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ACOs: HMOs in Drag or the Savior of our Health Care System?

Health Law Update Alyce C. Katayama

On November 2, 2011, the Centers for Medicare & Medicaid Service ("CMS") published its final rule on accountable care organizations ("ACOs"). By all accounts, the final rule is a very substantial improvement over the proposed rule in response to the 1,300-plus comments CMS received; many of them very negative. This rule implements Section 3022 of the Patient Protection and Affordable Care Act ("PPACA"). The ACO program, also known as the Medicare Shared Savings Program ("MSSP"), is another effort to advance the much touted triple aims of PPACA: better care for individuals; better health for population; and a lower rate of growth of expenditures for Medicare Parts A and B.

The MSSP application for 2012 is now available, and CMS will accept applications beginning December 1, 2011. The program must be established by January 1, 2012 in accordance with the law. The first round of applications are due in early 2012, and the first ACO agreements will begin on April 1 and July 1 of 2012.

Putting the MSSP Into Perspective

Before delving into the high points of the final rule, let's take a moment to put ACOs into perspective. CMS has indicated that the MSSP could save as much as $940 million for the federal government over a four-year period. CMS expects to enroll between 50 and 270 ACOs, and approximately 2 million Medicare beneficiaries will be impacted by those ACOs. As much as $1.9 billion in bonuses (i.e., shared savings) could be paid out over approximately three years in the MSSP.

By way of contrast, Medicare serves 49 million elderly and disabled Americans, and total Medicare benefit payments for 2011 are expected to be $551 billion. In other words, the MSSP will, at best, impact 4 percent of Medicare beneficiaries and reduce Medicare's expenditures by .22 percent (yes, the decimal point is in the right place) over three years. By way of further contrast, the super committee now meeting in Congress is looking for ways to make $500 billion in cuts to the Medicare and Medicaid program over a ten-year period - and that number does not even include solving the physician payment problem. Estimates of payment for outright fraudulent "care" in the Medicare and Medicaid program are in the $60-80 billion range. CMS estimates that its "partnership for patients" a three-year program to reduce hospital-acquired conditions and improve transitions in care, has the potential to save up to $50 billion over 10 years in a public/private partnership.

Thus, it appears that the MSSP will have little impact on the cost crisis faced by Medicare, at least in the short run. It does, however, take a small subset of providers and beneficiaries into a laboratory to conduct a three-year experiment, which may hold promise for the future.

What is the MSSP?

The MSSP allows providers, who voluntarily agree to work together, to assume responsibility for coordinating care for Medicare patients. If they meet certain quality standards, they may share in any savings achieved. ACOs must make a three-year commitment to care for at least 5,000 Medicare beneficiaries. ACOs will be held accountable for all the care their beneficiary population receives, and the quality measures will reflect that care whether received from an ACO provider or a non-ACO provider.

Changes Made in CMS's Final Rule

More ACO Participants. Under the statute, four groups are eligible to sponsor an ACO: ACO professionals (hospitals and physicians) in group practice arrangements; networks of individual practices of ACOs professionals; partnerships or joint venture arrangements between hospitals and ACO professionals; and hospitals employing ACO professionals. In the final rule, critical access hospitals, federally qualified health centers and rural health clinics have been added to the list of ACO sponsors, referred to in the rule as "participants."

Fewer Quality Measures. The quality measures for which the ACO will be accountable have been cut from 65 to 33 by "removing measures perceived as redundant, operationally complex or burdensome" according to CMS. There are now 33 measures in four domains: patient experience of care; care coordination and patient safety; preventive health; and caring for at-risk populations. In the first year, ACOs will receive credit simply for reporting on the measures; in the second and third years, they will actually be measured with respect to performance on the measures. ACOs need only attain a level of 70 percent on the measures in each domain to share in savings. However, because of the double weight applied to the EHR measure, if an ACO fails to completely and accurately report the EHR, it could miss the 70 percent cutoff for the care coordination domain and thus, not be eligible to share in savings.

More Options for Risk and Reward. The final rule defines savings as the difference between (1) actual Parts A and B spending during the relevant time; and (2) the CMS predetermined spending "benchmark for the particular ACO that exceeds the minimum savings rate threshold." The benchmark is risk-adjusted based on historical expenditures attributable to the ACO's assigned beneficiaries. CMS will restate the risk adjustment benchmark for each performance year based on risk adjustment, severity and case mix score for the assigned beneficiaries. This approach should allow ACOs to receive appropriate consideration for the complexity of their patients.

