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    Joe Aguilar
    Joe Aguilar, MBA, MPH, MSN, CVA

    On Jan. 19, 2021, the new value-based exceptions and safe harbors under the Physician Self-Referral “Stark” law and Anti-Kickback Statute (AKS) took effect as part of the Centers for Medicare & Medicaid Services’ (CMS) “regulatory sprint to coordinated care.”1,2 The new rules provide unprecedented flexibility for providers to enter specific value-based arrangements with other healthcare entities and serve as further incentive to shift from fee-for-service payment toward quality and cost accountability. Understanding new value-based terminology and the framework for such arrangements is critical for physician organizations committed to change as well as compliance. 

    Considering most current arrangements, there is still a significant way to go in terms of the shift toward value-based care and compensation. A recent review published in the Journal of the American Medical Association (JAMA) Health Forum found, based on physician compensation arrangements across 31 physician organizations between November 2017 and July 2019, that quality and cost performance incentives represented only 8.3% of total primary care provider (PCP) compensation and 4.5% of total specialist compensation at the median.3 

    In contrast, volume-based incentives were common: 83.9% of the participating organizations stated that it was a component of PCP compensation, and 93.3% reported it was a component of specialist compensation. Physician organizations reported overwhelmingly (70% of those interviewed) that increasing volume was the top action that would result in increased physician compensation.4 In today’s environment, quality and cost-control performance still represent a small portion of physician compensation. 

    However, payers and providers are signaling an increased interest in supporting the shift to value-based arrangements. Payers are creating larger incentives for providers to participate in value-based structures. In February, CMS announced a proposed 8% increase to provider payments in 2023 for those participating in Medicare Advantage (MA) plans, following a 4% increase in 2022.5 Increasing the payment by almost two times from the prior year reflects the growing emphasis on value. Commercial payers are also making investments in alternative payment models (APMs) that include bundled payment plans, shared savings plans, accountable care organizations (ACOs), and patient-centered medical homes (PCMH). Despite a decline in these models with the pandemic, Blue Cross Blue Shield and Humana are reinitiating their focus on value by creating more value-based plans, entering more value-based contracts with providers and establishing new managed Medicaid products.6  

    Continued investment in these changes to payment structure is expected to accelerate with the new rules.

    New terminology and guidance for value-based arrangements

    The ability for transactions to qualify under the new exceptions and safe harbors relies on the understanding and correct application of new value-based terminology. Given the variations in value-based transactions, these terms provide a means to evaluate each from a common perspective. In addition, attempts by CMS and the Office of Inspector General (OIG) were made to align the definitions and other guidance within the exceptions and safe harbors, despite the regulatory differences between Stark and AKS. Specifically, definitions were consistent amongst the following value-based terms: value-based enterprise (VBE), VBE participant, value-based purpose, value-based activity, value-based arrangement and target population.7,8 As physician practices begin to structure these arrangements, it is critical that value-based terminology be understood to ensure ongoing compliance amid change.

    New value-based terminology

    The new value-based terminology represents the key to unlocking the use of the new exceptions and safe harbors. The following terminology is similar across the Stark law and AKS rules; however, there are some slight differences. The definitions below are taken from the Stark law 42 C.F.R. § 411.351.

    • Value-based enterprise. Two or more VBE participants:
    1. Collaborating to achieve at least one value-based purpose;
    2. Each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise;
    3. That have an accountable body or person responsible for the financial and operational oversight of the value-based enterprise; and
    4. That have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s).9
    • Value-based arrangement. An arrangement for the provision of at least one value-based activity for a target patient population to which the only parties are:
    1. The value-based enterprise and one or more of its VBE participants; or
    2. VBE participants in the same value-based enterprise.10
    • Value-based purpose. Any one of the following:
    1. Coordinating and managing the care of a target patient population;
    2. Improving the quality of care for a target patient population;
    3. Appropriately reducing the costs to or growth in expenditures of payers without reducing the quality of care for a target patient population; or
    4. Transitioning from healthcare 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.
    • Value-based activity. Any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise:
    1. The provision of an item or service;
    2. The taking of an action; or
    3. The refraining from taking an action.
    • Target population. An identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that:
    1. Are set out in writing in advance of the commencement of the value-based arrangement; and
    2. Further the value-based enterprise’s value-based purpose(s).11

    Figure 1 visualizes how each term relates to the others. Value-based enterprises enter arrangements to provide a value-based activity with a value-based purpose to serve a specific target population.

