News / Resources

Welcome to this week's edition of the Health Law Update. Topics covered today include:

• FTC Commissioner: What's So Great About ACOs?
• Payment Under the ACO Final Regulations: It's All in the Math!
• Early Adopters of EHRs Get an Extra Year to Meet Stage 2 Meaningful Use Criteria
• Healthcare Umpires Get Glasses With Release of Medicare Data
• The Controversy Over State-Based Health Insurance Exchanges: Politics As Usual or Dangerous Brinksmanship?
• New FAQs Delay Summary of Benefits and Coverage Compliance Date and Provide Guidance on the Mental Health Parity Act
• Holiday Publication Notice
• Events Calendar

We hope you find this information helpful. Please contact any member of Baker Hostetler's Healthcare Team with questions.

FTC COMMISSIONER: WHAT'S SO GREAT ABOUT ACOs?

High hopes have been held out for Accountable Care Organizations (ACOs) to achieve healthcare savings and quality of care improvements under the Patient Protection and Affordable Care Act (PPACA). ACOs are joint ventures of providers such as physicians and hospitals that can participate in the Medicare Shared Savings Program if they meet performance criteria promulgated by the Centers for Medicare and Medicaid Services (CMS). Qualifying ACOs will probably use that same structure to negotiate with commercial health insurance payers. Not everyone is ready to jump on the ACO bandwagon, however. FTC Commissioner J. Thomas Rosch is a prominent and vocal skeptic, as he explained in a November 17, 2011, speech to the American Bar Association.

Commissioner Rosch's misgivings about ACOs stem from two concerns. First, he thinks that potential savings are probably overstated. Citing a CMS demonstration project that has been underway for several years, Commissioner Rosch said that savings "were nothing to crow about," and that ACO providers may simply shift costs to commercially insured patients in order to qualify for Medicare cost-reduction bonuses. If that occurs, he said, there may be no net reduction in total healthcare costs.

Second, as an antitrust enforcer, Commissioner Rosch worries that ACOs may gain market power, particularly in rural areas. "Against the very meager prospects for cost savings," he said, "there is a very real risk that some ACOs will be formed with an eye toward creating or exercising market power. The net result of the Shared Savings Program may therefore be higher costs and lower quality health care -- precisely the opposite of its goal."

Commissioner Rosch speaks only for himself and not for the FTC, and he has earned a reputation -- which he probably welcomes -- as a persistent and thoughtful contrarian. But his views are an important reminder that not everyone in Washington regards ACOs as panaceas for the nation's healthcare problems.

For more information, please contact Lee H. Simowitz, or 202.861.1608.

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PAYMENT UNDER THE ACO FINAL REGULATIONS: IT'S ALL IN THE MATH!

Since the promulgation of the final Medicare Shared Savings regulations governing the creation and payment of ACOs on October 20, 2011 (Final Rule), CMS has held several training sessions and discussions and accepted its first letters of intent on December 1, 2011. In our series on the ACO Final Rule, this article will explore the essential elements of the savings/loss formula.

First, it is important to remember that all ACOs participating in the Shared Savings Program will continue to receive fee-for-service payments for services provided to Medicare beneficiaries. Participation in an ACO may allow provider/suppliers to receive additional rewards for managing the patient population in a more efficient manner and achieving several quality benchmarks. Several factors will impact whether an ACO will achieve success or failure: (1) the assigned beneficiary population; (2) the ACO's ability to perform and positively score points in the four domains set forth in the Final Rule's quality performance standards; (3) the ACO's existing health delivery structure and infrastructure; and (4) an analysis of what might need to be created to produce the necessary efficiencies.

