With the release of the final rule governing Accountable Care Organizations (ACOs) under the Medicare Shared Savings Program (MSSP) (hereafter Final Rule), the Centers for Medicare and Medicaid Services (CMS) sought to address healthcare industry concerns reflected in over 1320 public comments to the April 7, 2011, proposed rule. (Please see Baker Hostetler’s detailed analysis of the proposed rule.)

Implementing Section 3022 of the Patient Protection and Affordable Care Act (PPACA), the Final Rule includes “significant modifications” aimed at reducing “the burden and cost for participating ACOs” by CMS. Widely heralded as a step in the right direction by the healthcare community, the Final Rule is scheduled for publication in the November 2 Federal Register.

The October 20 prepublication release of the CMS Final Rule was accompanied by an array of related issuances that highlight the Administration’s multi-agency approach to the MSSP:

  • An interim final rule with comment period on fraud and abuse waivers jointly issued by CMS and the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS). This rule is slated for publication in the Federal Register on November 2, which also is the date the rule takes effect. Comments are due 60 days after publication.
  • A final Statement of Antitrust Enforcement Policy jointly released by the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ).
  • A final Fact Sheet (2011-11) issued by the Internal Revenue Service (IRS) on tax-exempt organizations participating in the MSSP.
  • A Notice from CMS announcing the Advance Payment Model and soliciting applications to participate in the initiative. This Notice will be published in the November 2 Federal Register.

Underscoring the Administration’s commitment to achieving the triple aim of “better health, better healthcare and reduced expenditures through continuous improvement,” the modifications outlined in the 695-page Final Rule clearly signal CMS’s steadfast support of ACOs as vehicles for transforming the delivery of healthcare in the U.S.

The following report by the Baker Hostetler National Healthcare Team provides a “Baker’s Dozen” overview of key changes from the Final Rule and related issuances.

  1. Assignment of Beneficiaries

In a welcome change for the healthcare industry, ACOs now will receive quarterly prospective assignment of beneficiaries from the Medicare program with final membership reconciliation to occur based on each beneficiary’s utilization of primary care services from ACO providers during the performance year.

  1. Shared Savings and Losses

Many potential participants had expressed concern over the original structure of ACOs because the transition to bearing financial risk for many was too quick, coupled with the significant investment and uncertainties of return. The proposed rule provided for two shared savings models known as Track 1 and Track 2: Under the one-sided risk model (Track 1), ACOs would share savings only for the first two years and thereafter share savings and losses. Under the two-sided risk model (Track 2), ACOs would share in the savings and losses for all years. Under the Final Rule, the two-sided risk provision for year three under Track 1 is eliminated. This, CMS believes, will provide a “gentler on-ramp” for organizations seeking to participate, while organizations that are better equipped to accept risk have a distinct track. As a result, the one-sided risk model has become a shared “savings-only” track without financial risk to the ACO for the initial contract period.

To further encourage participation, ACOs in both the one-sided and two-sided models will receive shared savings for the first dollar after the minimum savings percentage is exceeded (minimum savings rate or MSR). This is in contrast to the proposed rule, where sharing only occurred above a two percent threshold once the MSR was achieved. CMS, however, chose not to increase the basic sharing ratios (50 percent allocated for providers in Track 1 ACOs and 60 percent allocated for providers in Track 2 ACOs).

In another change from the proposed rule, CMS eliminated the annual 25 percent withhold of earned bonuses.

  1. Repayment of Shared Losses

In the proposed rule, CMS required ACOs to repay any shared losses to the agency within 30 days of receipt of notification of the shared losses. The Final Rule has extended the repayment period to 90 days, which should assist with the cash flow of ACOs.

  1. Quality Performance Standards

Another major criticism of the proposed rules was the complexity surrounding the quality performance standards, which acted as a disincentive for many potential participants. The proposed rule contained 65 different measures across five domains. CMS, in the Final Rule, sought to streamline the measures to remove “certain redundant, operationally complex, or burdensome measures.” The Final Rule greatly simplifies the quality performance standards, reducing them to 33 measures across four domains. For instance, the Final Rule combined the care coordination and patient safety domains to better align with other CMS value-based purchasing initiatives and the National Quality Strategy and to emphasize the importance of ambulatory patient safety and care coordination. The Final Rule also adjusts the phase-in period, beginning with a primarily pay-for-reporting and moving, over the participation period, to pay-for-performance. As a result, to earn shared savings in the first performance year, providers will be required to report across all four quality domains. In the second and third performance years, ACOs will share savings based on reporting and performance in the 33 quality measures.

  1. Governance and Legal Structure

While acknowledging multiple comments seeking permission for ACO participants to form a new entity by contract, CMS remained steadfast in its position that each ACO must be an entity that is capable of:

  • Receiving and distributing shared savings;
  • Repaying shared losses, if applicable;
  • Establishing, reporting and ensuring ACO participant and ACO provider/supplier compliance with program requirements, including the quality performance standards; and
  • Performing the other ACO functions identified in the statute.

