Understanding the Value-Based Enterprise

If your organization is challenged by the limitations on physician compensation imposed by the Stark Law (Stark) and the federal Anti-Kickback Statute (AKS), a Value-Based Enterprise (VBE) may provide relief from those constraints. Stark’s value-based exceptions and the AKS’ value-based safe harbors provide greater flexibility for VBEs to compensate physicians, e.g., distribute ancillary profits in a manner that appropriately incentivizes physicians to refer patients for services aimed at achieving a specifically identified value-based purpose, and practices or networks may be able to avail themselves of these flexibilities with or without the assumption of downside risk.

This article will cover:

1. What is a VBE?
2. Why a VBE Might Make Sense for Your Organization
3. The Basics of How to Form a VBE

What is a VBE?

In November 2020, the Centers for Medicare & Medicaid Services finalized value-based exceptions under the Stark Law, and the Office of Inspector General (OIG) finalized value-based safe harbors under the AKS to facilitate the evolution of value-based care arrange­ments among health care providers (collectively, the “New Rules”). The New Rules, which went into effect on January 19, 2021, protect certain compensation arrangements among providers in a value-based care arrangement. The VBE is the centerpiece of the New Rules and qualifying as a VBE is the first step to meeting the requirements of a value-based Stark exception and/or a value-based AKS safe harbor.

As defined in the CMS Final Rule[1] Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, a VBE is formed by at least two individuals or entities that are “(i) collaborating to achieve at least one value-based purpose; (ii) each of which is a party to a value-based arrangement; (iii) that have an accountable body or person responsible for financial and operational oversight of the value-based enterprise; and (iv) that have a governing document that describes the value-based enterprise and how the value-based enterprise participants intend to achieve its value-based purpose(s).”[2]

The Value-Based Stark Exceptions and AKS Safe Harbors

The 3 Stark value-based exceptions finalized under the New Rules allow for increasing flexibility along a continuum of risk: Full Financial Risk; Meaningful Downside Risk to the Physician; and Value-Based Arrangement (i.e., No Risk).Some requirements apply to all 3 exceptions, but arrangements requiring greater risk are subject to fewer requirements. As described below, a VBE with no downside risk may be viewed as the ‘training wheels’ of the value-based contracting world because it provides a mechanism to gradually migrate toward risk-based models. If a VBE includes payments to physicians by an entity that furnishes designated health services (a “DHS Entity”), one of the above exceptions, or another Stark exception, must be met.

The 3 AKS value-based safe harbors finalized under the New Rules also allow for increased flexibility along a continuum of risk: Value-Based Arrangement with Full Financial Risk; Value-Based Arrangement with Substantial Downside Risk; and Care Coordination Agreements with no downside risk required.If remuneration is exchanged between/among participants in a VBE, it is advisable, but not required, to fit the arrangement within one of the above safe harbors or another existing AKS safe harbor.

Understanding the Defined Terms

It is critical to understand and satisfy all relevant definitions related to VBEs, as the protection of a value-based Stark exception or value-based AKS safe harbor is only available for parties that satisfy the applicable criteria.

To qualify as a “value-based arrangement,” VBE participants must provide at least one value-based activity for a target patient population between or among: (i) a value-based enterprise and one or more of its value-based participants; or (ii) the value-based participants in the same value-based enterprise.At its core, the VBE is created to facilitate a “value-based purpose” which may be any one of the four objectives: (i) coordinating and managing the care of a target patient population; (ii) improving the quality of care for a target patient population; (iii) appropriately reducing the costs to or growth in expenditures of payors without reducing the quality of care for a target patient population; and (iv) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.[3] In effect, the VBE is the hub that plugs participating providers into the value-based initiatives and the protection of the New Rules.

A “value-based activity” means any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the VBE: (1) the provision of an item or service; (2) the taking of an action; (3) the refraining from taking an action. The definition of a value-based activity is deliberately broad to provide parties with the flexibility to design innovative arrangements to further the value-based purposes of the VBE. In response to public comments on the Final Rule, CMS noted that parties must have a good faith belief that the value-based activity will achieve or lead to the achievement of at least one value-based purpose of the VBE. If a fact-specific analysis reveals that the value-based participants constructed a VBE primarily to avail themselves of one of Stark’s value-based exceptions and the parties did not commit to participating in value-based activities reasonably designed to achieve a value-based purpose, the parties would not enjoy the protection of the exception. Furthermore, if the parties’ own required monitoring of the arrangement does not substantiate that the arrangement is furthering the identified value-based purpose(s), the parties to the VBE must either revise or terminate the arrangement, or it may be deemed to have violated Stark.

A “target patient population” means an identified patient population selected by a VBE or the VBE’s participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the VBE’s value-based purpose(s).

Why a VBE Might Make Sense for Your Organization

Supplementary Information published in the New Rules included an acknowledgement that the transformation of our health care system from fee-for-service to value-based care requires the removal of regulatory impediments to innovation. CMS and the OIG conceded that the strict requirements of Stark and the AKS aimed at combatting self-dealing, fraud, waste, and abuse, would inhibit value-based innovation because providers need to dedicate resources to structuring arrangements, and could face potentially significant financial losses in the context of risk-based contracting. Acknowledging that providers will be more incentivized to participate in value-based care when they can financially benefit without running afoul of Stark and the AKS, CMS and the OIG created value-based exceptions and safe harbors that provide flexibility in how referring physicians within a practice or network can be compensated. These new flexibilities may fill in the gaps present in Stark’s In-Office Ancillary Services (“IOAS”) Exception and various AKS safe harbors.

