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AMERICAN HEALTH LAWYERS ASSOCIATION

Physicians and Physician Organizations Law Institute Hospitals and Health Systems Law Institute

Phoenix, Arizona February 12, 2013 Clinically Integrated Networks: The PHOs of the Twenty-First Century?

Peter A. Pavarini Squire Sanders (US) LLP

Michael F. Schaff Wilentz, Goldman & Spitzer

I. New Realities: Physician Employment vs. Independent Practice

A. Despite a dramatic increase in the number of physicians seeking

employment by hospitals and health systems1, independent medical practice shows no signs of disappearing anytime soon.

1. While newly minted doctors tend to express a preference for employment, more seasoned doctors and those in certain specialties remain highly independent.

2. The reasons for preferring independence over employment are varied, but hospitals and health systems which ignore this

component of their medical staffs will find it much more difficult to deal with the new realities of the marketplace, especially as fee-for-service medicine is gradually replaced by different forms of third party payment.

3. Offering employment to members of a hospital’s medical staff can be a polarizing, not a unifying expression of alignment. By having an alternative strategy which addresses the needs and concerns of independents, a hospital may be able to diffuse the tension created by employing some but not all doctors in the community.

B. The “mixed” medical staff 2requires health lawyers and other health professionals to take a second look at a business model many thought had

1

“When the Doctor Has a Boss”, Wall Street Journal, November 8, 2010.

2

“Engaging the Mixed Medical Staff: Six Strategies to Align with Independent Physicians in Value Creation”, Health Care Advisory Board, March 2010.

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been rejected in the 1990s: the Physician-Hospital Organization or the “PHO”.3

1. PHOs had their start in the 1980s and were primarily a response to the growth and market power of managed care organizations, especially HMOs.

2. By the 1990s, as many as 20% of all hospitals had functioning PHOs, and many more were planned before hospitals discovered they rarely had the infrastructure to manage the risk they assumed from MCOs under capitation and other forms of risk-sharing contracts. In particular, health information technology had not yet advanced to the state where it could be reliably used to control utilization in an appropriate way or to measure the clinical results achieved.

3. The problem with PHOs became more acute when some of them ventured into non-risk contracts (essentially discounted fee-for-service arrangements) that drew the attention of the antitrust enforcement agencies. Unless PHOs (and other networks of that day like independent practice associations or IPAs) were

financially integrated through the sharing of meaningful risk, the fact that they engaged in joint contracting on behalf of competing providers raised serious issues under federal and state antitrust laws.

4. As a consequence of these and other regulatory pressures (discussed below), the hey day of the PHO was relatively brief, and those few PHOs that remained in existence after 2000 did so by either sponsoring their own health plans or by taking on new lines of business, such as quality assurance and credentialing. C. Independent medical practitioners seek some of the same benefits that are

attractive to employed physicians: 1. Higher reimbursement

2. More efficient claims administration 3. Better technology, especially HIT

4. Ability to deliver better care and get paid for it

D. Independent medical practitioners face major hurdles in getting prepared for accountable care and health system integration4:

1. Most independent physicians still practice in small groups or in solo practices. Even though the trend favors larger medical group size, the reality in many communities is otherwise. Small groups

3

Barry S. Bader, “Clinically Integrated Physician-Hospital Organizations”, Great Boards, Vol. IX, No. 4 (2009).

4

Mark Shields, MD et al., “A Model for Integrating Independent Physicians Into Accountable Care Organizations”, 30 Health Affairs 161 (2011).

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generally lack the capital or depth of management to make the changes required by health reform.

2. Fee-for-service medicine, so long as it remains the predominant form of reimbursement, is a disincentive to taking the steps required to improve the quality and cost-effectiveness of most practices.

3. Existing hospital medical staff structures make it hard to provide physicians with incentives to improve performance or to discipline them for ineffective or poor care.

4. Most recent attention has been given to the government payers who are reforming how they intend to pay for care, but the commercial market is also changing, but not necessarily the same way. Practitioners who depend upon payment from both private and governmental sources don’t know which direction they should go.

E. Similarly, hospitals face a quandary. They are willing to employ those doctors who want to be employed but they also want to align with independent physicians who may be some of the best doctors on their medical staffs. Without such alignment, hospitals are at risk of:

1. Not getting the cooperation of these physicians in controlling hospital costs and improving quality of care

2. Not being attractive to third party payers who wish to enter pay for performance and other alternative forms of compensation (e.g., bundled payments, global payments, shared savings, and penalties for readmission)

3. Losing the loyalty of these physicians to competitors

F. As the post-Affordable Care Act (ACA) landscape takes shape, having a physician alignment strategy that embraces both employed and independent physicians will be an imperative for hospitals and health systems, regardless of geography or the scope of services they offer.

II. What Are Clinically Integrated Networks and How Are They Different From PHOs, ACOs and other Acronyms?

A. Clinically integrated Networks (“CINs”) are arrangements (typically separate legal organizations) usually sponsored by hospitals but led by physicians who are seeking to assemble the resources needed to effectively manage care for defined patient populations. Like PHOs, CINs are

membership organizations (i.e., physicians need to satisfy various criteria in order to join), but unlike PHOs, they desire to be under-inclusive, rather than over-inclusive. Ideally, CINs should be seen as a hospital or health system’s “A Team”, not the alter ego of its medical staff.

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B. CINs can evolve into ACOs, but that is not necessarily their raison d’etre. On the other hand, with the exception of some highly integrated systems like Kaiser Permanente, Cleveland Clinic, Geisinger Healthcare, etc., CINs are in the best position to serve as the core of ACO development, as such entities are currently envisioned.5

C. The ultimate business purpose of a CIN is to allow providers who are not otherwise economically aligned to engage in joint contracting6 with third party payers. Before we explain how this can be legally achieved, it is important to identify the predominant characteristics of a CIN:

1. All physician members are required to participate in every contract the network enters into;

2. All physicians in the network agree to a common set of measures to monitor improvement of the quality, safety and

cost-effectiveness of the care they deliver;

3. All third party contracts in some way provide incentive funds to reward those providers who attain these quality, safety and effectiveness goals;

4. The network has the infrastructure (e.g., governance, information systems, training) to support the attainment of the CINs goals; 5. The network is in a position to earn greater market recognition than if its members dealt individually with third party payers. D. What benefits can patients and payers realistically expect to receive from

CINs?

1. Existing examples of CINs (discussed below) have demonstrated the ability to deliver progressively improved quality outcomes through:

 Incentive payments for positive results

 Collaborative education programs for physicians and staff  Standardized practices and protocols

 Specific disease clinics that support practitioners  On-line education for physicians and staff

 Disease registries that track outcomes and recall patients for additional services

2. CINs have shown how physicians in a network can progressively make greater use of HIT to:

5

Lee B. Sacks, MD & Rick Wesslund, “FAQs: Clinical Integration and Accountable Care Organizations

(ACOs): What Physician Leadership, CEOs and Trustees Need to Know Before They Get Started” at ci-now.com.

