Last week, the Centers for Medicare and Medicaid Services (“CMS”) released a new proposed rule for Accountable Care Organizations (ACOs) participating in the Medicare Shared Savings Program (MSSP). This advisory focuses on the changes CMS proposes to the existing MSSP financial models (Tracks 1 and 2) as well as the new “Track 3” model. We will be publishing separate alerts addressing other significant changes to the MSSP under the Proposed Rule.

Current MSSP Financial Models

Under current MSSP regulations, ACOs must opt to participate in either a one-sided or two-sided financial risk model. Under the one-sided model (Track 1), ACOs can qualify to share in savings but are not responsible for losses. Under the two-side model (Track 2), ACOs can qualify for a higher shared shavings rate as compared to Track 1, but also assume risk for losses. The same eligibility criteria, beneficiary assignment methodology, benchmark and update methodology, quality performance standards, and other requirements apply to ACOs under both models. In addition, participants in both Track 1 and Track 2 must enter into an initial three-year agreement.

CMS established these two tracks based on its belief that the Track 1 model would provide an “appropriate on-ramp” toward performance-based risk to attract providers and suppliers new to value-based purchasing while Track 2 would offer more experienced organizations an opportunity to enter into a sharing arrangement that provides greater reward for greater responsibility. Under current MSSP regulations, an ACO may operate under the one-sided model only for the initial three years it participates; ACOs are not permitted to operate under the one-sided model for subsequent agreement periods. Since the inception of the MSSP, over 98 percent of ACOs have chosen Track 1; only a handful currently participate under Track 2.

CMS acknowledges it is concerned about the “slope of the ramp” to performance-based risk and the requirement that Track 1 ACOs transition to Track 2 for their second agreement period. In particular, CMS notes that many current ACOs are “risk adverse and lack the infrastructure and readiness to manage increased performance-based risk.” CMS also believes that many ACOs initially have focused on developing operational capacities rather than on the implementation of care redesign processes. CMS fears that current ACOs, particularly smaller and less experienced ones may drop out of the MSSP altogether when faced with the requirement to transition to Track 2.

To address these concerns, CMS proposes to “smooth the on ramp” for organizations participating in the MSSP by modifying the transition requirements for Track 1 ACOs and by modifying the financial thresholds under Track 2 to reduce the level of risks that an ACO must accept. In addition, CMS is proposing a third payment model (Track 3) that would provide an even greater opportunity for an ACO to share in savings along with greater exposure to sharing in losses.

Track 1—Extending the On Ramp

To be eligible to remain in Track 1, the ACO must during at least one of the first two performance years under the initial agreement: (1) meet the criteria established for ACOs seeking to renew their agreements (including demonstrating satisfaction of quality performance requirements such that the ACO was eligible to share in savings); and (2) not have generated losses in excess of the negative minimum savings rate (MSR). With regard to the second criteria, CMS explains that if a Track 1 ACO has 15,000 assigned beneficiaries with an MSR of 2.7, and the ACO’s expenditures exceed the ACO’s benchmark by 2.7 percent or more in both of its first two performance years, then CMS would not accept the ACO’s request to renew its agreement under Track 1. If, however, the ACO’s expenditures exceeded the negative MSR in only one of the first two performance years, then CMS would accept the ACO’s request to renew Track 1 participation, assuming all other renewal requirements were satisfied. CMS seeks comments as to whether the direction an ACO’s performance is trending should be considered when deciding whether to permit the ACO to remain in Track 1.

If an eligible ACO opts to stay in Track 1 for an additional agreement period, CMS proposes to reduce its sharing rate by 10 percent. Under the Proposed Rule, the maximum sharing rate for a Track 1 ACO in its second agreement period is 40 percent (down from the 50 percent sharing rate under the current regulations for ACOs in their first agreement period). This reduction is intended to make staying in Track 1 less attractive than moving into Track 2. CMS seeks input as to whether a 40 percent sharing rate will be sufficient to incentivize an ACO that may need more time to prepare to accept two-sided performance-based risk while also encouraging ACOs that are ready for performance –based risk to choose to continue participation in MSSP under a two-sided model.