The following are (1) the formulas that will be used to determine an ACO's savings or losses and (2) a brief explanation of each of their respective components:

Track 1 (savings only) ACOs

(Benchmark per member/per month (PMPM)) X (% savings below the ACO benchmark [assuming ACO beats its identified minimum savings rate (MSR)]) X (quality score) X (12 months) X (50% sharing rate) X (# of assigned beneficiaries)

Track 2 ACOs

Savings calculation: (Benchmark PMPM) X (% savings below the benchmark) X (quality score) X (60% sharing rate) X (12 months) X (# of assigned beneficiaries)

Loss calculation: (Benchmark PMPM) X (% of costs above the benchmark) X (1 - (quality score X 60% sharing rate [not to exceed 60%])) X (12 months) X (# of assigned beneficiaries)
For the initial contract period with CMS, a prospective ACO may select its shared savings model by choosing either Track 1 or Track 2. However, in all subsequent contract periods, ACOs will be required to participate in Track 2, which necessitates that participants share in the savings and losses. Track 1 ACOs will share in savings at the lower sharing rate of 50 percent, compared to 60 percent for Track 2 savings. An ACO that chooses Track 2, however, will be required to pay back any losses experienced during its contract below a threshold.

One of the determinants in the formula is the number of beneficiaries. With respect to the controversy relating to prospective or retrospective assignment, CMS responded to comments and will now apply a preliminary prospective assignment methodology for purposes of initially assigning beneficiaries to an ACO. However, assignment will be updated quarterly and will be reconciled at the end of the performance year. Assignment will be made looking at the plurality of allowed charges for primary care services. CMS said in its preamble to the Final Rule that this approach allowed for the intensity of access rather than the frequency to govern assignment. Consequently, CMS will apply what it calls a "step-wise" approach in which CMS will look at the entirety of the primary care services provided to patients, including primary care services provided by specialists and those provided by ACO professionals, defined to include physician assistants, clinical nurse specialists and nurse practitioners. The number of assigned beneficiaries, for purposes of Track 1 ACOs, directly correlates to an ACO's MSR, which is the percent of savings the ACO must beat to qualify to share in savings achieved. For Track 1 ACOs, the MSR is not fixed, but varies based on the number of assigned beneficiaries.

Pivotal to the savings/loss formula for both tracks is the establishment of an ACO's specific benchmark, which will be determined using beneficiary expenditure data from the prior three years. These expenditures will then be weighted with the most recent Benchmark Year (BY) 3 weighted at 60 percent; the BY2 at 30 percent and the BY1 at 10 percent. This trended expenditure is subject to three-month claims run-out with a completion factor, rather than a six-month run-out as originally proposed. Additionally, indirect medical education (IME) and disproportionate share hospital (DSH) payments will be excluded, for purposes of determining a benchmark. The calculation of expenditures will be separated into four broad categories of patients: end stage renal disease (ESRD); disabled; aged/dual eligible Medicare and Medicaid beneficiaries; and aged/non-dual eligible Medicare and Medicaid beneficiaries. This categorization of expenditures is in response to comments requesting a more accurate benchmark calculation and grouping according to severity of illness, and CMS anticipates that this will achieve the most accurate and fair approximation of expenditures for the purpose of establishing an ACO's benchmark. CMS will adjust the ACO's benchmark for historical growth, severity and case mix using prospective CMS-HCC risk scores.

Once the ACO-specific benchmark is set for an ACO, an MSR must be determined for each ACO. As noted above, this MSR is the percentage of savings rate that the ACO will have to "beat" for purposes of achieving savings subject to sharing. For Track 1 ACOs, the MSR table for various levels of assigned beneficiaries is set forth in the Final Rule. An ACO opting under Track 1 may share in first dollar savings of up to 50 percent, if it achieves savings under its MSR up to a performance payment limit of 10 percent of an ACO's updated benchmark.

Track 2 ACOs have a fixed MSR of two percent, which provides greater predictability. A Track 2 ACO has a performance payment limit of 15 percent of its updated benchmark and is subject to a loss calculation as well as a savings calculation, depending upon its performance relative to expenses and quality performance, as in the example above. Expenditures that exceed benchmark will result in completing a loss calculation and potential payback. The loss calculation is a function of the savings calculation, i.e., ACOs losses will be 1 - shared savings rate and may not exceed 60 percent. Additional protections are received through a shared loss limit of 5 percent in performance year 1; 7.5 percent in year 2; and 10 percent in year 3. CMS requires that an ACO that wishes to participate in Track 2 demonstrate on its application the capacity to repay losses as set forth more particularly in the Final Rule. Thus, how an ACO performs relative to its historic expenditures for its assigned beneficiaries will determine which of the formulas is applicable.

