 2) Assignment of beneficiaries Quality measures/performance Monitoring and terminating an ACO s participation in the MSSP ACO marketing activities The role of HIT in the MSSP and quality and other reporting requirements FTC/DOJ joint statement regarding antitrust review and scrutiny of ACOs Stark, anti-kickback, and civil monetary penalties waivers for ACOs IRS guidance regarding ACOs Eligibility for participation Who may form an ACO eligible for the Medicare Shared Savings Program ( MSSP )? The proposed regulations issued in March 2011 included: 1. ACO professionals in group practice arrangements (licensed physicians and other practitioners such as physician assistants, nurse practitioners, or clinical nurse specialists); 2. Networks of individual practices of ACO professionals; 3. Partnerships or joint venture arrangements between hospitals and ACO professionals; and 4. Hospitals employing ACO professionals.

2 The final regulations added: 5. Critical access hospitals; 6. Rural health clinics; and 7. Federally Qualified Health Centers Are other entities permitted to participate in ACOs? The final regulations permit other Medicare enrolled providers and suppliers (e.g., long-term care hospitals, nursing homes, and skilled nursing facilities) to participate in an ACO, provided that an independently eligible entity is also participating. Must an ACO be a newly formed entity? Not necessarily. An existing entity may be used, provided that all eligibility requirements are satisfied. However, an ACO formed by two or more otherwise independent ACO participants must be a legal entity separate from any of its ACO participants. How is the corporate structure of the ACO regulated? As discussed below and in the proposed regulations, the governance structure is well regulated. In addition, an ACO must have a structure that permits the receipt and distribution of payments for shared savings to participants. An ACO must also be able to repay shared losses and other monies due CMS. What are the key requirements for an ACO to become and remain eligible to participate in the MSSP? Some of the key provisions of the final rule require ACOs to: Enter into agreements with ACO participants. o Primary care providers are required to be exclusive to one ACO, while other participants may participate in several ACOs. Submit a detailed application to CMS, which includes, among other things: o A certification by the ACO that the ACO, its participants and providers/suppliers have agreed to become accountable for quality, cost and overall care of Medicare fee-forservices beneficiaries assigned to the ACO. o Disclosure of prior participation of the ACO, its participants or provider/suppliers in another shared savings program, and o Documents supporting the applicant s eligibility to become an ACO. Enter into a three-year agreement with CMS. Develop a compliance plan and conflict of interest policy. Make certain data, including quality, cost, and overall care of the beneficiaries assigned to the ACO available to the public and CMS. The Final Rule also contains prohibitions against gifts and remuneration to participating beneficiaries, as well as prohibitions against referrals and cost-shifting measures. Following the comments received on the Proposed Rule, some of the requirements have been relaxed, and some incentives enhanced. These changes include: Greater flexibility in eligibility to participate in the MSSP, Multiple start dates in 2012, Establishment of a longer agreement period for those ACOs starting in 2012, Greater flexibility in the governance and legal structure of an ACO,

3 - 3 - Simpler and more streamlined performance standards, Adjustments to the financial model to increase financial incentives, Increased shared savings caps, No down-side risk and first-dollar sharing in Track 1, Removal of the 25 percent withholding of shared savings, Claims run-out period reduced to 3 months, Greater flexibility in antitrust review, and Greater flexibility in the timing for repayment of losses. Governance requirements What are the responsibilities of the governing body of an ACO? The governing board: Is responsible for oversight and strategic direction of the ACO, for holding ACO management accountable for the ACO s activities described in the ACO regulations, Must have transparent governance processes, Has a fiduciary duty to the ACO and must act consistently with that duty, and Must be separate and unique to the ACO where the ACO comprises multiple, otherwise independent ACO participants. Who must be included on the governing body? The governing body must include a Medicare beneficiary representative served by the ACO who does not have a conflict of interest with the ACO and ACO participants must control 75% of the ACO s Governing Body. If not, the ACO must describe why not and how the ACO will involve ACO participants in governance or provide meaningful representation by Medicare beneficiaries. Note that the final regulations do not include the concept that each ACO participant must have appropriate proportionate control over decision-making. What guidance is given regarding a conflict of interest? Each ACO must have a conflict of interest policy. The policy must include: A requirement that each member of the governing body disclose relevant financial interests, Procedures and policies for determining and handling conflicts, and Remedial action for failure to comply with the policy. Additionally, the conflict of interest policy must be applicable to the Medicare beneficiary serving on the governing body. What additional requirements affect the corporate structure of an ACO? The ACO must have a leadership and management structure that includes clinical and administrative systems that align with and support the goals of Shared Savings Program. 42 C.F.R Do the ACO regulations offer any guidance regarding leadership/management? The ACO must be managed by an individual whose election and removal is controlled by the governing body. In addition, the clinical management must be controlled by a senior level medical director who is a board certified and licensed physician of one of the ACO providers or suppliers. The clinical manager must be physically present on a regular basis at an ACO participant s location.