6

Mark Shields, MD, ”From Clinical Integration to Accountable Care”, Annals of Health Law, Vol. 20, p. 154 (2011).

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 Access test results and hospital discharge information  Track patients with chronic disease

 Fill prescriptions with prompts that identify opportunities for generic substitution

 Generate report cards on physician performance

3. CINs have also shown how electronic data interchange (EDI) can be used to submit bills to managed care organizations and

accelerate payment for services rendered by the network’s providers.

E. Who else can expect to benefit from a CIN’s programs and services? 1. Primary care physicians who are often overlooked in some

hospitals’ physician integration strategies can have an elevated position in the CIN. The governance structure of a CIN (discussed below) must give adequate voice to the PCP in order for the

network to achieve optimal results. Patient centered medical homes should be seen as critical elements of the CIN’s

infrastructure. Some networks have also enhanced accessibility to care through electronic visits, groups visits, and the use of

advanced practice nurses.

2. Hospitals, rather than act as bystanders, can and should play a key role in the development of CINs, so long as they recognize that little will change unless physicians firmly believe they are empowered by this new organization. A CIN can help physicians focus on the hospital’s goals:

 Addressing community health needs  Improving inpatient safety and outcomes  Increasing use of hospitalists

 Reducing unnecessary costs

 Strengthening loyalty to the mission of the hospital

3. Post-acute care providers and others in the continuum of care are also potential beneficiaries of the CIN’s activities. Care managers can deflect patients from the hospital to more appropriate providers such as home health agencies. They can also assist with

medication reconciliation and scheduling of prompt office visits after discharge.

III. How Are Clinically Integrated Networks Organized and Governed? A. Choice of entity

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1. CIN’s should be separately organized entities (for the reasons addressed in Section V below); however, the choice of entity may take a variety of forms depending upon the jurisdiction and the specific business objectives of the participants.

2. CINs are essentially membership organizations (somewhat like hospital medical staffs). In the past, many provider networks were formed as taxable, not for profit corporations.

While this remains an option, the trend appears to favor forming a CIN as limited liability company (LLC), particularly when a tax-exempt hospital or health system is one of its participating providers.

3. LLCs provide the flexibility required to accommodate various classes of participants, certain tax advantages, and the potential for equity appreciation over time. In some jurisdictions, LLCs may be formed either for profit or not for profit.

4. Using a for-profit corporation may also be an option, but because CINs normally have numerous physician participants, Subchapter S status may not be available to such an entity. Needless to say, in the absence of other tax considerations, pass-through taxation at the level of the participating provider is normally the desired objective.

5. In and of themselves, CINs are unlikely to qualify for tax exempt status; however, there is an argument that, as part of a exempt health system, a CIN may serve a public purpose such as the promotion of population health and wellness.

B. Mutual dependency of physicians and hospitals

1. In most scenarios, physicians recognize their need for hospital partners as much as hospitals recognize their need for physician partners.

2. Physicians align with hospitals to get:

 Access to sophisticated facilities and medical technology  Access to capital that may be unavailable to medical

practitioners

 Professional administrative leaders  Support for clinical care redesign

 Access to health information technology  A structure for shared decision making  Common interface with multiple health plans

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3. Hospitals align with physicians to get:  A stable professional staff  Loyal and engaged physicians  High quality clinical supervision

 A means to encourage cost-effective practices

 A means to encourage health information technology adoption

 Medical leadership in the redesign of delivery systems  Strategic position for health care reform

C. Physician membership

1. The hallmark of most successful CINs is how selective they are in building their physician membership. As opposed to the over-inclusive networks of the 1990s, the CINs of today are more concerned about the quality of their membership, rather than their size.

2. A willingness to deliver healthcare services in conformance with an agreed set of performance standards is probably the most important criterion for CIN membership. Other criteria may include:

 Compliance with defined credentialing standards

 Agreement to share clinical data with the CIN electronically using standard coding procedures, physician portals, etc.  Active participation in the CIN’s clinical improvement

activities

 Agreement to submit to the authority of the CIN within certain defined parameters

 Agreement to participate in managed care contracts,

including alternative forms of payment, that are negotiated by the CIN once it has been determined to be clinically

integrated

 Avoidance of conflicts of interest

3. Physician membership may also require the payment of certain participation fees, but unlike other ventures, a CIN typically does not expect a significant equity contribution to be made by

physicians.

4. Although some CINs differentiate between independent physicians and employed physicians (either through class of membership or different governance rights), this almost always impedes the development of a cohesive delivery network. Recognizing that a hospital’s employment of physicians can be a polarizing force, the

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CIN should embrace a diversity of physician membership in support of its clinical and business objectives.7

D. Role of the hospital or health system

1. Hospitals are usually but not always the sponsors of CIN

development. Some CINs have been promoted as physician-only models, seeking only to have arm’s length relationships with hospitals and other institutional providers.

2. In the more common scenario, however, CINs include both physician and hospital participants. A careful balancing of physician and hospital interests is often a key planning step in the development of these organizations.

3. Hospitals bring capital, information technology, and administrative support to the table, but they do so at a price that some physicians are unwilling to pay. No matter how the governance of the CIN is set up, hospitals (especially tax exempt hospitals) will expect to receive certain reserved powers that align the CIN’s interests with those of the community.

4. That being said, hospitals are beginning to understand that physicians need a high level of self-direction if the CIN is to succeed. Overbearing control by the hospital or health system diminishes physician interest in the model, no matter how lofty its objectives might be.

E. Boards, committees and officers

1. The governance structure of CINs is frequently complex. It is not unusual to see multiple layers of decision making that act

concurrently to carry out the mission of the CIN.

2. The CIN’s board of directors (or its equivalent) normally reflects the “balance of power’ that gave rise to the organization.

Prototypical organizations like Advocate Physician Partners are proud to say that they are physician-led with a preponderance of physicians on their boards. In Advocate’s case, 13 of its 17 board members are physicians.8

7

Lee B. Sacks, MD, the president of Advocate Physician Partners, a successful CIN affiliated with the Advocate Health Care, describes his organization as a “bridge” between Advocate’s employed physicians and independent physicians, making it a good model to see whether these two groups of doctors can really collaborate with one another. Barry Bader, supra at p. 1.

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3. Even though physician-led organizations appear to be the most common form of CINs, class voting, super-majority voting and reserved powers are typically used to address the tax implications of an exempt hospital partnering with independent physicians (see Section V-C below).

4. CIN boards are primarily responsible for setting policy and making strategic decisions. Day to day operational issues are normally delegated to committees, councils and other kinds of work groups. 5. There is no standard set of committees in a CIN; however, the

more familiar committees address finance, utilization management, quality improvement, credentialing, and contracting. Many of these are chaired by physicians.

6. An independent physician’s service on a CIN board or committee may or may not be compensated. In the early stages of a CIN’s development, voluntary service is common; however, once a CIN is fully operational, physicians are in a position to demand

reasonable compensation for their administrative services to the organization.