CMS also seeks comments on the other options it considered to address concerns regarding the transition of Track 1 ACOs into Track 2. For example, CMS considered extending the agreement period of Track 1 ACOs for an additional two years, but rejected the option due to concerns that organizations would achieve savings without further improvements in care redesign simply because CMS would not be able to rebase the benchmark. CMS also considered permitting ACOs to participate in a second Track 1 agreement period without changing the sharing rate, but it rejected the option because the agency believes it is crucial to incentivize performance-based risk. Finally, CMS considered but rejected the option of allowing multiple subsequent agreement periods (rather than just one) with 10 percent reductions in the sharing percentage for each subsequent agreement period. CMS explained it was concerned such a model may reduce the urgency for quick progression along the on-ramp to risk if ACOs are permitted to remain under the one-sided model for several agreement periods.

The Proposed Rule clarifies that if a Track 1 ACO’s participation agreement is terminated less than half-way through the participation period, the organization would be permitted to reapply to the one-sided model as if it were applying for its first agreement period (assuming the ACO can demonstrate it has corrected the deficiencies that caused it to be terminated and has processes in place to ensure compliance with terms of a new participation agreement). If the ACO is accepted to reenter the program, the maximum sharing rate would be 50 percent. However, if a Track 1 ACO is terminated more than half way through its initial agreement, CMS would permit the ACO to reapply under Track 1 but the ACO would be treated as if it were applying for a second agreement period under Track 1 and hence subject to a maximum sharing rate of 40 percent.  Track 2—Adjusting the On Ramp  In addition to “extending the on ramp” under Track 1, CMS proposes to modify the Track 2 model in an effort to increase the model’s appeal. CMS is concerned with the very low participation rate in Track 2 (only 5 ACOs participate). Under current MSSP regulations, Track 2 ACOs are eligible to share in a greater percentage of savings than Track 1 ACOs but are also on the hook for a share of losses. Track 2 ACOs must achieve savings that meet or exceed a fixed two percent threshold to be eligible to share in savings. Similarly, a fixed two percent threshold is used to determine accountability for sharing in losses. In contrast, Track 1 ACO performance is measured using a minimum savings rate (MSR) that varies depending on the number of ACO beneficiaries. For most ACOs, the MSR that the ACO must achieve to be eligible to share in savings is lower in Track 2 than in Track 1. For example, an ACO with 10,000 attributed beneficiaries must achieve an MSR of three percent under Track 1 to be eligible to share in savings; an ACO of the same size must achieve an MSR of only two percent to be eligible to share in savings under Track 2.  In the Proposed Rule, CMS proposes to use the same methodology currently used to establish the applicable MSR under the one-sided model (based on the size of the ACO’s beneficiary population) to establish both the MSR and the minimum loss rate (MLR) under Track 2. Thus, a smaller sized ACO would be subject to a larger MLR before loss-sharing is triggered. CMS believes such an approach would offer better protection to ACOs against the risk of losses due to normal variation while also protecting the Medicare program from paying savings likely due to normal variation. CMS also notes that basing the MLR under Track 2 on an ACO’s assigned beneficiary population may encourage ACOs to take on performance-based risk by statistically protecting smaller ACOs from losses that result from normal variation. By building in greater downside protection, CMS hopes more ACOs will find Track 2 attractive, but the agency solicits input regarding how it could create potentially more attractive alternatives.

Creation of a New Track 3 Model

The Proposed Rule, if finalized, would create an additional risk-based option for ACOs ready to take on increased performance-based risk. This new proposed model (Track 3) would have the same general eligibility requirements, quality performance standards, data sharing requirements, monitoring rules and transparency requirements as Tracks 1 and 2. However, Track 3 includes modifications to the beneficiary assignment methodology, sharing rate, MSR, MLR and performance payment and loss sharing limits.

First, CMS proposes to shift from its current methodology of beneficiary attribution to a prospective assignment model. Under current MSSP regulations, CMS initially prospectively assigns beneficiaries to an ACO but the ACO’s final assigned beneficiary list is based on the actual utilization of primary care services by beneficiaries during the performance year. CMS seeks to provide greater certainty under Track 3 about the identity of the relevant pool of beneficiaries. Thus, CMS proposes there be no retrospective reconciliation resulting in the addition of new beneficiaries at the end of the performance year under Track 3. Beneficiaries who no longer meet eligibility criteria may still be excluded from the ACO at the end of the performance year but no beneficiaries would be added. A separate Client Advisory will be issued shortly focusing on the specifics of the beneficiary assignment methodology and exclusion criteria in Track 3.