4 - 4 - Do the ACO regulations provide any flexibility regarding leadership and governance? Yes. CMS permits an ACO to submit innovative leadership and governance structures that may not comply with the terms and conditions of the regulations. Potential benefits and risks of participating in the MSSP What are the benefits of participating in the MSSP? The MSSP provides financial incentives for those willing to participate. If an ACO: (1) exceeds a minimum savings rate, (2) meets certain minimum quality performance standards, and (3) maintains its MSSP eligibility, then CMS will pay the ACO a percentage of the savings. What are the risks of participating in the MSSP? If the ACO chooses the Track 1 (1-sided model), then the risks are minimal, as the ACO will only share in savings achieved, but will not be responsible for losses. But, as discussed below, the savings in Track 1 are less than in Track 2. If the ACO chooses the Track 2 (2-sided model), then the risks are greater, as the ACO must also share losses with the Medicare program. But the opportunity for savings in Track 2 is greater than in Track 1. What is the minimum savings rate? The minimum savings rate is determined through the computation of two factors: (1) a fixed historical benchmark, and (2) the percentage by which the ACO beats or exceeds this benchmark. In order to calculate the benchmark, CMS determines the per capita Parts A and B fee-for-service expenditures for beneficiaries that would have been assigned to the ACO in any of the three most recent years prior to the ACO s agreement to participate in MSSP. The calculations include, among other things: Use of the ACO participants TINs, Identifiable payments made under pilot and limited programs, and Adjustments for historical growth and certain beneficiary characteristics. The calculations exclude, among other things: Indirect medical education payments, Disproportionate share hospital payments, and CMS will also update this benchmark annually for every year the ACO participates in the Shared Savings program. CMS then determines whether the ACO is eligible for MSSP payments by determining whether the per capita Medicare expenditures for the ACO are below the benchmark by a required percentage, known as the minimum savings rate. As discussed below, the minimum savings rate depends upon whether the ACO chooses to apply under Track 1 or Track 2, as well as the number of beneficiaries assigned to the ACO.

5 - 5 - Two shared savings options ( Tracks 1 & 2) What are the shared savings options under the Final Rule? Two alternative tracks are available under the Final Rule: Under Track 1, the ACO has the opportunity to share in savings, but does not have any liability for losses. Under Track 2, there is a two-sided sharing in savings and losses. For what period are Track 1 and Track 2 available to ACOs? The Final Rule, like the Proposed Rule, permits the initial election of Track 1 or Track 2 for at least three years. After the initial term of approximately three years, ACOs must participate in the twosided model. How does an ACO qualify for a shared savings payment under Track 1? To qualify for a share of savings under Track 1, in addition to satisfying quality measures, the ACO s average per capita Medicare expenditures for the performance year must be less than the ACO s applicable updated benchmark by at least the minimum savings rate (MSR) established for the ACO. The MSR is a sliding scale ranging from 2% to 3.9% depending upon the number of beneficiaries assigned to the ACO. In Track 1, the shared savings payment may be up to 50% of all savings, not just savings above the MSR. Note: The cap on payment of savings is addressed below. How is an ACO s share of savings or losses measured under Track 2? For each performance year, CMS will determine whether the estimated average per capita Medicare expenditures of the ACO for Part A and B services for its Medicare Fee-For-Service ( FFS ) beneficiaries are greater or less than the ACO s updated benchmark by the minimum savings or loss rate determined under 42 C.F.R If the expenditures are greater than the updated benchmark, the ACO shares in the losses and must make payment in full to CMS within 90 days of receipt of CMS notification. The loss recoupment limits are: 5% of the updated benchmark in the first performance year, 7.5% in the second performance year, and 10% in the third and subsequent performance years. If the expenditures are less than the updated benchmark, the ACO in Track 2 shares up to 60% of all savings. Note: The cap on payment of savings is addressed below. Is there a cap on how much savings can be shared under the Final Rule? Track 1 ACOs can earn up to 10% of the updated benchmark. Track 2 ACOs can earn up to 15% of the updated benchmark. Under the Final Rule, the 25% withhold requirement has been eliminated for all ACOs.

