Proposed Accountable Care Organization Regulations Initial Takeaways

Formal ACO Structure, Governance and Participation in Shared Savings Program

1) Formal legal entity required for ACO. The Proposed Regulations require that an ACO be a legal entity recognized under state law. This requirement appears to foreclose the opportunity to form an ACO based solely on contractual affiliations.

2) Types of entities eligible to independently form ACOs not significantly expanded. Under the Accountable Care Act, the following groups of providers of services and suppliers are eligible to establish an ACO: (i) ACO professionals (i.e., doctors of medicine or osteopathy, physician assistants, nurse practitioners and clinical nurse specialists) in group practice arrangements; (ii) networks of individual practices of ACO professionals; (iii) partnerships or joint venture arrangements between acute care hospitals and ACO professionals; (iv) acute care hospitals employing ACO professionals; and (v) such other groups of providers of services and suppliers as the Secretary determines to be appropriate.

The Proposed Regulations expand the list of eligible groups in only one respect, by permitting a critical access hospital (CAH) that bills for both facility and professional services to independently form an ACO. The list of entities eligible to independently form ACOs was not expanded to include providers such as FQHCs, RHCs, LTCHs, SNFs, etc. ACO formation will therefore be driven by hospitals and physician groups.

Certainly, those entities forming the ACO are permitted to include as ACO participants other types of Medicare enrolled providers and suppliers (including providers and suppliers that would not be permitted to independently form an ACO) as the ACO deems appropriate.

3) Shared Savings Program participation agreements will be for a three-year term, with performance measured annually. ACO participation agreements will provide for three-year terms, beginning on the January 1 following approval of the ACO’s application (unless otherwise specified). Unless otherwise specified, the ACO’s performance (i.e., quality, savings, losses, etc.) will also be measured on an annual calendar year basis.

As noted below, participation as an ACO will require, at a minimum, willingness to accept shared risk in the third year of the term.

4) ACOs must be able to distribute the incentive/shared savings payments to participants. ACOs are required to describe to CMS how they will distribute or otherwise utilize shared savings.

5) Primary care providers exclusive to one ACO; no exclusivity for others. Primary care physicians (e.g., internal medicine, geriatric medicine, family practice and general practice), and any other ACO professionals billing under the same TIN as such primary care physicians, must participate exclusively in one ACO during the three-year agreement term. All others ACO participants (e.g., hospitals, specialists, FQHCs, etc.) are permitted to participate in more than one ACO and cannot be required to be exclusive to a single ACO. Therefore, multi-specialty physician groups that include a primary care component would presumably be required to participate exclusively in one ACO.

6) ACOs may remove but not add participants. During the three-year participation period, ACOs may generally remove, but not add, ACO participants, but the ACO may add or remove individual providers/suppliers within such ACO participant entities. For example, a group practice that is an ACO participant could add physicians who will provide services within the ACO, but the ACO could not add another group practice or solo practice as an ACO participant.

7) Governing body must be proportionally representative of entities participating in ACO. At least 75% control of the ACO’s governing body must be held by ACO participants (i.e., through representatives from within each participant entity), and each participant must have “appropriate proportional control.” The Proposed Regulations are unclear as to how control is to be divided proportionally. On their face, the Proposed Regulations appear to require that each ACO participant, whether such participant is a large integrated health system, a physician group practice, a sole practitioner, or otherwise, have at least one representative on the ACO’s governing board. This requirement, which could potentially lead to very large and unwieldy governance structures, may well be clarified when the Proposed Regulations are finalized.

8) Governing body must have at least one Medicare beneficiary representative. The ACO must have on its governing body one or more Medicare beneficiary representative(s) who are served by the ACO. Neither a Medicare beneficiary representative nor his or her immediate family members are permitted to have a conflict of interest with the ACO.

9) ACO must partner with the community. ACOs are required to establish partnerships with community stakeholders, and are deemed in compliance with this requirement if there is community stakeholder representation on the governing body. There appears to be room for “innovative” options to satisfy this requirement, such as a community advisory committee.

10) Management companies and health plans can have a relationship with ACOs. The regulations suggest that management companies, health plans and other entrepreneurial entities may have representation on the ACO’s governing body, as long as the above requirements are met, and presumably may have a financial relationship with the ACO pursuant to which such an entity is paid for services rendered/capital provided from revenues attributable to shared savings. Since CMS has the right to review and approve the methods by which an ACO will distribute or otherwise utilize shared savings, it appears that CMS may have indirect control over the terms of the ACO’s financial relationships with management companies, health plans and other entrepreneurial entities. It is not clear at this point what additional guidelines or restrictions will apply to such relationships.

