By Andrea M. Ferrari, Director, HealthCare Appraisers Inc., Boca Raton, Florida; William B. Eck, Seyfarth Shaw LLP, Washington, D.C.; Tizgel K.S. High, LifePoint Health, Brentwood, Tennessee; and David S. Szabo, Locke Lord LLP, Boston
A version of this article was previously published by the American Health Lawyers Association and the Wisconsin Bar Association.
In November 2017, the Centers for Medicare and Medicaid Services (CMS) published its second “final rule with comment period” implementing the Medicare Access and CHIP Reauthorization Act (MACRA).
This second final rule set forth new details, conditions and timelines for the physician payment changes that will follow from MACRA. MACRA is the bipartisan legislation that repealed and replaced the unpopular sustainable growth rate (SGR) formula for calculating annual Medicare payment changes for physicians.
MACRA replaced the SGR formula with the Medicare Quality Payment Program (QPP). The QPP provides two options for future clinician payments from Medicare:
- participation in the Merit-based Incentive Payment System (MIPS); or
- participation in one or more Alternative Payment Models (APMs).
Both options will transition clinicians away from traditional “volume-based” payment criteria to newer “value-based” payment criteria. The likely result is that MACRA will transform the norms for provider compensation throughout the marketplace, since Medicare payment practices typically set the standard for general market practices.
More often than not, the ability to demonstrate that health care provider compensation is fair market value (FMV) and commercially reasonable is the lynchpin for a regulatory-compliant transaction or arrangement. As recent court cases such as Tuomey have illustrated, compensation that does not meet the FMV and “commercially reasonable” standards may put providers at risk for financially ruinous consequences. With this in mind, and with recognition that FMV and commercial reasonableness are difficult to appropriately evaluate without an understanding of the market forces that may influence them, this article is to assist readers to understand how MACRA may transform market forces and economics in the coming years, and how that transformation may affect the questions and answers about what is FMV and commercially reasonable in provider compensation.
OVERVIEW OF THE MERIT-BASED INCENTIVE PAYMENT SYSTEM (MIPS)
Clinicians participating in MIPS will be subject to Medicare payment adjustments (which may be positive or negative) based on performance in four categories of measures:
- advancing care information,
- clinical practice improvement activities, and
Clinicians subject to MIPS are physicians, and also other care providers such as physician assistants, nurse practitioners, clinical nurse specialists and certified registered nurse anesthetists. MIPS is designed to provide incentives for quality and value improvements in health care delivery while maintaining Medicare budget neutrality. This being the case, there will be both “winners” and “losers” under MIPS. This is to say that a certain number of eligible clinicians will be subject to reimbursement reductions in order for others to achieve reimbursement enhancements. Since even those clinicians who are subject to reimbursement reductions may have made investments in new technology or infrastructure in order to have a hope of achieving the reimbursement enhancements, there is some risk inherent in participating in MIPS.
There is a two-year lag between the period during which MIPS performance data are collected (the “measurement period”) and the period during which corresponding payment adjustments are made (the “payment period”). A physician or practice that fails to report data or whose reports suggest relatively poor performance during a measurement period will suffer the consequences two years later. The two recent final rules have somewhat relaxed the reporting requirements and performance standards for the immediate measurement periods, but CMS has said that, for 2019 and beyond, the standards will be more stringent. This suggests that payment reductions may be looming for more physicians in 2021 and later years. With a payment differential of up to 18 percent by 2022 (based on +/- 9 percent from a baseline), the financial planning risks for physician practices may be significant.
OVERVIEW OF ALTERNATIVE PAYMENT MODELS (APMS)
Eligible clinicians may avoid participation in MIPS by participating in qualifying APMs. Qualifying APMs must meet specific criteria related to:
- use of certified electronic health record technology (CEHRT),
- payments conditioned on achievement quality criteria that are comparable to the quality criteria in the quality performance category of MIPS, and
- entity risk-bearing for poor performance and monetary losses.
Providers who participate in qualifying APMs may receive a 5 percent annual incentive bonus beginning in 2019, with potentially higher incentive payments later. However, achievement of these bonuses is likely to require some upfront expenditure – for example, expenditures for new IT, and/or for enhanced care management processes. One might reasonably speculate that the inevitable need for upfront investment may blunt the net economic benefit of the available incentive payments, at least initially. Moreover, participation in a qualifying APM (an “Advanced APM”) necessarily and by definition requires downside risk in that payments must be subject to a minimum percentage reduction for failure to achieve benchmark standards, and more than a nominal portion of the risk of loss must be borne by participating clinicians in order for the clinicians to qualify for APM participation as an alternative to MIPS.