While CMS did emphasize that a new entity may not be needed, it made clear that there must be an entity, with a taxpayer identification number, that otherwise meets program requirements.

Governance flexibility was a big winner in the Final Rule. While PPACA requires a mechanism for shared governance it does not proscribe how this occurs. The proposed rule outlining the initial governance requirements contained rigid, and often cumbersome, governance structures and were considered governance micromanagement by many. CMS recognized this and created a much more flexible approach to governance. For instance, CMS altered its requirement that each ACO participant be a member of the ACO’s governing body and that there be proportionate control among participants. Instead, CMS acknowledged that the governing body provides oversight and strategic direction for the ACO, holding management accountable for meeting the goals of the ACO and that members of the governing body shall have a fiduciary duty to put the ACO’s interests before that of any one ACO participant or ACO provider/supplier. CMS reiterated its belief that the governing body be provider-driven, maintaining the requirement that 75 percent control of the ACO’s governing body be held by ACO participants, with an exception for existing entities that qualify under the MSSP, so long as they can demonstrate how they will involve ACO participation in innovative ways and provide for meaningful participation in ACO governance by Medicare beneficiaries.

  1. Claims Run-Out Period

CMS proposed using a six-month claims run-out period to calculate the benchmark and actual per-capita beneficiary expenditures for each performance year. However, CMS concluded in the Final Rule that the minimal increased accuracy associated with six months of claims run-out data, as compared to three months of data coupled with an appropriate adjustment for claims anticipated to be received during the period after the third month, did not justify delaying the provision of quality metrics and shared savings reconciliation data to the ACOs. The shorter run-out of claims data, especially in the first year, will significantly aid the cash flow of ACOs. CMS, however, indicated that it will monitor claim submission patterns to avoid gaming through the deliberate delay in submission of claims that would result in an unusual increase. No mechanism was established to reduce the completion adjustment for providers that submit bills on a timely basis. Hence, some argument may be made that prompt submission of invoices could harm a provider.

  1. Electronic Health Records

In the Final Rule, CMS has decided not to finalize the requirement that at least 50 percent of an ACO’s primary care physicians be “meaningful EHR users” as that term is defined in the federal electronic health record (EHR) financial incentive program regulations, 42 C.F.R. § 495.4, by the start of the second performance year in order to continue participation in the MSSP. This is partly in response to commenters who expressed concern that the 50 percent meaningful EHR use requirement was set too high, given the current lack of experience with the EHR incentive program, especially in the areas of smaller, less integrated or rural physician practices. Instead, EHR participation will remain a key quality measure under the MSSP. Under the Final Rule, the quality measure, “Percent of PCPs who Successfully Qualify for an EHR Incentive Program Payment” will be given double the weight proposed initially by CMS to stress the importance of EHR adoption among ACOs.

  1. Start Dates and Agreement Period

In response to comments requesting additional flexibility in the start date of the MSSP, the Final Rule establishes two application periods for the first year—April 1, 2012, or July 1, 2012. All ACOs that start in 2012 will have agreement periods that terminate at the end of 2015 as follows:

  • April 1, 2012, Start Date—First performance year is 21 months, ending on December 31, 2013. Agreement period is three performance years, ending on December 31, 2015.
  • July 1, 2012, Start Date—First performance year is 18 months, ending on December 31, 2013. Agreement period is three performance years, ending on December 31, 2015.

The Final Rule provides that ACOs will be eligible to receive Physician Quality Reporting System (PQRS) incentive payments for each calendar year in which they fully and completely report the Group Practice Reporting Option (GPRO) measures, regardless of their start date. According to the agency, “this will provide ACOs that join the program in April or July 2012 with some working capital in advance of the completion of the first ACO performance year, regardless of their ability to generate shared savings.”

  1. Eligible Entities

CMS has created an eligibility pathway for federally qualified health centers (FQHCs) and rural health clinics (RHCs) to both form and participate in ACOs under the Final Rule. These organizations will be required to provide a list of practitioners to CMS who directly render primary care services in their facilities so that beneficiaries may be assigned on the basis of utilization of their services.

  1. Advance Payment Model

With the release of the Final Rule, CMS also issued a notice announcing the Advance Payment Model initiative aimed at encouraging participation by physician-owned organizations, critical access and rural providers in the MSSP. Designed to assist in defraying upfront infrastructure costs and “to smooth cash flow concerns,” selected participants will receive a prepaid advance on future shared savings earned by the ACO. Only ACOs that make application for and enter the MSSP in 2012 will be eligible for the advance payments.