7. Officer positions are typically shared between practicing

physicians, physician executives and lay administrators. In spirit of being physician-led, many CINs require the board chair and/or CEO to be physicians.

IV. What Tools Should the CIN Use to Achieve Improved Clinical and Financial Outcomes?

A. Comprehensive physician performance data sets

1. Electronic medical records (EMRs) are only one part of the data required to operate a CIN. In order to create a complete picture of a physician’s performance, the CIN also needs to draw from:

 Billing records  Scheduling records

 CMS core measures reports  Joint Commission OPPE reports

 Other repositories like co-management reports 2. What can be learned from these performance data sets?

 General performance (LOS, cost per case, patient volumes)  Hospital utilization (pharmacy, imaging, lab, supplies)  Quality outcomes (readmission rates, complication rates,

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 Hospital charges/costs

 Other performance standards (comparison with evidence-based medical protocols, CMS core measures, patient satisfaction scores)

B. Practice protocols, performance metrics and other standards

1. The key to raising system performance is encouraging physicians to adopt protocols, metrics and other standards that minimize the variation in care delivery.

2. This requires physicians to (i) have a better understanding of the clinical and economic forces that impact care they deliver, and (ii) be willing to collaborate with their peers to develop reasonable, achievable standards against which their performance is measured. 3. Protocol development must be placed in the hands of those

physician leaders who exemplify the “best practices” sought to be attained. Such physicians need to champion these standards and encourage others to follow them.

4. The organizational structure of the CIN must empower the developers of evidence-based protocols. This may include

investing in training doctors who are interested in such leadership positions, but are not yet ready to accept those duties.

C. Performance-based incentives

1. At present, outcome-based reimbursement remains uncommon in most markets; however, providers are beginning to acknowledge that they need to prepare for new forms of payment. Even in a fee-for-service environment, a CIN has the ability to incent best practices by using a variety of financial and non-financial incentives.

2. In the short run, the establishment of incentive funds may be the best way to overcome the deficiencies of fee-for-service

reimbursement. If such funds are not derived from the third party contracts, then they must come from another source. Typically, the “deep pocket” is a hospital with a keen interest in improving the performance of its programs. But physicians can also accumulate incentive funds by agreeing to withholds or other diversions of funds owed to them.

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 How much financial incentive is needed to change traditional practice patterns?

 What is the proper balance of group versus individual rewards?

 How frequently should the CIN measure the effectiveness of the incentive payment program?

 What is the process for reforming these incentives when they don’t work.

 How should regulatory issues be addressed? (see Section V below)

4. The CIN should also consider non-financial incentives for good performance, such as:

 Awards and other recognition for clinical excellence  Research opportunities

 Improved administrative and technical support D. Preparing for evolving methods of reimbursement

1. As noted above, the best reason for building a CIN is the ability to engage in joint contracting. However, until third party payers see the value in contracting with CINs, there may be very little

incentive for participating providers to change the way they deliver care.

2. Before bundled payments, shared savings, pay-for-performance and other alternative methods become available, some CINs have been attempting to create value for their members and payers alike by creating scaled-down or “narrow” networks9. As in the days of managed care, patients enjoy better insurance benefits if they use the providers in a narrow network (e.g., smaller co-payments. However, narrow networks need to be careful about avoiding the mistakes made by PPOs and IPAs in the past, many of whom were rejected by consumers because of their inability to serve those patients who had selected them.

3. CINs also need to be developing the skills required to perform under a shared savings or other alternative payment arrangement. These include:

 Patient attribution techniques

 Chronic disease management programs (e.g., dedicated disease clinics)

9

John Carroll, “Narrow Networks’ Broader Vision”, Managed Care Magazine Online, www.managedcaremag.com/achieves/0403.narrow_networks.html

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 Transitioning patients from inpatient to home based care (transition care managers)

 Value added staffing (e.g., patient-centric case managers)  Improved patient communications and access to health data

V. What Are the Major Regulatory Hurdles to CIN Development? A. Antitrust

1. General Statements

 Federal antitrust statutes govern competition between competitors, including their formation and operation of joint ventures and other collaborative arrangements.

 Independent, competing providers’ joint negotiation of fees through a CIN may raise antitrust concerns.

 Federal Trade Commission (“FTC”) has not identified specific criteria to provide a safe harbor for providers clinically integrating and engaging in joint contracting, but has provided some guidance through statements and advisory opinions.

2. Background on the Antitrust Laws

 Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.”10

 Two methods of analysis under Section 1 of the Sherman Act

o Per Se Rule: certain conduct, including agreements by horizontal competitors to fix prices and allocate markets, is deemed so egregious and lacking in redeeming value that it is per se illegal; and

o Rule of Reason: conduct is subject to a fact-intensive analysis that takes into account the reason for the restraint and its effects on competition, both pro-competitive and anticompetitive, resulting in a balancing of the pro-competitive benefits of the arrangement against its anticompetitive results.

 If a court identifies a particular restraint on trade, the arrangement will automatically be declared unlawful.

 Agreements to fix prices or divide up a market among competitors have been declared unlawful under the Per Se Rule.

 Section 2 of the Sherman Act prohibits monopolization, attempts to monopolize and conspiracies to monopolize.11

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 Section 7 of the Clayton Act prohibits acquisitions of stock or assets if their effect “may be substantially to lessen competition, or to tend to create a monopoly.”12

o This has been construed to apply to the formation of joint ventures between actual or potential competitors.

 Section 5 of the FTC Act prohibits unfair trade practices, including conduct prohibited under the Sherman Act.13

 The analysis under the Clayton Act and the FTC Act is substantially the same as the analysis under the Sherman Act.

3. Provider Network Statements, Analysis and Advisory Opinions

 1996 Joint United States Department of Justice and FTC Statements of Antitrust Enforcement Policy in Health Care – Statements 8 and 9 (the “Statements”)

o Clinical integration of physician or multi-provider networks could lead to significant enough efficiencies to obtain Rule of Reason treatment, despite the absence of sufficient financial risk sharing.14

o Risk-sharing networks and clinically integrated networks are automatically evaluated under the Rule of Reason.15

o Substantial financial risk sharing factors

 Capitated contracts between the network and health plans;

 Where the network creates significant financial incentives for its providers to meet cost containment goals;

 Where provider reimbursement is based on a percentage of health plan premiums or revenues;

 Where overall cost or utilization goals are established and subsequent financial rewards or penalties apply to those goals; and

 Where the network has global or all inclusive case rates. o Substantial clinical integration factors

 Establishing mechanisms to manage utilization and to control costs and ensure quality;

 Selectively choosing network participants who are likely to further efficiency objectives; and

11 15 U.S.C. § 2. 12 15 U.S.C. § 18. 13 15 U.S.C. § 45. 14

Statements 8 & 9, Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care, 1996 Revisions.

