ABA Health eSource
December 2010 Volume 7 Number 4

Eliminating the Regulatory Drag Coefficient on ACO Development

By Matthew D. Jenkins and Mark S. Hedberg, Hunton & Williams LLP, Richmond VA

AuthorAuthorOf the hundreds of pages of prose that comprise the Patient Protection and Affordable Care Act 1 , just a few speak to the establishment of Accountable Care Organizations or ACOs. 2 While sparse on legislative text, those portions of PPACA that contemplate the establishment of ACOs are now being seen as having the potential to fundamentally reshape the economics of the health-care delivery system that cares for Medicare beneficiaries. Not surprisingly, writers other than healthcare lawyers and policy experts are beginning to devote increasing attention to the patterns of care delivery that may emerge in response to the financial incentives that are expected to accompany PPACA’s invitation to reshape that system. 3 But for ACOs to take flight, the substantial drag coefficient created by Medicare’s current program protections must be eliminated. Otherwise, ACOs are destined to crash and burn before their wheels ever leave the ground.

Fee-For-Service Incentives

Medicare’s current fee-for-service system is a perfect exemplar of the old adage - you get what you pay for. Physicians are rewarded for performing procedures on patients in piece-work fashion. The more procedures a physician performs, the higher the economic reward; there is even a term -- proceduralist -- to describe physicians practicing in the deeper end of the clinical/financial pool. Nowhere does the current fee-for-service system provide economic incentives to physicians to minimize the services they provide to patients to only those that are absolutely essential, or to accept any financial risk for a patient’s wellness. Instead, the current system relies on the blunt weapon of enforcement against physicians who churn patient billings by challenging the physician’s conduct on the grounds of “medical necessity.” 4

On the other hand, the current system’s payment arrangements with hospitals impose conflicting economic incentives that at times are directly at odds with the financial interests of physicians. Weaned from cost-based reimbursement in the mid-1980s, hospitals have learned to thrive (relatively speaking) under a prospective payment system that pays hospitals on a modified piece-work basis that puts them (but only them) at risk for the costs of providing services to patients assigned to a particular diagnosis related group (inpatients) or a ambulatory patient classification group (outpatients). This means hospitals succeed financially under fee-for-service medicine by driving volume ever higher, but only if they manage the cost side of the equation effectively. However, these artificially constructed episodes of care do not include any longitudinal risk for the care delivered (or not delivered). Either way, the financial incentives placed before hospitals reward them for handling greater patient volume, and also for doing less, not more, once the patient is admitted or registered.

Program Protections Guard Against Abuses Driven By Existing Financial Incentives

Recognizing the collision of financial incentives, Medicare’s fraud and abuse armamentarium includes numerous civil and criminal provisions to protect against program abuses driven by the financial incentives of the current payment system.

To protect beneficiaries from the withholding of needed care, civil money penalties can be levied against hospitals that provide financial incentives to physicians for stinting on care. 5

To guard against overutilization and the corruption of physician decision-making, the Medicare program relies on the provisions of the Anti-kickback Statute (“AKS”) 6 and the Stark Law 7 to preclude the use of private financial arrangements or incentives (in either case, “remuneration”) to drive Medicare business in the direction of the source of remuneration. Other penalties apply if remuneration is paid to a beneficiary to influence the beneficiary’s choice of physician or provider. 8

The Collision of ACOs With the Existing Enforcement Regime

The formation and operation of ACOs will challenge the ability of ACO organizers to avoid conduct that results in substantial civil and criminal liability. The fundamental payment mechanism contemplated in PPACA for an ACO is “shared savings.” The economic concept is simple enough to grasp. Put physicians and other providers together in a single organization, pay them as they have always been paid for providing Part A and Part B care to beneficiaries over a defined period of time and let them share a portion of the savings that arise through the provision of “accountable care.” Sounds simple enough, but the current fraud and abuse enforcement toolbox is inherently biased against the fundamental economics of an ACO paid under the shared savings program.

Section 1128A(b) of the Social Security Act permits the imposition of a civil money penalty (“CMP”) on any hospital that “knowingly makes a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided with respect to individuals” who are Medicare beneficiaries under the direct care of the physician. A similar penalty may be imposed on the physician who knowingly accepts any such payment. 9 But if a shared savings payment is anything, it is a payment to reduce or limit services.