Another key factor in the formula for savings and losses is how many points an ACO obtains relative to the various quality performance measures applicable to the ACO. As the formula illustrates, how an ACO performs with respect to quality performance measures set forth in the Final Rule will be a key multiplier in the final savings/loss formula. CMS reduced the number of quality performance measures down to 33 from 65 and eliminated the requirements relating to electronic health records from the proposed rule. However, CMS weights electronic health records quality measures twice that of other measures for purposes of calculating the number quality points an ACO can obtain.

In the Final Rule, CMS defines four distinct quality domains: (1) patient/caregiver experience, (2) care coordination/patient safety, (3) preventative health, and (4) at-risk population. Each measure within the four domains has an identified number of points that an ACO may achieve. The quality performance measures have benchmarks, which are minimum attainment levels for each of the measures, and performance below the minimum attainment level will result in zero points earned. The minimum attainment level for ACOs as set forth in the Final Rule is 30 percent of the performance benchmark. ACO performance equal to or greater than the minimum attainment level for a measure will result in a quality score obtained on a sliding scale based upon the level of performance. An ACO will obtain a certain number of points for each of the domains, and the total shall be its quality score.

The quality measures are focused in the first year on pay for reporting, while in the second and third years of the CMS contract, the measures phase into pay for performance by the ACO, with reporting occurring mostly through the CMS's group practice reporting option (GPRO) payment tool.

Once each of the above-referenced factors is obtained, an ACO can calculate its share of savings. Especially significant is an ACO's ability to score highly in each of the quality domains. The ability to highly impact the formula in a positive way and, conversely, the adverse mathematical impact of poor quality performance, is significant. Consequently, applicants considering whether and how to proceed should carefully study the quality performance indicators and determine how best to ensure success in these various quality performance domains.

CMS anticipates, in the preamble to the Final Rule, that more ACOs will opt for Track 1 to avoid the potential for downside risk in this first contract cycle with CMS. Achievement of savings relative to the assigned benchmarks will be critical to the success of the overall ACO program, as providers look to application of the ACO Final Rule to see whether its promise will be fulfilled.

For more information, please contact Susan Feigin Harris, or 713.646.1307.

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EARLY ADOPTERS OF EHRs GET AN EXTRA YEAR TO MEET STAGE 2 MEANINGFUL USE CRITERIA

During a visit to Cleveland, Ohio, on November 30, Secretary of Health and Human Services (HHS) Kathleen Sebelius announced that eligible hospitals and physicians who adopted and became meaningful users of Certified Electronic Health Records Technology (EHRs) during 2011 will not have to meet the next phase, known as the Stage 2 Criteria for Meaningful Use, until 2014, one year later than originally promulgated in the federal EHR Incentive Program regulations.

The federal EHR Incentive Program was enacted under the Health Information Technology for Economic and Clinical Health Act (HITECH Act) as a means for the federal government to promote the adoption of electronic medical records in support of establishing a national health information infrastructure. The EHR Incentive Program is also viewed as an essential "carrot" motivating providers to embrace the electronic information gathering, such as outcomes and quality data, and interoperability of EHR systems, necessary under PPACA's various healthcare delivery and payment reforms.

Under the original EHR Incentive Program regulations, eligible physicians and hospitals that attested to meaningful use of EHRs during 2011 would have to meet expanded EHR criteria in 2013, such as enhanced quality measures and capabilities to exchange data, in order to continue to receive federal financial incentives for that year. Many providers and industry groups, however, have expressed concern that while hospitals and physicians are actively pursuing EHR implementation, the aggressive timelines and complicated measures for attaining EHR meaningful use have made the process for qualifying for the financial incentives too difficult. Concerns also have been raised about perceived limitations in vendor capacities to meet future EHR requirements.

