Understanding Regulations of ACO’s July 14, 2011

1. Understanding Regulations of ACO’sJuly 14, 2011

2. Speakers • Todd I. Freeman, Larkin Hoffman (Minneapolis, MN) • Sheri Dacso, Seyfarth Shaw, LLP (Houston, TX) • James Egleston, Waldheger-Coyne (Cleveland, OH) • Adam J. Tutaj, Esq., Meissner Tierney Fisher & Nichols S.C. (Milwaukee, WI)

3. PresentationOverview • Stark Law Waiver • Anti-kickback Law Waiver • Antitrust Safety Zones and Ruling Process • Tax-Exempt ACO Member Issues

4. Stark Law Waiver Section Overview • Official Guidance • Authority granted under the Affordable Care Act • Scope of Stark Waiver • Topics to which CMS sought comment

5. Official Guidance • Notice dated March 24, 2011 from CMS and OIG.

6. Authority granted under the Affordable Care Act • authorize the Secretary to waive provisions of the Stark Law to accommodate creation and operation of ACOs. • Application of Waivers • Qualified ACOs – Undefined • ACO participants • ACO providers/suppliers • Requirement to be “qualified” may or may not apply to ACO participants/Suppliers

7. Authority granted under the Affordable Care Act B. While waiver applies to ACO participants and providers/suppliers, there is no provision for applying to the owners of such participants and providers/suppliers C. Waiver only applies to those participating in the Shared Savings Program – if the ACO ceases to participate in the Program, it may need to dissolve or be restructured to comply with Stark

8. Scope of Stark Waiver • Distributions of shared savings from the Shared Savings Program to ACO participants and providers/suppliers • Distributions of shared savings from the Shared Savings Program to individuals and entities that were ACO participants or providers/suppliers during the year in which the shared savings were earned by the ACO – given that shared savings are received in the year following participation, this requirement seems nonsensical and impossible to meet

9. Scope of Stark Waiver C. Activities necessary for or directly related to the ACO’s participation and in operations under the Shared Savings Program • “Necessary for” requirement sets an almost impossible threshold • “Directly related” also creates factual issues that would give pause to rely on a waiver

10. Scope of Stark Waiver • Other problems with the scope of the waiver 1. Tracking dollars from shared savings • If ACO receives other funds, then shared savings funds need to be earmarked • Are dollars able to be distributed in gross without assessment of ACO overhead? • Offset for prior year’s losses?

11. Scope of Stark Waiver 2. Dollars distributed from private arrangements not waived possibly necessitating separate ACO for private arrangements 3. Waiver only applies to ACO participant and not to a redistribution of funds to the owners and employees of the ACO participants 4. Payments made to referring physicians that are not ACO participants are not included in the waiver

12. Scope of Stark Waiver 5. Stark violation is based on a financial relationship, which is not cleansed by the waiver, only distributions are cleansed 6. Stark violation is the referral to an entity to which a physician has a financial relationship – not the payment pursuant to that relationship

13. Topics to which CMS sought comment • Arrangements related to the establishment of the ACO to finance the ACO • Arrangements between and among ACO participants and/or ACO providers/suppliers related to achieving ACO goals • Arrangements between the ACO, its participants and providers/suppliers and outside entities

14. Topics to which CMS sought comment D. Distribution of shared savings or similar payments received from private payors E. Requirement of “necessary for or directly related to the ACO’s participation and in operations under the Shared Savings Program”

15. Anti-kickback Law Waiver Section Overview • What is the anti-kickback (“AKS”) statute? • How do the AKS laws affect ACOs? • What steps has the federal government taken to mitigate the draconian effect of AKS on ACOs?

16. The Anti-Kickback Statute (“AKS”) • Criminal statute which prohibits the giving, accepting, soliciting, or arranging items of value in any form (gifts, certain discounts, cross-referrals between parties), either directly or indirectly for the purpose of inducing or rewarding another party for referrals of services paid for by a federal government health care program

17. The Anti-Kickback Statute (“AKS”) • Also covers purchasing, ordering, leasing, or arranging for or recommending the purchase, leasing, or ordering of services paid for by a federal health care program in exchange for any item of value • Violations of the AKS could implicate Civil Monetary Penalty liability as well • Exist in many state statutes

18. How AKS in Implicated • Fraud and Abuse laws prohibit the activities related to ACOs which allow distributions of shared savings received from CMS in relation to the delivery of healthcare to ACO participants, ACO providers and ACO suppliers. • Because of this, CMS intends to issues waivers to protect these financial relationships created by shared savings both within and outside of an ACO

19. Qualification for Waivers • A qualified ACO must enter into an agreement with CMS to participate in the Medicare Shared Savings Plan (“MSSP”) • An ACO must assure compliance of all ACO participants, providers and suppliers with the final provisions of the MSSP. • Once qualified, the ACO may request a waiver for the Fraud and Abuse laws.

