Last week, the Centers for Medicare & Medicaid Services (CMS) released its Final Rule on the Medicare Shared Savings Program (MSSP). The Final Rule provides additional flexibility to accountable care organizations participating in the MSSP and clarifies the operational rules and governance requirements.   

There are 405 ACOs in the Medicare Shared Savings Program; 401 of these are in Track 1, which provides for shared savings but no downside risk.  As originally enacted, the MSSP regulations allowed an ACO to remain in Track 1 for only three years.  With the three-year deadline approaching for many early adopters, ACOs have been vocal about their unwillingness to move out of Track 1 and into the two-sided risk model.  Part of the problem is that only 54 of the ACOs in the MSSP have earned shared savings.  The other 351 participants have struggled to meet the spending and quality metrics for a variety of reasons, some of which critics attribute to flaws in the agency’s design and implementation of the MSSP.     

In the Final Rule, CMS responded to the ACOs’ reluctance to accept downside risk and attempted to respond to other operational criticism.  Time will tell if the agency has done enough to keep existing ACOs in the program and to attract new participants.  Announcing some changes from the proposed rule the agency released in December 2014 (Proposed Rule) the Final Rule’s highlights include:

  • ACOs that have been participating in the MSSP may avoid taking downside risk for another three years.  More specifically, ACOs may remain in Track 1, which provides for shared savings but not shared deficits, for another three-year agreement period if they are in good standing with the program and maintain high quality scores. Retreating from its position in the Proposed Rule, CMS did not reduce the shared savings rate for ACOs who continue in Track 1 for a second three-year agreement; 
  • The addition of Track 3, which offers ACOs higher shared savings rates, prospective assignment of beneficiaries, and the opportunity to use new care coordination tools;
  • Clarification of the ACO governance requirements to emphasize the independence of the ACO from sponsoring or participating organizations;
  • Improved data sharing processes, enabling ACOs to more easily access data on their patients; and
  • Changes in the policies for resetting ACO benchmarks. 

The Final Rule goes into effect August 3, 2015.

The Final Tracks  

Under current MSSP regulations, ACOs must opt to participate in either Track 1 (a one-sided financial model under which ACOs can qualify for shared savings but are not responsible for losses) or Track 2 (a two-sided model with a higher shared savings rate but risk for losses).  CMS originally designed Track 1 to provide a three-year “on-ramp” toward performance-based risk but, as noted in the Proposed Rule, has grown concerned about the willingness and capabilities of many current ACOs to transition to financial risk.  In the Proposed Rule, CMS explained it sought to “smooth the on ramp” for organizations participating in the MSSP by extending the time an organization can participate under Track 1 and modifying the financial thresholds under Track 2 to reduce the level of risks that an ACO must accept.  In addition, CMS proposed Track 3 as a new model to offer an even greater opportunity for an ACO to share in savings along with greater exposure to sharing in losses to incentivize further participation in performance-based risk models.  In the Final Rule CMS made several adjustments to the existing Track 1 and Track 2 models and finalized the new Track 3 model, with several modifications from the Proposed Rule.    

Track 1—The Extended On Ramp  

Under the Final Rule, certain ACOs will be eligible to participate in Track 1 for a total of six years rather than only three.  CMS finalized its proposal to permit ACOs that have completed a three-year agreement under Track 1 to enter into one additional three-year agreement under Track 1 if certain criteria are met.  Track 1 ACOs currently are required to transition from Track 1 to Track 2 or exit the MSSP at the end of their initial three-year agreement period.  CMS believes its decision to extend the time period for participating in Track 1 addresses the concern that the current regulatory scheme may not provide adequate time for some ACOs to become sufficiently experienced under accountable care models before taking on performance-based risk.  Although CMS reiterated in the Final Rule its belief that ACOs that accept financial risk for the cost of care furnished to beneficiaries have the greatest positive effect on the Medicare program and its beneficiaries, CMS acknowledged that a second three-year agreement period would “strike a reasonable balance” between permitting additional time to gain experience under a one-sided model and providing a clear timeframe for when ACOs must transition to performance-based risk.  

CMS had proposed that only those ACOs that had not generated losses in excess of the negative minimum savings rate (MSR) would be eligible to remain in Track 1.  However, CMS abandoned this requirement in the Final Rule, noting many commenters’ concern that using financial performance criteria for continued participation in Track 1 may come too early for ACOs that struggle to demonstrate cost savings during the initial years in the MSSP.  Under the Final Rule, CMS will evaluate an ACO’s request to renew its Track 1 agreement using only the general criteria applicable to all renewals.  