The proposal to delay until 2014 the Stage 2 Criteria for Meaningful Use for those eligible providers that attested during 2011 was first proposed in March of this year, and has received the endorsement of the Office of National Coordinator for Health Information Technology, the agency created under the HITECH Act and tasked with developing standards for the EHR Incentive Program and coordinating federal HIT initiatives and resources across the nation.

As a reminder, the deadline for eligible hospitals and critical access hospitals to register and attest to EHR Meaningful Use for the 2011 Medicare EHR incentives was November 30, 2011; while the deadline for eligible physicians to attest to EHR Meaningful Use for the 2011 calendar year is February 29, 2012. Deadlines for registering and attesting for Medicaid EHR incentives are governed by your state's own Medicaid State HIT Plan.

Should you need assistance in submitting comments, please contact John S. Mulhollan, or 216.861.7484.

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HEALTHCARE UMPIRES GET GLASSES WITH RELEASE OF MEDICARE DATA

Section 10332 of PPACA explicitly reversed a 1979 Florida Medical Association v. HEW court decision that enjoined HHS from releasing Medicare claims data on physicians because it would violate the physician's privacy rights. However, PPACA did not go as far as the 2007 district court decision ordering the unfettered release of such information in the Consumers' CHECKBOOK/Center for the Study of Services v. HHS 2007 litigation (subsequently overturned by the Circuit Court of Appeals for the District of Columbia).

On December 5, 2011, CMS issued a final rule providing for the release to and use of Medicare claims data by qualified entities to measure the performance of providers and suppliers and generate public reports regarding provider and supplier performance. Qualified entities generally are defined as entities that demonstrate (1) expertise and sustained experience in analyzing this type of data, (2) data privacy expertise, (3) expertise in combining Medicare data with other data, (4) a viable business model, and (5) that they can produce a description of the evaluation measures that consumers and others can use to assess the performance reports.

Users of the data generally are required to employ standard measures for evaluating the performance of providers and suppliers unless CMS, in consultation with appropriate stakeholders, determines that use of alternative measures would be more valid, reliable, responsive to consumer preferences, cost-effective or relevant to dimensions of quality and resource use not addressed by standard measures.

Data cannot be released by a qualified entity to the public until the providers and suppliers have had at least a 60-day opportunity to ask for and review their data and, if necessary, ask for corrections. However, after 60 days the data can be released even if the dispute has not been resolved, provided that the qualified entity publicly posts the name of the appealing provider or supplier and the category of the appeal request.

Providers and suppliers should monitor qualified entities' submissions to CMS to understand the measures they intend to calculate and report on in order for the provider or supplier to monitor its own performance and avoid any incorrect data reports.

Less clear is what the effect of this data availability will be on insurer's rating systems and the agreements they reached with various attorneys general over the last several years to help assure that their physician rating systems were transparent and produced fair and sound rankings.

For more information, please contact Robert M. Wolin, or 713.646.1327.

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THE CONTROVERSY OVER STATE-BASED HEALTH INSURANCE EXCHANGES: POLITICS AS USUAL OR DANGEROUS BRINKSMANSHIP?

From all accounts, the 45-month period between the enactment of PPACA in March 2010 and the full-fledged implementation of most of PPACA's reforms on January 1, 2014, was intended to give federal and state government officials the time needed to substantially overhaul the health insurance markets then in place, starting with the individual and small group markets in 2014 (and then extending those reforms to larger employers no later than 2017).

During that period, government officials and the insurance industry have struggled with how to construe and implement a variety of critically-important PPACA provisions. Of these, three stand out: (1) the design and implementation of state-based health insurance exchanges (HIX) which will control how coverage will be sold; (2) the development of a new minimum coverage standard known as the qualified health plan (QHP) standard which will control what essential health benefits (EHB) will have to be part of the coverage that is sold; and (3) the imposition of medical loss ratio (MLR) rules that force insurers to spend at least 80 cents of every premium dollar on claims and related expenses (85 cents, for large employers) which controls how much insurers can spend on marketing, sales and other "non-claims" expenses from the premium dollars they collect from the coverage that is sold.