20. New ACO Rules Propose AKS Waiver • The proposed AKS waiver would waive application of the AKS with respect to the following two scenarios:

21. Scenario One • Distributions of shared savings received by an ACO from CMS under the MSSP • to or among ACO participants, providers/suppliers and individuals/entities that were ACO participants or ACO providers/suppliers during the year in which the shared savings ere earned by the ACO • for activities necessary for and directly related to the ACO’s participation in and operations under the MSSP

22. Scenario Two • Any financial relation between or among the ACO, ACO participants, and ACO providers/suppliers necessary for and directly related to the ACO’s participation in and operations under the Medicare Shared Savings Program that implicates the Stark Law and fully complies with a Stark Law regulatory exception.

23. Scenario Two • Because, ordinarily, compliance with an exception to the Stark Law does not necessarily immunize an arrangement under the AKS, OIG and CMS included this language in the waiver in order to minimize the burden on entities establishing ACOs in a manner consistent with the Stark Law regulatory exceptions (e.g., the exception for certain physician incentive plans (42 C.F.R. § 411.357(d)(2))

24. Affect of Waivers on Civil Monetary Penalties • Scenario Two: • Any financial relationship between or among the ACO, its ACO participants, and its ACO providers/suppliers necessary for and directly related to the ACO’s participation in and operations under the Medicare Shared Savings Program that implicates the Stark law and fully complies with an exception

25. Waiver Duration • The waiver of Stark law related to shared savings applies for the term of the agreement with CMS even if actual distributions occur after the expiration of the agreement. • For AKS and CMP, for arrangements that are compliant with a Stark exception, the waiver only applies during the period of time of the CMS contract.

26. Open Items – CMS Still Seeking Comment • Whether the waiver provisions provide protection for: • ACO formation, including start-up expenses and initial investments to cover same • ACO governance requirements • ACO administrative requirements • ACO IT requirements • ACO participants, providers/suppliers (inside ACO) • ACO participants, providers/suppliers (outside ACO) • Distribution from private payors

27. ACO Development Strategies • Always try to structure entities and relationships to fall within existing safe harbors • Take advantage of safe harbors for certain managed care plans established under the Medicare and Medicaid Patient and Program Protection Act of 1987 • Establish and monitor compliance at all levels.

28. Antitrust Safety Zones and Ruling Process Section Overview • Antitrust Risks • Antitrust Basics • Proposed Statement of Antitrust Enforcement Policy • ACOs to which the Rule of Reason analysis will be applied • Safety Zone for ACOs • Mandatory Antitrust Review • ACOs outside the safety zone but below the mandatory review threshold • How to Calculate the ACO’s PSA share for each common service • The Antitrust Review Submission (if desired or necessary) • Five Types of Conduct FTC and DOJ Suggest ACOs Avoid

29. Antitrust Risks • Despite the potential savings ACOs could produce within Medicare, by their very nature, ACOs also present very significant Antitrust Risks as they relate to the commercial insurance market: • ACOs are potentially very large organizations that could dominate a market and lessen competition. • ACOs are collaborations among competitors that could engage in myriad anticompetitive conduct.

30. Antitrust Basics • Primarily concerned about Section 1 of the Sherman Act. • Section 1 of the Sherman Act - Prohibits concerted conduct among competitors that unreasonably restrains trade (price fixing, group boycotting, tying arrangements etc.). 

31. Antitrust Basics b. Price agreements among competing, independent health care providers are usually per se illegal (i.e. – there is no defense). However: • Financially or clinically integrated organizations of independent health care providers • Where price agreements are reasonably related to attainment of procompetitive effects • Are analyzed under the Rule of Reason (the benefits are weighed against risks)

32. Antitrust Basics • Violations of Antitrust Law carry extensive criminal and civil penalties. Enforcement actions can come from the FTC, the DOJ or by private parties who, if successful, are entitled to treble damages. So, the stakes are very high.