A notable distinction between Stark and the AKS is that compliance with an AKS safe harbor is voluntary; by contrast, Stark is a strict liability statute, which means that no specific intent to violate the law is required. As such, physicians who refer patients to a DHS entity in which the referring physician or the referring physician’s immediate family member has a financial relationship must fit the arrangement (value-based or otherwise) within a Stark exception.

The Value-Based Exceptions Differ from Other Stark Exceptions

Because care models that align clinical and economic performance are viewed as inherently containing disincentives to overutilize services, Stark’s value-based exceptions include some important flexibilities that are not found in other Stark exceptions. They include:

A group practice may distribute profits, including net profits from designated health services (“DHS”), directly to a physician in the practice or network if those profits are directly attributable to the physician’s participation in a VBE (Contrast: Stark’s IOAS Exception, commonly used by group practices, includes stringent rules about the way profits from DHS may be distributed to physicians)

The exceptions for providers who are participating in risk-based and partial risk-based contracts do not require compensation to be consistent with fair market value (Contrast: a crucial element of compliance with several other Stark exceptions is the requirement that physician compensation be consistent with fair market value)

There is no prohibition on compensation being determined in a manner that considers the volume or value of referrals (Contrast: a fundamental requirement of many Stark exceptions is that physician compensation may not be determined in a manner that takes into account the volume or value of referrals)

The Advantages Afforded to a VBE Can Be Accessed Without Assumption of Downside Risk

Most physicians would not dispute the underlying merits of a value-based care system in theory, but many are understandably apprehensive to enter into risk-based contracts – a world in which a physician’s own income may be dramatically affected by variables only partially within the physician’s control.A VBE that is initially undertaken without any downside risk can be a helpful starting point for those reluctant providers.

Providers that avail themselves of Stark’s Value-Based Arrangements exception have the opportunity – while engaging in a legitimate value-based activity toward a clearly articulated value-based purpose in a properly structured VBE – to utilize the VBE as a vehicle for acclimating to the value-based environment before undertaking the commitment of a partial or full-risk payment model. With careful planning, a VBE can be structured to achieve a value-based purpose while avoiding downside risk, and with relief from the strictures of Stark’s rules regarding the distribution of DHS profits, the VBE can also provide at least reasonable compensation to the participating physicians.

The Basic Elements of VBE Formation

A common misperception among would-be participants in a VBE is that the enterprise must be an elaborate construct comprised of multiple participants and multiple, novel value-based purposes. There are a variety of options for the structuring of a VBE. A VBE may be a distinct legal entity, such as a medical practice, an Independent Practice Association (IPA), Clinically Integrated Network (CIN), Accountable Care Organization (“ACO"), or other organization with a governing body, operating agreement or bylaws and the ability to receive payments on behalf of affiliated health care providers; however, a VBE can also simply be comprised of two parties to a value-based arrangement with the required written documentation of the arrangement serving as the governing document.[4]No matter the size of the enterprise, only one value-based purpose is required to qualify as a VBE.A new entity may be formed, if desired, or an existing organization may be modified to satisfy the definition of a VBE.

Individuals or entities desiring to pursue a VBE must identify suitable partners for alignment in the VBE and a value-based activity that has verifiable criteria for measurement in furtherance of a clearly defined value-based purpose for the benefit of a target population. All the foregoing elements should be reviewed by experienced healthcare counsel, and once determined to be consistent with the definitions and elements of the applicable Stark exception and/or applicable AKS safe harbor, must be memorialized in a writing prior to engaging in the arrangement.

About the authors

Daniel B. Frier, Esq., is a founding partner of Frier Levitt; Theresa M. DiGuglielmo, Esq., is senior counsel with Frier Levitt; and Nicole M. DeWitt, Esq., is an Associate with Frier Levitt. Frier Levitt’s team of experienced health care attorneys represents clients in a variety of transactions and ventures, including but not limited to the formation of VBEs, CINs, and the negotiation of alternative payment models.

[1] Hyperlink to 2020-26140.pdf (govinfo.gov).

[2] Note that citing “program integrity concerns,” the OIG’s Final Rule identified the following entities as ineligible for the protection of the value-based safe harbors: (i) Pharmaceutical manufacturers, distributors, and wholesalers (referred to generally throughout this preamble as ``pharmaceutical companies''); (ii) PBMs; (iii) laboratory companies; (iv) pharmacies that primarily compound drugs or primarily dispense compounded drugs (sometimes referred to generally in this rule as ``compounding pharmacies''); (v) manufacturers of devices or medical supplies; (vi) entities or individuals that sell or rent DMEPOS, other than a pharmacy or a physician, provider, or other entity that primarily furnishes services, all of which remain eligible (referred to generally throughout this preamble as ``DMEPOS companies''); and (vii) medical device distributors or wholesalers that are not otherwise manufacturers of devices or medical supplies (for example, some physician-owned distributors).

[3] See 42 C.F.R. § 411.351.

[4] See Supplemental Information in Final Rule at page 14.