  1. Antitrust Issues

Concurrent with the promulgation of the Final Rule, the FTC and the Antitrust Division of the DOJ (Agencies) revised their approach to antitrust guidance for ACOs. Notably, the Agencies jettisoned the burdensome mandatory antitrust review originally proposed as a prerequisite to entry into the MSSP for ACOs with large market shares. Antitrust review is now voluntary, and the Agencies provided guidance for how ACOs can, if they choose, obtain expedited review. The final policy statement of the Agencies, “Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program,” differs from its proposed policy statement in another significant way: the policy statement now applies to all collaborations among otherwise independent providers, not only those formed prior to March 23, 2010.

In the final statement, the Agencies retain from the proposed statement the explicit recognition that CMS’s eligibility criteria for ACOs are sufficiently consistent with the indicia of clinical integration that such arrangements are presumptively bona fide and will not be considered anticompetitive shams subject to automatic (or “per se”) illegality under the antitrust laws. Thus, the Agencies agree to afford ACOs that meet CMS’s criteria the more flexible and forgiving “rule of reason” treatment. The Statement explicitly recognizes that the Agencies have not identified specific criteria required to establish clinical integration, but rather have avoided prescribing how integration should take place.

The Statement also provides a safety zone for certain ACOs unlikely to raise significant competitive concerns, and describes conduct ACOs generally should avoid.

  1. Fraud and Abuse Waivers

In conjunction with the Final Rule, CMS and the OIG have published an interim final rule (IFR) that establishes waivers of the application of the physician self-referral law (Stark Law), federal anti-kickback statute (AKS), and certain civil monetary penalties (CMP) law provisions to ACOs. The IFR expands the three waivers set forth in the proposed rules to the following five waivers:

  • ACO Pre-Participation Waiver. This new waiver of the Stark Law, AKS and gainsharing CMP, applies for a maximum one-year period to start-up arrangements that predate an ACO’s participation agreement in the MSSP. Start-up arrangements are defined as items, services, facilities or goods used to create or develop an ACO, and examples are furnished in the IFR. The IFR precludes application of the waiver if the parties to the arrangement include drug and device manufacturers, distributors, durable medical equipment suppliers or home health agencies.
  • ACO Participation Waiver. This waiver of the Stark Law, AKS and gainsharing CMP, which was included in the proposed rules, applies to any arrangement reasonably related to the purposes of the MSSP as determined by an ACO’s governing body. The “reasonably related” language replaces the “necessary for and directly related to ACO purposes” provision set forth in the proposed rules. The waiver starts on the effective date of the MSSP participation agreement and ends six months after termination, unless the agreement is terminated by CMS, in which case the waiver ends on the date of termination.
  • Shared Savings Distribution Waiver. This waiver of the Stark Law, AKS and gainsharing CMP, which was included in the proposed rules, applies to the distribution or use of shared savings earned by the ACO during the term of the MSSP participation agreement. The shared savings must be: (1) distributed to or among the ACO’s ACO participants, its ACO providers/suppliers or individuals in this category during the year in which the shared savings were earned; or (2) used for activities that are reasonably related to the purposes of the MSSP. With respect to the gainsharing CMP, payments may not be made knowingly to induce a physician to reduce or limit medically necessary items or services to patients under the direct care of the physician.
  • Compliance with the Stark Law Waiver. This waiver, which was included in the proposed rules, provides that the gainsharing CMP and AKS are waived with respect to any financial relationship reasonably related to the purposes of the MSSP between or among the ACO, its ACO participants and its ACO providers/suppliers that meets an exception set forth in the Stark Law.
  • Waiver for Patient Incentives. This new waiver waives the beneficiary inducement CMP and AKS for items or services provided by an ACO, its ACO participants or its ACO providers/suppliers to beneficiaries at free or below market prices. The items or services must advance the goals of preventive care, adherence to treatment, drug, or follow-up care regimes or management of a chronic disease or condition. The items and services must be in-kind incentives related to the care of the patient and may not include financial incentives such as waiving or reducing patient cost-sharing amounts.

Finally, the IFR solicits comments on various issues, including whether to impose commercial reasonableness or fair market value requirements on the arrangements in the ACO pre-participation and participation waivers.

  1. Tax-Exempt Organization Participation

In conjunction with the issuance of the Final Rule, the IRS released Fact Sheet 2011-11, confirming that although CMS’s final regulations differed from the proposed regulations, the IRS discussion in Notice 2011-20 continues to reflect the IRS position with respect to participation in ACOs by tax-exempt organizations. The IRS clarified that it is sufficient for the written agreement to set forth the methodology for determining an ACO’s allocation of shared savings payments, rather than specifying a precise share or exact amount. Also, whether an ACO’s termination from the MSSP would jeopardize the tax-exempt status of a participant will depend on all facts and circumstances. Similarly, ownership interests in an ACO need not be directly proportional to capital contributions, nor is an ACO required to always distribute shared savings payments in proportion to such ownership interests. Finally, the IRS confirmed that its 2007 memorandum relating to EHR applies to a charitable organization participating in the MSSP through an ACO.