33. Proposed Statement of Antitrust Enforcement Policy • March 31, 2011 FTC and DOJ Proposed Statement of Antitrust Enforcement Policy. • Applies to: • Collaborations among otherwise independent providers and provider groups • Formed as ACOs after March 23, 2010 • That seek to or have been approved to participate in the Shared Savings Program b. Describes ACOs to which the Rule of Reason analysis will be applied c. Establishes an antitrust safety zone for ACOs d. Mandates FTC or DOJ review of some ACOs e. Offers options for ACOs outside the safety zone but below the mandatory review threshold

34. ACOs to which the Rule of Reason analysis will be applied • ACOs that are clinically integrated • ACOs that meet CMS’s eligibility criteria are “deemed” clinically integrated • ACO may propose alternate ways to clinically integrate b. ACOs that achieve significant procompetitive efficiencies • Participating in the Shared Savings Program allows CMS to collect cost, utilization and quality data –

35. Safety Zone for ACOs • Multiple providers of same service must have a combined share of 30 percent or less of each common service in each provider’s primary service area (“PSA”) (does not apply to single providers or single groups – subject to dominant provider limitation) • All hospital and ASC participants must be non-exclusive (i.e. the must have the right and ability to contract with payors outside of the ACO) • Rural Exception (allows an ACO to exceed the 30 percent limitation) - ACOs may include, on a non-exclusive basis, one physician per specialty from each rural county and Rural Hospitals

36. Safety Zone for ACOs d. Dominant Provider Limitation • Applies to ACOs with a participant with greater than a 50 percent share in its PSA in any service that no other ACO participant provides in that PSA • The ACO may include that participant on a non-exclusive basis • The ACO cannot require payors to contract with it exclusively or restrict payors from dealing with other ACOs or networks

37. Mandatory Antitrust Review • ACOs that have a PSA share over 50% for any common service (two or more providers) must undergo a mandatory review by either FTC or DOJ to participate (must give CMS the letter)

38. ACOs outside the safety zone but below the mandatory review threshold • ACOs that have a PSA share over 30 percent and less than 50 percent for any common service (two or more providers) may be okay but have the option to submit to an antitrust review • If the ACO submits to a voluntary antitrust review and antitrust concerns are identified, they may be excluded from the Shared Savings Program

39. How to Calculate the ACO’s PSA share for each common service • Identify each “common service” (a service provided by more than one independent ACO participant) • For a physician, a service is the primary specialty • For inpatient facilities, a service is a major diagnostic category (MDC) • For ASCs and hospital outpatient departments, a service is an outpatient category

40. How to Calculate the ACO’s PSA share for each common service b. Identify the PSA for each common service for each independent participant • the lowest number of contiguous postal zip codes from which the participant draws at least 75% of its patients for the service

41. How to Calculate the ACO’s PSA share for each common service c. Calculate the ACO’s share of Medicare fee-for-service payments for the common service in the PSA • Medicare allowed charges for most-recent calendar year for physicians • Medicare payments for most-recent calendar year for outpatient services • Medicare discharges for most-recent calendar year for inpatient services or Medicare payments if discharge data is not available CMS to publish aggregate Medicare data (allowed charges and payments) by zip code

42. The Antitrust Review Submission (if desired or necessary) • Application and supporting documents submitted or to be submitted to CMS • Documents relating to provider contracting rights (i.e. – exclusivity) • Documents relating to business strategies or plans to compete in the Medicare and commercial markets and the likely impact on prices, cost, or quality of any service to be provided • Formation documents – articles, certificates, state filings etc

43. The Antitrust Review Submission (if desired or necessary) e. Information sufficient to show the following: • PSA share calculations for each common service • ACO plans to protect pricing information of individual participants • The identity of and contact information for the 5 largest health plans or payors for the ACO’s services • The identity of any other existing or proposed ACOs in any PSA in which the ACO will operate

44. Five Types of Conduct FTC and DOJ Suggest ACOs Avoid • Preventing or discouraging payors from directing or incentivizing patients to choose certain providers (anti-steering, guaranteed inclusion, product participation, price parity, etc.) • Tying ACO services to ACO provider services • Requiring exclusivity of any provider or participant other than PCPs  • Restricting ability of commercial payors to make available to enrollees cost, quality, efficiency, and performance information regarding ACO participants  • Sharing among the participants individual’s competitively sensitive pricing or other information that could restrict competition outside the ACO

