OCR Issues its First Civil Monetary Penalty for a Violation of the HIPAA Privacy Rule

On Feb 22, 2011, HHS announced that OCR has issued a Notice of Final Determination ordering Cignet to pay a CMP of $4.3 million. HHS’ imposition of this penalty represents the first CMP issued by HHS for a covered entity’s violation of the HIPAA Privacy Rule. The HITECH Act expanded HHS’ ability to issue CMPs and increased the maximum penalty amount from $25,000 to $1.5 million for all violations of an identical provision.

OCR determined that Cignet had violated the law both because it violated the rights of patients, and because it failed to cooperate with OCR’s investigation. OCR found that Cignet violated the rights of 41 patients by denying them access to their medical records. The HIPAA Privacy Rule generally requires that a covered entity provide a patient with a copy of the patient’s medical records within 30 days of the patient’s request. In addition to imposing sanctions on Cignet for failing to provide patients with access to their medical records, OCR also penalized Cignet for its failure to cooperate with OCR’s investigation. OCR found that Cignet failed to cooperate with OCR’s investigation, in violation of the law, on a continuing daily basis from March 17, 2009 to April 7, 2010.

The CMP of $4.3 million is comprised of a CMP of $1.3 million for Cignet’s violations of patient privacy rights, and a CMP of $3 million for Cignet’s failure to cooperate.

The Million Dollar Subway Ticket

On Feb. 24, 2011, OCR announced that Mass General had agreed to pay $1 million to settle a potential HIPAA violation. Mass General entered into a Resolution Agreement with HHS that requires it to develop and implement a comprehensive set of policies and procedures to safeguard the privacy of its patients. As part of the settlement, in addition to paying $1 million, Mass General must implement a three-year corrective action plan. Mass General did not admit liability or wrongdoing.

The settlement follows an extensive investigation by OCR. According to the Resolution Agreement, the settlement relates to a 2009 incident in which a hospital employee misplaced documents containing protected health information, including information of patients with HIV/AIDS. The Resolution Agreement indicates that while commuting to work on the subway, the employee removed documents containing PHI from her bag and placed them on the seat beside her – upon exiting the train, she left the documents on the subway and they were never recovered. The documents contained the name, date of birth, medical record number, health insurer and policy number, diagnosis, and name of provider for 66 patients and the practice’s daily office schedules for three days containing the names and medical record numbers of 192 patients. The documents were not in an envelope and were bound with a rubber band.

The Future of HIPAA Enforcement

HHS has now sent a clear message to entities bound by HIPAA – HIPAA must be taken seriously. Indeed, in the HHS press release related to the Mass General incident, OCR Director Georgina Verdugo indicated that entities bound by HIPAA must ensure they have an effective compliance plan in place in order to avoid enforcement penalties. Specifically, Verduga stated, “[w]e hope the health care industry will take a close look at this [Mass General Resolution] agreement and recognize that OCR is serious about HIPAA enforcement. It is a covered entity’s responsibility to protect its patients’ health information.” Verdugo further opined, “[t]o avoid enforcement penalties, covered entities must ensure they are always in compliance with the HIPAA Privacy and Security Rules. A robust compliance program includes employee training, vigilant implementation of policies and procedures, regular internal audits, and a prompt action plan to respond to incidents.”

In light of OCR’s clearly articulated intention to aggressively enforce the HIPAA Privacy and Security Rules, covered entities and business associates should review their current HIPAA compliance programs. Such a review should include consideration of the organization’s plan documents, training program(s), documentation management systems and organizational readiness for a HIPAA audit.

For more information on this topic, or for guidance to help ensure compliance, please contact one of the authors below.

Kimberly J. Kannensohn
312.750.8649
kkannensohn@mcguirewoods.com

Holly Carnell
312.849.3687
hcarnell@mcguirewoods.com

Amita A. Sanghvi
404.443.5723
asanghvi@mcguirewoods.com

1.         Notification of Facility Closure

Prior to promulgation of the Interim Rule, Federal regulations did not require LTCFs to notify Federal or state agencies prior to an LTCF closure, even though many states have such notice requirements.  The Interim Rule, however, requires written notice to be submitted sixty days prior to the date of closure of a LTCF, or, in the case of termination of a LTCF from participation in Medicare and/or Medicaid, not later than the date specified by the Secretary. 