6 - 6 - What assurances of its ability to repay CMS must a Track 2 ACO demonstrate? A Track 2 ACO must have the ability to repay losses for which it may be liable, and any other monies determined to be owed upon the first performance year reconciliation. Track 2 ACOs must have an adequate mechanism for repaying amounts equal to at least one percent of the ACOs total per capita Medicare Parts A and B fee-for-service expenditures for its assigned beneficiaries based either on expenditures for the most recent performance year or expenditures used to establish the benchmark. What might adequate mechanisms of repayment be? Adequate mechanisms of repayment may include: Obtaining reinsurance, Placing funds in escrow, Obtaining surety bonds, Establishing a line of credit (as evidenced by a letter of credit that the Medicare program can draw upon), or Establishing another appropriate repayment mechanism that will ensure the ACOs ability to repay the Medicare program. Is a Track 2 ACO subject to state insurance laws? In some states, Track 2 ACOs may be subject to state insurance laws because the ACO is a riskbearing entity. Assignment of beneficiaries How is an individual beneficiary assigned to an ACO? Beneficiaries do not enroll in ACOs. CMS will review beneficiaries and apply a step-wise process based on the ACO s utilization of primary care services. The relevant criterion includes the ratio of primary care services provided to the beneficiary by the target ACO as compared to the number of primary care services received by the beneficiary from providers affiliated with either: (1) a different ACO, or (2) no ACO at all. Assignment is broken down into a two-step process: 1. If a beneficiary has used a primary care physician, CMS will use a plurality of allowed charges for services rendered by all primary care physicians. 2. If the beneficiary has not used a primary care physician, CMS will use the plurality of charges for services rendered by any other ACO professionals. As opposed to the proposed rule, preliminary assignment of a beneficiary is a retrospective attribution augmented by prospective predictions. CMS assigns beneficiaries in a preliminary manner at the beginning of the year based on the most recent 12 months of data available. CMS will then perform a retrospective reconciliation of those assignments quarterly based on the most recent 12 months of data. Thus, an ACO will not know with certainty which patients will ultimately be assigned to the ACO. Do the ACOs have any other requirements with regard to assigned beneficiaries? The ACOs must: Provide notice to the beneficiaries that they are being treated by an ACO, including: o Posting signs in the ACO participant s facilities; and o Making available standard written notices.

