New Marketplace

Are Fraud and Abuse Laws Stifling Value-Based Care?

Article · September 12, 2018

In early March 2018, the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School hosted a full-day exploration of the question Will Value-Based Care Save the Health Care System? The speakers included academics from law schools, medical schools, and business schools; chief medical officers of insurers and provider systems; and general counsels of medical device companies. Despite the diversity of perspectives, the answer to the event’s guiding question was consistent among virtually all panelists: “Yes, but not yet.”

This consistent answer leads to the logical follow-up question of, “Why not yet?” Value-based care can no longer claim the excuse of youth. In 2006, Michael E. Porter and Elizabeth O. Teisberg published Redefining Health Care, arguably bringing the concept of the value agenda into mainstream health care debates. The Affordable Care Act tried to knit value-based care into the framework of the American health care system through a variety of vehicles, including the Medicare Shared Savings Program, the promotion of medical homes, and the implementation of new payment structures. Virtually all health care stakeholders use the language of value-based care as they tout new initiatives and programs.

And yet, even with years of interest and enthusiasm under its belt, value-based care has yet to save our health care system. One challenge that has prevented value-based care from meeting its full potential is the American regulatory system, which has designed its fraud and abuse laws to penalize overutilization, a pervasive worry under fee-for-service payment structures. The focus on overutilization, in the age of value-based care, is outdated and only serves to impede the adoption of — and innovation within — value-based care.

A Quick Primer on Fraud and Abuse Laws

The Anti-Kickback Statute (AKS) and the Stark law are two such fraud and abuse regulatory regimens well known to health care entities seeking to provide value-based care. The AKS prohibits the exchange of (or offer to exchange) anything of value in order to induce or reward the referral of federal health care program business. For example, one hospital ran afoul of the AKS when it awarded local cardiologists the opportunity to work in its Heart Station (its center in which patients received non-invasive cardiac-related procedures) according to the volume of their referrals to the hospital. Another hospital violated the AKS by providing after-hours phone-answering and waste-removal services to independent physicians at below-market rates in order to induce referrals to the hospital.

The Stark law prohibits a physician from making referrals to an entity with which the physician (or a member of his or her immediate family) has a financial relationship. The classic example is that of a physician who refers a patient to a lab owned by his or her spouse for follow-up testing. A more immediately applicable example is that of a physician who has an ownership interest in an accountable care organization. If the physician were to refer a patient to another part of the organization, perhaps for an MRI screening, that referral may violate the Stark law because of his or her ownership interest.

Both the AKS and the Stark law predate the current trend for value-based care, and both now inadvertently restrict the growth of value-based care. The Stark law, for example, is one of strict liability with narrow exceptions, meaning that even the most technical of violations can result in liability for providers unless an arrangement can firmly fit into one of the exceptions. These exemptions, which are often articulated in regulations, are also known as safe harbors. In cases in which an exception requires an application or submission, they are often referred to as waivers.

The assumption in both the AKS and the Stark law that fee-for-service is the default system creates a scenario in which any innovative delivery and financing structures must find an explicitly articulated exception to these laws to escape liability, even when there is little worry of overutilization. This requirement can have a chilling effect on innovative health care financing and delivery models because these exceptions can be very narrow and difficult to comply with. Because innovation is stifled when entities must focus on complying with the requirements of articulated exceptions, we should modernize the governing regulatory statutes to reflect the idea that value-based care, not fee-for-service, should be the default.

A Limited Toolbox for Addressing the Impact of Fraud and Abuse Laws on Value-Based Care

A few mechanisms are available for government agencies seeking to create exemptions from fraud and abuse laws for value-based care initiatives, but they are limited in scope. The Department of Health and Human Services has attempted to mitigate the impact of fraud and abuse laws on value-based care by issuing waivers for entities participating in certain programs. Waivers are granted when the Secretary of Health and Human Services announces that certain requirements, such as AKS or Stark requirements, are not applicable for programs that meet certain criteria. For example, regulators began to offer waivers from fraud and abuse laws to accountable care organizations that were formed under the Medicare Shared Savings Program.

In addition, the Office of the Inspector General of the U.S. Department of Health and Human Services is authorized to issue advisory opinions on how entities can deliver health care goods and services without running afoul of fraud or abuse laws in response to specific questions submitted to the Office. In January 2018, for example, the Office reviewed an arrangement in which neurosurgeons agreed to implement cost-reduction measures during certain surgical procedures performed at a particular medical center in exchange for receiving a percentage of the cost savings resulting from these policies. After evaluating the specific arrangement proposed, the Office concluded that it would not impose fraud and abuse sanctions for the participants in this specific proposal.