Moreover, LTCF’s should note that the Interim Rule places the responsibility for complying with this notice requirement squarely on an LTCF’s administrator.  The Interim Rule establishes minimum penalties for failure to comply with the notice requirement of $500 for the first offense, $1,500 for the second offense, and $3,000 for the third offense, but CMS suggests that higher penalties (up to $100,000) may be applied based on criteria it identifies in interpretative guidelines.  The Interim Rule does not specify under what circumstances a LTCF administrator would face exclusion from Federal health care programs as a result of failing to comply with the notice requirements.  CMS also notes that any sanctions levied against an administrator would also be reviewed by the State’s licensing agency for possible disciplinary action proceedings against an administrator.

2.         Relocation of Residents

The Interim Rule also requires an LTCF administrator to provide, along with the written notice of facility closure discussed above, a plan for the transfer and adequate relocation of facility residents.  The plan must be pre-approved by the State and “include sufficient detail to clearly identify the steps the facility would take, and the individual responsible for ensuring the steps are successfully carried out.”  The Interim Rule provides several examples of elements that an adequate plan might include.

PPACA Section 6113 also requires states to ensure that prior to a LTCF closure, all facility residents have been successfully relocated to another facility or an alternative home and community-based setting.  CMS intends to implement this statutory requirement through sub-regulatory guidance to be published in the State Operations Manual (SOM) as interpretive guidance for surveyors.

3.         Other Important Provisions in the Interim Rule

The Interim Rule includes other provisions related to the implementation of Section 6113 of PPACA, including:

• LTCF administrators must ensure that no new patients are admitted to the facility on or after the date on which written notification of facility closure is submitted to the Secretary and the other necessary parties;
• LTCFs must implement policies and procedures to ensure an administrator’s duties and responsibilities involve providing appropriate closure notices and complying with other relevant requirements of Section 6113 of PPACA.  Failure to adopt such policies may result in citation of an LTCF during the survey process; and
• CMS establishes appeal rights for LTCF administrator sanctions for noncompliance with these new regulatory requirements.

4.         Key Dates and Considerations

While the effective date of the Interim Rule is March 23, 2011, CMS will accept comments on the Interim Rule through April 19, 2011.  Please contact one of the attorneys below if you need assistance implementing written policies and procedures, if you have questions regarding the Interim Rule or if you are considering submitting written comments regarding the Interim Rule to CMS.

Joseph J. Hylak-Reinholtz
312.698.4509
jhreinholtz@mcguirewoods.com

Jason S. Greis
312.849.8217
jgreis@mcguirewoods.com

R. Brent Rawlings
804.698.252
rbrawlings@mcguirewoods.com

The aggregate value of the transaction is estimated at $1.3 billion, which includes $400 million of existing RehabCare debt.  Kindred has obtained financing commitments from JPMorgan Chase, Morgan Stanley and Citigroup Global Markets in connection with the pending transaction and expects to have in place $1.9 billion of long term financing, of which an estimated $1.6 billion will be in place at closing.

The transaction will create the largest post-acute healthcare service company in the United States with annual revenues exceeding $6 billion.  Kindred currently operates 83 LTACHs in 24 states and 226 skilled nursing and rehabilitation centers in 27 states.  The combined company will operate 118 LTACHs with 8,492 licensed beds, 226 nursing and rehabilitation centers with 27,442 licensed beds, 121 IRF hospitals (primarily hospital-based units) and will have 1,808 hospital, nursing center and assisted living rehabilitation therapy services contracts across the country.

