Accountable Care Organizations (ACOs) will face large start-up costs under proposed rules issued on March 31, 2011 by the Centers for Medicare and Medicaid Services (CMS), with an uncertain outlook for savings and even possible losses. An ACO is an organization of health care providers that agrees to be accountable for cost, quality and the overall care of Medicare beneficiaries who are assigned to it. ACOs were created under the Patient Protection and Affordable Care Act (PPACA) as a new health care delivery and payment model. However, judging by estimates provided by CMS and other agencies on March 31, it appears that the aggregate possible pool of savings to be shared with ACOs over the three-year period may not cover ACO’s expected start-up and first-year operating costs. On top of this, some ACOs may have to re-pay Medicare for any losses Medicare experiences as a result of costs associated with an ACO.

CMS estimates average start-up costs and first-year operating expenses of $1.7 million for an ACO. The large costs are due to the numerous and highly detailed requirements that organizations must meet in order to be allowed to participate as an ACO under the Medicare Shared Savings Program (MSSP) established by PPACA. CMS expects that 1.5 to 4 million Medicare beneficiaries will align with an ACO in the first three years of the program and that an estimated 300 to 800 ACOs will participate. The median estimate of net savings to the Medicare program over the three-year period is $510 million.

The proposed rules (to be published in the April 7, 2011 Federal Register) are open for public comment for 60 days, after which CMS will issue final regulations. In conjunction with the proposed rules issued by CMS, the Internal Revenue Service (IRS), the Federal Trade Commission (FTC), the Department of Justice (DOJ), and the Department of Health and Human Services, Office of Inspector General (OIG) all issued notices explaining how those various agencies intend to treat ACOs.

Operational Requirements for ACOs

Participation in the MSSP is purely voluntary, but ACOs will face numerous hurdles in order to become a participant. ACOs must be a legal entity with shared governance by the various ACO members. The governing body of the ACO must be comprised of at least 75 percent ACO members, and include at least one Medicare beneficiary from the ACO service area. The ACO’s operations must be managed by an executive acting under control of the governing board. There must also be a senior-level, board-certified physician serving as medical director. Moreover, there must be meaningful financial or human (time and effort) investment in clinical integration. The ACO must also develop evidence-based medical practices or clinical guidelines and have an IT infrastructure that allows for the collection and evaluation of clinical data.

ACOs will also be expected to have a designated compliance official who is not the ACO’s legal counsel and who reports directly to the ACO governing board. There must be an effective compliance training program and adoption of a conflicts of interest policy. Participants cannot be added to an ACO after it is starts the three-year agreements, however, participants can be terminated from an ACO. Participation in the ACO cannot be conditioned on the referral of federal health care program beneficiaries.

Primary care providers must be exclusive to one ACO; however, specialty physicians, hospitals, federally qualified health clinics and rural health centers may participate in more than one ACO. An ACO may not participate in another Medicare program or demonstration involving shared savings, unless the ACO provider is an individual.

CMS retains the right to terminate an ACO for failure to meet reporting or quality requirements, or if the ACO fails to maintain at least 5,000 Medicare beneficiaries assigned to it. CMS must also approve all marketing and communication material that the ACO intends to use to educate, solicit, notify or contact Medicare beneficiaries regarding the ACO. CMS also has the right to conduct audits and monitor ACOs to verify compliance with program requirements.

Assignment of Beneficiaries

CMS proposes to assign Medicare fee-for-service beneficiaries to ACOs on a retroactive basis, depending on the ACO primary care physician that the beneficiary has seen the most during the preceding 12-month period. To address concerns that an ACO should have patient information in order to effectively manage a patient population, CMS proposes to provide ACOs, at the beginning of the calendar year, aggregated data on Medicare beneficiary use of health care services in the area the ACO serves. This data will be provided on a quarterly basis to ACOs and will be based on the most recent 12-month data.

ACOs must enter into a Data Use Agreement with CMS prior to the receipt of beneficiary indentifiable claims data. Beneficiaries will be given the option of opting out of having his or her information shared with an ACO. The ACOs are responsible for notifying beneficiaries of the ACO’s ability to request claims data about them if they do not object. ACOs must post signs in their facilities indicating their participation in the MSSP and provide other information to beneficiaries mandated by CMS.