Indeed, unless the physicians involved in the care of Medicare beneficiaries are given a direct financial incentive to eliminate unnecessary care, it is questionable whether the economic underpinnings of accountable care can be realized. Under PPACA, payments for care provided within an ACO “are to continue to be made to providers of services…participating in an ACO under the original Medicare fee-for-service program under Parts A and B in the same manner as they would otherwise be made except that a participating ACO is eligible to receive payment for shared savings” if it meets certain quality performance standards and meets savings benchmarks. 10 At the same time that an ACO’s physicians are working to generate a pool of savings in which they will expect to share, they will be lowering their fee-for-service income. Whether there will be enough savings to make an individual physician whole for the income lost through services not rendered would appear to be a core concern. Arguably, the continuation of fee-for-service payments to the same providers responsible for generating distributable savings carries with it the healthcare equivalent of the so-called Tragedy of the Commons. 11 Unless an ACO chooses a metric other than personal productivity for the allocation of fee-for-service revenues, each physician will have a clear incentive to maximize his or her procedural productivity and work to limit the productivity of his/her fellow physicians in order to generate savings to be shared. 12 Thus, creating a financial incentive strong enough to generate shared savings and overcome the personal production incentive will likely require the type of payments that the CMP law aims to proscribe. 13

Another fraud and abuse enforcement challenge arises when those responsible for organizing and operating ACOs contemplate the expansive reach of the Medicare AKS. 14 In a nutshell, the AKS criminalizes the knowing and willful offer or payment, solicitation or receipt of remuneration to induce referrals of Medicare (and other federal) program business. In a fee-for-service program, the necessity for such a provision was made evident by any number of programmatic abuses. However, certain of the business challenges that an ACO will confront likely demand solutions that will make the seasoned health law practitioner draw a short breath.

If the financial Holy Grail that an ACO will pursue is the generation of shared savings for an attributed population of Medicare beneficiaries, the ACO will have a substantial stake in assuring that those beneficiaries receive services primarily if not exclusively from providers affiliated with the ACO. While the whole method of attribution of patients to ACOs remains shrouded in mystery, one thing is certain. If a beneficiary receives care from providers who have a common financial interest in avoiding unnecessary care, then there is at least the prospect of generating shared savings for subsequent distribution. But if that beneficiary receives services from an array of providers, some having a shared savings incentive to avoid unnecessary care and others not, the likelihood of generating shared savings diminishes. This aspect of shared savings creates a strong incentive for the ACO to control referrals of patients to assure retainage within the ACO. But as soon as an ACO begins to develop the control mechanisms to assure such retainage, the AKS implications of enforcing referral protocols backstopped by the payout of shared savings become obvious. 15

An even greater challenge is presented by the Stark Law, which prohibits a physician from making a referral to a hospital or other entity that provides designated health services (“DHS”) if the physician has a financial relationship with the entity and no exception applies. The intent of the parties under the Stark Law is irrelevant, and for ACOs that involve hospitals (or other DHS entities) and physicians, finding an applicable exception is made extraordinarily difficult by a requirement imposed by the exceptions most likely to apply: payments generally cannot vary with or otherwise take into account the volume or value of DHS referrals or, in some instances, any referrals from the physician. 16 Any shared savings payment based in part on hospital services arguably takes into account at least the value of the physician’s referral.

Shedding the Drag Coefficient: The Secretary’s Waiver Authority

PPACA recognizes the difficulties existing program provisions may present, but delegates the responsibility for addressing them to the Secretary of HHS by granting her broad authority to waive the civil and criminal penalty provisions of the Social Security Act 17 and any provision of Title XVIII (the Medicare Program itself) “as may be necessary to carry out the provisions of this section.” 18 How the Secretary will choose to implement her waiver authority is unclear. A blanket waiver would be simple to accomplish and easy to administer, but is likely to be viewed as far too broad, at least as an initial step. The healthcare bar should expect something more targeted, but the details will not be known until proposed regulations are published early next year.