Each of these three PPACA provisions is to be put in place during this 45-month period. The MLR rules are already in effect, and those rules recently were finalized in regulations published on December 7, 2011 (at 76 Fed. Reg. 76574). Notably, the final MLR regulations ignored a recent call by 21 state insurance commissioners to permit certain brokers' and agents' commissions to be excluded from the MLR calculations; that decision alone is almost certain to cut brokers' and agents' pre-PPACA commissions by as much as 50-60 percent -- leaving brokers and agents scrambling to find other sources of income to replace what is being eliminated.

What remains to be seen are the final HIX rules (the general rules were published earlier this year, partly on July 15, 2011 (76 Fed. Reg. 41786), and partly on August 17, 2011 (76 Fed. Reg. 51202)) and the QHP/EHB rules (which have not yet been seen). Once these rules have been published and finalized, insurers and states should have what they need to be able to offer, buy and sell health insurance coverage at the individual state level (or by forming regional HIX), starting in 2014, without running afoul of PPACA's provisions.

It is not possible to overstate the importance of the HIX rules or their effect on insurers and the general public. Their importance will depend on what individual state officials decide to do, or not do. Notably, if a state fails to have an implementation-ready HIX by January 1, 2013 (or has not made sufficient progress to ensure that state's HIX will be ready to enroll individuals in 2013 so coverage can be ready to commence January 1, 2014), HHS is authorized to put a federalized HIX format in place which is capable of enrolling individuals effective January 1, 2014 (assuming PPACA is not either completely invalidated or repealed). There is no guarantee that any federal-implemented HIX would have the same level(s) of flexibility that a state-designed HIX might have.

The differences between a state-based HIX system and a federal HIX system, in terms of variety and choice, could be profound. For example, PPACA and relevant HHS rules leave to the individual states whether to have one HIX or two: a state can decide whether to establish a separate HIX for small employers, known as a small business health options program (SHOP), or simply operate both markets as a single HIX. PPACA and relevant HHS rules also allow the individual states (or HHS itself) to decide (1) how much variety insurers will be allowed to build into the coverages they offer for sale on the state's HIX (once the QHP standard has been met); (2) whether insurers will be permitted to offer for sale on the state's HIX low-cost "private label" coverage packages, made possible by selectively contracting with provider networks; and (3) whether (and what types) of noncompliant or supplemental "off-market" coverages insurers will be permitted to offer for sale directly to businesses and individuals on an "off-exchange" basis.

Indeed, a Kaiser Family Foundation study published in April 2011 (Focus on Health Reform) points out that insurers likely will be able to design a broad range of coverages capable of meeting the QHP standard, working within the EHB and other criteria provided, so long as a state's HIX permitted a wide array of health insurance coverages to be marketed and sold. Likewise, a study by Price Waterhouse Coopers (PwC), published in July 2011 (Changing the Channel), points out that HIX design will heavily influence the extent to which insurers will (or won't) participate in individual state HIX, in regional HIX or in a federal, HHS-orchestrated HIX. The PwC study also points out that 87 percent of those expected to shop for individual coverage on HIX likely will be eligible for some form of government subsidy -- which means most of those scheduled to purchase coverage on a HIX will be partially insulated from the true costs of their purchase decision.