7 - 7 - Make beneficiaries aware that: o The ACO has a financial incentive to provide improved coordination and quality; o The beneficiary can opt out of required data sharing, in certain circumstances; and o The beneficiary has the option to seek services from non-aco providers and may leave the ACO at any time. Quality measures/performance What are some of the most important quality performance standards? The most basic principle to be remembered is that ACOs will and must be held accountable for the quality, cost, and overall care of Medicare FFS beneficiaries assigned to it. PPACA entrusts the creation of quality performance standards to CMS. CMS has proposed 33 measures under four domains to determine an ACO s success in promoting the aims of better care for individuals, better health for populations, and lower growth expenditures. These four domains are: 1. Patient/caregiver experience, 2. Care coordination/patient safety, 3. Preventative health, and 4. At-risk populations. Additionally, CMS must establish a method to calculate the ACO s quality performance score, which will evaluate the ACO s meeting of CMS established quality performance standards. The Proposed Rule would have required that participating ACOs meet quality performance thresholds for all measures in each domain. The Final Rule relaxes this requirement, necessitating the meeting of quality performance standards (as measured by the ACO s quality performance score) in 70% of the measures in each domain. This methodology hinges upon data availability and as-yet-tobe determined performance benchmarks. CMS will define these benchmarks based on several available sources. Also, the ACO must audit, evaluate, and submit performance data according to these benchmarks within the domains in order to comply with CMS guidelines. The ACO must report all measures within the domains. All domains will be weighted equally. What are some of the consequences for failing to meet these quality standards? An ACO that fails to meet these standards will lose its eligibility for participation in the MSSP. Additionally, CMS has the right to audit and validate data provided by the ACO. Material discrepancies in audits could lead to CMS deeming that the ACO has failed to meet necessary performance benchmarks. Monitoring and terminating an ACO s participation in the MSSP What methods will CMS use in its monitoring of ACOs and their participating providers/suppliers? The final ACO regulations provide that CMS will employ a range of methods to monitor ACO performance including but not limited to the following: Analysis of data reported by ACOs and aggregated annual and quarterly reports, Analysis of beneficiary and provider complaints, and Audits (i.e., chart reviews, coding audits, and on-site compliance reviews).

8 - 8 - Avoidance of at-risk beneficiaries (cherry picking) The ACO regulations allow CMS to take pre-termination actions, immediately terminate an ACO, or require a Corrective Action Plan (CAP) if CMS determines that an ACO has avoided at-risk beneficiaries. Who are at-risk beneficiaries? While the term at-risk beneficiaries is not defined in the ACO regulations, CMS proposed a definition in the preamble to the proposed ACO rule and provided further clarification in the final ACO rule. CMS believes that the term includes beneficiaries at significant risk for health costs. This would include, but not limited to, beneficiaries who have a high risk score on the CMS-HCC risk adjustment model, are considered high cost due to having two or more hospitalizations or emergency room visits each year, are dually eligible for Medicare and Medicaid, have a high utilization pattern, have one or more chronic conditions, are entitled to Medicare because of disability, and those who are diagnosed with mental health or substance use disorders. CMS acknowledges that as more is learned about ACOs and the MSSP, other beneficiaries may be considered at-risk for avoidance. If an ACO does not meet quality performance standards or fails to report on one or more quality measures, what actions may CMS take? For severe instances of noncompliance, CMS reserves the right to place an ACO on a special monitoring plan, immediately impose a CAP, or immediately terminate the ACO s participation agreement; however, the more routine reaction to quality performance noncompliance would be as follows: ACO may be given a warning for the first time it fails to meet the minimum attainment level in one or more domains and may be subject to a CAP. ACO s compliance with quality performance standards will be re-evaluated in the following year and if noncompliance continues, the agreement will be terminated. If an ACO fails to meet one or more quality measures or fails to report completely and accurately on all measures in a domain, CMS will require the ACO to perform one of the following corrective actions: o Submit the required measure data, o Correct the existing data, o Provide a written explanation, or o Any combination of the above. ACOs that fail to report fully and completely on quality performance measures will not qualify to share in savings in that year. Furthermore, ACOs that exhibit patterns of inaccurate or incomplete reporting of quality performance measures may be terminated from the MSSP. For what reasons may CMS terminate an agreement with an ACO? The proposed ACO rule included a laundry list of reasons that CMS may terminate an agreement with an ACO. Although in the final rule CMS reduced that list to three general categories (noncompliance with eligibility and other requirements, sanctions or actions taken against the ACO by other agencies, and violations of other applicable laws), the categories are so broad that they include all of the prior reasons. Basically, CMS reserves the flexibility to terminate the participation agreement with an ACO when an ACO, its participants, providers, or suppliers fail to comply with any of the requirements of the MSSP.