Second, CMS proposes a 75 percent shared savings rate for Track 3 ACOs, subject to a performance limit not to exceed 20 percent of the ACO’s updated benchmark. CMS also proposes a 75 percent shared loss rate capped at 15 percent of the ACO’s updated benchmark in each year of the ACO’s three-year agreement period. In addition, Track 3 ACOs with high quality performance would not be permitted to reduce below 40 percent the percentage of shared losses for which they would be responsible each year of the agreement period.

These proposals reflect an increase in both the potential upside and downside risk under Track 3 as compared to Track 2. Under current MSSP regulations, Track 2 ACOs can potentially receive shared savings payments of up to 60 percent of all savings under its updated benchmark, not to exceed 15 percent of its updated benchmark. Additionally, Track 2 ACOs are accountable for between 40 to 60 percent of all losses under applicable updated benchmarks, depending on the ACO’s quality performance, subject to additional limitations. CMS seeks comments on the Track 3 proposed sharing rates for savings and losses and performance payment limit and loss recoupment limit.

Finally, as proposed, the Track 3 model would use the same fixed two percent MSR and MLR that currently apply to Track 2 ACOs. As discussed above, CMS proposes to modify the current Track 2 MSR and MLR to vary based upon the size of the ACO, which CMS believes will improve the attractiveness of Track 2 by offering greater protection against shared losses. Under the Proposed Rule, Track 2 would be less risky in terms of shared loss exposure than Track 3, while Track 3 offers the greater upside potential. In proposing to set the MSR and MLR for Track 3 at a fixed two percent, CMS reiterated its view that the use of an MSR and MLR remain important under a two-sided model to guard against normal variations in costs. However, CMS acknowledged that it considered doing away with the MSR and MLR altogether under Track 3 as well as setting the fixed percentage at one percent. CMS solicits comments concerning the alternatives considered in setting the final MSR and MLR under Track 3.

Transition of Pioneer ACOs to Shared Savings Program

Currently, 19 ACOs participate in the Pioneer Model, which is designed for health care organizations and providers that have prior experienced in coordinating care for patients across care settings. Although the Pioneer Model ACOs are held to the same quality reporting requirements as ACOs participating in the MSSP, there are several key distinctions including the methodologies used for benchmarking, payment, reconciliation, and assignment.

Pioneer Model ACOs may not concurrently participate in the MSSP. CMS recognizes, however, that once a Pioneer Model ACO completes the model test (which test period runs a minimum of three years with an option to extend for an additional two years), the organization may wish to participate in the MSSP. The Proposed Rule establishes a process to facilitate an efficient transition.

Given the agency’s familiarity with Pioneer ACO participants, CMS proposes a streamlined application for Pioneer ACOs, but only if they opt to apply to participate in MSSP under a two-sided model (Track 2 or Track 3). CMS explains that because Track 1 was designed as an “on-ramp” to provide organizations with experience as they become ready to accept risk, and because Pioneer ACOs have already accepted significant financial risks, Track 1 not appropriate. Thus, the Proposed Rule prohibits Pioneer ACOs from entering the MSSP under Track 1.

To qualify for the condensed application, the entity applying for the MSSP under Tracks 2 or 3 must be the same legal entity as the Pioneer ACO. In addition, all of the TINs on the applicant’s ACO participant list must have appeared on the “Confirmed Annual TIN/NPI List (as defined in the Pioneer ACO Model Innovation Agreement with CMS) for the applicant ACO’s last full performance year in the Pioneer ACO Model. CMS proposes to compare TINs only, not NPIs. An ACO can qualify for the condensed application if it drops one or more TINs that participated in its Pioneer ACO. However, it if proposes to add one or more TINs that were not on the Pioneer ACO’s Confirmed Annual TIN/NPI List, it must use the standard MSSP application. Organizations may not transition to participate in the MSSP until their participation in the Pioneer ACO Model has ended, and they would be subject to the standard program integrity screening and an evaluation of their history of compliance with the Pioneer ACO Model requirements.

CMS seeks comments on both the condensed application process for Pioneer ACOs and its proposal to require such Pioneer ACOs to participate under a track that includes performance-based risk. CMS is accepting public comments to the Proposed Rule until Feb. 6, 2015.