15

Statement 8, Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care, 1996 Revisions.

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 Investments in resources needed to realize the network’s efficiencies.16

 “Inherently Suspect Analysis”

o Whether there is a “close family resemblance between the suspect practice and another practice that already stands convicted in the court of consumer welfare.”17

o If the practice is inherently suspect, there must be a legitimate justification for the practice that is “cognizable” and “legally plausible.”18

o If there is a legitimate justification, there must be a showing that the restraints at issue are likely to harm competition.19

 MedSouth Independent Practice Association (“IPA”) Advisory Opinion: although the participating physicians constituted over 50% of the physicians with admitting privileges at the hospitals in the service area, the FTC concluded that the network would be unlikely to raise antitrust concerns due to the non-exclusive nature of the network and the presence of other efficiencies.

o 3 goals of MedSouth IPA:

 Coordinate its participants’ delivery of care services;

 Implement a clinical resource management program with clinical information sharing, development and implementation of clinical protocols, and oversight and monitoring of performance against pre-established benchmarks; and

 Negotiate with payors as a network of collaborating physicians to improve quality and integrate physician services and efficiency tools.

o Tools

 A web-based clinical data record system;

 Create, adopt, implement and monitor clinical practice protocols;  Impose performance goals on participants relating to service

quality and utilization. Each physician would be required to o Contracting: Negotiate fee-for-service rates with commercial managed

care payers on a non-exclusive basis. 20

16

Id.

17

See Polygram Holding, Inc., 5 Trade Reg. Rep. (CCH) ¶15,453 (FTC 2003), available at

http://www.ftc.gov/os/2003/07/polygramopinion.pdf, aff’d, Polygram Holding, Inc. v. FTC, 416 F.3d 29, 37 (D.C. Cir. 2005) (Polygram). 18 Id. at 35-36. 19 Id. 20

FTC Staff Letter regarding MedSouth, Inc. (February 19, 2002), available at http://www.ftc.gov/bc/adops/medsouth.shtm

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 Greater Rochester IPA Advisory Opinion: the FTC concluded that the proposed IPA would involve substantial integration among the physician participants that had the potential to produce significant efficiencies and that joint contracting, even if it resulted in higher rates, was reasonably related to the IPA’s planned integration and efficiencies.21

o Implemented practice guidelines and quality benchmarks.

o Monitored individual and collective performance in applying the guidelines and achieving benchmarks.

o Used an electronic clinical-information system through which participants would share clinical information related to their common patients, order prescriptions and lab tests electronically, and access patient information from hospitals and ancillary providers throughout the community.

 TriState Health Partners Advisory Opinion: the FTC approved a clinical integration program established by a physician-hospital organization.

o Although participation was generally very open to physicians, the number of requirements imposed on participants appeared to be designed to limit participation to those who would be fully committed to the network.

o Substantial investment of time and effort and some, although modest, financial investment in the network by participants was present.

o Infrastructure was put into place to foster increased interaction and cooperation among participants to achieve efficiencies including a health information technology system, clinical practice guidelines, monitoring of physician performance targets and policies and procedures related to utilization management, case management and disease management. o Measurement and evaluation of physician performance was deemed

important, although the FTC noted that the network’s systems for doing so had yet to be fully developed.22

4. Points for CINs to Consider. It is important to note that there is no specific antitrust guidance for CINs, so one cannot specifically identify factors that unequivocally will be or will not be acceptable. Nonetheless, there are some considerations for CINs.

 Final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations (“ACO”) Participating in the Medicare Shared Savings Program (the “Final Statement”).23

21

FTC Staff Letter regarding Greater Rochester Independent Practice Association, Inc. (September 17, 2007), available at http://www.ftc.gov/bc/adops/gripa.pdf

22

FTC Staff Letter regarding TriState Health Partners, Inc. (April 2009), available at http://www.ftc.gov/os/closings/staff/090413tristateaoletter.pdf

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o Although ACOs and CINs are not exactly the same, they share many characteristics for antitrust analysis purposes that some guidance for CINs can be gleaned from the Final Statement.

o Participants in CINs should not share competitively sensitive information. o Exercise caution with exclusivity arrangements with participants especially

in light of high participation by providers in the applicable market o Plan significant efficiencies as a result of the CIN

 Other Considerations

o CINs should aim to improve quality of care and access to high quality of care while at the same time reducing costs

o Do not assume that participation thresholds in the Statements are absolutely binding under all circumstances.

o If there is high participation, the CIN may need to justify why high participation is necessary to achieve its objectives

o Generally, the pro-competitive efficiencies of the CIN must outweigh the potential anticompetitive effects

o Quality improvement should not just be an objective, but measures should be employed to document and prove the improvement.

o Employ clinical practice guidelines for participants

o Participants should collaborate on patient and treatment information and implement health information technology systems to achieve this end

o Require participants to be active in achieving the objectives of the CIN by taking part in developing the actual measures used to get to those goals o Monitor participant performance and engagement in the CIN

o Inject significant capital into the infrastructure to utilized to build the CIN

B. Fraud and Abuse 24

1. The Federal Healthcare Program’s Anti-Kickback Statute (“AKS”)  42 U.S.C. §1320(a)-7b

 Relevant Safe-Harbor Regulation

i. Electronic Health Records Items and Services Safe Harbor  42 C.F.R. §1001.952(y)

1. Under the Medicare Modernization Act of 2003 (MMA 2003), the U.S. Department of Health and Human Services (“HHS”) has published this final rule protecting eligible individuals and entities that provide electronic

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health record (“EHR”) items and services to eligible recipients from being subject to the AKS as long as the requirements of the safe harbor are satisfied.

2. See Section B(3) below for the requirements needed to satisfy this safe harbor.

2. Federal Physician Self-Referral Law (the “Stark Law”)  42 U.S.C. §1395nn

 Relevant Stark Law Exception

i. Electronic Health Records Items and Services Exception

 42 C.F.R. §411.357(w)

1. Under the Medicare Modernization Act of 2003 (MMA 2003), the U.S. Department of Health and Human Services (“HHS”) has published this final rule protecting eligible entities that provide

electronic health record (“EHR”) items and services to eligible recipients from violating the Stark law as long as the requirements of the exception are satisfied.

2. See Section B(3) below for the requirements needed to satisfy this exception.

3. Requirements to satisfy: 42 C.F.R. §1001.952(y) Electronic Health Records Items and Services Safe Harbor and 42 C.F.R. §411.357(w) Electronic Health Records Items and Services Exception

 The above regulations became effective October 10, 2006 and both expire December 31, 2013. Both regulations need thirteen (13) requirements to be satisfied to gain protection under the applicable statute, the majority of which are identical, except as set forth below.

1. The hospital and recipient physicians must be within the class of donors and recipients identified under each regulation.