9 - 9 - May an ACO terminate an agreement with CMS? If so, what steps must the ACO take to accomplish this termination? Yes, an ACO may terminate an agreement with CMS upon 60 days advance written notice to CMS and its ACO participants. The ACO must include the effective date of its termination in such notice. The ACO will not share in any savings for the performance year during which it notifies CMS of its decision to terminate. Thus, the timing of the ACO s notice of termination can be financially significant. If an ACO s agreement is terminated, may the ACO apply to participate in the MSSP in the future? Yes, an ACO whose agreement is either terminated by CMS or voluntarily terminated by the ACO may participate in the MSSP again only after the date that the original three year agreement would have expired had it not been terminated. To be eligible for participation, the ACO will need to demonstrate that it has corrected any prior deficiencies that caused it to be terminated by CMS. Additionally, unless the agreement was terminated less than half way through its term, an ACO that was previously under the one-sided model may only reenter the MSSP under the two-sided model. No matter when the agreement was terminated, an ACO that was previously under the two-sided model may only re-apply under the two-sided model. ACO marketing activities What items are considered marketing materials and activities? Marketing materials and activities are defined to include general audience materials such as brochures, advertisements, outreach events, letters to beneficiaries, web pages, data sharing opt out letters, mailings, social media, or other activities when used to educate, solicit, notify, or contact Medicare beneficiaries or providers and suppliers regarding the Shared Savings Program. What items are not considered marketing materials and activities? Marketing materials and activities exclude certain informational materials customized or limited to a subset of beneficiaries, non-aco related materials, materials that address beneficiary-specific billing and claims issues, materials that address other specific individual health related issues, educational information on specific medical conditions, written referrals for health care items, and services and materials or activities that do not constitute marketing under 45 C.F.R and (a)(3)(i) (1) To make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service, unless the communication is made: (i) to describe a health-related product or service (or payment for such product or service) that is provided by, or included in a plan of benefits of, the covered entity making the communication, including communications about: the entities participating in a health care provider network or health plan network; replacement of, or enhancements to, a health plan; and health-related products or services available only to a health plan enrollee that add value to, but are not part of, a plan of benefits; (ii) for treatment of the individual; or (iii) for case management or care coordination for the individual, or to direct or recommend alternative treatments, therapies, health care providers, or settings of care to the individual. (2) An arrangement between a covered entity and any other entity whereby the covered entity disclosed protected health information to the other entity, in exchange for direct or indirect remuneration, for the other entity or its affiliate to make a communication about its own product or service that encourages recipients of the communication to purchase or use that product or service. (i) Notwithstanding any provision of this subpart, other than the transition provisions in , a covered entity must obtain an authorization for any use or disclosure of protected health information for (Footnote continued on next page)

10 Do marketing materials and activities need to be approved by CMS? No. Under the Proposed Rule, all marketing materials needed to be submitted to CMS for prior approval. Under the Final Rule, marketing materials and activities may be used or conducted five days after they are submitted to CMS if the ACO certifies compliance with all the marketing requirements and CMS does not disapprove of the marketing materials or activities. Marketing materials and activities are considered approved after the expiration of the initial five-day review period. CMS may, however, issue written notice of disapproval at any time, even after the conclusion of the initial five-day review period. If such written notice is issued, the ACO, ACO participants, ACO providers/suppliers, and other individuals or entities performing functions or services related to ACO activities must cease using any disapproved materials or activities. Does the Final Rule impose any additional requirements on ACO marketing materials and activities? Marketing materials and activities must: Use template language developed by CMS, if available; Not be used in a discriminatory manner or for discriminatory purposes; Comply with (a) regarding beneficiary inducements; and Not be materially inaccurate or misleading. The role of HIT in the MSSP and quality and other reporting requirements What is the general role of health information technology in the Shared Savings Program? Health information technology forms the backbone of the rules reporting requirements aimed at measuring and assessing the quality of care furnished by each ACO. As such, it can be said that one of the goals of the Shared Savings Program is to catalyze investment in health information technology. Unlike the proposed regulations, the final regulations do not require any level of implementation of EHR in order to participate in the MSSP, however, EHR milestones form a major component of an ACO's quality reporting score. For example, the final rules encourage ACOs, ACO participants, and ACO providers/suppliers to develop a robust Electronic Health Records infrastructure and offers incentives for doing so. An ACO s quality reporting score will include a quality measure for adoption of EHR that is weighted twice as much as any other quality measure. In short, successful implementation of EHR systems is essential to succeed as an ACO, and also to report the quality measures and outcomes required by the Shared Savings Program. Are the health information technology requirements burdensome to participants in the Shared Savings Program? The answer will depend upon the current status and condition of the participant s health information technology systems and other factors unique to each participant. However, the rules aim to limit the burden to providers and leverage a participant s existing health information technology system with the ACO health information technology requirements and those of CMS EHR Incentive Programs, including attaining Meaningful Use and the requirements of private payer incentive programs. (Footnote continued from previous page) marketing, except if the communication is in the form of: (A) a face-to-face communication made by a covered entity to an individual, or (B) a promotional gift of nominal value provided by the covered entity. (ii) If the marketing involves direct or indirect remuneration to the covered entity from a third party, the authorization must state that such remuneration is involved.