If a qualified ACO opts to stay in Track 1 for an additional agreement period, the ACO will continue to be eligible for a maximum sharing rate of 50 percent.  CMS had proposed to reduce the sharing rate by 10 percent (down to a 40 percent maximum) to make staying in Track 1 less attractive than moving into Track 2, but was persuaded by comments suggesting that the 10 percent reduction was not likely to increase the attractiveness of moving to Track 2.  In addition, CMS noted that by maintaining the 50 percent sharing rate, ACOs may have more funds available to invest in infrastructure and financial reserves for transitioning to performance-based risk.  

Track 2—A New Menu of Options for Financial Risk  

CMS adopted a new “menu” of options for the Track 2 model under the Final Rule.  In its proposed rule, CMS indicated it wanted to modify the Track 2 model to increase the model’s appeal given its very low participation rate.  CMS thus proposed to use in Track 2 the same methodology used to establish the applicable MSR under Track 1 (based on the size of the ACO’s beneficiary population) to establish both the MSR and the minimum loss rate (MLR) for Track 2.  However, in developing its new option approach under Track 2, CMS explained that it was persuaded by commenters’ statements that ACOs themselves are best positioned to determine the level of risk they are willing to accept.  Thus, the Final Rule provides an ACO the ability to select from a menu of options for setting its MSR and MLR for the duration of its agreement period.  These options reflect CMS’s desire to retain symmetry between upside and downside risk, and include the following:

  • Removing the MSR/MLR such that the ACO shares in savings and losses from the first dollar;
  • Selecting a symmetrical MSR/MLR in a 0.5 percent increment between 0.5-2.0 percent; and
  • Implementing a MSR/MLR that varies based on the size of the ACO's assigned population according to the methodology established under Track 1.

Track 2 ACOs must select their MSR/MLR prior to the start of their agreement period, as part their initial program application or agreement renewal application.  An ACO may not modify its selection during its three-year agreement period.  CMS hopes that the ability to customize the threshold for risk and reward under a symmetrical MSR/MLR will encourage ACOs to move to two-sided risk. 

Track 3—A New Risk Model  

CMS finalized the elements of its “Track 3” model, a new risk-based option for ACOs ready to take on additional financial risk.  CMS introduced this new model in the Proposed Rule as an option to increase ACO participation in a performance-based risk track by improving the attractiveness of the final sharing rate and performance payment limit in a risk model.  CMS explained its view that it is important to reward ACOs with a greater level of savings for taking on greater levels of risk, while also drawing a distinction between the sharing rates available under Track 2 and the proposed Track 3.  Under the Final Rule, CMS adopted its proposal described the Proposed Rule to apply a shared savings rate of up to 75 percent for Track 3 ACOs, subject to a performance limit not to exceed 20 percent of the ACO’s updated benchmark in conjunction with such ACOs accepting risk for up to 75 percent of all losses, capped at 15 percent of the ACO’s updated benchmark in each year of the ACO’s three-year agreement period.  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.    

Similar to the Track 2 Model, CMS believes that Track 3 ACOs are in the best position to determine the level of risk they are willing to accept.  Consequently, the Final Rule provides the same “menu of options” for selecting the MSR/MLR to Track 3 ACOs as available under the updated Track 2 model.  Like Track 2 ACOs, Track 3 ACOs will have the opportunity to select a symmetrical MSR/MLR option prior to the start of the three-year agreement period (either as part of their initial application or agreement renewal application) and would not be permitted to change the selection during the three-year period.  CMS also noted the administrative simplicity of using the same MSR/MLR options for both Track 2 and Track 3.   

ACO Governance   

The portions of the Final Rule relating to ACO legal structure and governance largely affirm the changes discussed in the Proposed Rule.  These changes and clarifications define governing body composition and limit the ability of the ACO’s governing body to delegate authority to committees.  To summarize:

  • An ACO, as well as each entity forming such ACO, must each have its own separate and unique taxpayer identification number (TIN).  CMS believes this will promote program integrity without being overly burdensome.
  • The governing body of an ACO must be separate and unique to the ACO and must not be the same as the governing body of any ACO participant (in the case of an ACO that comprises multiple ACO participants).  Delegation of all ACO decision-making authority to a committee of the governing body or retention of ACO decision-making authority by a parent entity is precluded. 
  • The fiduciary duty of loyalty is included among the fiduciary duties of the members of an ACO’s governing body.  The governing body must implement a conflicts of interest policy.
  • An ACO provider/supplier may no longer be the beneficiary representative on a governing body of an ACO.

CMS made two important clarifications to the Proposed Rule.  First, an ACO formed by a single participant may use its existing legal entity and governing body to be the governing body of the ACO.  Also, CMS has decided to retain the permissive option of ACOs to deviate from the requirement that at least 75 percent control of the governing body must be held by ACO participants.  CMS will retain this flexibility, although they “anticipate permitting such exceptions only in very limited circumstances.”  

As anticipated following release of the Proposed Rule, this Final Rule will move control of ACOs away from parent corporations by requiring true independent governing bodies.  

