On January 1, 2027, mandatory downside financial risk under the Centers for Medicare & Medicaid Services’ (“CMS”) Transforming Episode Accountability Model (“TEAM”) will begin for most participating hospitals. TEAM is a mandatory, episode-based alternative payment model that took effect on January 1, 2026, and will end on December 31, 2030. Most hospitals located in any of the 188 Core-Based Statistical Areas (“CBSAs”) selected by CMS were required to participate. Calendar Year 2026 is Performance Year One (“PY1”) and is a practice year with no financial risk for participating hospitals. Most participating hospitals have approximately six months remaining before they are required to share in the risk for the cost of care.
Many participating hospitals have spent the early months of 2026 building infrastructure, evaluating performance data and engaging physicians. For hospitals that have not yet developed a comprehensive physician alignment and care redesign strategy, the next six months represent a critical window for action. A properly structured Value-Based Enterprise (“VBE”) provides flexible tools to collaborate with physicians and can help mitigate risk under the Stark Law and Anti-Kickback Statute (“AKS”).
TEAM at a Glance
TEAM holds participating hospitals financially accountable for the total cost and quality of care delivered across an episode that begins with an inpatient stay or outpatient procedure and extends 30 days after discharge. The TEAM model covers five high-volume, high-cost surgical episode categories, including:
- Lower Extremity Joint Replacement;
- Surgical Hip/Femur Fracture Treatment;
- Coronary Artery Bypass Graft (“CABG”);
- Major Bowel Procedure; and
- Spinal Fusion.
Performance is measured against episode target prices that are established by CMS. The actual cost is reconciled against CMS’s episode target price each year. Hospitals whose episode spending falls below the target, while meeting quality thresholds, may earn positive reconciliation payments. If the cost exceeds the target or quality performance falls short, the hospital may be required to repay CMS. The risk sharing for the cost and quality of care of services provided to TEAM beneficiaries begins January 1, 2027.
Participation is mandatory for most acute care hospitals paid under the Inpatient Prospective Payment System (“IPPS”) that are physically located in one of the 188 selected CBSAs. Limited voluntary participation was available only for certain hospitals that had previously participated in the Bundled Payments for Care Improvement Advanced or Comprehensive Care for Joint Replacement models.
What Changes on January 1, 2027?
TEAM offers three participation tracks with materially different risk profiles:
- Track 1. Available only during PY1 (or PY1 through PY3 for safety-net hospitals). This Track has no downside risk, with reduced upside potential.
- Track 2. Available in PY2 through PY5, and only to safety-net hospitals, rural hospitals, Medicare-dependent hospitals, sole community hospitals and essential access community hospitals, as those categories are defined under the TEAM final rule. This Track has lower risk and lower reward, with two-sided exposure generally capped at approximately 10%.
- Track 3. Available in PY1 through PY5. This Track has two-sided risk for the next five years and has the highest exposure to repayments to CMS (subject to applicable stop-loss limits and quality adjustments).
Beginning January 1, 2027, all non-safety-net participants must move to Track 3. Track 3 entails full two-sided risk. Eligible safety-net and rural hospitals may elect Track 2, but they too will face some downside exposure beginning January 1, 2027.
In other words, the runway for risk-free preparation for participating in TEAM is quickly shrinking for most hospitals. Episode performance during 2027 will directly affect Medicare reimbursement at reconciliation.
Success Under TEAM Requires Physician Alignment
The five TEAM episodes are clinically and operationally distinct. The physicians, care pathways, post-acute utilization patterns and quality considerations associated with a spinal fusion episode differ substantially from those associated with a joint replacement, CABG or major bowel procedure. As a result, hospitals often need episode-specific care redesign strategies rather than a single enterprise-wide solution.
Most participating hospitals also rely on a combination of employed and independent physicians to perform TEAM procedures. Meaningful care redesign requires engagement from both employed and independent physicians. The challenge for participants is, therefore, to rapidly align a clinically and contractually diverse group of physicians around common quality, utilization and care coordination objectives, and to do so in a manner that is compliant with applicable fraud and abuse laws.