The acquisition has been viewed positively by most industry analysts and experts since it is believed that the transaction will be highly accretive to Kindred’s earnings and:

• enhance Kindred’s cluster and transitional care unit strategy and result in greater continuity of patient care across the post-acute spectrum;
• add substantial scale to its skilled nursing, rehabilitation and LTACH business lines;
• result in significant back office, purchasing and information technology savings and synergies (Kindred expects to achieve operating synergies of approximately $25 million in the first year and an additional $15 million in the second year); and
• result in an additional $100 million of annual cash flow.

The announcement of this merger comes on the heels of Select Medical Holdings Corporation’s acquisition of Regency Hospital Company (a former Waud Capital Partners portfolio company that operated 23 LTACHs) for an estimated $210 million and the assumption of certain Regency liabilities.  Other recent notable large post-acute care transactions, including RehabCare’s 2010 merger with Triumph HealthCare, signal the post-acute care industry’s continuing consolidation in an attempt to address reimbursement pressure and anticipate the introduction of certain post-acute pay-for-performance standards and a post-acute care bundled payment pilot program.

Jason S. Greis, Esq.
McGuireWoods LLP
(312) 849-8217

The Report includes a summary of the GAO’s finding and CMS’s comment and highlights differences in four areas, including Medicare and Medicaid participation requirements, quality standards, surveys and enforcement of quality standards.  The Report notes that CMS is in the process of developing LTACH-specific hospital Conditions of Participation (CoPs) in response to requirements in the Medicare, Medicaid and SCHIP Extension Act of 2007.  CMS may propose new long-awaited rules on or about May 11, 2011 to the LTACH patient admission and discharge process, staffing requirements and the levels of patient care provided in LTACHs.

It is worth noting that representatives from the LTACH industry’s two dedicated trade organizations, the Acute Long Term Hospital Association (ALTHA) and the National Association of Long Term Hospitals (NALTH) are also currently working with The Joint Commission, an accreditation organization responsible for oversight of approximately 95% of the nation’s 434 LTACHs, to develop new LTACH-specific accreditation criteria.

The GAO report does not conclude the Senate Finance Committee’s investigation of the LTACH industry, but it is unclear what additional action the Committee will take.  Regardless of the outcome of this investigation, LTACHs should remain vigilant for opportunities to tell their story of quality of care and highlight successful patient outcomes.  Please contact the author of this blog post if you have any questions about the Report.

Jason S. Greis, Esq.
McGuireWoods LLP
312.849.8217

The draft criteria are arranged into seven categories that reflect the core capabilities ACOs should possess:

1. Program Structure Operations
2. Access and Availability
3. Primary Care
4. Care Management
5. Care Coordination and Transitions
6. Patient Rights and Responsibilities
7. Performance Reporting

There is no indication at this time that the Centers for Medicare and Medicaid Services (CMS) or any other regulatory agency will adopt these criteria in establishing requirements for ACOs under the Medicare Shared Savings Program or any other ACO initiative under the Medicare or Medicaid programs, but it is possible that they could be relied upon by CMS and other regulatory agencies in determining how ACOs should be structured and how their performance should be measured.  NCQA is accepting public comments on the draft criteria until Nov. 19, 2010. NCQA has specifically requested comments on a number of issues related to the ACO criteria, including:

• Whether the types of specialists that should be included in the ACO should be specified in the criteria.
• Whether the eligibility criteria captures the organization types that have the capability to act as ACOs and whether additional structures should be considered.
• Whether measures such as Healthcare Effectiveness Data and Information Set (HEDIS) and Meaningful Use align with stakeholder expectations for ACOs.
• Whether there are critical functions of ACOs that are not included in the draft criteria.

It is unclear at this time what impact the NCQA criteria will have on the development of ACOs, but it is likely that NCQA will continue to have a voice in the public dialogue about the evolution of this healthcare delivery model and its role in improving quality and reducing costs under healthcare reform.

If you would like to submit comments to the NCQA or if you would like to discuss the draft criteria for ACOs, please contact one of the authors listed below.