Coordinating Care  

CMS finalized its proposal that prospective participants must describe the ways in which they will use “enabling technologies” (e.g., electronic health records, population health management and data aggregation and analytic tools, telehealth services, health information exchanges, or other tools to engage patients) for improving care coordination for beneficiaries.    

To allow flexibility and encourage innovation, CMS did not impose any additional specific requirements, signaling the agency’s agreement with commenters who wanted ACOs to have discretion in the ways they engage beneficiaries and providers in care coordination.  Since many enabling technologies are on the cutting edge, it is prudent to allow providers to experiment in innovative ways to effectively utilize such technologies before handing down any mandates regarding their use.  


Through the Final Rule, CMS adopted its formal definitions of “participation agreement” (the written agreement between an ACO and CMS governing the ACO’s participation in the Shared Savings Program) and “ACO participant agreement” (the written agreement between an ACO and an ACO participant in which the ACO participant agrees to the requirements of the Shared Savings Program).  As CMS states, adopting such definitions will likely facilitate transparency and a better understanding of program rules. Also as set forth in the Proposed Rule and unchanged in the Final Rule:

  • The ACO and ACO participant are to be the only parties to ACO participant agreements.  CMS states that typical IPA contracts are “inappropriate and unnecessary” for purposes of the program.
  • An agreement must permit the ACO to take remedial action against the ACO participant, and must require the ACO participant to take remedial action against its ACO providers/suppliers to address noncompliance with program requirements.
  • CMS may request copies of executed agreements at any time for audit or monitoring purposes.

Noting that the timing of the Final Rule’s release gave ACOs little time to incorporate these requirements into their contracting practices, CMS will not require these changes to be incorporated into any ACO participant agreement submitted for the 2016 performance year.  

Improved Data Sharing  

The Final Rule describes additional data CMS will share with ACOs.  More specifically:

  • Each beneficiary who has a primary care visit with an ACO will be included in the aggregate reports and claims data the agency shares with Track 1 and 2 ACOs even if the beneficiary is not preliminarily assigned to the ACO. 
  • CMS will share aggregate reports and claims data of those beneficiaries who are prospectively assigned to Track 3 ACOs with Track 3 ACOs.
  • CMS will furnish data on enrollment status, heath status, utilization rates and related expenditure information for all preliminarily/prospectively assigned beneficiaries in the aggregate data reports provided to ACOs in all three tracks.
  • The Final Rule also changes the process by which a beneficiary may opt out of data sharing.  ACOs will no longer be required to provide opt-out notices to beneficiaries before requesting individually identifiable claims data.  Beneficiaries may opt out by contacting CMS directly (1-800-MEDICARE) and will no longer have the option to opt out by notifying the ACO.  

Beneficiary Assignment  

The Final Rule largely affirms the Proposed Rule’s changes to the beneficiary assignment process.  CMS agreed with recommendations to include pediatric medicine in Step 1 of the beneficiary assignment methodology, reasoning that pediatricians typically provide primary care for their patients. Additionally, in response to commenters, CMS made a number of changes to the specialties included and excluded from Step 2 of the beneficiary assignment methodology.  The following tables identify the specialties that are now included and excluded from Step 2, with additions made by the final rule marked as “New”:

Click here to view table.

Benchmarking Methodology  

Current Methodology:  

CMS has drawn criticism for the current benchmarking methodology used to determine baseline costs and calculate savings or spending for ACOs. The current methodology bases an ACO’s expected level of spending on the prior three years of risk adjusted fee-for-services (FFS) expenditures among beneficiaries attributed to the ACO. These historical benchmarks are weighted by year according to the following schedule: ten percent for benchmark year (BY) one; thirty percent for BY two, and; sixty percent for BY three. This approach inadvertently penalizes ACOs that have effectively managed costs and improved quality by forcing successful ACO’s to “chase diminishing returns” in subsequent contracts when the benchmarks are reset.   

Final Rule:  

Under the Final Rule, CMS’s benchmark rebasing methodology will reset benchmarks in a second or subsequent agreement period by equally weighting an ACO’s historical benchmark years. Further, CMS will account for savings generated during the first three-year agreement period, thereby accounting for financial performance. By adjusting the benchmark methodology, ACOs successful in generating savings during their first term will not be penalized by overly demanding savings targets during the ACO’s second term.  

Next Steps:  

CMS intends to commence rulemaking later in 2015 to implement a benchmark rebasing methodology that accounts for regional FFS costs and trends in addition to an ACO’s historical costs and trends.  CMS stated that the benchmark basing methodology will ensure that: the MSSP remains attractive to ACOs; ACOs are incentivized to improve efficiency; benchmarks remain high enough to encourage ACO’s to meet CMS’ “three-part aim” (better care for individuals, better health for populations, and lower growth in expenditures); and benchmarks reflect an ACO’s actual costs to avoid selective participation by ACOs with high benchmarks. The new rule will be effective no sooner than 2017.