Blog Post

Stark Law Update: Value-Based Enterprise Rules and Exceptions

Stark Law Update Vbe Web

On October 9, 2019, the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) issued proposed rules that update the 1989 Stark Law and Anti-Kickback Statute. There is much to be excited about in 2020 as proposed rules for the healthcare industry move toward finalization and implementation. Prior to the proposed revisions, there had not been any changes since 2007. The updates include key definitions and clarifications in areas such as fair market value, commercial reasonableness, and the volume and value of referrals. These are considered “the big 3” by CMS and will garner much industry attention leading up to the final rule.

Notably, regulators have also acknowledged the shift toward value-based care within the healthcare industry and have offered new definitions and exceptions for value-based enterprises (VBE). While these proposed rules were subject to feedback through December 31, 2019, the language put forth by HHS and CMS shows promise for continued value-based progress.

Under the proposed rules changes, a VBE exception will be created, opening the door for innovative compensation structure designs. The proposed Stark Law exception will likely be welcomed by legal counsel reviewing physician compensation arrangements in the future. The introduction of value-based exceptions and safe harbors will reduce regulatory barriers and support the organizations that are transforming the delivery of care, while also encouraging cost-effective coordination.

The Definition of a Value-Based Enterprise

For organizations that are working to create value-based delivery systems, understanding the VBE definition and exceptions will be critical. CMS has proposed that a VBE have the following attributes:

  • Two or more participants
  • An accountable body or person responsible for financial and operational oversight of the VBE
  • A governing document that describes the VBE and how the VBE participants intend to achieve its value-based purposes

The purposes of a VBE include providing better coordination of care for a target population, improving the quality of care, reducing costs, and transitioning to value-based models. The proposed rule also defines the activities of a VBE, which, provided that the activity is “reasonably designed to achieve at least one value-based purpose of the VBE,” includes any of the following:

  • The provision of an item or service (e.g., clinical care or other designated health service)
  • The taking of an action (e.g., coordination of care, management of a chronic disease, addressing other social determinants of health)
  • The refraining from taking a less desirable action (e.g., by choosing to provide a conservative or non-invasive course of treatment)

Consistent with the existing rule, “the making of a referral” will still not be considered a value-based activity. In examples provided by CMS, value-based activities may include certain types of direct payments to a physician which are made, in part, to encourage an adherence to new protocols or required post-discharge meetings as part of a value-based arrangement.

Accepting Financial Risk

With the VBE and related attributes defined, exceptions were proposed for Stark Law as it applies to varying levels of financial risk. These include full financial risk and meaningful downside risk. Additional safeguards were also provided for arrangements when neither party has assumed financial risk. In parallel with the Stark Law exceptions, safe harbors for the Anti-Kickback Statute were also proposed for VBE arrangements with full financial risk, substantial downside financial risk, and no financial risk. Finally, there are likely to be commercial reasonableness considerations regarding specific arrangements. However, in a major clarification by CMS, the proposed definitions suggest that an arrangement can still be commercially reasonable even if the arrangement is not profitable—a consideration that has caused some disagreement in the past about what constitutes commercial reasonableness.

Value-Based Compensation Plan Structures

We see many opportunities as the proposed rules move toward finalization and implementation. With the introduction of these new exceptions and safe harbors—which will allow for compensation plans under a VBE to deviate from common $/WRVU models—there will be greater flexibility in how physicians can be compensated. Under VBE models, a significantly larger portion of physician compensation will be tied to the total clinical expense of a population, as well as the activities that help to manage utilization (e.g., care coordination, monitoring sites of service, wellness and preventive services).

Although the specific compensation plan elements for VBE models will vary by location and market conditions, providers can expect to see a shift to include acuity-adjusted panel compensation and credit for care-coordination activities. Further, there will be a greater reliance on the total clinical expense ratio of the population or a similar risk surplus compensation performance. Of course, new plan structures will need to align with the core financial fundamentals of the medical group and the reimbursement landscape.

The Future of Value-Based Compensation Models

The clarifications and exceptions laid out in the proposed Stark Law updates will soon allow for greater regulatory flexibility in support of more innovative value-based compensation plans and moving beyond traditional base salary plus productivity models. When the final rule is published in 2020, specific details about the allowable models will emerge and provide greater clarity for compensation planning efforts. We look forward to seeing the final rule and working with our clients to implement it for models in 2021 and beyond.

Looking for more information regarding physician compensation?

Take a look at our previous post where we discuss how to correctly account for recruitment incentives in a physician’s total compensation when comparing against industry benchmark figures.

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The ECG Valuation team is often asked by our clients and colleagues to respond to challenging matters of health care valuation and physician compensation. Occasionally, answers to these questions are clear and uncomplicated, but frequently a nuanced and specific response is necessary. If you have any questions about the valuation process, contact the ECG valuation team.