Significantly, a physician could be affiliated with an entity that is intended to be a qualifying APM, but not experience sufficient volume in the alternative payment plan to gain exemption from MIPS. Thus, physicians who seek to participate in qualifying APMs will ignore MIPS performance at their own peril.
APMs under the 2017 and 2018 MACRA Final Rules Must:
Advanced APMs qualifying for MIPS exemption specifically include:
POTENTIAL IMPACT OF MIPS AND APMS ON PHYSICIAN PRACTICE PATTERNS AND ECONOMICS
Initially, physician practice expenses may increase under MACRA, due to the need for investment in the infrastructure necessary to achieve the upside benefits of MIPS and APMs. Larger practices may have the most substantial expenditures, but may also have the benefit of being able to spread their costs over a greater number of revenue generators. Smaller practices with more limited purchasing power, including sole providers and small physician-owned groups, may find themselves without access to adequate infrastructure, particularly with respect to IT, and may be at a disadvantage in responding to the reimbursement changes.
Experts indicate that some of the most expensive but also important investments to prepare for MACRA may be:
- information technology infrastructure (g., electronic health records and other tools to permit tracking, aggregation and analysis of data); and
- support systems to identify and plan necessary changes in practice patterns.
The need for these investments may have substantial impact on the economics of provider service delivery, and consequently, may force changes to the prevailing models of care delivery, as we discuss further below.
2. IMPACT ON SOURCES AND AMOUNT OF PHYSICIAN COMPENSATION
Medicare is currently a major source of payment for certain types of physician services, including services related to end stage renal disease (nephrology), joint replacement (orthopedics) and heart disease (cardiology), to name just a few. The implementation of MACRA may significantly affect compensation trends for physicians whose specialty is these services. Also, if other payors in the marketplace follow the lead of the Medicare program to model their own payment policies (as often happens and some data suggest is already happening), then the effects of MACRA may be quite dramatic and may affect providers of nearly all specialties.
The potential for dramatic changes in reimbursement poses some risk for hospitals and health systems that employ physicians. Recent False Claims Act litigation has focused attention on hospital losses from physician compensation as an indicator of inappropriate physician compensation, and specifically, as an indication of nonFMV and noncommercially reasonable compensation.
Some qui tam plaintiffs have successfully argued that such losses are evidence of non-FMV, noncommercially reasonable compensation that fails the requirements of the Stark Law or implies violation of the Antikickback Statute. If current litigation and enforcement trends continue, hospital-affiliated employers may face substantial financial risk if their employed physicians fail to meet the required benchmarks for full reimbursement under MACRA but their employment compensation does not adjust accordingly. Fixed rates of compensation per work relative value unit (wRVU), which were once considered a fairly safe bet for regulatory-compliant physician employment models, have the potential in the future to become fraught with risk.
3. IMPACT ON PRACTICE MODELS AND CLINICAL INTEGRATION
Physician practice models have evolved and transformed several times in recent decades. In the last five to seven years, we’ve been in a wave of provider consolidation, with large numbers of mergers and acquisitions and increasing physician employment by hospitals and health systems or their affiliated organizations. The implementation of MACRA may affect both the pace and direction of the consolidation trend. On the one hand, a desire for economies of scale related to the need for access to information technology and other efficiency building infrastructure may increase the interest in consolidation among independent physicians, especially in markets with less favorable payor mix or high dependence on government payors such as Medicare.
On the other hand, the combined effects of increasing practice costs and difficulty projecting future revenue may have a chilling effect for the would-be purchasers and managers of many physician practices, particularly in the current enforcement environment, in which the financial impact of transactions with poor or questionable economics might easily go from bad to disastrous. Our reference to “disastrous” financial impacts is, in part, a reference to the risk of liability under the Stark Law, Antikickback Statute and/or False Claims Act.
If the FMV or commercial reasonableness of physician compensation comes into question, as may happen in the wake of a physician practice transaction or physician employment relationship that yields substantial and seemingly unjustified losses for the purchaser and employer, the consequences could be enormous. The difficulty in projecting future revenue arises from both
- uncertainty about the state of the market given, for example, uncertainty about the potential for repeal and replacement of the Affordable Care Act; and
- uncertainty about the performance of individual eligible providers under MIPs or their chosen APM.
There are also antitrust enforcement concerns about some types of transactions.
The competing desires for economies of scale and mitigation of consolidation risk may increase interest and participation in clinically integrated networks (CINs) and accountable care organizations (ACOs). Participation in a CIN or ACO may allow providers to share and spread the cost of IT, analytics and care management resources without transferring ownership or accountability for practice performance.
