Lobbying Affiliate: MML&K Government Solutions

Room for Improvement, M.D. Update, May 2011


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M.D. Update, June 2011

Authored by: Lisa English Hinkle

On March 31, 2011, the long-awaited proposed rule on accountable care organizations ("ACOs") was released. While ACOs were only addressed in seven pages of the Patient Protection and Affordable Care Act ("ACA"), the proposed rule about them is 429 pages. Simultaneously, the Department of Justice and the Federal Trade Commission also released for public comment a joint "Proposed Statement of Antitrust Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program" offering limited protections for CMS-approved ACOs. These Proposed Rules and Guidance are exceedingly complex — so complex that many providers and their associations have labeled the Proposed Rules as unworkable.

As Donald Berwick, Administrator for CMS wrote, "the creation of ACOs is one of the first delivery-reform initiatives that will be implemented...with the purpose to foster change in patient care so as to accelerate progress toward a three-part aim: better care for individuals, better health for populations and slower growth in costs through improvements in care." 1 The proposed rule defines how physicians, hospitals and other key constituents can adopt this new organizational form and share in the savings generated by coordination and defragmentation of care. Under the Proposed Rule, however, the complex requirements for qualification coupled with a new risk sharing mechanism where losses can be attributed to ACOs will make establishing these organizations expensive and risky.

How is an ACO formed?

Under the Proposed Rule, and ACO must be a legal entity that is recognized under state law and holds its own Taxpayer Identification Number. The ACO must be comprised of eligible participants, which include (1) physicians and mid-level practitioners in group practices; (2) networks of individual practices of ACO professionals; (3) arrangements between hospitals and ACO participants; (4) hospitals that employ physicians; and (5) other groups of providers that the Secretary of Health and Human Services ("Secretary") designates. Despite having the ability to do so, the Secretary did not expand the types of providers eligible to establish ACOs other than to include certain critical access hospitals. ACOs, however, do have the ability to establish broad collaborations that may include other Medicare enrolled providers and suppliers like nursing facilities, rural health clinics, etc. ACOs must however, have a sufficient number of primary care physicians to provide services to at least 5,000 beneficiaries.

To participate in the Shared Savings Program, an ACO must submit a lengthy application with supporting documentation to CMS. The Proposed Rule spells out detailed requirements that include requirements for each provider member to participate in governance along with Medicare beneficiaries and community stakeholders such that "appropriate proportional control" exists to ensure that the ACO is provider-driven and patient-controlled. In other words, CMS does not want administrative and financial entities to control ACOs.

How are savings shared?

If accepted into the Shared Savings Program, the ACO must agree to participate for three years and the ACO's executive must certify that its participants are willing to become accountable for and report on the quality, cost and overall care of the Medicare fee-for-service beneficiaries assigned to the ACO. In addition, the Proposed Rule requires that the ACO share in the risk that the cost of care will exceed established benchmarks by paying back a share of losses sustained by the Medicare program on a beneficiary's course of care in addition to sharing in the savings generated. Moreover, ACOs must reach a certain threshold of savings before they can participate in the upside of shared savings. In addition, 25 percent of an ACO's savings are not distributed until the end of the third year of participation.

Under the Proposed Rule, an ACO has the ability to choose to participate in one of two programs or "tracks." Under Track 1, a participating ACO will share in the savings for all three years, but will be required to assume risk for losses only in the third year. Under Track 2, a participating ACO will share in the savings and the losses for all three years. ACOs that choose Track 2 will be paid a higher percentage of savings than the Track 1 participants.

How are beneficiaries assigned?

Under the Proposed Rule, an ACO will be required to assume responsibility for meeting all the health care needs of a minimum of 5000 beneficiaries for at least three years. Each patient will be assigned to the ACO where the patient receives most of his/her primary care. A patient could be assigned either retrospectively or prospectively to an ACO, based on the patient's use of primary care services. Patients will be notified if their primary care physician is participating in the ACO, but a beneficiary will not be able to choose his or her ACO. The ACO will be responsible for patient care management and quality of care. In addition, each beneficiary will have the ability to seek care from providers outside the ACO. An ACO may not limit a beneficiary to certain providers, implement utilization management or require prior authorization for services.

How is quality of care monitored?

The Proposed Rule is part of an overall effort by CMS to link reimbursement to quality of care and outcomes rather than volume. According to the Proposed Rules, CMS will define specific quality and continuous improvement goals that ACOs must meet to qualify for shared savings that include: (1) patient-caregiver experience; (2) care coordination, transitions and information systems; (3) patient safety; (4) preventive health; and (5) at-risk population/frail elderly health. In the Guidance released with the Proposed Rule, CMS has proposed using 65 nationally recognized measures that range from general process-oriented items such as getting timely care and appointments to specific clinical areas, including immunization, cancer screenings and heart failure prevention. Initially, ACOs will engage in complete and accurate reporting, but in subsequent periods, CMS will actually assign quality scores for each measure. In addition to comprehensive quality reporting, CMS intends to actively engage in monitoring ACOs by looking at financial and quality data, site visits, beneficiary-provider complaints and audits.


The Proposed Rule is exceedingly complicated and creates significant drawbacks for providers seeking to form ACOs, particularly smaller providers. Compliance with the requirements for an ACO's governance is very complicated and may make governing boards too large to function efficiently. Assessing the financial impact of forming an ACO is very difficult, particularly given the fact that ACOs have no ability to direct beneficiaries to participating providers or any real mechanism to project what cost-savings can be generated. Of CMS' Physician Group Practice Demonstration Project's 10 large physician group practice members, only two were able to attain better than a t2 percent saving threshold the first year and only half were able to surpass this savings threshold after three years. It is noteworthy, however, that all 10 were able to meet the quality standards imposed. Based upon the startup costs for the demonstration project, the GAO estimates that startup costs and first-year operating costs for an ACO to be $1.7 million. For Kentucky providers, the initial costs of implementing an ACO may be insurmountable, particularly for smaller hospitals and rural providers. Hospitals that employ large number of physicians seem to be in the best financial position to establish ACOs. However, physicians, particularly primary care specialties, appear to be the financial key to ACO success. Fortunately, the Proposed Rule is just that a proposed rule. Hopefully, these points will be communicated to CMS so that these exceedingly complicated requirements do not become a barrier to implementing ACOs. Comments may be filed with Centers for Medicare & Medicaid Services by June 6, 2011, no later than 5 p.m.

Lisa English Hinkle is a Member of McBrayer law. Ms. Hinkle concentrates her practice area in healthcare law and is located in the firm's Lexington office. She can be reached at lhinkle@mcbrayerfirm.com or at 859-231-8780, ext. 1256.

This article is intended as a summary of newly enacted federal law and does not constitute legal advice.


1Berwick, Donald, "Launching Accountable Care Organizations" NEJM, March 31, 2011.

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