ABA Health eSource
December 2009 Volume 6 Number 4

Health Care Reform: For “Accountable Care Organizations” to Work, Fraud and Abuse Laws Must Evolve
By W. Bradley Tully, Esq. and Charles B. Oppenheim, Esq.,
Hooper, Lundy & Bookman, Inc., Los Angeles, CA

AuthorAuthorWhile the details remain much debated, it seems likely that some type of healthcare reform legislation will be enacted. Although controversy swirls around the potential benefits and drawbacks of a “public option” and how to fund the cost of coverage for the uninsured, the need to control the growth in healthcare costs is widely accepted and far less controversial. Likewise, there is increasing support for the notion that substantial savings can be achieved through better management of the delivery of healthcare, and it seems likely that new incentives will be created to support decisions for better management of healthcare.

Accountable Care Organizations

In furtherance of these goals, both the House and Senate reform bills have included provisions regarding accountable care organizations (“ACOs”). 1 Under the House bill, a pilot program is to be conducted to test different incentive models designed to reduce expenditures and improve outcomes. 2 Specifically, the pilot program is designed to reward physician practices and other physician organizational models for the provision of high quality, cost-effective healthcare services. To the extent that the Secretary of Health and Human Services (the “Secretary”) finds a particular ACO model to be successful in improving quality and reducing costs, the Secretary is to implement such model on as large a geographical scale as practical and economical.

The House Bill sets forth specific incentive payment models for ACOs. These include:

  • The Performance Target Model. Under the performance target model, the qualifying ACO will receive an incentive payment if expenditures for items and services provided to beneficiaries in the ACO are less than the target spending level or target rate of growth.
  • Partial Capitation Model. Under the partial capitation model, an ACO would be at financial risk for some (but not all) items and services covered by the Medicare program. The Secretary would be given authority to limit the partial capitation model to ACOs that are highly integrated and are determined to be capable of bearing risk.
  • Other Payment Models. The Secretary is also authorized to create additional payment models to improve quality and efficiency.

There is little doubt that the concept of ACOs will (and has already) provided a large incentive for providers to move toward the development of a variety of integrated healthcare delivery systems, similar in many ways to those that arose in the 1990’s in response to the advent of managed care (and even without pressure from the Medicare program). However, many of the integrated delivery systems that were created in the 1990s were unsuccessful. For example, the physician practice management companies that were once the darlings of Wall Street crashed and burned as a result of having bid-up the price of physician practices to astronomical levels, taking on financial risk that they could not properly manage, ultimately delivering no added value. Caught up in the frenzy, many hospitals, while they survived based on their core businesses, overpaid for physician practices and lost money under practice management agreements. To the extent these integrated models took on insurance type risk, in many instances they were not properly capitalized or equipped to managed to such risk and, in many cases were not regulated as insurance companies. The result, perhaps predictable, was that many of these entities failed financially. Whether ACOs can be designed now to avoid the problems of the past remains to be seen. However, aside from financial regulation, a body of federal law known as “fraud and abuse” law, which has been created for other purposes, imposes important constraints on ACOs, and that body of law will need to evolve to accommodate ACOs, if they are to function effectively.

Fraud and Abuse Law

Restrictions on financial relationships involving physicians are imposed under principally three bodies of law:

  • The anti-kickback laws 3 ;
  • The self-referral laws 4 ; and
  • Laws prohibiting financial incentives to physicians to limit the cost of care (“CMP Statute”). 5

Some gainsharing programs, similar in spirit to the incentive payments to be made to ACOs, have been established under the existing laws, but they have not faced an easy task. (“Gainsharing” refers to programs that encourage physicians to reduce costs by ordering items only when necessary, and through product substitution, and sharing part of the savings achieved with those physicians.) The OIG took a very negative position on gainsharing in 1999. 6 Nevertheless, over time, the OIG through its process of issuing advisory opinions has developed a narrow avenue of approval for gainsharing plans, and also, in at least one case, has issued an advisory opinion approving a “pay for performance” type model.

One factor that has caused the pay for performance model to be somewhat limited is, to date, insurers have largely been unwilling to pay for increased quality through increased reimbursement. However, it is possible that that type of program will be revisited and become more popular under the ACO model.

In recognition of the restrictions that fraud and abuse laws have put on innovative healthcare models, the House Bill contains a waiver provision stating that:

The Secretary may waive such provisions to this title (including Section 877) and Title 11 in the manner the Secretary determines necessary in order to implement the pilot program. 7

Thus this provision (and it appears likely that a similar provision will be necessary if any program providing incentives for ACOs becomes enacted as part of the healthcare reform) recognizes that these programs will have to be freed from existing constraints.