However, participation in a CIN or ACO comes with its own set of financial questions, particularly for the hospitals, health systems and affiliates that already employ physicians and may be the primary owner and funding source for a CIN’s or ACO’s operations. A CIN or ACO can be costly to establish and operate. Therefore, there is significant financial risk related to poor performance. Does this financial risk become a regulatory compliance risk if losses are not appropriately spread or accounted for in the CIN’s or ACO’s relationships with participating providers and/or in its revenue allocation and distribution plans? Is the risk allocation appropriate to allow the participating providers to qualify as APM participants under the MACRA final rule? Answers to such questions are intertwined with the answers to questions about what constitutes a commercially reasonable and FMV financial arrangement for a provider in the post-MACRA world.
WHAT MACRA MIGHT MEAN FOR DETERMINING WHAT IS FMV AND COMMERCIALLY REASONABLE
Various laws make FMV and commercial reasonableness a focus of legal scrutiny in health care transactions and contracts. The law that typically receives the most attention is the Federal Physician Self-Referral or “Stark” Law, a strict liability statute that, absent an exception, is violated when a physician or an immediate family member has a “financial relationship” with an entity (which may be an ownership, investment or compensation relationship) and the physician makes a “referral” to the entity for the furnishing of any of a specified list of “designated health services” that are payable by Medicare.
To avoid liability under the Stark Law, the financial relationship must meet all the requirements for one of an enumerated list of Stark Law exceptions. Many of the exceptions have a requirement that compensation be consistent with or not exceed FMV, and several have a requirement that the compensation arrangement be “commercially reasonable.” Some exceptions do not contain the words “commercially reasonable” but still contain elements that suggest a need for reasonableness in the arrangement. For example, the Stark Law exception for personal services arrangements has a requirement that “aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement(s).”
Violations of the Stark Law give rise to liability for each payment claim submitted pursuant to a prohibited referral. Liability for violations can add up quickly and to astronomical amounts. Repeated or egregious violations may lead to debarment from Medicare and other government health care payment programs. And, the Stark Law is not the only reason to be concerned about whether compensation is FMV and commercially reasonable. There are several other anti-fraud and abuse laws that make FMV and commercially reasonable compensation an implicit imperative, even if not an explicit requirement. The potential liability for violations of these laws may be equally or more troublesome than liability under the Stark Law, particularly if the violations coexist with violations of the Stark Law.
2. DEFINITIONS FOR “FAIR MARKET VALUE” AND “COMMERCIALLY REASONABLE”
“Fair market value” (FMV) has a specific definition in the Stark Law. This definition is:
the value in arm’s length transactions, consistent with the general market value, and, with respect to rentals or leases, the value of rental property for general commercial purposes (not taking into account its intended use) and, in the case of a lease of space, not adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of referrals to the lessee.
The term “general market value,” which is part of the Stark Law’s definition of FMV, is defined in the Stark Law’s promulgating regulations as follows:
the price that an asset would bring as the result of bona fide bargaining between well‐informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as a result of bona fide bargaining between well‐informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement.
The expanded definition of FMV that appears in the Stark Law regulations sets forth guidance as to how the definition should be applied, stating:
[u]sually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals (emphasis added).
The Stark Law regulations also provide specific guidance for applying the definition of FMV to rentals and leases, stating that, in this context, FMV is:
the value of rental property for general commercial purposes (not taking into account its intended use). In the case of a lease of space, this value may not be adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor when the lessor is a potential source of patient referrals to the lessee. For purposes of this definition, a rental payment does not take into account intended use if it takes into account costs incurred by the lessor in developing or upgrading the property or maintaining the property or its improvements.
Although several Stark Law exceptions require that compensation arrangements be commercially reasonable, the Stark Law does not contain a definition for “commercially reasonable.” However, various government publications provide guidance regarding tests for a commercially reasonable arrangement.
For example, in 1998, in the introduction to a proposed Stark Law rule, the Health Care Financing Administration (predecessor to CMS) stated (with emphasis added), “We are interpreting commercially reasonable to mean that an arrangement appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”
In 2004, in the Preamble to the Stark Law Interim Phase II final rule, CMS stated, “An arrangement will be considered ‘‘commercially reasonable’’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals.”
Given the limited authoritative guidance on what “commercially reasonable” means, these statements from the agency charged with enforcing and issuing guidance for the Stark Law may represent the best guideposts for determining compliance with the Stark Law exceptions requiring a commercially reasonable arrangement. The statements suggest that the term commercially reasonable refers to a financial arrangement that would make business sense even if there were no possibility for referrals between the parties entering into it.
