Edward W. Correia, JD, MP

	The 2010 Patient Protection and Affordable Care Act included a provision to promote the formation of Accountable Care Organizations (ACOs). These organizations will be eligible to share in the savings to Medicare if they are able to reduce costs and provide high-quality care. The law allows a wide variety of organizations to become ACOs, even networks of providers that are small compared with major integrated delivery networks. The Center for Medicare and Medicaid Services recently proposed regulations, which are extensive and complex. They impose significant regulatory requirements on these new organizations, ranging from the structure of the organization to quality standards for qualifying for any shared savings. There are a number of challenges to ACOs and it is uncertain whether they can achieve the goals Congress had in mind or even whether many healthcare provider organizations will be interested in participating in the program. The potential for shared savings may be too small to justify the additional costs and regulatory burdens of becoming an ACO. In addition, the incentives to physicians may be inadequate to encourage behavior that reduces cost while maintaining quality. The article reviews the proposed regulations and discusses the prospects for success of ACOs.

		Many hospital administrators and physician groups will be interested in creating ACOs that can qualify for shared savings if they reduce Medicare costs per patient below a benchmark. However, before taking steps to qualify for the program, they will want to understand the new proposed regulations.

		The new ACO program contains a number of complex features, including the methodology for computing the savings to Medicare achieved by the ACO. The article describes the methodology in detail.

		Currently, CMS is evaluating comments on its proposed regulations. Healthcare organizations that are interested in the program will want to see if CMS revises them in light of the mostly negative reaction.

	Last year’s major healthcare reform bill, the Patient Protection and Affordable Care Act (ACA),

 provided for a new form of healthcare organization called Accountable Care Organizations, or ACOs. The concept of ACOs has been advocated by a number of healthcare experts for some time.

 In addition, the Center for Medicare and Medicaid Services (CMS) conducted a demonstration project during 2005-2009 to test the concept. The results of this demonstration, which are discussed below, were not completely encouraging. However, they did not dissuade Congress from authorizing CMS to implement a national program. ACOs now have new prominence because the ACA includes a section intended to promote their formation.

	Recently, CMS proposed regulations describing how hospitals and other providers can create an ACO and setting out the requirements to qualify for the program.

 The CMS has also published rules for ACOs to apply for waivers from certain federal laws in order to operate effectively.

 The reaction to the Proposed Rule was overwhelmingly negative. Major healthcare organizations, such as the American Hospital Association (AHA), the American Medical Association (AMA), and others criticized the proposal as too burdensome and costly considering the limited incentives offered by the program. I discuss some of these comments in this article in connection with particular provisions of the proposal.

	The ACA and the proposed regulations promote the formation of ACOs by providing for a creative form of reimbursement that is intended to encourage providers within the ACO to reduce costs while maintaining quality. In particular, an ACO may receive payments for shared savings if it can reduce costs for Medicare beneficiaries below a specified benchmark. These payments in turn can be shared with physicians and other providers in order to encourage more efficient healthcare delivery. But while ACOs have the potential to reduce costs, in large part by influencing physician behavior, as I discuss below, a number of challenges may prevent them from providing significant benefits.

	The ACO potentially has 2 advantages over other forms of organization. First, the ACA provides for considerable flexibility in how ACOs are organized. They need not be as large or integrated as an Integrated Delivery Network (IDN). Consequently, they can be developed more quickly and with fewer resources. The ACA provides that the following arrangements may qualify as an ACO

	1. ACO professionals in group practice arrangements. (“ACO professionals” are defined as physicians, physician assistants, nurse practitioners, and clinical nurse specialists.)

	2. Networks of individual practices of ACO professionals.

	3. Partnerships or joint venture arrangements between hospitals and ACO professionals.

	4. Hospitals employing ACO professionals.

	5. Such other groups of providers of services and suppliers as the Secretary of Health and Human Services (HHS) determines appropriate.

	The second potential advantage is that the ACA provides for a unique form of payment to an ACO: participation in “shared savings,” which are defined as a percentage of the difference between a benchmark determined by the Secretary and the costs to Medicare for services provided to beneficiaries who are assigned to the ACO.

 Although this type of reimbursement has features that resemble capitation, it is different in important respects. Capitation reimbursement pays the same amount for each enrollee in a plan, whether an individual uses services or not. An ACO is generally guaranteed at least the standard Medicare reimbursement levels for beneficiaries who require services. Under some circumstances, an ACO can experience a loss in reimbursement if its expenditures for beneficiaries are too high. Thus, total Medicare payments are higher for a population that experiences a greater need for services, while total payments are fixed under a capitation approach. As a result, ACOs face considerably less financial risk than a Health Care Organization (HCO) that depends on fixed capitation payments. (As used here, “HCO” is a generic term for an integrated network of healthcare providers, ranging from a single hospital affiliated with a physician group to a large IDN, which may include dozens of hospitals, affiliated physician groups, and other types of providers.)