45. Tax-Exempt ACO Member Issues Section Overview • IRS Notice 2011-20 • Preliminary Comments and Issues

46. IRS Notice 2011-20 On March 31, 2011, the Internal Revenue Service (IRS) issued Notice 2011-20, regarding the implications under the Internal Revenue Code for hospitals and other health care organizations recognized as 501(c)(3) organizations that participate in the Medicare Shared Savings Program (MSSP) through an accountable care organization (ACO).  The Notice is long on requests for commentary and short on actual guidance – rather, what is offered is really a summary of what the Service “anticipates” and “expects” in terms of how the rules regarding private benefit, private inurement and unrelated business income tax (UBIT) might be applied, at least with respect to MSSP operations.

47. IRS Notice 2011-20 • Private Inurement/Private Benefit Considerations In order to preserve its exempt status, a 501(c)(3) organization must ensure that its participation in the MSSP through an ACO is structured so as not to result in its net earnings inuring to the benefit of its insiders or in its being operated for the benefit of private parties participating in the ACO. Whether prohibited inurement or impermissible private benefit has occurred must be determined by the IRS on a case-by-case basis, based on all the facts and circumstances. Because of CMS regulation and oversight of the MSSP, as a general matter, the IRS expects that it will not consider a tax-exempt organization’s participation in the MSSP through an ACO to result in inurement or impermissible private benefit to the private party ACO participants where:

48. IRS Notice 2011-20 • The terms of the tax-exempt organization’s participation in the MSSP through the ACO (including its share of MSSP payments or losses and expenses) are set forth in advance in a written agreement negotiated at arm’s length. • CMS has accepted the ACO into, and has not terminated the ACO from, the MSSP. • The tax-exempt organization's share of economic benefits derived from the ACO (including its share of MSSP payments) is proportional to the benefits or contributions the tax-exempt organization provides to the ACO. • If the tax-exempt organization receives an ownership interest in the ACO, the ownership interest received is proportional and equal in value to its capital contributions to the ACO and all ACO returns of capital, allocations and distributions are made in proportion to ownership interests. • The tax-exempt organization's share of the ACO's losses (including its share of MSSP losses) does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled. • All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO's participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.

49. IRS Notice 2011-20 B. Unrelated Business Income Tax (UBIT) Considerations Whether the MSSP payments will be subject to UBIT depends on whether the activities generating the MSSP payments are substantially related to the exercise or performance of the tax-exempt organization’s charitable purposes. The IRS expects that, absent inurement or impermissible private benefit, any MSSP payments received by a tax-exempt organization from an ACO would derive from activities that are substantially related to the performance of the charitable purpose of lessening the burdens of government within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2) – provided that the ACO meets all of the eligibility requirements established by CMS for participation in the MSSP. However, in contrast to activities conducted as part of the MSSP, the IRS anticipates that many non-MSSP activities conducted by or through an ACO are unlikely to lessen the burdens of government within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2). While the IRS acknowledges that shared savings arrangements with Medicaid might further or be substantially related to an exempt purpose – inasmuch as such arrangements would appear to further the charitable purpose of relieving the poor and distressed or the underprivileged – the Notice does not address whether and under what circumstances a tax-exempt organization’s participation in non-MSSP activities through an ACO would be consistent with an organization’s tax-exemption under § 501(c)(3) or not result in UBIT.

50. IRS Notice 2011-20 C. Request for Comments The IRS requested comments (on or before May 31, 2011) regarding what guidance, if any, is necessary or appropriate regarding a tax-exempt organization’s participation in non-MSSP activities through an ACO. In so doing, the IRS emphasized that comments should take into account two guiding principles: 1. Although the promotion of health has been recognized as a charitable purpose, not every activity that promotes health supports tax exemption under § 501(c)(3). (Citing IHC Health Plans Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003) and Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff’d 625 F.2d 804 (8th Cir. 1980).)  2. If a tax-exempt organization is a partner (or member, in the case of an LLC) of an ACO treated as a partnership for federal tax purposes, the ACO’s activities will be attributed to the tax-exempt organization for purposes of determining both whether the organization operates exclusively for exempt purposes and whether it is engaged in an unrelated trade or business. (Citing Rev. Rul. 2004-51, 2004-1 C.B. 974 and Rev. Rul. 98-15, 1998-1 C.B. 718.)