Antitrust Considerations

Finally, although the Medicare program’s ability to fix prices is likely the Eden of the most ardent monopsonist, the private sector side of the healthcare delivery system has been limited in its ability to do so (or to engage in other anti-competitive behaviors) through public and private enforcement of federal and state antitrust laws.

Perhaps more attention has been focused on the limiting effects of the antitrust laws on the ability of non-integrated providers to establish ACOs than on the Medicare fraud and abuse laws. But here the prospect of a waiver by the Secretary of HHS is inapposite. In an ACO that is financially integrated, antitrust worries are likely to be minimal. But for an ACO that is not financially integrated, antitrust worries may be paramount. Certain of the eligible ACO

structures contemplated by PPACA are likely to be sufficiently financially integrated (e.g., hospitals employing ACO professionals, ACO professionals in group practice arrangements and partnerships or joint ventures between hospitals and ACO professionals). However, “networks of individual practices of ACO professionals” does not connote a substantial level of financial integration.

At first blush, continuation of fee-for-service care to Medicare beneficiaries coupled with shared savings payments allocated to the providers accountable for such care would seem to carry with it little antitrust risk. The fees are set by Medicare, so the ability of non-integrated providers to collude on pricing does not exist. Presumably, Medicare will have some influence over the manner in which shared savings are paid out. Again, little apparent antitrust risk there either.

However, § 10307 of PPACA adds several dimensions to the payment methods available to ACOs, including partial capitation and other payment models determined by the Secretary of HHS to improve the quality and efficiency of services provided to Medicare beneficiaries. Moreover, § 10307 gives the Secretary the authority to give preference to ACOs that are participating in similar arrangements with other payers. This latter point clearly invites ACOs to seek out private sector payment arrangements that are not limited to shared savings (or even fee-for-service) concepts.

Consider the deployment of a shared savings payment arrangement among non-financially integrated providers. If such an arrangement continues in force existing fee-for-service payment arrangements, unless all providers are being paid off of a payer-controlled fee schedule, the generation of any shared savings will be impacted, at least in part, by price disparities among participating providers. For example, if Physician A enjoys superior negotiated payment rates over Physician B, then Physician B will likely generate more shared savings for the ACO then Physician A. Presumably, A and B would have a strong incentive to coordinate fee-for-service pricing to the payer to avoid the revenue disparity that will otherwise arise. But that sort of price coordination among non-financially integrated physicians raises substantial antitrust concerns. And, it remains to be seen whether competition enforcers would be persuaded that the ACO could not deliver shared savings without such coordination among non-financially integrated providers.

Thus, to the extent that a non-financially integrated ACO desires to establish payment arrangements for its constituent providers, antitrust considerations are likely to emerge in full force. Currently, beyond guarded comments from enforcement officials, those contemplating an ACO that will not rely on financial integration to engage in otherwise anticompetitive conduct will have to embrace the concept of clinical integration as explained in the Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care. 19

PPACA does not confer upon the agencies responsible for enforcing the competition laws the same broad authority enjoyed by the Secretary of HHS to waive existing requirements that may stand in the way of developing and implementing PPACA’s shared savings program. However, in the recently convened workshop on ACOs and Implications Regarding Antitrust, Physician Self-Referral, Anti-kickback, and CMP laws, Federal Trade Commission (“FTC”) Chairman Leibowitz stressed the FTC’s interest in exploring the development of antitrust safe harbors and an expedited review process for ACOs that fall outside of any such safe harbors. 20 Given the substantial uncertainty that attends the development of ACOs in the absence of clear guidance, it is essential that the FTC move forward with its exploration and eliminate this component of regulatory drag on ACOs as well.


PPACA’s enactment has set off a veritable race down the runway among providers seeking to establish ACOs. But the regulatory restrictions that have evolved to protect Medicare from fraud and abuse, along with an antitrust regime skeptical about the claimed pro-competitive benefits of provider “collaboration,” present a substantial drag coefficient on the successful launch of this latest effort to bend the healthcare cost curve. Clear, bright line rules from those responsible for enforcement are essential if the widespread development of ACOs is to take off. Recognizing that some might argue that the regulators who sought to craft clear, bright line rules implementing the Stark Law missed the mark, it is worth emphasizing that the Secretary’s waiver(s) and the FTC’s guidance, in whatever form, really must be clear enough to permit those developing an ACO to be confident they understand where the line between the permissible and the impermissible has been drawn. Leaving the development of ACOs subject to a regime where legal uncertainties persist, given the stiff penalties awaiting those whose conduct is successfully challenged, places too great a risk on the provider community to respond to the public and private sector calls for a fundamental reshaping of the care delivery model.