Options for Relaxing Fraud and Abuse Laws to Accommodate ACOs

It appears there are three approaches available to the Secretary. Under the first, the Secretary could take a broad approach and simply exempt ACOs from the anti-kickback, self-referral and CMP Statute restrictions. However, given the legitimate concerns that exist as to how payments to physicians may result in inappropriately restricting care, it appears unlikely that the Secretary will adopt a “wild west” approach and permit any type of ACO payment methodology and financial incentives that are not carefully crafted in terms of protecting patients. Therefore, it appears likely that the Secretary will impose regulatory constraints when it issues the waivers authorized by law.

The statute talks about waivers of the law, and describes such waivers as “being in the manner the Secretary determines necessary in order to implement the pilot program.” Therefore, it appears that while the Secretary may have the authority to create blanket waivers from these laws, it would also have authority to craft whatever type of conditional waivers it may deem appropriate.

Under a second approach available to the Secretary, it could continue its past cautionary stance and require that waivers be granted on a case-by-case basis either using its existing apparatus for the issuance of advisory opinions or similar process. However, this approach presents two potential difficulties. First, the range of programs which have obtained OIG approval to date have been quite narrow (e.g., they have been limited to a one-year duration, have required outside consultants to monitor quality of care, etc.). It appears likely that ACOs will need flexibility broader than what has been approved so far for gainsharing programs. Second, the advisory process requires a protracted period of time. Today, many opinions take well over a year to be issued, and it seems like such delays will not be feasible to meet the needs of a revamped healthcare system. In addition, unless additional staffing is devoted to processing such opinion requests, it is likely the OIG would be besieged by an avalanche of opinion requests, and would be unable to process requests within any reasonable time period. Indeed, the desire not to be deluged by advisory opinion requests was one of the reasons the OIG had initially taken the position it would not rule on such programs through its advisory opinion process.

Given the practical necessity of approving ACO programs, a third approach appears to be necessary. Under this regulatory approach, the Secretary could take the position that the statutory authority to “waive such provisions” as “the Secretary determines necessary” gives the Secretary (and/or OIG, as appropriate) the ability to issue regulations, using the notice and comment process, which would, in essence, create a template for benign programs, by designing them to stay within the guidelines set forth in the new regulations. It appears it would be wise for the OIG to take the existing models it has approved, and define them within some range of parameters so that they can be implemented on a “cookie cutter” basis without the need for additional advisory opinions being requested on a case by case basis. To the extent that the OIG remains concerned about the payments outside the formal context of ACOs, it appears likely that the OIG would limit the availability of the new regulatory safe harbor to entities that have been approved as ACOs.

It appears that keeping both these options available is the most likely position that will be taken by the government going forward: certain pre-approved models for incentive payments within the ACO construct will be approved, and flexibility will be provided for additional models to be approved on a case-by-case basis through the existing advisory opinion process or, perhaps, through a revised one. Over time, models approved through the advisory opinion process may come to be approved under the “cookie cutter” regulatory approach.


Under any of these regulatory approaches, the OIG will need to build significant additional flexibility into the existing fraud and abuse laws to accommodate the range of new compensation structures and methods that will develop as the newly-created ACOs seek to implement various approaches to incentivize physicians and other providers to control costs and improve the quality of care under healthcare reform.

1 While the actual legislation is constantly shifting, we refer herein to H.R. 3792, Affordable Health Care For America Act (October 29, 2009) and S. 1796, America’s Health Future Act of 2009 (October 19, 2009).
2 The Senate bill’s ACO provisions (at S. 1796, Sec 3022) are similar in many ways to those of the House bill, but are somewhat more general, and we do not discuss their specifics herein.
3 See 42 U.S.C. § 1320a-7b(b) (prohibiting any person from “knowingly and willfully” paying, offering, soliciting or receiving any remuneration to induce the referral of any item or service covered by a federal health care program, or in exchange for arranging for or recommending purchasing, leasing or ordering any good, facility, service or item covered by a federal health care program).
4 See 42 U.S.C. § 1395nn (prohibiting a physician from referring Medicare beneficiaries for certain designated health services to any entity with which the physician has a financial relationship, and prohibiting the entity from billing for services provided pursuant to such a referral, unless an exception applies).
5 See 42 USC § 1320a-7a(b) (prohibiting a hospital from “knowingly” making a payment to a physician as an inducement to reduce or limit services provided with respect to individuals who are Medicare or Medicaid beneficiaries, and are under the physician’s direct care, and prohibiting physicians from knowingly accepting such payments).
6 See Special Advisory Bulletin, Gainsharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries, 64 Fed. Reg. 37985 (July 14, 1999)
7 H.R. 3792, Sec. 1301(f)(2). Similar, but narrower waiver authority was proposed by S. 1796, Sec. 3022, which stated that “The Secretary may waiver such requirements of sections 1128A and 1128B and title XVIII of this Act as may be necessary to carry out the provisions of this section.” Thus, unlike the House bill, the Senate bill did not propose waiver authority under the Stark law.

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