Legal Considerations for Healthcare Organizations Exploring Value-Based Models

Coming up with the benchmarks for measuring and rewarding quality and efficiency and finding the right provider partner are only part of the battle. Don’t forget about compliance with state and federal requirements. 

Value-based contracting is the managed care contracting model du jour. But coming up with the benchmarks for measuring and rewarding quality and efficiency and finding the right provider partner are only part of the battle.  Don’t forget about compliance with state and federal requirements. 

At the state level, implementing a value-based contracting strategy can trigger a broad range of regulatory requirements, including laws related to the assumption of financial risk, provider contracting, network adequacy, and delegation agreements.  None of these laws is focused specifically on value-based contracting, but each can be implicated depending upon the particular contracting arrangement. 

For example, where the value-based arrangement requires the provider to assume financial risk for the cost of healthcare services, such as through capitation payments from the managed care organization (MCO), state law may require the MCO to monitor the provider’s financial solvency or require the provider to get licensed as a risk-bearing entity.  Additional state requirements may apply where the MCO delegates one or more functions to the provider.  A typical delegated function is utilization management, which involves prior authorization, referral and other requirements that are intended to control the utilization of services and expenditures and ensure that the healthcare services provided are medically necessary.  Many states have licensure or certification requirements for those performing utilization management.

Value-based contracting under Medicare Advantage and/or Medicaid managed care subjects the parties to federal regulation and, in the case of Medicaid MCOs, additional state requirements.  Both the Medicare Advantage and Medicaid managed care programs have unique requirements relating to provider risk assumption, provider contracting, network adequacy and delegation. 

Related: The Missing Link in Value-Based Care

In some cases, such as in the case of provider risk assumption, the federal requirements have been in place for decades and are difficult to apply to value-based arrangements.  The federal Physician Incentive Plan (PIP) regulations are an example.  These regulations apply where a Medicare Advantage organization or Medicaid managed care organization places a physician or physician group at “substantial” financial risk for services they do not provide themselves (known as “referral services”), but do not apply where incentive payments are based solely on quality.  However, other than confirming that the PIP regulations apply to value-based arrangements that involve assumption of risk and quality, CMS has failed to provide helpful guidance to the industry.

Similarly, federal fraud and abuse laws have not kept up with the move toward value-based contracting.  While the federal safe harbor regulations for Medicare Advantage and Medicaid MCOs provide some protection for MCOs and their contracted providers, those protections are limited.  The safe harbor regulations may not, for example, protect arrangements that seek to steer or encourage plan members to use certain providers. Such arrangements can also run afoul of the federal beneficiary inducements civil monetary penalty. There is a glimmer of hope, however, as the HHS Office of the Inspector General issued a request for information seeking input on how the fraud and abuse laws might be changed to eliminate barriers to coordinated care or value-based care. Comments are due October 26.

Another sign of hope is the many state Medicaid agencies that require Medicaid managed care organizations to adopt value-based contracting in their arrangements with contracted providers. The states’ experience with these arrangements may pave the way for new regulatory requirements and guidance that are specifically focused on value-based arrangements.  Until then however, managed care organizations will have to evaluate what state and federal requirements apply to their value-based contracting arrangements.

Christine M. Clements is a partner at Sheppard Mullin’s Washington, D.C. office and has 25 years of experience with managed care law issues. She focuses her practice on federal healthcare government contract programs, with particular emphasis on the Medicare Advantage Program, the Medicare Prescription Drug Benefit, the Federal Employees Health Benefits Program, Medicaid managed care, and Medicare-Medicaid Plans.