Simply stated, depending on how and what a state decides to do, a state's HIX thus could either be an exclusive market where a limited number of generic insurance coverages are made available for purchase and off-market coverages are barred by law (or, required to play by HIX's on-market insurance-rating and other rules); or a state's HIX could be a nonexclusive market where a wide variety of coverages are made available for purchase, and a variety of "off-market" coverage offerings could be available for purchase, which are not bound by HIX rules and underwriting requirements). These decisions likely are to have a substantial impact on whether insurers are willing (or able) to operate in at least some states; how (and perhaps, how well) urban, suburban and rural health provider systems are able to compete against each other and possibly against out-of-state health systems; and whether brokers and agents are needed to help individuals and small business decisions-makers choose between a variety of different coverage offerings (as opposed to a limited number of generic coverage options, where price alone is likely to be the determining factor).

So how are individual states responding? Despite the fact that time is fast running out to design and implement a HIX, many states have done comparatively little work. Some state officials have even publicly declared that they will not support the creation of a HIX within their state, apparently leaving the decision-making to HHS on January 1, 2013 (assuming PPACA takes effect in 2014 as scheduled).

So what is going on? Just political theater? Or are state officials playing a dangerous game of brinksmanship with HHS, where insurers, health systems, brokers and agents and even the general public, could later find themselves big winners or big losers? Only time -- and politics -- will tell, but one thing is clear: A major reformation of the health insurance marketplace already is underway, and it is sure to produce winners and losers. Those with a vested interest in the outcome would be well-served to figure out, sooner rather than later, into which category they most likely are to fall.

For more information, please contact John McGowan, or 216.861.7475.

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NEW FAQs DELAY SUMMARY OF BENEFITS AND COVERAGE COMPLIANCE DATE AND PROVIDE GUIDANCE ON THE MENTAL HEALTH PARITY ACT

Recently the U.S. Departments of Labor, Treasury and HHS (the "Departments") jointly released frequently asked questions (FAQs) addressing implementation of PPACA and the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA).

PPACA guidance in the FAQs addressed the Summary of Benefits and Coverage and Uniform Glossary requirements imposed by PPACA under Section 2715 of the Public Health Service Act (PHSA). Under PHSA Section 2715, group health plans and health insurance issuers are required to provide plan participants with a summary that accurately describes their plan benefits and coverage. The penalty for noncompliance is $1,000 for each "failure" to provide the required information. On August 22, 2011, the Departments released proposed regulations and templates, with a proposed applicability date "beginning March 23, 2012."

Since issuance of the proposed regulations, the Departments received many comments and questions regarding the form and substance requirements of the Summary of Benefits and Coverage and the proposed applicability date. In response to these questions and comments, the Departments stated in the FAQs that the final regulations will be issued "as soon as possible." Once the final regulations are issued, the actual applicability date will give group health plans and insurance issuers "sufficient time to comply."

The remainder of the FAQs discussed the MHPAEA, which prohibits group health plans or group health insurance issuers from imposing more restrictive financial requirements and treatment limitations on mental health and substance use disorder benefits than those that apply to substantially all medical and surgical benefits. The FAQs primarily address nonquantitative treatment limitations. For instance, a plan cannot require a "medically necessary" prior authorization for mental health/substance use disorder benefits if such prior authorization is not required for any medical/surgical benefits. The FAQs recognize that some differences in prior authorization practices with respect to individual conditions or treatments may be permissible based on recognized clinically appropriate standards of care.

If you have any questions regarding the Summary of Benefits and Coverage requirements under PPACA or the operation of the rules under the MHPAEA, please contact Jennifer A. Mills at or 216.861.7874, Susan Whittaker Hughes at or 216.861.7841, or Michelle Manzoian at or 216.861.7714.

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HOLIDAY PUBLICATION NOTICE

Please be advised that the Health Law Update will not publish its regular bi-weekly issue on Thursday, December 22, 2011, due to the end of the year holidays. We will resume our normal publication schedule in January 2012. Happy Holidays!

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EVENTS CALENDAR

February 9, 2012

Houston counsel Lynn Sessions will speak at a webinar on "The Enterprise Risk of Drug Shortages in Hospitals" at the February meeting of the American Health Lawyers Association's Enterprise Risk Management Task Force.

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Baker & Hostetler LLP publications are intended to inform our clients and other friends of the Firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2011 Baker & Hostetler LLP