    Once the arrangement qualifies as one that “facilitates value-based healthcare delivery and payment,”12 physician practices need to determine which exception and safe harbor applies to their specific arrangement. This requires judgment based on knowledge of the newly updated laws. 

    Framework for value-based Stark Law exceptions/AKS safe harbors

    There are three new exceptions under Stark and three new corresponding safe harbors under AKS that vary in terms of flexibility based on the type of remuneration exchange, the degree of financial risk carried by the parties, as well as other criteria.13 Given the fact that these exceptions and safe harbors often operate in conjunction with each, there are noted similarities in the rules. However, important structural and enforcement differences exist that must be contemplated. Notably, since AKS is a criminal intent-based statute, the OIG rules are more restrictive than those put forth by CMS. 

    The rules serve as a framework for evaluating “arrangements that facilitate value-based healthcare delivery and payment.”14 This framework establishes a compliance checklist based on the new value-based terminology defined above and characterizes the arrangement based on level of financial risk. Table 1 outlines the exceptions and safe harbors.

    In addition to financial risk, each level has specific requirements for a variety of conditions that include timing of risk, type of remuneration, record maintenance and more. All arrangements require CR to satisfy the exception and safe harbor.

    Considerations for FMV and commercial reasonableness (CR)

    The Stark law exceptions and the AKS safe harbors are clear in that value-based arrangements must be commercially reasonable; however, they do not need to be consistent with FMV. The premise is that arrangements that are structured to share financial risk are more likely to be within FMV.
    So, does that mean that FMV is no longer needed?
    It depends, and this question should be answered on a case-by-case basis. Most arrangements for the foreseeable future will only have a component of the compensation arrangement that is value-based and may not fully qualify for an exception or safe harbor. As a result, FMV will still be a requirement to satisfy the regulatory compliance on the overall terms of physician compensation. Below are some key considerations to keep in mind as each transaction is evaluated for FMV and CR compliance:

    • Value-based arrangements vary in scope, structure and measured performance. The scope, structure and metrics used in each value-based arrangement vary widely from payer to payer. The new rules allow for greater flexibility, but the arrangements need to meet the specific criteria based on the value-based terminology and level of financial risk. Given this fact, documentation is a critical step toward ensuring that all criteria are met in the context of the new rules. Looking at each unique arrangement and documenting the value-based activity, purpose and target population will help inform the process of ensuring FMV and CR.
    • Total physician compensation reported to national surveys. Physician compensation is reported to national surveys (e.g., MGMA). MGMA and other national surveys request total physician compensation from practice survey participants. Not only does this data reflect production-based compensation, research income, sign-on bonuses and ER call compensation, it also includes value-based compensation. As such, this data can help serve as guardrails when benchmarking and evaluating total physician compensation, inclusive of value-based compensation. Nonetheless, there is an argument that if the physician practice achieves value-based targets that exceed the norms, increased compensation may be warranted above certain survey metrics. This would be an area to seek expertise from an outside legal and/or valuation firm.  
    • Performance targets should be set to differentiate providers/achievement. Newly established performance targets need to be measurable, require a high level of physician involvement, and should be tied to achieving specific metrics. The metric may vary based on that which is being measured:
    1. Process-based: measures time and efficiencies (e.g., ST elevated myocardial infarction care door-to balloon time)
    2. Outcomes-based: measures specific clinical targets (e.g., readmission rates or chronic care management)
    3. Structural-based: measures infrastructure necessary to provide quality care (e.g., provider and non-provider staffing ratios as well as the effective use of technology to track outcomes and/or ensure patient safety)
    4. Patient-based: measures patient responses to satisfaction questionnaires (e.g., Press Ganey scores)

    Targets should be at a level that denotes significant achievement, whether benchmarked against survey data (e.g., greater than 90th or 95th percentile) or historical performance (e.g., greater than 20% to 30% improvement). The value-based compensation should be set at a level commensurate with meaningful targets.