Shared Savings and Shared Losses

An ACO will be eligible for shared savings only if it meets predetermined standards in all 65 different quality measures. ACOs must agree to a three-year agreement with CMS and can choose one of two models in which it can be eligible for shared savings. Under the “one-sided” model, an ACO will share in savings for the first two years and then be transitioned to a full risk model in the third year, when the ACO would be responsible for any losses to the Medicare program if costs exceed certain thresholds. Under the “two-sided” model, the ACO would be responsible for any losses beginning in the first year, but in return, would be eligible for a greater percentage of any savings. One-sided model ACOs may be eligible to share up to 52.5 percent of savings, while two-sided ACOs may share up to 65 percent.

Savings will be determined based upon a comparison with a benchmark of expected average per capita Medicare fee-for-service expenditures. It will be risk adjusted for beneficiary characteristics. The proposed regulations also contain safeguards against ACO providers who attempt to “game” the system by coding changes without improved patient care.

Shared savings will be calculated using a 6-month claim runoff period. CMS will withhold 25 percent of any earned performance payment to guard against losses in future years as well as to provide an incentive to ACOs to stay in the program for the full three-year period. At the end of the 3-year period, any positive balances will be returned to the ACO. If the ACO does not complete the three-year term, it will forfeit any withheld savings. ACOs must also establish a method by which any losses to the Medicare program are guaranteed, such as obtaining re-insurance, obtaining a surety bond, placing funds in escrow, or another method deemed acceptable by CMS. The ACO must guarantee losses equal to one percent of the per capita expenditures to its assigned beneficiaries for the most recent year available.

Coordination with Other Agencies

In connection with submitting an application to be accepted into the MSSP, ACOs must also seek a waiver from the OIG. The OIG has issued separate guidance indicating its proposed procedure for issuing waivers of the application of certain Civil Monetary Penalty law provisions, the Federal anti-kickback statute, and the physician self-referral (Stark) law to specified financial arrangements involving ACOs.

The DOJ and FTC have jointly issued a proposed Statement of Antitrust Enforcement Policy Regarding ACOs. The Statement sets forth a “safety zone” for ACOs that serve rural areas or that have a combined share of 30 percent or less of each common service in the ACO’s Primary Service Area (PSA). If an ACO has a PSA share above 50 percent for any common service that two or more ACO participants provide, the ACO must obtain a letter from the DOJ or FTC confirming that it has no present intent to challenge the ACO on antitrust grounds. If the ACO’s PSA share is between 30 and 50 percent for any common service provided by two or more ACO participants, the ACO may request an expedited review of its arrangement, or it may proceed without FTC/DOJ review and remain subject to an antitrust investigation.

The IRS also issued contemporaneously a solicitation for comments on what guidance, if any, is necessary for tax-exempt organizations participating in ACOs.

Impact on Health Care Providers

Health care providers may decide that the investment in start-up and first-year operating costs, estimated by CMS to average $1.7 million per ACO, are too great and the proposed savings are too unknown in order to justify the effort needed to become an ACO. Especially concerning are CMS’s estimates that 300 to 800 ACOs will participate in the program and that expected median net savings to Medicare for the three year period is $510 million. By extrapolation, this means that ACO’s will collectively spend an estimated $510 million to $1.3 billion in start-up and first operating costs in order to be eligible to share an estimated $563 million to $947 million over a three-year period. Additionally, ACOs will be responsible for repaying Medicare any losses associated with the ACO. For some, this risk-reward analysis will not be enough to entice them to start an ACO.

Health care providers will have to decide quickly if they wish to become part of an ACO. Applications for the first program year (beginning January 1, 2012) will likely be due shortly after the final regulations are published this summer. Additionally, the amount of detail that CMS will require as part of the application process (e.g., policies and procedures, clinical integration, IT infrastructure, legal organization and governance) means that health care providers who wish to participate in the first year of the MSSP should already be working on assembling the necessary admission requirements. Moreover, ACO applicants must also assess antitrust concerns and seek a clearance from the FTC or DOJ if the ACO’s proposed market share is too big. And, all ACO applicants must seek a waiver from the OIG. All of this will require an extraordinary amount of work and coordination.