11 The proposed rules required reporting of data pertaining to 65 quality measures that would be reported through claims data, surveys, and Group Practice Reporting Option Data Collection Tools (GPRO). Were all 65 quality measures adopted in the final rule? No, the final rule includes 33 required quality measures, which will be scored as 23 measures to determine an ACO s quality reporting score. What is the GPRO and what is a GPRO audit? GPRO stands for Group Practice Reporting Option Data Collection Tool, which is a web interfaced database assigned to an ACO that captures quality information for each beneficiary. An ACO must use the GPRO to submit data regarding the 33 required quality measures in order to qualify on behalf of their eligible professionals for the Physician Quality Reporting System (PQRS) incentive under the Shared Savings Program. CMS has the right to audit quality reporting data in order to validate all reported data. The audit consists of three phases of medical records review. An ACO must provide CMS all beneficiary medical records during an audit. If a gap of greater than 10 percent exists between the quality data reported and the medical records provided during the audit, the ACO will not receive credit for meeting the quality target for any measures to which the gap applies. Untimely, inaccurate, uncorrected, and incomplete quality reporting data may lead to disqualification from the Shared Savings Program or other sanctions. Also note that the GPRO does not require an actual group practice. Individual medical professionals that are ACO participant providers/suppliers constitute a group practice in the context of the PQRS. How much is the PQRS incentive amount for eligible professionals? The final rule adopts the same PQRS incentive in the proposed rule. The PQRS incentive equals 0.5% of the Secretary s estimate of the ACO s eligible professionals total Medicare Part B Physician Fee Schedule allowed charges for covered professional services furnished during the calendar year reporting period from January 1 through December 31, for years 2012 through FTC/DOJ joint statement regarding antitrust review and scrutiny of ACOs In conjunction with the Final Rule, the Federal Trade Commission and the Department of Justice (the Agencies ) released a final joint Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (the Final Policy Statement ). The Final Policy Statement is intended to ensure that health care providers have the antitrust clarity and guidance needed to form procompetitive ACOs that participate in both the Medicare and commercial markets. Changes from proposal to Final Policy Statement: Elimination of the mandatory antitrust review for ACOs with 50% or more market share. This change is consistent with the final ACO regulations, which no longer require a mandatory antitrust review as a condition of entry into the Shared Savings Program. Applicability of the guidelines. With the exception of the voluntary expedited review (described below), the guidance in the Final Policy Statement now applies to all collaborations among otherwise independent providers and provider groups that are eligible, or have been approved, to participate in the Shared Savings Program, and is not limited to ACOs formed after the enactment of the PPACA (March 23, 2010).

