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Insight Accountable Care Organizations: Status Update

ACO is the new name for an old idea: health care providers and payers collaborate so that providers are accountable for and compensated according to the quality of care rendered to a defined population. An ACO includes providers who can coordinate and provide care across a broad spectrum of health care services, thereby avoiding duplication and errors, improving quality and efficiency, and reducing costs. The key is to structure incentives to reward quality and cost savings. Managed care déjà vu? Yes, but ACOs generally differ from HMOs, PPOs, and PHOs in their scope: ACOs coordinate care among a broader range of providers across a broader spectrum of health care services, usually with aid of improved technology that facilitates capturing, analyzing and sharing health information. The provider compensation structure may take many forms, including employee salaries and bonuses, capitation, pay for performance, bundled payments, or–in the case of the ACA–shared savings.

Medicare Shared Savings Program (MSSP). The federal ACO program (the Medicare Shared Savings Program or MSSP) is codified at ACA § 3022. It is a voluntary program. Providers who wish to participate may establish an ACO that agrees to be accountable for the quality, cost and overall care of at least 5000 beneficiaries enrolled in traditional fee-for-service (FFS) Medicare (i.e., Medicare parts A and B), and who are assigned to the ACO. The ACO continues to submit FFS claims just as it does now, but if the ACO meets specified organizational and quality performance standards, the participants may also share in Medicare cost savings in addition to their FFS reimbursement. By way of example, participants in Medicare’s MSSP prototype project were permitted to share $25.3 million for achieving $32 million in cost savings to Medicare.

  1. Eligible Participants. The MSSP is open to most providers as long as they satisfy certain organizational requirements described below. Under the MSSP, ACOs may be comprised of hospitals and employed practitioners, partnerships or joint venture arrangements between hospitals and practitioners, practitioners in group practice arrangements (e.g., multi-specialty groups); practitioner networks, or other entities deemed appropriate by HHS. (ACA § 3022(b)(1)).
  2. Organizational Requirements. ACOs must meet certain organizational requirements to participate in the MSSP, e.g., the ACO must have a formal legal structure that allows it to receive and distribute shared savings to participants, and establish processes to satisfy clinical and data reporting functions. It may be established as a separate legal entity, or through less formal contractual relationships among participants. It must have a sufficient number of primary care professionals to care for at least 5000 Medicare beneficiaries assigned to it. The ACO must agree to participate in the MSSP for at least three years. (ACA § 3022(b)(2)). The proposed regulations presumably will establish more detailed requirements for ACO participation.
  3. Target Standards and Financial Benefits. Under the MSSP, if the ACO satisfies certain quality and cost saving standards during a 12-month period, the ACO will receive a share of Medicare savings. (ACA § 3022(b), (d) and (i)). This is the heart of the MSSP and the key consideration for participation. Unfortunately, however, HHS has not yet determined or announced the target quality and cost reduction standards, nor has it defined the relevant amount of incentives that an ACO may expect to receive if it meets the targets. Many providers have been waiting for the proposed regulations to assess the pros and cons of ACO participation.
  4. Assigned Beneficiaries. An ACO must have at least 5,000 assigned Medicare Part A and B beneficiaries to participate in the MSSP. Because ACOs will receive incentive payments based on the quality and cost of care provided to assigned beneficiaries, the assignment of beneficiaries is critical to ACO viability. Unfortunately, the ACA provides little guidance concerning how beneficiaries will be assigned except to note that beneficiaries will be assigned based on utilization of primary care services by ACO participants, and ACOs may be penalized if they try to exclude at-risk beneficiaries. Unlike HMOs, participation in the ACO is intended to be “invisible” to the beneficiaries, i.e., beneficiaries are not required to use ACO participants to receive their care, and may not realize they are even assigned to an ACO. (ACA § 3022(c)). Hopefully, the forthcoming regulations will explain how an ACO may be held accountable for the quality and cost of a patient’s care when the patient chooses receive care from providers outside the ACO.
  5. MSSP Timelines. Under the MSSP, HHS will begin contracting with qualifying ACOs effective January 1, 2012. HHS promised the implementing regulations by Fall 2010, but finalizing regulations has apparently proven more difficult than Congress anticipated. In October 2010, CMS, the Office of Inspector General (OIG), and Federal Trade Commission (FTC) held public meetings to receive industry suggestions for ACO implementation. The meetings apparently raised more questions than they answered: in November 2010, CMS issued a general Request for Information soliciting additional suggestions for structuring ACO regulations. Comments were due in December. If the proposed rules are truly at the OMB, the wait may be coming to an end. Even with the proposed regulations issue, however, health care providers may want to wait for a final rule before investing the resources and costs in establishing an ACO. Thus, relatively few providers will likely be lining up to contract with HHS on January 1, 2012.