R. Brent Rawlings
804.775.1126
rbrawlings@mcguirewoods.com

Thomas J. Stallings
804.775.1007
tstallings@mcguirewoods.com

James B. Riley, Jr.
312.7508665
jriley@mcguirewoods.com

Scott P. Downing
312.750.8910
sdowning@mcguirewoods.com

On Sept. 23, 2010, the Center for Medicare and Medicaid Services (CMS) released its self-referral disclosure protocol (SRDP). The SRDP provides guidance for healthcare providers and suppliers to self-report actual or potential violations of the Stark Act in exchange for potentially (although not guaranteed) informal and more lenient settlement proceedings. Providers and suppliers should be cautious in self-disclosing through the SRDP. This article highlights nine key concepts and considerations regarding the SRDP.

1. SRDP for Stark Violations Only: CMS points out that the SRDP is only to address actual or potential Stark Act violations; if the disclosing party’s conduct raises potential liabilities under other federal criminal, civil or administrative laws, the provider or supplier should self-disclose through the OIG’s Self-Disclosure Protocol. If CMS reviews an SRDP and determines that other violations in addition to the Stark Act may be implicated, CMS will refer the matter to the appropriate law enforcement agency (i.e., the OIG or the Department of Justice).
2. Conduct an Internal Investigation Before Filing an SRDP: It is vital to conduct a thorough internal investigation of all related compliance issues prior to filing an SRDP, because violations other than the one being reported that are discovered by CMS through the SRDP may be used by the appropriate government agency to bring charges against the disclosing party. Thus, it is important to have a full picture of all potential compliance problems or risks before opening the door to government scrutiny of an organization’s operations.
3. Good Faith Cooperation Necessary: An SRDP must be made in good faith, meaning that a disclosing party that attempts to circumvent an ongoing investigation or fails to fully cooperate in the self-disclosure process will be removed from the SRDP, and as noted above, information learned in an SRDP that is terminated for any reason may be used by CMS or another law enforcement agency to pursue legal action against the disclosing provider or supplier.
4. SRDP Is Distinct from the Stark Advisory Opinion Process: A disclosing party may not use the SRDP to obtain a CMS determination as to whether an actual or potential violation of the Stark Act occurred. An SRDP is only appropriate where the disclosing party is prepared to accept responsibility for a violation or potential violation of the Stark Act, and is prepared to work with CMS to come to a resolution regarding such violation.
5. Participation in SRDP Conditioned on Certain Terms; Waiver of Appeal Rights: One condition of disclosing a matter pursuant to the SRDP is that the party waives all appeal rights attached to claims relating to the conduct, and agrees to have the reopening rules (i.e., rules pertaining to remedial actions to change a final determination that resulted in either an overpayment or an underpayment) apply from the date of the initial disclosure to CMS. Similarly, although CMS has the authority to reduce the overpayment amount owed by the disclosing party as a result of the Stark violation, CMS has no obligation to reduce any amounts due and owing. As CMS states:
   

   CMS will make an individual determination as to whether a reduction is appropriate based on the facts and circumstances of each disclosed actual or potential violation. The nature and circumstances concerning a physician self-referral violation can vary given the scope of the physician self-referral law and the health care industry. Given this variability, CMS needs to evaluate each matter in order to determine the severity of the physician self-referral law violation and an appropriate resolution for the conduct.

   CMS further advises that “a disclosing party should make a submission to the SRDP with the intention of resolving its overpayment liability exposure for the conduct it identified.”