Donors. With regard to the Stark Law Exception, "entities" are permitted to be donors. Under the Stark Law, any entity that furnishes designated health

services is an "entity." There are numerous designated health services, including inpatient and outpatient hospital services. With regard to the Anti-Kickback Safe Harbor, a "donor" is permitted to be any individual or entity that provides services covered by a federal health care program and submits claims or requests for payment under that program.

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Recipients. With regard to the Stark Law Exception, physicians are the only eligible "recipients" since the Stark Law covers only financial relationships with physicians. With regard to the Anti-Kickback Safe Harbor, eligible "recipients" include any individual or entity engaged in the delivery of health care.

2. Appropriate Scope of Items and Services. In order to gain protection under the Exceptions, the items or services donated must be "software or information technology and training services necessary and used predominantly to create, maintain, transmit, or receive electronic health records." Hardware, such as software with core functions other than as an EHR system, e.g., standalone practice management, is not included.

3. The software must be interoperable. Software will meet the definition of interoperable if, at the time of donation, the software is able to: (i) communicate and exchange data accurately, effectively, securely and consistently with

different information technology systems, software applications and networks and (ii) exchange data such that the clinical or operational purpose and meaning of the data are preserved and unaltered.

4. No Limitations on Donation by Hospital. The donor (or any person on the donor's behalf) may not take any action to limit or restrict the use,

compatibility or interoperability of donated items or services with other electronic prescribing or EHR systems.

5. No Conditions on Receipt by Physician. Both regulations specifically state that neither the recipient nor the recipient's practice (or any affiliated individual or entity) may make the receipt of items or services, or the amount or nature of the items or services, a condition of doing business with the donor. 6. Eligibility Not Based on Volume/Value of Referrals. The donor is permitted to select a recipient and/or the nature of the items or services, provided that the factors that are used do not directly take into account the volume or value of referrals or other business generated between the parties, including factors such as, the total number of prescriptions written by the recipient/physician, the size of the recipient/physician’s medical practice, or whether the recipient/physician is a member of the donor’s medical staff. 7. Written Agreement. The arrangement must be set forth in a written agreement that: (i) is signed by the parties; (ii) specifies the items and services being provided, the donor's cost of those items and services and the amount of the recipient's contribution; and (iii) covers all of the EHR items and services to be provided by the donor (or any affiliate).

8. Knowledge of Equivalent Items or Services. The donor must not have actual knowledge, act in reckless disregard, or deliberate ignorance, of the fact

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that the recipient possesses or has obtained items or services equivalent to those provided by the donor.

9. No Patient Restrictions. The regulations require that the items or services donated can be used for any patient without regard to payor status and prohibit the donor from restricting or taking any action to limit the recipient's right or ability to use the items or services for any patient.

10. Staffing/Relation to Clinical Operations. The regulations specifically prohibit the donor from contributing physician office staff or assistance in converting paper medical files to electronic medical records as part of the implementation process.

11. E-Prescribing Capabilities. Donated EHR software must contain an electronic prescribing capability either through an electronic prescribing component or the ability to interface with the recipient's existing electronic prescribing system.

12. Cost Sharing. Before receipt of the items and services, the recipient must pay not less than 15% of the donor's cost for the items and services qualifying for the donation.

 Requirement to only the Anti-Kickback Safe Harbor: No Cost Shifting. The donor may not shift the costs of donated items or services to any federal health care program.

 Requirement to only the Stark Law Exception: No violation of Federal or State law. Arrangement can not violate the Anti-Kickback Statute, or any Federal or State law or regulation governing billing or claims submission.

C. Tax Implications of CINs

1. Furthering Charitable Purposes -- IRC § 501(c)(3)

-Broad discretion exists in defining what constitutes a "charitable" purpose. - Promotion of Health

- Form 990 requires greater disclosure regarding the community benefits that hospitals provide in exchange for tax-exempt, charitable status. Schedule H to the Form 990, the following activities would be relevant for purposes of IRC § 501(c)(3):

 the amount of free or reduced-cost healthcare services that the hospital makes available;

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 the amount of community health improvement activities that the hospital undertakes;

 the degree to which the hospital furthers the education of health professionals;  the scope of the hospital's research activities;

 the benefit derived by community groups from the hospital's contributions or activities;

 economic development and community support activities that the hospital undertakes;

 leadership development and training that the hospital provides for community members;

 investments that the hospital makes in building coalitions within its community to address health and other social needs; and

 training and development activities that the hospital engages in to improve the education, performance, and sustainability of its workforce.25

- Lessing the Burdens of Government

- requires that a tax-exempt, charitable organization demonstrate the following:  that a governmental unit considers the activity in question to be a governmental

burden; and

 that participation in the activity lessens the governmental burden in some way.26

2. Private Inurement

- No part of a tax-exempt, charitable organization's net earnings may inure to the benefit of private shareholders or individuals.27

- This prohibition targets non-fair-market-value transactions with so-called "insiders." "Insiders" are those persons who have an opportunity to control or influence an organization's activities because of their relationship with the organization.28

25

2010 Form 990, Schedule H, Part I, Lines 7a to 7k, and Part II, Lines Ito 10.

26

See, e.g., Treas. Reg. § 1.501(c)(3)-1(d)(2).

27

See Treas. Reg. § 1.50I(c)(3)-1(c)(2).

28

See Treas. Reg. § 1.501(a)-1(c); United Cancer Council, Inc. v. Commissioner, 165 F.3d 1173, 1176 (7th Cir. 1999); American Campaign Academy v. Commissioner, 92 T. C. 1053 (1989).

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3. Excess Benefit Transactions

- "Intermediate sanctions" set forth in IRC § 4958, imposes sanctions on the influential persons in charities and social welfare organizations who receive excessive economic benefits from the organization, rather than to punish the exempt organization itself."29

- Persons who are insiders for purposes of the prohibition against private inurement are also disqualified persons for purposes of IRC § 4958. Non-fair-market-value transactions that result from the participation of a tax-exempt, charitable organization give rise to private inurement and result in an excess benefit transaction.

- IRC § 4958 imposes excise taxes on "disqualified persons" who receive benefits, directly or indirectly, from an IRC § 501(c)(3) public charity that exceed the fair market value of the services that they provide in exchange for the benefits. An initial excise tax equal to 25% of the excess benefit received, with an additional 200% tax imposed if the disqualified person does not timely "correct" the excess benefit transaction. Officers, directors, or other "organization managers" who knowingly approved the payment of the excessive benefits also incur excise tax liability equal to 10% of the excess benefit (up to $20,000).30

- A "disqualified person" for purposes of IRC § 4958 generally includes any person who is, or during the previous five years was, in a position to exercise substantial influence over the affairs of the exempt organization.

4. Relationship Between Private Inurement and Excess Benefit Transactions - IRS views IRC § 4958 as an additional tool for identifying prohibited inurement and assisting it in determining when to revoke an organization's exempt status.31 Tax-exempt, charitable organizations should be aware of the relationship that exists between the intermediate sanctions regime of IRC § 4958 and the revocation of exempt status as a result of private inurement, particularly the importance of the scope of the organization's charitable purposes.