	CMS’s Proposed Rule sets out the requirements for participating in the program, the formulas for shared savings, and other relevant regulations.

 The proposed regulations are complex and lengthy. In part, this is the result of the analytical challenges inherent in devising a rational way to calculate shared savings. In addition, it appears that CMS envisioned each ACO to be a model HCO, which incorporates all the ideal qualities of efficiency, high quality care, and sensitivity to patients. The complete regulatory scheme is quite daunting, so much so that it is likely to discourage many organizations from participating in the program.

	In order to qualify for participation in the Shared Savings Program, an ACO must agree to a series of conditions.

	1. become accountable for the quality, cost, and overall care of the Medicare fee-for-service beneficiaries assigned to it;

	2. enter into an agreement to participate for at least 3 years;

	3. have a formal legal structure that allows it to receive and distribute shared savings;

	4. include primary care professionals sufficient for the beneficiaries assigned to it (at least 5000);

	5. provide HHS with required information;

	6. have a management structure that includes clinical and administrative systems;

	7. adopt processes to promote evidence-based medicine and coordinate care; and

	8. meet patient-centeredness criteria specified by HHS.

	The statutory requirements are amplified in the proposed regulations. The following discussion summarizes the principal requirements:

 A participating ACO must agree to comply with certain requirements for 3 years.

 As discussed below, an ACO can choose to participate under Track 1 (the “one-sided” lower-risk, lower-reward model) or Track 2 (the “two-sided” higher-risk, higher-reward model). After the first 3 years, all ACOs must operate under the Track 2 model.

Creating a Separate Legal Entity to Serve Certain Functions.

 An ACO can be composed of several distinct legal entities, such as hospitals and physician practices. However, it must create a separate legal entity, such as a non-profit corporation, to serve certain functions, such as distributing shared savings.

While the statute and the Proposed Rule are flexible regarding the type of legal entity required, an ACO must have a governance structure that meets CMS’s requirements. The ACO’s participants must have at least 75% of “control” of the ACO.

 As a technical matter, it would seem that this 75% control requirement could be met by giving 1 physician practice, out of many participating in an ACO, the right to name, say, 8 of 10 board directors. However, the explanation of the Proposed Rule also states: “[W]e propose that the ACO must demonstrate a mechanism of shared governance that provides all ACO participants with an appropriate proportionate control over the ACO’s decision making process.”

 This statement suggests an additional requirement, that each participant must have a share in the control of the ACO that reflects its degree of participation in the ACO. In addition, beneficiaries are to play some role in governance as well.

	The idea of proportionate control is not a traditional one in HCOs or any other corporate structure, nor is “customer” participation in governance. Control of a traditional corporation is vested in a board of directors, which is chosen in a variety of ways, including by shareholders in a for-profit corporation. There is no requirement that service providers affiliated with a corporation, eg, physician groups affiliated with an HCO, share proportionally in its governance. Mandating a particular scheme of governance could undercut the efficiency of the ACO and require a major revision of existing governance structures of HCOs that want to qualify as ACOs. There is certainly a value in ensuring the accountability of the leadership of an ACO, but “proportionality” is an unwieldy and unnecessary requirement. Note, for example, the suggestion made by Delos M. Cosgrove, MD, on behalf of the Cleveland Clinic, in his letter (May 26, 2011) (Cleveland Clinic Comment) to Donald Berwick, MD: “We recommend that CMS drop its specific Board composition and relationship requirement.” Note also the suggestion made by Rick Pollack, on behalf of the AHA, in his letter (June 1, 2011) (AHA Comment) to Donald M. Berwick, MD: “We urge CMS to moderate its proposed governance requirements to allow providers to use their current governance process…as long as they can demonstrate how they achieve shared governance on care delivery policies.”

 The ACO must satisfy CMS that it has a particular management structure that accomplishes the goals that CMS envisions. For example, there must be a full-time senior-level medical director physically present at one of the ACO participant facilities who is a board-certified physician.

 An ACO’s participants must have a meaningful investment in the ACO but the investment need not be financial. It can be a “meaningful human investment (for example, time and effort) in the ongoing operations of the ACO....”

 There must also be an “infrastructure” (eg, information technology) that enables the ACO to collect and evaluate data.

One of the most demanding—and probably unrealistic&mdash;requirements is that 50% of primary care physicians participating in the ACO meet the CMS standard for “meaningful use” of information technology.