The final rule offers ACOs a choice depending on how much risk they are willing to accept. Track one has no downside risk but offers a lower upside reward. Track two offers greater upside reward but also has the possibility of downside risk. Track one ACOs will not be required to transition to track two until after their initial agreement period. Further, if ACOs rack up net losses over the initial agreement period, they will have an opportunity to continue participating in the program as long as they continue to meet all other participation requirements.

In the proposed rule, the one-sided risk model offered no opportunity to share in savings until a target savings was achieved. However, under the final rule ACOs on both tracks will be able to share in the first dollar of savings once the minimum savings rate has been achieved and, those dollars have, in effect, filled a "basket" of savings.

The required minimum savings rate for track one is 3.9 percent at the 5,000 beneficiary level and 2 percent at the 60,000 plus beneficiary level. Track two ACOs have a minimum savings rate of 2 percent regardless of the size of the beneficiary population. Track one ACOs, depending on quality scores, are eligible to share up to 50 percent of the savings achieved up to 10 percent of the total benchmark. Track two ACOs, again depending on quality scores, can share up to 60 percent of the savings achieved up to 15 percent of the total benchmark.

Because track two ACOs are subject to downside risk, they must demonstrate their ability to share in losses by obtaining reinsurance, placing funds in escrow, obtaining surety bonds, or establishing a line of credit as evidenced by a letter of credit upon which CMS could draw. However, the final rule has eliminated the proposal to withhold portions of shared savings payments in order to assure repayment of future losses.

More Rational Process for Assignment of Beneficiaries. The original proposal to retrospectively assign beneficiaries more than a year into the initial agreement period generated a lot of negative commentary. The final rule adopts a preliminary prospective assignment method with beneficiaries identified on a quarterly basis. There will be a final reconciliation after each performance year on the basis of patients actually served by the ACO.

Assignment will be a two-step process. In the first step, beneficiaries who have received at least one primary care service from a physician in the ACO will be assigned. This will be done using a plurality of allowed charges for primary care services rendered by primary care physicians. Step two (for beneficiaries who have not received any primary care services from a physician) will use a plurality of allowed charges for primary care services rendered by other ACO professionals to make the assignment. The final rule will recognize primary care services when provided by specialists, PAs and NPs.

Providers who are part of an ACO are required to alert their patients to the ACO's existence. Although one would expect physicians participating in an ACO to try to refer patients to hospitals and specialists within the ACO network, Medicare beneficiaries will not be locked into a restricted panel of providers and are free to see any providers they choose. In the end, the determination of whether an ACO was responsible for coordinating care for a particular beneficiary will be based on whether that person received a plurality of his or her primary care services from that organization.

Same Beneficiary Opportunity to Opt-Out of Data Sharing. Beneficiary opt-out was another topic of much negative commentary. In the final rule, ACOs are permitted to contact beneficiaries identified on the quarterly list the ACO receives to notify them that data sharing will be going on and give them an opportunity to decline. In other words, the ACO can reach out to the beneficiary before the beneficiary happens to have contact with an ACO provider. Beneficiaries have 30 days after being contacted to decline data sharing and must be given another opportunity to decline data sharing during their next face-to-face encounter with an ACO participant. This counterproductive feature remains in the final rule.

Improved EHR Considerations. In the proposed rule, 50 percent of the primary care physicians in an ACO had to show meaningful use of an EHR by the beginning of the second year in order for the ACO to continue to qualify as a participant. EHR use continues to be important but is no longer a condition of participation. Instead, the degree of usage of EHR is retained as a quality measure and given a higher weight than any other measures for quality scoring purposes.

It will also be easier under the final rule to report data on the required quality measures as they may now be reported through a combination of methods including a new group-practice-reporting-option ("GPRO") web interface that has already been piloted. The preventive and chronic care metrics on which ACOs must report are included in the list of quality measures for stage one of Meaningful Use. This should eliminate redundancy in providers' efforts to collect and submit data required for participation in the MSSP.

More Rational Governance

In the final rule, governance is no longer required to be proportional to ownership. ACO participants are not required to have proportionate representation on the ACO governing body. This change was a result of CMS agreeing with commentators that the proposed rule created a risk of governing bodies becoming unwieldy and losing their effectiveness. However, it is still true that no more than 25 percent of board seats may be occupied by non-ACO participants, such as entrepreneurial companies.