- In making the determination as to whether or not to seek revocation of tax-exempt status, the regulations provide that the IRS will consider all relevant facts and circumstances, including, but not limited to, the following:

 the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;

 the size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;

29

Id.

30

See IRC § 4958(a); see also Treas. Reg. § 53.4958-1(a).

31

See, e.g., Steven T. Miller, Easier Compliance is Goal of New Intermediate Sanction Regulations (2001). Mr. Miller is the former director of exempt organizations for the IRS.

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 whether the organization has been involved in multiple excess benefit transactions with one or more persons;

 whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

 whether the excess benefit transaction has been corrected (within the meaning of §§ 4958(0(6) and 53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.

All of the foregoing factors will be considered in combination with each other, and depending on the particular situation, the IRS may assign greater or lesser weight to some factors than to others.32

5. Private Benefit

- A Tax exempt organization must be "operated exclusively" for one or more of the tax-exempt purposes and must serve a public, rather than a private, interest. It must not be operated for the benefit of private interests or persons controlled, directly or indirectly, by such private interests.33 This prohibition applies regardless of whether a person is an "insider" or a "disqualified person." As a result, IRC § 501(c)(3) organizations must demonstrate that their activities do not more than "incidentally" benefit private parties.

6. Impact of CIN Participation on Private Inurement, Private Benefit, and Excess Benefit Transactions

-The IRS makes determinations regarding the existence of prohibited private inurement, excess benefit transactions, and impermissible private benefit on a case-by-case basis based on all the facts and circumstances of the transaction in question.34

7. Unrelated Business Income

- IRC § 512(a)(1) defines "unrelated business taxable income" as the gross income derived by an organization from any regularly carried on trade or business that is not related to its exempt purposes.

- IRC § 512(c) provides that, for purposes of determining unrelated business taxable income, a tax-exempt organization that is partner in a partnership is considered to be directly carrying on its proportionate share of the partnership's activities and must, subject to certain limitations, include in unrelated business taxable income its share (whether or not distributed) of the gross income of the partnership.

- IRC § 513(a) defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of the organization for

32

Treas. Reg. § 1.501(c)(3)-1(f)(2)(iii).

33

St. David's Health Care Sys. v. U.S., 349 F.3d 232, 236-237 (5th Cir. 2003), and authorities cited therein and Treas. Reg. § 1.501(c)(3)-1(c)(1).

34

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income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational, or other exempt purpose. The Treasury Regulations provide that a trade or business is "related" to an organization's exempt purposes only if the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income).35 A trade or business is "substantially related" for purposes of §513(a), only if the causal relationship is a substantial one. To be substantially related, the activity "must contribute importantly to the accomplishment of [exempt] purposes."36 IRC § 513(a) focuses on "the manner in which the exempt organization operates its business" to determine whether it contributes importantly to the organization's exempt purposes.37

D. HIT Subsidies- Meaningful Use

1. Research indicates that replacing more traditional paper-based medical record systems with electronic health record ("EHR") systems can lead to considerable health care savings, reduction of medical errors, and an overall improvement in the health of a

population.38 Recognizing these benefits, the federal government and numerous healthcare advocates are promoting health information technology as a partial solution to the cost conundrum currently facing the healthcare industry.39

2. In February 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA) into law which includes the Health Information Technology for Economic and Clinical Health Act, or the “HITECH Act,” which established programs under Medicare and Medicaid to provide incentive payments to Eligible Providers (EPs), hospitals, and critical access hospitals for the “meaningful use” of certified EHR technology. It

authorized the Centers for Medicare and Medicaid Services (CMS) to make such EHR incentive payments for certain Medicare and Medicaid EPs who are meaningful users of certified EHR technology.

3. EHR allows healthcare providers to record patient information electronically instead of using paper records. However, EHRs are often capable of doing much more than just recording information. The EHR Incentive Program asks providers to use the capabilities of their EHRs to achieve benchmarks that can lead to improved patient care. The EHR Incentive Program is NOT a reimbursement program for purchasing or replacing an EHR. Providers have to meet specific requirements in order to receive incentive payments.

35 Treas. Reg. § 1.513-1(d)(2). 36 64 Treas. Reg. § 1.513-1(d)(2). 37

United States v. American College of Physicians, 475 U.S. 834, 849 (1986).

38

Richard Hillestad et al., Can Electronic Medical Records Systems Transform Health Care? Potential Benefits, Savings, and Costs, 24 Health Affairs 1103, 1103 (Project HOPE-The People to People Health Foundation, Inc., 2005).

39

See THE LEWIN GROUP, HEALTH INFORMATION TECHNOLOGY LEADERSHIP PANEL FINAL REPORT 3 (2005) (categorizing the implementation of health information technology as a “high priority” for health care).

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4. The ARRA authorized the EHR Incentive Programs are available for Medicare and Medicaid eligible professionals, eligible hospitals, and critical access hospitals (CAHs). Although most hospitals will be able to receive a payment from both programs, eligible professionals must choose which program they want to participate in.

5. Overall, the Medicare and Medicaid EHR Incentive Programs provide a

financial incentive for the "meaningful use" of certified EHR technology to achieve health and efficiency goals. By putting into action and meaningfully using an EHR system, providers will reap benefits beyond financial incentives–such as reduction in errors, availability of records and data, reminders and alerts, clinical decision support, and e-prescribing/refill automation.

6. What is Meaningful Use?

Meaningful Use is using certified EHR technology to:  Improve quality, safety, efficiency, and reduce health Disparities

 Engage patients and families in their health care  Improve care coordination

 Improve population and public health

 All the while maintaining privacy and security  Meaningful Use mandated in law to receive Incentives

7. What are the Three Main Components of Meaningful Use?

i. Use of certified EHR in a meaningful manner (e.g., e-prescribing)

ii. Use of certified EHR technology for electronic exchange of health information to improve quality of

health care

iii. Use of certified EHR technology to submit clinical quality measures (CQM) and other such measures

to be determined

8. What are the Requirements of Stage 1 Meaningful Use?

a. Meaningful use includes both a core set and a menu set of objectives that are specific to eligible professionals or eligible hospitals and CAHs.

b. For eligible professionals, there are a total of 25 meaningful use

objectives.

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 The remaining five objectives may be chosen from the list of 10 menu set objectives.

 See Exhibit A Checklist for Stage 1 Meaningful Use Criteria

c. For eligible hospitals and CAHs, there are a total of 24 meaningful use objectives.

 There are 14 required core objectives.

 The remaining five objectives may be chosen from the list of 10 menu set objectives.