6. Other Discovered Violations in CMS Verification Process of SRDP Fair Game: Any matters uncovered during CMS’s verification processes and investigation pursuant to the SRDP which are outside of the scope of the matter disclosed to CMS may be treated as new matters outside of the SRDP and prosecuted accordingly. In other words, self-reporting a Stark Act violation could potentially lead to additional criminal, civil or administrative liabilities under statutes such as the False Claims Act or the Anti-Kickback Statute.
7. Need to Act Quickly: Given the 60-day time limit to return or report potential overpayments pursuant to Section 6402 of PPACA, providers and suppliers need to act quickly in order to get an SRDP on file, if the provider or supplier believes he or she has violated the Stark Act or has potentially violated the Stark Act. Note, however, that the 60-day period to return or report overpayments is tolled once a valid SRDP is filed.
8. Complex Disclosure Requirements: The SRDP submission is a tedious process requiring complete legal and financial analyses related to the violation or potential violation. Some of the components of the SRDP submission include:
   • A detailed description of the actual or potential violation, including a complete legal analysis of the application of the Stark Act to the conduct and any exceptions to the Stark Act that may apply;
   • A description of all past, present and future compliance programs that the disclosing party has implicated, why such programs failed in preventing the violation, and what efforts have been taken to avoid violations going forward;
   • A detailed financial analysis of the violation, itemized by year, for the entire period of non-compliance (referred to by CMS as the “look back” period), as well as a description of the methodology used for the financial analysis; and
   • Certification by an authorized representative of the disclosing party that all information contained in the SRDP is truthful and based on a good faith effort to bring CMS’s attention to the Stark Act violation.
9. Secure Appropriate Representation and Counsel: Because an SRDP is a tedious process involving careful legal and financial analyses of a provider or supplier’s business, providers and suppliers are urged to seek immediate counsel if they suspect they have violated the Stark Act.

Scott Becker
312.750.6016
sbecker@mcguirewoods.com

At issue, is how nonprofit hospitals should interpret and apply the limitation as to what a hospital may charge individuals eligible under their financial assistance policies. The AHA and other groups have claimed they should be able to apply financial assistance to gross charges or charge master rates, as long as no eligible patient pays more than the lowest commercial rate or what Medicare pays. Sen. Grassley claims Congress intended that financial assistance policies of tax-exempt hospitals be applied to the lower adjusted basis and not by starting with charge master rates.

According to Sen. Grassley, Congress expected tax-exempt hospitals to maximize the amount of charity care, and he said, “the intent in prohibiting the use of charge master rates or gross charges was clear.” His comments are important, because he was the architect of provisions in the health reform law applicable to tax-exempt organizations requiring these hospitals to do more and not less charitable care.

This is just one in a series of issues that have arisen in the interpretation of the new health legislation, as the IRS struggles to promulgate rules and regulations to implement the new law. We will keep you informed on new developments. For more in this area, see IRS Addresses Hospital Concerns Regarding Section 501(r) and Nonprofit Hospitals in Need of an Aspirin.

Milton Cerny
202.857.1711
mcerny@mcguirewoods.com

1. What legal structures will be permitted?

The Patient Protection and Accountable Care Act (the Act) requires that the ACO have a legal structure that allows the organization to receive and distribute payments for shared savings. With respect to the Medicare program, this means that ACOs may need to be structured to comply with the Stark physician self-referral law, the federal anti-kickback statute, and civil monetary penalties law. Aside from these federal fraud and abuse laws, compliance with state self-referral laws, anti-kickback laws, and fee-splitting laws will also be necessary. In addition, federal and state antitrust laws could be implicated by ACOs and the Shared Savings Program.

It should be noted that the Act gives the Secretary of Health and Human Services (the Secretary) the authority to waive those requirements of sections 1128A and 1128B, and title XVIII of the Social Security Act (which includes the Stark physician self-referral law, the federal anti-kickback statute, and civil monetary penalties law and other laws applicable to the Medicare program) as the Secretary determines may be necessary to carry out the Shared Savings Program. If the Secretary acts on this authority, new organizational structures or arrangements that might not have otherwise been available under existing laws could be introduced.

On Oct. 5, 2010, the Department of Health and Human Services, CMS, the Office of Inspector General and the Federal Trade Commission conducted a workshop regarding ACOs and implications of Stark physician self-referral law, the federal anti-kickback statute, civil monetary penalties law, and federal antitrust law. Although no definitive guidance was finalized as a part of this workshop, it provided a great deal of insight on how various stakeholders view the implications of these laws for future development of ACOs.