Help With IT Infrastructure

CMS, through its Innovation Center, is also offering an "Advance Payment" ACO model recognizing that some organizations may need funds to help build IT infrastructure. Qualified organizations may now apply to receive their anticipated share of savings upfront rather than having to wait until after the conclusion of the first year and the claims analysis. This option will be available for physician-owned and rural providers participating in the MSSP. The Advance Payments would of course be recovered from any future savings achieved by the ACO. As many as 50 small ACOs may qualify for upfront payments in this model as the Innovation Center will award up to $70 million for this purpose. The Advance Payment ACO Model is only open  to two types of organizations participating in the MSSP: ACOs that do not include any inpatient facilities AND which have less than $50 million in total annual revenue; and ACOs in which the only inpatient facilities are critical access hospitals and/or Medicare low-volume rural hospitals AND have less than $80 million in total annual revenue.

It remains to be seen whether providers who build the IT infrastructure to participate in the MSSP will see an appropriate return on their investments.

Other Regulation of ACOS

Coordinated with the CMS publication of the final ACO rule, the other agencies that regulate ACOs have also weighed in with their final thoughts on the topic. The Federal Trade Commission ("FTC")and Department of Justice ("DOJ") have published a final joint policy statement of antitrust enforcement policy regarding ACOs. Two changes from the proposed statement - released in March 2011 - are noteworthy. First, ACOs will not be required to submit to mandatory review by FTC/DOJ in order to enter into the MSSP. More importantly, the final statement applies to all collaborations that are eligible and intend or have been approved to participate in the MSSP and indicate that a "rule of reason" analysis will be applied to their combinations.

Newly formed ACOs that still want formal guidance from FTC/DOJ may request a statement as to the agency's assessment of the ACO's likely competitive effects through an expedited 90-day review process, but no ACO is required to obtain that input.

The IRS has also weighed in once again by issuing a new Fact Sheet (FS-2011-11) regarding the participation of tax-exempt organizations in ACOs. The Internal Revenue Service ("IRS") affirms its prior statements on ACOs in Notice 2011 released in March and continues to state that it will review ACO arrangements on a case-by-case basis based on all the facts and circumstances. The IRS has said that because of CMS regulation and oversight, it generally expects "that it will not consider a tax-exempt hospital's participation in an ACO to result in inurement or private benefit if certain factors are met." When tax-exempt hospitals choose to participate in ACOs through tax partnerships such as multimember LLCs, they will need to review and adhere to long-standing IRS guidance applicable to joint ventures (e.g., Rev. Rule 98-15 and Rev. Rule 2004-51).

The IRS has also confirmed that its 2007 guidance relating to EHRs also applies to tax-exempt hospitals participating in an ACO. For example, when an ACO arrangement benefits medical staff physicians, the IRS has indicated that the arrangement must meet the general requirements of its EHR guidance (i.e., the benefit must be made available to all staff physicians either at the same level or if varied, based on community health needs, etc.). IRS's case-by-case approach leaves tax-exempt hospitals once again to grapple with uncertainties as they go forward into the brave new ACO world.

On another front, CMS and OIG have issued an interim final rule with comment period. This rule creates five self-implementing waivers (meaning no application is necessary) relating to the Stark law, the federal anti-kickback statute ("AKS"), and certain civil monetary penalties ("CMP"). The waivers are a product of CMS's desire to encourage broader participation in the MSSP and its conclusion that in order to carry out the MSSP, it will be necessary to waive certain provisions of the fraud and abuse laws. The five ACO waivers under the final rule are:

  1. ACO Pre-Participation Waiver;

  2. ACO Participation Waiver;
  3. Shared Savings Distribution Waiver;
  4. Compliance With the Stark Law Waiver for the AKS and Gainsharing CMP; and
  5. Waiver for Patient Incentives.

Each of the waivers contains certain conditions that must be met in order for an ACO (or ACO participant/provider/supplier) to be protected by the waiver, but an arrangement needs to meet only one of the waivers to be protected.


ACO type organizations are already a feature of the commercial insurance market and large insurers like Humana, Cigna, and UnitedHealthcare and the Blues already offer such plans or are about to do so. The consensus in the insurance industry seems to be that private commercial ACOs can be effective - but of course they do not have the data opt-out and complete freedom of choice features found in the MSSP.

In CMS's view, it has now offered "a more feasible and attractive on-ramp for a diverse set of providers and organizations to participate in ACOs."[1] Just how attractive? Stick around and we will see.

For more information on the final rule on the Medicare Shared Savings Program and the new Advance Payment ACO model, please contact Alyce C. Katayama at (414) 277-5823 / or your Quarles & Brady attorney.

[1] Donald M. Berwick, CMS Administrator writing in The New England Journal of Medicine, October 20, 2011.