9. What changes has Stage 2 implemented?

a. On September 4 2012, CMS published a final rule that specifies the Stage 2 criteria that eligible professionals (EPs), eligible hospitals, and critical access hospitals (CAHs) must meet in order to continue to participate in the Medicare and Medicaid Electronic Health Record (EHR) Incentive Programs. All providers must achieve meaningful use under the Stage 1 criteria before moving to Stage 2.

b. The earliest that the Stage 2 criteria will be effective is in fiscal year 2014 for eligible hospitals and CAHs or calendar year 2014 for EPs.

c. Stage 2 has initiated some changes as found below and also changes to the core objectives that include more patient engagement and care coordination activities. One of the more standout changes for Stage 2 is the allowance of groups to submit attestation information for all of their individual eligible providers (EPs). This alone saves so much time when attesting to Meaningful Use for larger facilities.

i. Eligibility Changes

Since eligibility is mandated by the HITECH Act, the Stage 2 Final Rule has resulted in no changes to who qualifies for the incentive program since it has no effect on the eligibility rules. However, there is one change to the definition of a "Hospital-Based EP".

 Hospital-Based Eligible Providers may qualify to receive incentive: Eligible providers demonstrating that they fund the

acquisition, implementation, maintenance, hardware and interfaces of certified EHR technology (CEHRT) needed to meet Meaningful Use without reimbursement from the hospital are eligible to apply for a "Non-Hospital-Based" status and potentially receive incentive payment.

ii. Meaningful Use Changes

The number of core objectives has increased for both EPs and eligible hospitals while the number of menu objectives has decreased. Many of the menu objectives in Stage 1 were related to patient engagement and have now been moved to the core objectives for Stage 2 in an effort to focus more on clinical processes.

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 Exclusions: Starting in 2014, exclusions claimed for menu objectives will not count toward the required number of menu objectives for attestation. If exclusions are claimed then another menu objective must be selected that can be met.

 Reporting Period for 2014: To allow time for participants to adopt the certified EHR technology as (which ALL incentive programs will require for 2014), ALL participants will report on a three-month time period in 2014.

 Batch Reporting: Starting in 2014, groups will be allowed to

attest for all of their EPs with just one file upload into the Attestation System without the need for enter data for each individual EP.

 CQM Reporting: Starting in 2014, Clinical Quality

Measurements will no longer be a core objective; however, ALL providers are required to report on CQMs in order to demonstrate meaningful use. Additionally, Medicare-eligible providers in their second year and every year thereafter of demonstrating meaningful use must electronically report their CQM data to CMS. The number of CQMs that are required for reporting will also increase for 2014.

d. In the first year of participation, providers must demonstrate meaningful use for a 90-day EHR reporting period; in subsequent years, providers will demonstrate

meaningful use for a full year EHR reporting period (an entire fiscal year for hospitals or an entire calendar year for EPs) except in 2014, which is described below. Providers who participate in the Medicaid EHR Incentive Programs are not required to demonstrate meaningful use in consecutive years as described by the table above, but their progression through the stages of meaningful use would follow the same overall structure of two years meeting the criteria of each stage, with the first year of meaningful use participation consisting of a 90-day EHR reporting period.

e. For 2014 only, all providers regardless of their stage of meaningful use are only required to demonstrate meaningful use for a 3-month EHR reporting period.

f. For Medicare providers, this 3-month reporting period is fixed to the quarter of either the fiscal (for eligible hospitals and CAHs) or calendar (for EPs) year in order to align with existing CMS quality measurement programs, such as the Physician Quality Reporting System (PQRS) and Hospital Inpatient Quality Reporting (IQR). The 3-month reporting period is not fixed for Medicaid EPs and hospitals that are only eligible to receive Medicaid EHR incentives, where providers do not have the same alignment needs.

g. CMS is permitting this one-time 3-month reporting period in 2014 only so that all providers who must upgrade to 2014 Certified EHR Technology will have adequate time to implement their new Certified EHR systems.

h. Stage 2 uses a core and menu structure for objectives that providers must achieve in order to demonstrate meaningful use. Core objectives are objectives that all

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providers must meet. There is also a predetermined number of menu objectives that providers must select from a list and meet in order to demonstrate meaningful use.

i. To demonstrate meaningful use under Stage 2 criteria—

 EPs must meet 17 core objectives and 3 menu objectives that they select from a total list of 6, or a total of 20 core objectives.

 Eligible hospitals and CAHs must meet 16 core objectives and 3 menu objectives that they select from a total list of 6, or a total of 19 core objectives.

j. Clinical Quality Measures for 2014 and Beyond

i. Beginning in 2014, the reporting of clinical quality measures (CQMs) will change for all providers. EHR technology that has been certified to the 2014 Edition standards and certification criteria will have been tested for enhanced CQM-related capabilities, Eligible professionals (EPs), eligible hospitals, and critical access hospitals (CAHs) will be required to report using the new 2014 criteria regardless of whether they are participating in Stage 1 or Stage 2 of the Medicare and Medicaid Electronic Health Record (EHR) Incentive Programs. Although clinical quality measure (CQM) reporting has been removed as a core objective for both Eligible Professionals (EPs) and eligible hospitals and CAHs, all providers are required to report on CQMs in order to demonstrate meaningful use.

ii. In 2014, EPs must report on 9 of the 64 approved CQMs  See Exhibit B for a list of Recommended core CQMs -

encouraged but not required (See http://www.cms.gov/Regulations-

and-Guidance/Legislation/EHRIncentivePrograms/Recommended_Core_ Set.html)

 9 CQMs for the adult population  9 CQMs for the pediatric population

 Selected CQMs must cover at least 3 of the National Quality Strategy domains

iii. Eligible Hospitals and CAHs must report on 16 of 29 approved CQMs

 Selected CQMs must cover at least 3 of the National Quality Strategy domains

iv. Beginning in 2014, all Medicare-eligible providers beyond their first year of demonstrating meaningful use must electronically report their CQM data to CMS.

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(Medicaid EPs and hospitals that are eligible only for the Medicaid EHR Incentive Program will electronically report their CQM data to their state.)

k. For more information, please visit the Official Website for the Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs at:

http://www.cms.gov/Regulations-and-Guidance/Legislation/EHRIncentivePrograms/index.html 10. How can a CIN pay for the electronic health record software if owned by a Hospital?

a. See Section V(B) above.

E. Patient Data Privacy and Security 1. General Statements.

 Participants in CINs need to access, analyze and share Protected Health Information (“PHI”) to further the purposes of the CIN.40

 The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and their regulations will apply to the operations of a CIN.41

 CIN participants will fall under the definition of “Covered Entity.”42

2. HIPAA and HITECH Requirements.  Privacy Rule

o The Privacy Rule promulgated under HIPAA (the “Privacy Rule”) prohibits the use and disclosure of PHI except under certain circumstances or in accordance with a signed patient authorization.43  Accounting of Disclosures

o The Privacy Rule provides an individual with the right to request and receive an accounting of all disclosures of his or her PHI made by a Covered Entity during the preceding six (6) years, subject to exceptions.44

o Section 13405(c) of HITECH deletes the exception to the accounting requirement for payment, treatment or healthcare operations if the disclosures of PHI are made through an electronic health record

40

See 45 C.F.R. § 160.103 for the definition of PHI.