 These notices include informing beneficiaries that their ACO providers are participating in the ACO, that they have a right to use other providers, and that they can opt out of CMS sharing data on the services they receive.

Taking Responsibility for the Care of at Least 5000 Beneficiaries.

 All ACOs must have responsibility for at least 5000 beneficiaries, although CMS contemplates that some ACOs will be much larger.

 A beneficiary does not “choose” an ACO, at least not directly, and an ACO does not “choose” a beneficiary. Instead, the Proposed Rule states: “The term ‘assignment’.... refers only to an operational process by which Medicare will determine whether a beneficiary has chosen to receive a sufficient level of the requisite primary care services from physicians associated with a specific ACO so that the ACO may be appropriately designated as exercising basic responsibility for that beneficiary’s care.”

 In general, CMS determines whether a patient is assigned to an ACO based on whether a patient is receiving a “plurality” (not a majority) of his or her primary care services from participants in the ACO.

 This determination is made “retrospectively,” that is, it is based on use of services during the 3-year period before the ACO agreement begins by beneficiaries that “would have” been beneficiaries of the ACO if they had kept using the same primary care providers during the agreement period that they used during the benchmark period.

 “Performance period” and “performance years” are CMS’s terms for the period of the ACO’s agreement when determinations of shared savings are made.

Complying With Extensive Reporting Requirements.

 These include reporting information about participating providers, submitting extensive information in the original application and in the event of significant changes, and reporting information related to quality of care and making public disclosures.

Adopting Procedures to Achieve “Evidence-Based Medicine,” “Patient Engagement,” “Coordination of Care,” and “Patient-Centeredness.” 

These terms are not self-defining and there are obviously a wide variety of approaches to achieving these goals, depending on how they are defined. The explanation of the Proposed Rule states: “Evidence-based medicine can be generally defined as the application of the best available evidence gained from the scientific method to clinical decision-making.”

 The Proposed Rule also includes several criteria for determining whether the “patient-centeredness” requirement is met. These include, for example, making beneficiaries and their families partners in caregiving and ensuring patient involvement in governance. The ACO must also have a “beneficiary experience of care survey” in place and a plan for using the results of the survey.

Submitting All Marketing Materials to CMS for Advance Approval.

 States CMS: “We believe there is a potential for beneficiaries to be misled about Medicare services available from an ACO or about the providers and suppliers from whom they can receive those services.”

 For this reason, all marketing materials must receive advance approval from CMS. Note that this is a more burdensome requirement than the one imposed by the Federal Trade Commission (FTC) on advertisers generally. The FTC does not require advance approval of advertisements and marketing materials, but challenges advertising that it considers to be false or deceptive. This advance approval requirement puts a significant administrative burden on CMS and also risks substantial delays in marketing campaigns while CMS performs its review. In his letter to Donald Berwick (June 3, 2011) (AMA Comment), Michel D. Maves pointed out: “[The] requirement that CMS approve all ACO marketing materials is an unprecedented, unnecessary, inappropriate, and unworkable requirement.” Additionally, it does not seem likely that ACOs have a greater potential to engage in deceptive advertising than advertisers in general. Therefore, it is difficult for CMS to justify this unusual advance review requirement.

Complying With Other Legal Requirements. 

The Proposed Rule requires that the ACO have a compliance plan to ensure compliance with all legal requirements, including the Anti-Kickback Statute, the False Claims Act, etc.

 One of the most significant requirements is intended to prevent conflicts of interest by mandating that ACOs require members of their governing body (not all ACO participants) to disclose relevant financial interests.

 A waiver procedure proposed by CMS would allow ACOs to be exempt under some circumstances from the Physician Self-Referral Law, the Anti- Kickback Statute, and other restrictions.

 Obviously, CMS and the antitrust agencies that participated in developing the Proposed Rule are concerned that the cooperation of multiple providers within an ACO might harm competition. An ACO would already be subject to federal and state antitrust laws without any new requirement, but the Proposed Rule and a Policy Statement issued by the FTC and Department of Justice provide for a special antitrust review procedure.

 The antitrust agencies already have in place a Health Care Policy Statement, which addresses the degree of integration required to be analyzed under a “rule of reason,” which takes into account market share and other facts that affect competition, rather than a “per se” analysis, which focuses only on the nature of the agreement. Arguably, the antitrust procedure in the Proposed Rule includes a more flexible standard for rule of reason analysis.

	In general, the required review is based on the ACO’s market share for a “common service” if 2 or more participants in the ACO offer the same service. If the total market share of all the ACO participants for that service is below 30% in the ACO’s geographic area called the Primary Service Area (PSA), the ACO is eligible for a “safe harbor” for that service and no review is required.