Operation of Shared Savings Program

The Shared Savings Program generally allows ACOs to share in (and distribute) a specified percentage of savings attributable
to the Medicare expenditures of the ACO’s assigned beneficiaries. These savings are determined by measuring the difference
between actual expenditures and an expenditure benchmark set by CMS, which benchmark will be set at a dollar amount
per beneficiary. The basic calculation for an ACO’s shared savings is as follows (subject to applicable caps and eligibility

ACO Shared Savings = ACO’s Sharing Percentage x (Per Capita Medicare Expenditures Benchmark – Net Savings
Threshold, if applicable – Average Actual Per Capita Medicare Expenditures)

11) Each Medicare beneficiary will be assigned to a single ACO retroactively, based on which providers the beneficiary used for primary care. A beneficiary will be retroactively assigned to the ACO whose primary care providers rendered the plurality of primary care services to such beneficiary during the completed performance year. Assignment does not restrict the beneficiary’s right to choose where to receive health care services. Based on the retroactive assignment methodology, neither the ACO nor the beneficiaries will know with certainty to which ACO the beneficiaries will be assigned, and potentially reassigned, annually.

12) ACOs must have at least 5,000 assigned beneficiaries. ACOs not meeting this standard would face remedial measures up to and including imposition of a corrective action plan, suspension of eligibility for shared savings and termination from the program. Although the minimum is 5,000 assigned beneficiaries, ACOs may consider seeking to have (many) more beneficiaries assigned to them to avoid non-compliance with this requirement and obtain other advantages, such as lower minimum shared savings rates (discussed below) and better actuarial control over the risk of shared losses. In addition, the complexity of the ACO structure reflected in the Proposed Regulations will necessarily compel providers to migrate toward a large ACO format.

13) Two ACO shared savings models: one-sided model in which the ACO shares savings only, and two-sided model in which the ACO shares savings and losses. The one-sided model has no downside (loss sharing) risk, but has lower shared savings percentages and shared savings caps. The two-sided model has downside (loss sharing) risk, but has higher shared savings percentages and shared savings caps.

14) Two tracks available to ACOs under the program. ACOs may choose between two tracks at the time of initial application to participate in the Shared Savings Program. Under Track 1, during the first two years of the term, the ACO will be eligible to participate in shared savings but will not be at risk for shared losses (i.e., one-sided model); during the third year of the term, the ACO will share in both savings and losses, to the extent specified in the Proposed Regulations (i.e., two-sided model). Under Track 2, the ACO will share in both savings and losses, to the extent specified in the Proposed Regulations (i.e., two-sided model), during each of the three annual performance periods. For subsequent agreement periods, all ACOs must operate under the two-sided model.

Therefore, all ACO participants must be prepared, either immediately or on a relatively short-term basis, to move to a
shared savings/shared loss operating model.

15) Shared savings benchmarks based on assigned beneficiaries’ expenditures during prior three years. The benchmarks are set by CMS and measure overall expenditures attributable to beneficiaries that received a plurality of primary care services from the ACO participants during the three-year period prior to the participation period. The data is weighted in favor of the more recent years. Expenditures attributable to an assigned beneficiary might be attributed to the ACO, in establishing its benchmark, notwithstanding the fact that some portion of such expenditures were in connection with services provided by non-ACO providers and suppliers. Each ACO’s benchmark will be adjusted for subsequent years based on national Medicare fee-for-service expenditures.

16) ACO must meet minimum quality performance standards to receive shared savings. Under both the one-sided and two-sided models, to be eligible for shared savings, ACOs must meet minimum performance standards measuring patient/care giver experience, care coordination, patient safety, preventative health and at-risk population/frail elderly health. These standards are also used to determine the ACO’s sharing percentage (i.e., percent of savings to which the ACO is entitled), which percentages can be up to 52.5% in the one-sided model and up to 65% in the two-sided model.

17) ACO must achieve minimum savings rate to be eligible for shared savings. Under both the one-sided and two-sided models, ACOs must save a minimum of 2% to 3.9% (depending on model and size) of the applicable benchmark to be eligible for shared savings.

18) All shared savings payments to ACOs subject to 25% holdback. Under both models, an ACO’s share in savings will be subject to 25% withholding to help ensure repayment to Medicare of any shared losses for which the ACO becomes responsible. This holdback is to be applied towards repayment of ACO’s losses and will be forfeited in most cases of ACO termination from the Shared Savings Program.