With respect to Stark physician self-referral law, the federal anti-kickback statute, and civil monetary penalties law, there was general discussion in the workshop of how a possible waiver could be applied by the Secretary. Many stakeholders favored a waiver that would be applied uniformly for all types of ACOs without prescribing any specific characteristics for an ACO to qualify for the waiver, so as to create a level playing field and to not create any chilling effect on innovation. Regulators included in the workshop mentioned the possibility that a series of different safe harbors or exceptions that address specific areas of concern or certain activities could be developed without the need of acting on the waiver authority, but no further discussion of the components of any such safe harbors or exceptions was provided.

With respect to federal antitrust law, stakeholders discussed the availability of existing guidance on financial integration and clinical integration for ACOs, including such matters as whether shared savings across otherwise competing healthcare providers creates sufficient financial integration. Stakeholders also discussed the possibility of creating an antitrust safety zone for ACOs that would outline behavior that would not be challenged as a violation of federal antitrust laws similar to that provided for other physician network joint ventures.

Further comment and guidance is expected from the Department of Health and Human Services, CMS, the Office of Inspector General and the Federal Trade Commission on these and other questions regarding the acceptable legal structures of ACOs and the implications of Stark physician self-referral law, the federal anti-kickback statute, civil monetary penalties law, and federal antitrust law for ACOs.

2. What is the possible amount of shared savings that could be achieved by an ACO in proportion to the Medicare per capita expense?

Shared savings payments are based off of the Medicare per capita expense for the population assigned to the ACO. The Act allows CMS to establish a limit of shared savings that could be paid to an ACO. Understanding what these limits might be in terms of a portion of the Medicare per capita expense is a fundamental concern for any current or prospective ACO considering participation in the Shared Savings Program.

This information will be necessary to assess the cost and benefits of developing an ACO or restructuring an existing ACO to participate in the Shared Savings Program. Physicians, hospitals, and other suppliers and providers considering developing an ACO can expect that a significant initial capital investment will be required to implement the legal structure and administrative and technology platform needed to operate a successful ACO.

Another factor to consider is that ACOs could experience an offset in revenues resulting from decreased utilization of healthcare services, such as diagnostic tests and hospital admissions, from pre-ACO levels. Given the legal, administrative, and clinical challenges involved, the costs of developing an ACO could be significant and without having a sound understanding of the potential additional revenues that could be achieved, it would be difficult to predict the return on investment, at least in terms of achieving shared savings.

3. What quality improvement and performance indicators and metrics will be included?

The Act gives the Secretary the authority to determine appropriate measures to assess the quality of care furnished by the ACO, such as measures of clinical processes and outcomes, patient experience, and utilization. This raises questions not only about the types of measures that will be included and the metrics used to evaluate those measures, but also about how quality improvement and performance indicators will be reported. In the Oct. 5, 2010, workshop discussed above, a number of stakeholders expressed the need for uniformity of measures within the Shared Savings Program and across various third-party payors with similar incentive payment programs involving ACOs. Another question that arises is how the baseline for measurement will be established. There could be significant disparity in baselines for certain measures across different markets relating to geographic variations in practice patterns and other factors.

4. Are ACOs compensated for use of enabling technologies?

Under the Act, ACOs are to promote evidence-based medicine and coordinate care, such as through the use of telehealth, remote patient monitoring, and other such enabling technologies. Unless ACOs are separately paid for the significant costs of developing and providing these technologies, they will be placed at risk for any return on their investment through the Shared Savings Program. On the other hand, ACOs may determine that there are other more compelling reasons to adopt enabling technologies, such as reduced admissions, improved outcomes on pay-for-performance measures, and overall improvements in quality of care across which to spread the costs for purposes of assessing the return on investment.

5. How will ACOs impact relationships with Medicare beneficiaries?

Coordination of care for Medicare beneficiaries in ACOs will often require recommending to beneficiaries a course of diagnosis or treatment based on evidence-based guidelines that may be perceived by the beneficiary as a lower standard of care. In the recent past, the role of coordinator of care has been more actively engaged in by Medicare contractors, and in the private sector, managed care plans with significant backlash. Under the Shared Savings Program, this role will be assumed by ACOs. This could impact the dynamics of relationships between caregivers and beneficiaries, and create additional challenges for ACOs.