12 Key Provisions of Final Policy Statement: Antitrust Oversight and Enforcement. The Agencies will communicate with CMS to gather information (including ACO applications and claims data) that will assist with antitrust oversight of ACO activities. The Agencies will also respond to complaints about an ACO s formation or conduct and take appropriate enforcement action. Voluntary Expedited Review. The Final Policy Statement provides for an expedited (90- day) voluntary review for ACOs that wish to obtain additional antitrust guidance. To initiate the voluntary review process, the ACO must submit a variety of documents and information relating to the Agencies assessment of the ACO s impact on competition. As the 90-day review period does not begin until the Agencies are satisfied that all required documents and information have been submitted, it is anticipated that this process could far exceed the expedited timeline. Rule of Reason Analysis. As set forth in the proposed policy statement, the Agencies will use the Rule of Reason to evaluate ACOs that meet CMS eligibility criteria, with respect to both Medicare and private sector contracting. The Final Policy Statement provides that organizations meeting the eligibility requirements for the Shared Savings Program are reasonably likely to be bona fide arrangements intended to improve the quality, and reduce the costs, of providing medical and other health care services through their participants joint efforts. Safety Zone. As set forth in the proposed policy statement, absent extraordinary circumstances, the Agencies will not challenge the formation of an ACO with a combined market share of 30% or less of each common service in each participant s Primary Service Area ( PSA ), defined as the lowest number of contiguous postal zip codes from which the ACO participant draws at least 75 percent of its patients. What is the value of the antitrust guidelines? To some extent, the Final Policy Statement is simply a reiteration of existing antitrust law. The establishment of the Safety Zone for ACOs with a 30% or less market share, for example, reflects the generally accepted view of the Agencies and the courts that an entity with market share below the 30% threshold lacks the ability to affect the market in an anticompetitive way. On the other hand, by clearly articulating the rules the Agencies will apply, the Final Policy Statement creates some helpful bright line tests that may give provider organizations additional confidence in moving forward as ACOs. Does the Statement have meaningful application outside of the Medicare context? Yes. By clearly stating that ACOs that meet the CMS eligibility criteria qualify for Rule of Reason review of their contracting activities with commercial payers, the Final Policy Statement helps clarify when organizations of independent providers are sufficiently clinically integrated to warrant Rule of Reason review of their conduct in the commercial market. Is it recommended to seek voluntary antitrust approval before proceeding with forming an ACO? The decision to seek prior antitrust approval should be made on a case-by-case basis. One significant factor to take into consideration is the existing guidance from the Agencies regarding how they will evaluate conduct from an antitrust perspective, including the Final Policy Statement. This information may permit many ACOs to determine for themselves whether they would pass antitrust muster without incurring the expense of going through an Agency review.

13 Stark, anti-kickback, and civil monetary penalties waivers for ACOs Are the fraud and abuse waivers as broad as they seem? Yes. The interim final rule contains the following five waivers: 1. ACO pre-participation, 2. ACO participation, 3. Shared savings distributions, 4. Compliance with the Stark Law, and 5. Waiver for beneficiary inducements to encourage preventative care and compliance with treatment regimens. As long as an arrangement proposed by an ACO is reasonably related to the purposes of the Shared Savings Program, the arrangement should fall within one of the five waivers. One of the reasons CMS and the OIG created such broad waivers is because the design of the Shared Savings Program itself is thought to guard against programmatic fraud, waste, and abuse (e.g., ACOs cannot condition provider participation on referrals of non-aco business and cannot limit or restrict referrals to ACO participants). Another reason underlying the creation of these broad waivers is the fact that prospective ACOs must go through an application process that will be designed to weed out applicants with a history of program abuse. Although the waivers are very broad, CMS and the OIG promise close scrutiny of ACO arrangements to determine whether they adversely affect Medicare beneficiaries or costs. CMS and the Office of Inspector General indicated that they may continue to refine the waivers should such effects materialize. The waivers often require the terms of an arrangement to be reasonably related to the purposes of the Shared Savings Program. What does that mean? Consistent with the statutory purposes of the Shared Savings Program, the rule defines this phrase as follows: Promoting accountability for the quality, cost, and overall care for a Medicare population in the Shared Savings Program; Managing and coordinating care for Medicare fee-for-service beneficiaries through an ACO; or Encouraging investment in infrastructure and redesigned care processes for high quality and efficient service delivery for patients. Is there any requirement for ACOs financial arrangements to be fair market value? The hallmark of most Stark and anti-kickback exceptions/safe harbors is that the financial arrangement in question must involve fair market value remuneration. However, there is no fair market value or commercial reasonableness requirement in the ACO fraud and abuse waivers. CMS and OIG are seeking comments as to whether these concepts should be included in the final waivers. For waivers that require public disclosure of a financial arrangement, how does the ACO comply? Until further guidance is issued, ACOs can meet the public disclosure requirement by posting a description of the arrangement on its website (or the website of an individual or entity forming the ACO) within 60 days of the date of the arrangement. The arrangement must be clearly labeled as an arrangement for which waiver protection is sought. The financial terms of the arrangement are not among the information required to be disclosed.