    • Commercial reasonableness. To comply with the new value-based exceptions and safe harbors, all arrangements must be deemed CR. The basic premise is to answer the question of whether the transaction makes business sense for the parties. A thorough CR review requires both quantitative and qualitative analyses. While CMS has now made it clear the CR is not merely a review of the profitability of a transaction, a quantitative analysis of the financial terms along with a feasibility analysis incorporating the net present value and/or internal rate of return can still be helpful. From a qualitative perspective, the transaction should also be tested through questions such as:
    1. Is the transaction necessary for the organization to accomplish its mission?
    2. Does the transaction address a community need or fulfill a regulatory obligation?
    3. What alternatives to the transaction exist, if any, to accomplish the same goal?
    4. Are the parties qualified to perform the services under the transaction?
    5. Is the transaction consistent with industry norms for the parties to the arrangement?

    Note that CMS has decoupled FMV from CR. A transaction that has been deemed within FMV does not automatically satisfy the question of whether it is commercially reasonable.

    Future of value-based arrangements

    Value-based arrangements will continue growing in physician practices. It is important to have knowledge of the underlying framework for such transactions, especially for determining financial feasibility and ensuring regulatory compliance. While it is common to think of physician arrangements in terms of clinical compensation and/or joint ventures, a shift toward value-based arrangements could impact other physician-hospital arrangements such as ER call coverage, medical directorships and other purchased services. The shift could result in compensation moving away from hourly or per diem rates toward compensation based on process, clinical outcomes and/or patient satisfaction metrics. Knowledge and understanding of new exceptions and safe harbors will be critical for physician practices if they are to serve as key stakeholders and influence the process.


    1. CMS. “Medicare Program; Request for Information Regarding the Physician Self-Referral Law.” 83 Fed. Reg. 29,524. June 25, 2018. Available from:
    2. HHS OIG. “Medicare and State Health Care Programs: Fraud and Abuse; Request for Information Regarding the Anti-Kickback Statute and Beneficiary Inducements CMP.” 83 Fed. Reg. 43,607. Aug. 27, 2018. Available from:
    3. Reid RO, Tom AK, Ross RM, Duffy EL, Damberg CL. “Physician Compensation Arrangements and Financial Performance Incentives in US Health Systems.” JAMA Health Forum. 2022; 3(1):e214634. doi:10.1001/jamahealthforum.2021.4634.
    4. Ibid.
    5. Goldman M. “Medicare Advantage plans could see nearly 8% increase in revenue.” Modern Healthcare. Feb. 2, 2022. Available from:
    6. Waddill K. “4 Payers That Have Embraced Value-Based Care Models in 2021.” Health Payer Intelligence. June 10, 2021. Available from:
    7. 42 C.F.R. § 411.351.
    8. 42 C.F.R. § 1001.952(ee)(14).
    9. 42 C.F.R. § 411.351.
    10. Ibid.
    11. Ibid.
    12. 42 C.F.R. § 411.351 (aa).
    13. The author recognizes that the new rules contain other value-related exceptions and safe harbors; however, given the scope of this piece, I’ve focused on the value-based arrangements only.
    14. 42 C.F.R. §411.357(aa).
    15. 42 C.F.R. §411.357(aa)(3).
    16. 42 C.F.R. §411.357(aa)(2).
    17. 42 C.F.R. §411.357(aa)(1).
    18. 42 C.F.R. § 1001.952(ee).
    19. 42 C.F.R. § 1001.952(ff).
    20. 42 C.F.R. § 1001.952(gg).
    Joe Aguilar

    Written By

    Joe Aguilar, MBA, MPH, MSN, CVA

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