These are just a few examples of the numerous unanswered questions about ACOs and the Shared Savings Program. It will be necessary to continue to identify and ask questions, and seek additional guidance from CMS and other regulators regarding the implementation of the Shared Savings Program and other similar initiatives to be sure that organizations are fully informed of the potential costs, benefits, and risks involved in pursuing, or choosing not to pursue, a particular course of action in the frenzy of activity around the issue of healthcare reform and the promise of ACOs. If you would like to discuss the development of ACOs, specifics about the Shared Savings Program, or any other matter involved in healthcare reform, please contact one of the authors or another member of McGuireWoods’ Healthcare Department.

Thomas J. Stallings
804.775.1007
tstallings@mcguirewoods.com

R. Brent Rawlings
804.775.1126
rbrawlings@mcguirewoods.com

James B. Riley, Jr.
312.750.8665
jriley@mcguirewoods.com

Scott P. Downing
312.750.8910
sdowning@mcguirewoods.com

While ACOs are often touted as the solution to many of the ailments of the current model of healthcare delivery for Medicare, including the need for enhanced quality, improved outcomes, better coordination of care, and greater cost-savings, there are many misconceptions about the Shared Savings Program and a growing list of questions about what form ACOs will take under the law.

The Centers for Medicare and Medicaid Services (CMS), which will be responsible for implementing the Shared Savings Program under the authority of the Secretary, has issued scant guidance on any specifics aside from a brief Preliminary Questions & Answers document posted on its website (the Q&A).

A number of unknowns exist at this time. This article tackles some of the common misconceptions about ACOs and the Shared Savings Program. In a second installment, we will address a number of unanswered questions about ACOs and the Shared Savings Program.

1. ACOs do not necessarily have to involve a hospital. ACOs are defined by the Medicare Payment Advisory Commission as a set of physicians and hospitals that accept joint responsibility for the quality of care and the cost of care received by the ACO’s patients. Many confuse the concept of ACOs with the concept of payment bundling models involving hospital and physician services and hospital and physician integration efforts. While existing and developing ACOs often involve the integration of hospitals and physicians through contractual arrangements or employment of physicians, the Act and the Q&A make clear that, for purposes of the Shared Savings Program, group practices, physician networks, and networks of group practices can all be ACOs without including a hospital.There is not much detail available at this time about specific participation requirements for ACOs that want to participate in the Shared Savings Program, but the Act does specify some minimum requirements, including: having a formal legal structure that allows the ACO to receive and distribute payments for shared savings; having a leadership and management structure that includes clinical and administrative systems; and having a defined process to promote evidence-based medicine, report on quality and cost measures, and coordinate care. The Act also specifies that, in order to participate in the Shared Savings Program, an ACO will be required to enter into an agreement with the Secretary to participate for no less than a three year period. In addition, the ACO must be of a size sufficient to provide the bulk of primary care services to a minimum of 5,000 beneficiaries. As the rulemaking process with CMS proceeds, we will have more information about the particular characteristics that a given organization must have to participate in the Shared Savings Program.
2. An ACO is not a “provider network.” Beneficiaries assigned to an ACO are able to seek services from any Medicare provider and are not obligated to receive items and services from the ACO to which they are assigned. ACOs should expect that many of the beneficiaries assigned to them will seek services from providers not involved in the ACO, which will require effective means of coordinating care with non-ACO providers and suppliers.
3. Participation in the Shared Savings Program is not mandatory. Physicians, hospitals, and other suppliers and providers that are not part of an ACO will still be permitted to participate in Medicare and receive the same fee-for-service payments as providers and suppliers that are part of an ACO. Also, physicians, hospitals, and other suppliers and providers can develop an ACO, but not participate in the Shared Savings Program. However, it is expected that many private payors will be encouraging the development of ACOs through a variety of different payment incentives and there is a growing body of literature to support the quality improvement, coordination of care, and cost-savings benefits of ACOs, so there may be other compelling reasons for physicians, hospitals, and other suppliers and providers to develop ACOs. It should be noted that, as amended by Section 10307 of the law, the Act allows CMS to give preference to ACOs that are participating in similar models with other payers, such as Medicaid and private payors.
4. ACOs are not paid capitation under the Shared Savings Program (at least not yet). CMS has stated that ACO providers and suppliers will continue to receive traditional fee-for-service payments under Medicare Parts A and B. However, as amended by Section 10307 of the law, the Act allows CMS to employ alternative payment models, including partial capitation placing an ACO at financial risk for some, but not all, of Medicare Parts A and B items and services, such as some or all physicians’ services or all items covered under Part B. It is likely that, for the foreseeable future at least, CMS would limit a partial capitation model to ACOs that are highly integrated and capable of bearing risk.
5. Neither ACOs nor providers or suppliers that are not ACOs will have their Medicare payments reduced as a result of the Shared Savings Program. Both ACOs and non-ACO providers and suppliers will continue to receive traditional fee-for-service payments under Medicare Parts A and B. A non-ACO provider or supplier will not receive lower fee-for-service payments as a result of not being part of an ACO and not participating in the Shared Savings Program. Similarly, providers and suppliers in an ACO that does not meet the quality performance standards and cost-savings targets will not receive lower fee-for-service payments as a result. It appears as though, for the time being at least, there will be no down-side risk for any provider or supplier, only the up-side risk of receiving shared savings. The exception would be where ACOs agree to participate in the Shared Savings Program on a partial capitation basis as discussed above.