 For example, assume that: 1) 2 group practices that are participants in an ACO offer cardiology services, and 2) the combined market share of these 2 group practices for cardiology services is less than 30% in the relevant PSAs. Under those circumstances, there is a safe harbor for cardiology services and no special review is required. However, if the market share is above 50%, the ACO must seek an antitrust review and obtain approval from the agencies.

 If the share is between 30% and 50%, the ACO has the option to seek a review.

 In that intermediate zone, the Policy Statement provides that, if the ACO avoids certain types of conduct, it is more likely to obtain clearance from the agencies.

 For example, conduct that should be avoided includes discouraging payers from directing patients to use providers outside the ACO and contracting with physician specialty groups on an exclusive basis.

	Note that the standard of review—safe harbor, optional review, or required review&mdash;is based on a particular service, not the overall percentage of patients who are assigned to the ACO in a particular geographic area. Even if the market share under the above analysis is less than 30% for all services but 1, review is required for the remaining service.

 Note also that, except for the “dominant provider” limitation discussed below, no review is required if there is only 1 participant in the ACO that offers a particular service.

 To take the cardiology services example, assume that there is only 1 group practice within the ACO that offers cardiology services, but its market share in the PSA is 75%. There would be no mandatory review. However, to come within a safe harbor, “The ACO participant (a ‘dominant provider’) must be non-exclusive to the ACO to fall within the safety zone. In addition, to fall within the safety zone, an ACO with a dominant provider cannot require a commercial payer to contract exclusively with the ACO or otherwise restrict a commercial payer’s ability to contract or deal with other ACOs or provider networks.”

	The antitrust agencies are obviously worried that the consolidation of hospitals and physician practices within an ACO can threaten competition, and therefore a special review process is needed. However, like the requirement for advance approval of marketing materials, this new review procedure may end up delaying the operation and formation of ACOs and imposing unnecessary burdens and costs on ACOs as well as the agencies. Some commenters argued that, if there is to be a mandatory review threshold, the one proposed by CMS and the antitrust agencies is too low. In contrast, the health insurance industry tended to take the position that the antitrust standards should be stricter. That is presumably because health insurers are worried that consolidation may allow an ACO to have enough market power to drive down health insurance premiums.

	As a practical matter, many HCOs with even a modest degree of integration will exceed the 50% threshold in at least 1 area, triggering an expensive mandatory review. For example, the AHA found that: “[I]n the overwhelming majority of these areas, hospitals that sought to partner with any other hospital likely would exceed the 50 percent review threshold…and, thus be faced with costs of potentially several hundred thousand dollars in order to defend their ACO application before one of the Agencies.” In light of these difficulties, CMS and the antitrust agencies should consider scrapping the special review process altogether in favor of issuing more specific enforcement guidance and offering to give expedited advisory opinions.

 Section 1899(b)(3)(A) of the Act requires the Secretary to determine appropriate measures to assess the quality of care furnished by the ACO. As a first step, the Proposed Rule identifies performance criteria and reporting requirements but does not set specific quality standards.

 The Proposed Rule describes 5 “domains” of quality measures. Those standards will be developed in future rule making. The Proposed Rule includes 65 measures to calculate the “ACO Quality Performance Standard.”

 In the first year, the ACO would meet the quality performance standard by full and accurate reporting. In subsequent years, the ACO would have to meet certain minimum quality standards, which will be announced by CMS. If it does not meet the minimum quality performance standard for at least 1 domain, it would not be eligible for shared savings.

 In addition, the level of shared savings allocated to an ACO will be reduced if it falls below a perfect score on the quality standards. This is termed the “performance score approach” by CMS, to be distinguished from the “threshold approach,” which would allow maximum shared savings if all minimum quality standards are met.

 The effect may be that it is impossible for most ACOs to achieve the maximum possible savings. As noted in the AHA Comment, “[T]he manner in which CMS proposes to use the ACO’s quality score to reduce the sharing rates makes these maximums unattainable. This is because, unless an ACO scores 100 percent on all 65 proposed quality measures, which may not be possible, the quality score will always serve to reduce the sharing rate from the stated 50 and 60 percent.”

	The most significant element of the ACO program is the potential for ACOs to participate in “shared savings,” that is, some portion of the savings to Medicare from their efficient delivery of care. That possibility is the incentive for organizations to participate in the program in the first place. The question is whether the incentive is strong enough, given the administrative burden, implementation costs, and financial risks that the ACO must assume.

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CMS recently proposed regulations for Accountable Care Organizations which are extensive and complex. This article reviews the proposed regulations and discusses the prospects for success.

Edward W. Correia, JD, MP

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