3. THE IMPACT OF MACRA
Based on these definitions for FMV and commercially reasonable, MACRA-driven changes to health care delivery and economics may significantly affect whether and which arrangements meet the FMV and commercially reasonable standards. As payor rules change, market forces also change, and such changes are likely to affect how much and under what circumstances parties may be willing to compensate each other for items or services. As a result, longstanding assumptions about which arrangements make commercial sense and which don’t, and about what compensation is FMV and not, may need to be reconsidered.
With changing payment rules, new trouble spots may include:
- multiyear agreements with nonadjusting salary guarantees or fixed compensation per hour or per wRVU
- bonuses or penalties that are inconsistent or incompatible with – or inappropriately duplicative of – known payor quality initiatives; and
- financial metrics that suggest inappropriate risk (or lack of risk) for one party versus another.
Depending on the details, such arrangements may put one party in a position to experience substantial and uncontrolled losses due to the poor performance of the other party, and in some cases may be inconsistent with reasonable or prevailing business practices.
Some types of previously-uncommon compensation arrangements have become, or may in the future become, more prevalent after MACRA, including arrangements based on gainsharing or “pay for performance” principles.
Determining whether these newer arrangements provide for compensation that is FMV and commercially reasonable requires understanding the influences and effects of new market forces, and how available data may be affected by those forces. The most commonly-utilized sources of provider compensation data are annually published compensation surveys.
The survey data, although highly useful, provide a retrospective rather than current snapshot of market practices, and, in an evolving marketplace with changing rules and rapidly shifting payment trends, the data from such surveys may need to be considered carefully and with detailed understanding of context. Compensation that was negotiated in 2014, was paid in 2015, and is reported in 2016 or 2017 publications may reflect the economics of the pre-MACRA world.
To the extent that MACRA is changing or has changed how much and under what conditions providers will be paid, currently-available survey data might not be the best basis to determine reasonable or FMV compensation for the post-MACRA era. Just as a driver cannot navigate by looking only in the rear-view mirror, health care organizations may not be able to rely solely on retrospective compensation analyses for understanding FMV and commercial reasonableness.
4. RECOMMENDATIONS FOR COMPLIANT PHYSICIAN TRANSACTIONS DURING THE MACRA TRANSITION
Many of the newest and most challenging compensation questions will need to be answered with consideration for not only how and how much parties have been paid in the past, but also how and how much similarly situated parties might be paid as health care rules and economics change. To some degree, the latter may be reasonably surmised based on survey data trends and current observations of market behavior. However, even the most reasonable supposition may turn out to be wrong. This being the case, ensuring regulatory compliance may demand periodic and frequent reevaluation of compensation – perhaps once per year – until the MACRA payment transition is complete.
Focus areas for periodic reevaluations may include, but not be limited to:
- Modification to salary guarantees;
- Modification to compensation rates or compensation caps;
- Modification to minimum performance standards;
- Downside risk for poor performance or revenue reductions;
- Allocation of increased practice expenses for information technology and care management costs; and
- Shifting market trends and value indications, particularly those related to quality of care.
Compensation terms for periodic reevaluation during the MACRA payment transation:
- Salary guarantees
- Compensation rates (per hour, per wRVU, etc.)
- Bonuses and penalties for quality ahcievements
- Incentive payments based on measures other than quality
- Aggregate annual compensation caps
- Modifications to salary guarantees
- Modifications to compensation rates
- Allocation of risk for poor performance on key indicators and associated revenue losses
- Allocation of new expenses and/or compensation related to use of IT and/or care management processes
- Allocation and "stacking" of value-based payments and incentives, including ACO/CIN distributions, gainsharing and shared savings payments, and other revenue that is not directly tied to traditional measures of productivity
About the Authors:
William B. Eck is an attorney with Seyfarth Shaw, Washington, D.C. He has more than 30 years of experience representing clients in health care transactional, regulatory and enforcement matters. He regularly advises clients on Stark, fraud and abuse, and other compliance and reimbursement matters.
Andrea Ferrari is a director at Healthcare Appraisers, Inc.. Boca Raton, Florida. She speaks and publishes regularly on topics related to fair market value and commercial reasonableness in health care transactions.
Tizgel K. S. High is vice president and associate general counsel for LifePoint Health, Brentwood, Tennessee. She has primary responsibility for all LifePoint Health’s affiliated physician practice entities. In this role she supports the company’s acquisition activity and onboarding efforts for new hospital affiliated clinics. Prior to joining LifePoint, Tizgel was an Operations Counsel for Community Health Systems.
David S. Szabo is partner with Lock Lord LLP, Boston, where he has extensive experience in healthcare licensing and regulation, reimbursement, fraud and abuse compliance matters, and the structuring of joint ventures. He represents hospitals, integrated delivery systems, physician organizations, home care companies, and other health care service providers, as well as health care IT companies and health plans.