However, these advisory opinions are usually grounded in the specifics of the questions posed to the Inspector General and cannot be relied upon by third parties. As noted on the website of the Office of the Inspector General, “[a] party that receives a favorable advisory opinion is protected from . . . administrative sanctions, so long as the arrangement at issue is conducted in accordance with the facts submitted to the [Office of the Inspector General]. However, no person or entity can rely on an advisory opinion issued to someone else.” For example, if another medical center were to try to replicate the exact arrangement proposed in the January 2018 advisory opinion mentioned above, the Office of the Inspector General could still potentially impose fraud and abuse sanctions on the other medical center because the advisory opinion only applies to the medical center that had originally sought the opinion. There is no general exception to the fraud and abuse laws for health care entities seeking to pursue value-based care.

The problem with trying to mitigate the chilling effect that fraud and abuse laws have on value-based care through waivers and advisory opinions is that these limited exemptions will inevitably place problematic boundaries on the types of value-based care arrangements that are possible, thereby limiting innovation.

For example, without a specific exemption, the AKS would likely prevent a hospital from offering financial incentives to physicians who complied with the hospital’s appropriate, evidence-based clinical protocols, which would limit the hospital’s ability to encourage physicians to improve clinical outcomes. This arrangement would be suspect under the AKS because these incentives would likely influence a physician’s treatment decisions. Unfortunately, the hospital would not have the option to argue that the proposed financial incentives do not constitute a violation because they were designed to positively influence provider decisions and result in improved patient care. As a result, medical providers would have to incur substantial legal fees to structure the incentive program to fit within one of the narrow waivers articulated by the Department of Health and Human Services.

Moreover, there is always a chance that the waiver pursued by the hospital in question would be undermined or undone by the next Administration. The hospital also could pursue an advisory opinion, but this process also can be costly and, if the program were to be significantly revised, the hospital would likely have to seek a new opinion. The legal burden of finding protection from fraud and abuse liability thus may discourage hospitals and providers from implementing innovative care programs.

The Need to Untangle Value-Based Care from Fraud and Abuse Liability

While health care delivery and financing should not be a free-for-all, designing the exemptions to explicitly conform to specific regulatory programs does not best serve the system. Even when a medical provider decides that a value-based care program is worth the legal headaches, the limited exceptions may unduly influence the shape that the arrangement will take. An illustrative example is that of the above-mentioned Medicare Shared Savings Program, which was intended by the drafters of the Affordable Care Act to promote the implementation of value-based care through accountable care organizations. The relevant regulatory agencies then issued a rule waiving the application of the Stark Law, the AKS, and the beneficiary inducement civil monetary penalties law, to these new entities.

These waivers are very helpful to entities that want to form an accountable care organization that complies with the program’s requirements. But for entities that might be interested in further pushing the envelope, these waivers will not provide a sufficient safe harbor. For example, one of the requirements that must be met for an accountable care organization to be eligible for a waiver is that the organization not include any distributors, durable medical equipment suppliers, home health suppliers, pharmaceutical manufacturers, or device manufacturers.

However, we know that value-based care has a role in delivering pharmaceuticals and devices to patients, as demonstrated by the rise of value-based care contracts between companies such as Novartis, Cigna, and Aetna for heart-failure medication, Merck and Aetna for diabetes medications, and Novartis, Eli Lilly, and Harvard Pilgrim, also for diabetes medications. Because fraud and abuse exceptions are tailored to specific regulatory programs, we may be losing the ability to come up with creative new structures to deliver value-based care.

Instead of using waivers, advisory opinions, and exceptions to insulate value-based care from misapplied fraud and abuse laws, we should encourage a regulatory system that embodies two central tenets: (1) that all health services, if possible, should be delivered through value-based care, and (2) that value-based care, by its nature, disincentivizes the types of fraud and abuse that our traditional statutes were intended to address. As the Senate Committee on Finance majority staff noted in a report on the impact of the Stark law on value-based care, “[t]he risk of overutilization, which drove the passage of the Stark law, is largely or entirely eliminated in the alternative payment models. When physicians earn profit margins not by the volume of services but by the efficiency of services and treatment outcomes, their economic self-interest aligns with the interest to eliminate unnecessary services.”

Value-based care, by its nature, is designed to address the same problem that our current fraud and abuse laws target, making these statues redundant at best and stifling at worst. Therefore, allowing value-based care to be broadly exempt from those statutes runs a much lower risk of fraud and abuse than allowing more traditional fee-for-service delivery structures to be exempt.