14 IRS guidance regarding ACOs Last April, the IRS issued Notice , which detailed the IRS s thinking on the participation of exempt organizations in ACOs. Does Notice continue to reflect the IRS s current views on exempt organization participation in ACOs? Yes. The IRS confirmed in Fact Sheet , issued on the same day as CMS interim final rules on ACOs, that Notice , I.R.B. 652 (Apr. 18, 2011) continues to be the most relevant guidance document for exempt organization participation in ACOs. Fact Sheet , however, does amplify some of the concepts announced in Notice (particularly with respect to capital contributions - see below). On November 10, 2011, the IRS issued a Private Letter Ruling (No ) that some observers believe may negatively affect the ability of an ACO to qualify for Internal Revenue Code Section 501(c)(3) status and may stand as an impediment for ACOs that wish to contract with nongovernmental payors. The PLR advised the party that an organization formed to help a tax-exempt hospital and its medical staff members participate in provider networks and contract with commercial payers could not qualify for exemption under Section 501(c)(3) because it was not organized exclusively for 501(c)(3) purposes. The governing documents did not limit the organization s activities to exempt purposes. The IRS also ruled that the organization was not operated exclusively for 501(c)(3) purposes because its primary activities were similar to those of an independent practice association (the coordination of contracting between a physician-hospital organization and private payors). In Revenue Ruling 86-98, the IRS previously found that similar IPA activity was not exempt activity. The organization in PLR did conduct some activity that would be similar to the activities of an ACO (i.e., quality and care management), but the organization did not appear to emphasize those activities in its representations to the IRS. It may not be wise to place too much emphasis on PLR PLR made no reference to several features of ACOs required by CMS s interim final ACO regulations (e.g., care coordination, electronic health records, and the development of care protocols and policies). However, the request for the rulings contained in PLR was likely submitted without the benefit of CMS s interim final ACO regulations, the above-referenced IRS guidance on ACOs and perhaps even before the passage of the Affordable Care Act itself. If an ACO plans on expanding the ACO model beyond the Medicare Shared Savings Program and other government health care programs, the ACO will likely need to demonstrate to the IRS how the ACO will reduce the burdens of government and benefit its community in order to be recognized as tax-exempt under Section 501(c)(3). Is compliance with all five factors specified in Notice required in order to avoid inurement and private benefit issues? No. In Notice , the IRS stated that an exempt organization s participation in an ACO will not result in inurement or private benefit where: The terms of the exempt organization s participation in an ACO are established in a written agreement negotiated at arm s length. The ACO has been accepted into the Shared Savings Program by CMS. The exempt organization s share of economic benefits derived from the ACO is proportional to the benefits or contributions the exempt organization provides to the ACO. The exempt organization must share in any ACO losses to the same extent as it shares in economic benefits derived from the ACO.

15 All contracts and transactions entered into by the exempt organization with the ACO and ACO participants, and by the ACO with the ACO s participants and any other parties, are at fair market value. Notice made no pronouncement that an exempt organization s ACO participation must always be consistent with these factors. Fact Sheet explicitly confirms that no such requirement exists. In connection with Factor 3 in Notice , if an exempt organization has an ownership interest in an ACO, does the return on that ownership interest have to be proportional to the exempt organization s capital contributions? No. The IRS explained that language contained in Notice suggesting that returns on investment had to be proportional to capital contributions served only as an example where the exempt organization s total share of economic benefits derived from the ACO would be proportional to the benefits or contributions made to the ACO. Factor 3 is broader than just returns on investment. It includes all benefits or contributions received by, or derived from, the ACO. For more information please contact your Nixon Peabody LLP attorney.

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