41

See Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191 (1996) and American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, § 13001, 123 Stat. 115 (2009).

42 45 C.F.R. § 160.103. 43 45 C.F.R. § 164.502. 44 45 C.F.R. § 164.528(a).

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(“EHR”) (defined in Section 13400(5) of HITECH) and reduces the time period to three (3) years.

o Section 13405(c)(3) of HITECH permits a Covered Entity to provide the accounting for disclosures made by its “Business Associate” or provide the individual with the information for the Business Associate who will then provide an accounting of its disclosures, but it is only clear that this applies for disclosures from EHRs.45

 Minimum Necessary

o The Privacy Rule requires that a Covered Entity use reasonable efforts to limit requests for PHI and its disclosure or use of PHI to the “minimum necessary” to accomplish the intended purpose, subject to certain exceptions.46

o Guidance on “minimum necessary” has yet to be issued. o Guidance on de-identification of PHI was recently issued.47  Breach Notification

o Section 13402 of HITECH states that if a breach of unsecured PHI occurs, under certain circumstances, the Covered Entity shall notify the individual whose PHI was involved and the United States Department of Health and Human Services (“HHS”).

o Section 13400 of HITECH provides that a breach is “the unauthorized acquisition, access, use or disclosure of protected health information which compromises the security or privacy of such information, except where an unauthorized person to whom such information is disclosed would not reasonably have been able to retain such information.”

o A final rule for breach notification has not yet been issued. o Notice to HHS is defined by certain circumstances.

o If the PHI of more than five hundred (500) residents of a state or jurisdiction is affected by the breach, then the Covered Entity shall also notify prominent media outlets servicing the area.

3. The CIN and its Participants.  The Privacy Rule

o Key Terms 45 45 C.F.R. § 160.103. 46 45 C.F.R. § 164.502(b). 47

See Guidance Regarding Methods for De-identification of Protected Health Information in Accordance with the Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule, Office for Civil Rights, United States Department of Health and Human Services, available at

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 “Treatment”: “the provision, coordination, or management of health care and related services by one or more health care providers, including the coordination or management of health care by a health care provider with a third party; consultation between the health care providers relating to a patient; or the referral of a patient for health care from one health care provider to another.”48

 A Covered Entity may use and disclose PHI for its own treatment purposes and for treatment activities of another Healthcare Provider.49

 As the CIN is acting as a Business Associate for each participant, the CIN can make these uses and disclosures of PHI on behalf of each participant in accordance with the terms of a Business Associate Agreement.

 “Payment”: defined in the Privacy Rule.50

 Generally, PHI may be used and disclosed for the purposes of obtaining and providing reimbursement for the provision of health care.

 CINs need to be careful with respect to disclosures from one participant in the CIN to another in this regard as disclosures by PHI from one Covered Entity to another are more limited.51

 “Health Care Operations”: defined in the Privacy Rule.52

 A Covered Entity may use and disclose PHI for its own Health Care Operations.53

 Caution must be taken when one CIN participant seeks to disclose PHI to another CIN participant as both are Covered Entities and such disclosures are restricted to instances when both Covered Entities have a current or prior relationship with the patient, the PHI to be disclosed relates to the relationship and the purpose of the disclosure is limited to activities in the first two

48 45 C.F.R. § 164.501. 49 45 C.F.R. § 164.506(c)(1) and (2). 50 45 C.F.R. § 164.501. 51 45 C.F.R. § 164.506(c)(3). 52 45 C.F.R. § 164.501. 53 45 C.F.R. § 164.506(c)(1).

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paragraphs of the definition of Health Care Operations in the Privacy Rule, which can be construed broadly.54 o Business Associate

 The entity which forms the basis for the CIN will serve as the Business Associate of each participant in the CIN, who will be the Covered Entity.

 The CIN entity will need to enter into a business associate agreement with each participant in accordance with Section 164.504(e) of the Privacy Rule.

 Section 13404 of HITECH requires all Business Associates to comply with the Privacy Rule and Security Rule requirements. o Organized Health Care Arrangements (“OHCA”)

 An arrangement whereby Covered Entity participants need to share PHI about their patients to manage and benefit a covered enterprise.55

 There are many types of OHCAs as defined in the regulations and a CIN may fit in one of these types.56

 A Covered Entity that participates in an OHCA may disclose PHI to another Covered Entity participant for any Health Care Operations of the OHCA.57

Certain Health Conditions: certain health conditions may require specific patient consent under applicable state and federal laws.

E. Insurance Regulatory Oversight

1. There is a possibility that health care providers participating in a Clinically Integrated Network will be subject to the jurisdiction and oversight of the applicable State’s Division of Insurance and could be considered to have engaged in insurance business.

2. Employee welfare benefit plans are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA’s general preemption clause states that, with some exceptions, ERISA supersedes state laws that “relate to any employee benefit plan.” ERISA provides that no plan subject to ERISA may be deemed “to be an insurance company or other insurer . . . or to be engaged in 54 45 C.F.R. § 164.506(c)(4). 55 45 C.F.R. § 160.103. 56 Id. 57 45 C.F.R. § 164.520(d).

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the business of insurance . . . for purposes of any law of any State purporting to regulate insurance companies [or] insurance contracts.”

a. However, where an ERISA plan contracts with providers through a risk sharing arrangement and transfers all of its financial risk to the

providers, the plan may be subject to state insurance laws.

3. Some states consider any providers that have undertaken any type of financial risk to have engaged in the business of insurance.

a. The question is whether the providers are considered to have engaged in the business of insurance without a license by assuming financial risk. b. State insurance regulators could potentially treat any provider that

assumes financial risk for the cost of the medical care of patients as a risk bearing entity that must obtain a license as an insurer.

c. Regulators are concerned when the financial risk exceeds the scope of provider risk and becomes insurance risk.

d. Regulators are more likely to view financial risk as insurance risk where providers accept financial responsibility for patients’ future losses (i.e., the costs of future medical care of the patients) as opposed to costs in connection with identifiable and present medical needs of the patients (e.g., costs of episodes of care).

e. The specific details of risk sharing arrangements between a health plan and providers must be carefully analyzed under the applicable state laws to determine whether the arrangement will require the providers to obtain a license as an insurer.

4. Other states have taken the view that providers are not subject to insurance licensure requirements if the financial risks undertaken by providers are limited to the providers’ cost of doing business.

a. Some states provide an exception for providers who only accept “downstream” risk, i.e. to provide medical services to members of an insurer or health maintenance organization and be paid through a capitation arrangement.

b. Generally, the more the arrangement looks like a provider’s individual risk (e.g., costs of providing medical care within the provider’s control), the less likely that providers will be considered to have engaged in insurance business.

5. On August 10, 1995, the National Association of Insurance Commissioners issued a memorandum to all state departments of insurance titled, “Suggested Bulletin Regarding Certain Types of Compensation and Reimbursement

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