Challenges to Establishing ACOs. With the possible exception of existing integrated delivery systems (e.g., hospital systems or large multi-specialty groups) that already have the necessary infrastructure in place, most providers are in limbo concerning ACO implementation. Until the final regulations issue, they cannot evaluate either the costs or benefits of ACO implementation. In addition to the regulatory uncertainty, providers must consider the practical challenges to ACO implementation.

  1. Cost of Implementation. Most analysts agree that ACOs will require sophisticated electronic medical records (EMR) systems to coordinate care, improve quality and reduce costs, and capture data necessary to confirm eligibility for MSSP payments. Those EMR systems cost thousands to millions of dollars. In addition, there will be significant legal, operational, and opportunity costs in starting up and maintaining a successful ACO. Most providers are unwilling to invest those costs before knowing the burdens and benefits of MSSP participation.
  2. Financial Shift. ACOs will necessitate a fundamental shift in a provider’s economic philosophy. Under our current FFS system, providers generally make more money by selling more services. Under the MSSP, providers are motivated to reduce costs by reducing the need for or provision of services. Interestingly, the MSSP contemplates that providers will operate under both philosophies simultaneously: participating ACOs will continue to bill under the current FFS structure while they seek to obtain MSSP payments by reducing costs to Medicare. It remains to be seen whether the MSSP payments cover the costs of ACO operation and reduced FFS payments.
  3. Cooperation Among Competing Participants. ACOs require the participation and cooperation of a wide variety of providers, some of whom may be at odds with each other concerning management of the ACO and division of MSSP payments. For example, hospitals and specialists may suffer the greatest reduction in FFS income as care is directed to less expensive settings; however, other ACO participants may be unwilling to allocate proportionally greater MSSP benefits to hospitals and specialists. The most likely ACOs are large hospital systems that already employ or contract with providers to offer a wide array of services. Those organizations are generally subject to corporate governance. When it comes to ACOs, however, the American Medical Association (AMA) is apparently leading a charge to ensure that ACOs are governed by the participating physicians. In October 2010, the AMA published its “Accountable Care Organization (ACO) Principles”, which maintains that ACOs must be “physician-led,” i.e., that physicians should have the principal role in ACO governance as well as client care.
  4. Existing Laws that Limit Participation. Existing state and federal laws currently prohibit or severely restrict many relationships or actions that ACOs would promote. For example, the federal Stark and Anti-Kickback Statutes currently prohibit many of the incentives or financial relationships that might be used to implement an ACO. The federal Civil Monetary Penalties statute prohibits hospitals from offering inducements to practitioners to limit services, e.g., “gainsharing”, which is counter to the ACO premise. Federal antitrust laws may prohibit consolidation or cooperation among competitors that participate in ACOs. These laws and regulations must be addressed before most entities may pursue ACOs. CMS, the OIG, and the FTC have promised regulatory waivers, exceptions or guidelines to accommodate ACOs; until then, most providers are severely limited in any attempt to organize or implement an ACO.


The ACA promised incentives but gave us only a bare outline for ACOs. Large hospital systems and multi-disciplinary groups likely have the infrastructure and regulatory exceptions available to push ahead with ACOs in anticipation of the MSSP’s January 1, 2012 “go live” date. For the rest of us, we need the government’s implementing regulations or guidelines before we can fully evaluate the cost and benefits of participation in the MSSP or create an ACO that satisfies regulatory requirements. To complicate matters, those regulations or guidelines must come from and coordinate between several agencies, including CMS, the OIG, and the FTC. Even if the HHS’s proposed regulations issue shortly, it may be months before providers have the final regulations or coordinated guidance necessary to contract with HHS and participate in the MSSP. We are anxiously waiting for the regulations to determine the appropriate next steps.

If you have questions about these or other legal issues, please contact a member of our Health Law group or call 208.344.6000.

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