In our next installment we will address some of the unanswered questions about ACOs and the Shared Savings Program.

If you would like to discuss the development of ACOs, specifics about the Shared Savings Program, or any other matter involved in healthcare reform, please contact one of the authors or another member of McGuireWoods Healthcare Department.

Thomas J. Stallings
804.775.1007
tstallings@mcguirewoods.com

R. Brent Rawlings
804.775.1126
rbrawlings@mcguirewoods.com

In California, Kindred plans to acquire five leased LTACHs from Rancho Cucamonga, California-based Vista HealthCare. Vista operates four freestanding hospitals and one hospital-in-hospital. The 250 total beds generate annualized revenues of $150 million and EBITDA-adjusted earnings  of $27 million.  The valuation for these LTACHs of 6.6x EBITDA is similar to the valuation for RehabCare’s acquisition of Triumph in November 2009.

In Texas, Kindred will acquire three nursing and rehabilitation centers in the Dallas-Fort Worth area from an unidentified company. With a total of 405 beds, the three centers generate annualized revenues of $24 million and EBITDA-adjusted earnings of $3 million. Kindred plans to convert two of the three new centers into short-term transitional care centers, as well as adding a transitional care unit to the third nursing center. Kindred already operates six LTACHs, and is developing a co-located hospital-based subacute unit, in Dallas-Fort Worth.  Paul Diaz, Kindred’s President and CEO, said the purchases further the company’s strategy of offering a continuum of long-term care services, including nursing care, rehabilitation, transitional care and hospitals, in key markets.

Kindred anticipates incurring first-year transition costs of $6 million to $8 million for the two acquisitions. Excluding these costs, the company expects the acquisitions to be slightly accretive to earnings in 2010 and to add earnings of $0.17 to $0.22 per diluted share post-integration. That estimate factors in the expected added cost of refinancing Kindred’s debt, including the funds it will borrow to buy the new facilities.

As of December 31, 2009, Kindred operated 10 hospitals (823 licensed beds) in California and 11 hospitals (822 beds) in Texas. The company had 21 nursing facilities (2,437 beds) in California but none in Texas. Nationally, Kindred had 83 LTAC hospitals (6,580 beds) and 222 nursing facilities (27,523 beds).

Jason S. Greis
McGuireWoods LLP
312.849.8217