Why a VBE May Be the Right Vehicle
The VBE framework created under the Stark Law value-based exception (42 C.F.R. § 411.357(aa)) and the AKS value-based safe harbors (42 C.F.R. § 1001.952(ee)-(gg)) aligns with the goals of TEAM and the work required to succeed under the Model. A properly structured VBE permits hospitals and physicians, including independent physicians, to collaborate around defined value-based purposes, including:
- Coordinating and managing care for a target patient population;
- Improving quality outcomes;
- Reducing costs for payors; and
- Transitioning from volume-based to value-based reimbursement.
The VBE framework offers several features that align particularly well with TEAM:
- It permits both employed and independent physicians to participate within a single arrangement, which matters because many hospitals rely on independent surgeons for one or more of the surgical episode categories (e.g., ortho, cardiac).
- A VBE can add to existing physician relationships (including employment agreements, professional services agreements, call coverage arrangements and co-management agreements), rather than replacing them.
- A VBE provides defined regulatory pathways with three levels of risk: (i) no downside financial risk; (ii) meaningful downside financial risk (i.e., 10%); and (iii) full financial risk. This tiered structure allows the VBE to scale with the participants’ appetite and the model’s risk trajectory.
For hospitals willing to structure their VBEs to assume meaningful or substantial downside financial risk under the value-based regulations, the value-based safe harbors and exceptions offer flexibility in program design for items, services and remuneration exchanged among VBE participants, provided certain administrative requirements are met.
TEAM and VBE Requirements Are Naturally Aligned
One reason the VBE framework fits TEAM particularly well is that many requirements overlap. Both TEAM and the value-based regulations require:
- A clearly defined patient population;
- Measurable quality and performance objectives;
- Improved care coordination;
- Cost and utilization management; and
- Accountability for outcomes.
In many respects, TEAM defines the destination and the VBE provides the pathway to get there. CMS has already identified the episodes, established quality expectations and created financial accountability. The remaining challenge is to build the physician-alignment infrastructure necessary to achieve those objectives, and to do so quickly.
Practical Takeaways
- Confirm your Track and risk exposure. Most non-safety-net TEAM participants will move to Track 3 (full two-sided risk) effective January 1, 2027. Safety-net and rural-eligible hospitals should confirm Track 2 eligibility and election timing.
- Model the proposed quality changes. The FY 2027 IPPS Proposed Rule would integrate TEAM scoring with the Hospital Inpatient Quality Reporting Program, Hospital Outpatient Quality Reporting Program and Hospital-Acquired Condition Reduction Program through the CMS Quality Score, add three measure performance periods and expand the spinal fusion category by three Medicare Severity Diagnosis-Related Groups effective October 1, 2026. Comments are due June 9, 2026.
- Treat the five episodes as distinct strategic initiatives. Episode-specific clinical workflows, physician participants and post-acute patterns generally do not lend themselves to a one-size-fits-all approach.
- Evaluate VBE structures now. A properly structured VBE, ideally episode-specific, can engage both employed and independent physicians under a common framework while remaining compliant with the Stark Law and AKS.
- Document early. VBE arrangements require defined value-based purposes, written documentation, monitoring and accountability structures. Building this documentation before PY2 begins will support both compliance and performance.
Hall Render attorneys and consultants are currently assisting hospitals and health systems across the country in evaluating and implementing value-based enterprise arrangements designed to support success under TEAM and other mandatory and voluntary value-based payment models. If you have questions or would like assistance evaluating a VBE strategy for TEAM, please contact:
- Jim Burke at (618) 222-1000 or jburke@hallrender.com;
- Erin Drummy at (317) 977-1414 or edrummy@hallrender.com;
- Laetitia Cheltenham at (919) 447-4968 or lcheltenham@hallrender.com;
- Scott Strickland at (919) 447-4965 or sstrickland@hallrender.com;
- Steven Pratt at (317) 977-1442 or spratt@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