The Centers for Medicare and Medicaid Services recently acknowledged the tension between our current fraud and abuse laws and the increased focus on value-based care. On June 20, 2018, the agency issued a public request for information, inviting public comments on the impact that the Stark law has on care coordination. Requests for information generally indicate that an agency is considering redesigning regulations and would like feedback before it begins to make revisions. Comments can be submitted online and were due on August 24, 2018.

Physicians, hospital groups, and other medical providers should consider submitting comments articulating the challenges that they have faced in complying with fraud and abuse laws while embracing value-based care and should urge the agency to also consider the impact of AKS on value-based care. This is an opportunity to push the Administration to prioritize this issue and to rethink the reach of current fraud and abuse laws.

Updating Our Underlying Assumptions to Encourage Innovation

To realize the true potential of value-based care, we must update the underlying assumptions in our fraud and abuse regulatory system. Broadly applying fraud and abuse regulations to all delivery models and only carving out limited exceptions makes no sense when we are trying to encourage innovative health care delivery structures. We should consider adopting the rule that so long as a health care delivery and finance structure is value-based care and not fee-for-service, it should be exempt from fraud and abuse laws, such as the Stark Law, that seek to penalize overutilization.

Call for submissions:

Now inviting expert articles, longform articles, and case studies for peer review


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace
Value-Based Pricing Would Lower Drug Costs and Boost Quality

New Marketplace Buzz Survey: Who’s to Blame for Drug Pricing, and How to Fix It

This survey of NEJM Catalyst Insights Council members shows strong opinions about the impact of high prices, who’s to blame, and how to fix the problem.

A Look at the Four Pillars of Primary Care

Pay for Relationship: A Novel Solution to the Primary Care Crisis

What society should and can pay for is care that enables relationships between patients and providers.

Examples of Stages of AI Technology Development and Diffusion

How Artificial Intelligence Is Changing Health Care Delivery

The development of intelligent machines holds great promise for making health care delivery more accurate, efficient, and accessible, but challenges remain for incorporating AI technology into clinical and administrative settings.

Recommendations to Resolve Information Asymmetry at the Strategic Level

Information Asymmetry: The Untapped Value of the Patient

The knowledge and preferences that patients could — and should — share with clinicians would restore balance to point-of-care interactions, leading to better outcomes and enhanced value.

Key Components for Health Care Systems to Address Patient Affordability

The Next Frontier in Reducing Costs of Care: Patient Affordability

To create meaningful point-of-care guidance so that patients can make informed medical and financial decisions, health system leaders and policymakers can develop interventions to address four major components of a proposed patient affordability scale.

Direct-to-Consumer Telemedicine Is the Biggest Coming Threat to Traditional Health Care Organizations

Survey Snapshot: Mega-Mergers and Telemedicine Accelerate Convenient Care Growth

NEJM Catalyst Insights Council members detail how providers are looking to direct-to-consumer telemedicine and partnerships to meet the differing needs of their patient populations.

Opelka01_pullquote - ACS IPU team-based surgical care bundles playbook

Developing a Playbook for IPU-based Surgical Care and New Payment Models

The complexity associated with most surgery lends itself to the integrated practice unit structure, with its focus on the care team and value-based payment.

Convenient Care Has Been Good Overall for the Health Care Industry

New Marketplace Survey: Convenient Care — Opportunity, Threat, or Both?

A survey of the NEJM Catalyst Insights Council shows conflicting views about both the value of convenient care and what respondents’ organizations should do.

Payer-Provider Partnerships Produce Better Quality Outcomes 3 - community health plan - physician partnership

New Research Shows How Payer-Provider Partnerships Can Accelerate Adoption of Evidence-Based Care

Five best practices that are replicable and scalable are facilitating improved clinical and financial outcomes today.

30-Day Mortality Rates at Non-Teaching and Major Teaching Hospitals 2013-2014 - value-based care at academic medical centers

What Value-Based Payment Means for Academic Medical Centers

Academic medical centers must become as dedicated to advancing operational and clinical efficiency as they have been to advancing the science of medicine.


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »


Platforming Health Care to Transform Care…

Health care leaders need to focus less on ownership and control of the delivery process,…

New Marketplace Buzz Survey: Who’s to…

This survey of NEJM Catalyst Insights Council members shows strong opinions about the impact of…

Build vs. Buy: What Should Health…

The consolidation craze continues, but vertical integration has yet to demonstrate real progress toward the…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now