1 Pub. Law No. 111-148 (hereinafter “PPACA”).
2 See PPACA, § 3022. Section 2076 of PPACA provides for a Pediatric Accountable Care Organization Demonstration Project; this article pertains only to ACOs as contemplated in § 3022.
3 See Pear, R., “Consumer Risks Feared as Health Law Spurs Mergers,” New York Times, Sunday, November 20, 2010.
4 See 42 U.S.C. § 1320a-7a(a)(1)(E) (imposing civil money penalties for presenting claims to Medicare that the Secretary of Health and Human Services determines is for a pattern of medical or other items or services that a person knows or should know are not medically necessary).
5 See Social Security Act, § 1128A(b), codified at 42 U.S.C. § 1320a-7a(b).
6 Id. § 1128B(b), codified at 42 U.S.C. § 1320a-7b(b).
7 Id. § 1877, codified at 42 U.S.C. 1395nn.
8 Id. § 1128A(a)(5), codified at 42 U.S.C. § 13201-7a(a)(5).
9 Notably, hospital-physician incentive plans for Medicare beneficiaries enrolled in risk-based managed care programs were regarded by the Office of Inspector General as being outside the reach of the CMP because of the regulatory apparatus in place to govern such programs under their enabling legislation. Letter re Social Security Act sections 1128A(b)(1) and (2) and hospital-physician incentive plans for Medicare and Medicaid Beneficiaries enrolled in managed care plans, Lewis Morris, Assistant Inspector General for Legal Affairs, August 19, 1999 (available at http://oig.hhs.gov/fraud/docs/alertsandbulletins/gsletter.htm).
10 PPACA, § 3022(d).

See generally “The Tragedy of the Commons,” Garrett Hardin, Science, 162 (1968):1243-1248. Hardin’s example posited a common pasture providing each herdsman an incentive to maximize his own herd (which redounds directly to his individual benefit) despite the negative consequences of overgrazing (which are shared by all herdsmen).

12 Of perhaps greater concern to hospitals is that the physicians in an ACO striving to pile up shared savings will have a direct financial incentive to maximize income by sustaining their own level of fee-for-service income while driving down demand for hospital services.
13 Although the CMP law addresses payments made by a hospital or critical access hospital to physicians to induce a reduction or limitation of services, in any ACO that includes a hospital that participates in the distribution of shared savings payments with physicians, careful analysis will be necessary to assure that the distribution method is not susceptible of characterization as involving an indirect payment of any improper inducement to physicians to reduce or limit care.
14 See 42 U.S.C. § 1320a-7b(b).
15 Apart from the bona fide employment safe harbor, 42 C.F.R. § 1001.952(i), none of the existing AKS safe harbors appear useful in protecting the distribution of shared savings payments to referring physicians. However, as discussed infra. note 16, under the Stark Law’s employment exception, compensation that varies with the volume or value of referrals is problematic.
16 See, e.g., 42 C.F.R. § 411.355(e) (academic medial center exception) and § 411.357(c) (employment exception), (d) (personal services exception), (e) (physician recruitment exception), (f) (isolated transaction exception), (l) (fair market value exception), and (p) (indirect compensation arrangement exception).
17 Social Security Act §§ 1128A & 1128B, codified at 42 U.S.C. §§  1320a-7a & 1320a-7b.
18 PPACA § 3022(f).
19 Available at http://www.ftc.gov/bc/healthcare/industryguide/policy/index.htm. Two of the statements in particular warrant mention: Statement 8 - Physician Network Joint Ventures and Statement 9 - Multiprovider Networks.
20 The Workshop was held on October 5, 2010 at CMS headquarters in Baltimore. A PDF version of the transcript may be accessed by visiting http://www.ftc.gov/opp/workshops/aco/index.shtml

The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.