19) ACOs must have reserve mechanisms. As part of the application process, and annually thereafter, ACOs must submit documentation demonstrating the adequacy of the ACO’s repayment mechanism. ACOs must obtain reinsurance, place funds in escrow, obtain surety bonds, establish a line of credit, or establish another appropriate repayment mechanism.

Additional ACO Requirements

20) ACOs to provide general notice of participation and other information to beneficiaries. ACOs are required to post notice of their participation in the Shared Savings Program and make other information available to beneficiaries generally, although the parties will not know with certainty whether any individual will be an “assigned” beneficiary.

21) All ACO marketing materials to be reviewed and approved by CMS. All ACO marketing materials or activities (defined broadly), and any subsequent changes, must be reviewed and approved by CMS prior to their use. This appears to be an unduly burdensome requirement that will receive substantial comments.

22) ACOs prohibited from avoiding at-risk beneficiaries. CMS will monitor ACOs to identify trends and patterns suggestive of avoidance of at-risk beneficiaries (and will follow up with investigations and various sanctions, up to and including termination, where appropriate). “At-risk beneficiaries” include, without limitation, those considered high cost due to multiple annual hospitalizations, dual eligible patients, high utilization pattern patients and those patients with recent high cost diagnoses.

23) ACOs must identify high-risk beneficiaries. ACOs must implement systems to identify high-risk patients and develop individualized care plans for targeted patient populations.

24) Additional incentives for using Physician Quality Reporting System. To qualify for this incentive, ACOs and eligible physicians must submit quality performance standard measures according to the submission method established by CMS. The incentive is equal to 0.5% of the ACO eligible professional’s total estimated Medicare Part B Physician Fee Schedule allowed charges for covered professional services furnished during a calendar year.

25) Half of ACO primary care physicians must be meaningful EHR users. By the start of the second performance year, at least 50% of participating primary care physicians must be meaningful EHR users of Certified EHR Technology (as defined by HITECH Act and subsequent Medicare regulations). CMS may terminate an ACO’s participation agreement if this requirement is not timely met.

26) ACOs must take measures to promote evidence-based medicine. ACOs are required to design and implement, through medical practice or clinical guidelines and processes, a process to promote the use of evidence-based medicine. All ACO participants must agree to follow such guidelines and the guidelines must contain provisions addressing performance evaluations and remedial measures, including expulsion, for ACO participants failing to follow such guidelines.

27) ACOs must use beneficiary experience of care surveys. The ACO must describe how it will use the survey results to improve care.

28) ACOs must assess needs of assigned beneficiaries. ACOs must develop a process for evaluating their beneficiaries’ health needs as well as a plan to address such needs.

29) ACOs must adopt a detailed compliance plan. The compliance plan must include,among other things, designation of a compliance official reporting directly to the governing body, a process for addressing identified compliance issues, whistleblower/reporting processes and compliance training methods.

Regulation of ACOs by Other Regulators

30). ACOs with greater that 50% PSA share subject to prior antitrust review. An ACO with a Primary Service Area (PSA) share greater than 50% for any common service that two or more ACO participants provide to patients from the same PSA must obtain advance expedited antitrust review by the FTC/DOJ before participating in the program. A PSA is defined as the lowest number of contiguous zip codes from which originate 75% of the ACO’s patients for a particular service. A rural exception is also provided with respect to the above antitrust review requirement.

31) Antitrust “safety zone” available to certain ACOs with less than a 30% PSA share for any common service. Those ACOs falling between 30% and 50% PSA shares have the option to seek antitrust review or may take other enumerated measures.

32) Proposed fraud and abuse waivers available for ACOs. CMS and OIG have proposed waivers under the Stark Law, Anti-Kickback Statute and Civil Monetary Penalty Law generally covering an ACO’s distribution of shared savings payments under the program, but not any other financial relationships. Substantial questions therefore remain as to the permissibility of various financial relationships that may arise in connection with the formation and operation of an ACO, e.g., the manner in which necessary investments in ACO technology and infrastructure ability may be funded by the respective ACO participants.

33) IRS solicited comments as to tax-exempt organization matters. The IRS has issued a notice to address and solicit comments with respect to the impact of ACOs and the Shared Savings Program on tax-exempt organizations and whether existing IRS guidance is adequate to address issues related to tax-exempt organization participation in ACOs.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.