Section 3022 of the Affordable Care Act (ACA) establishes a Medicare Shared Savings Program for Accountable Care Organizations (ACOs), which is to be implemented on January 1, 2012. The ACA allows providers to form ACOs that will be held accountable for improving the health and experience of care for individuals, improving the health of populations and reducing the rate of growth in healthcare spending. The Shared Savings Program rewards ACOs with a percentage of the resulting shared savings if the ACO meets both financial and quality benchmarks.

As part of a cross-agency, coordinated effort, on March 31, 2011, several federal agencies simultaneously issued documents proposing a regulatory framework for ACOs participating in the Shared Savings Program and addressing legal issues arising from the creation of ACOs. The following summary provides an overview of the Proposed Rule issued by the Centers for Medicare and Medicaid Services (CMS), and the other federal agency notices and statements.

CMS expects this delivery system reform will provide Medicare savings of between $510 million to $960 million over three years. The rule is expected to be published in the Federal Register on April 7, 2011. The 60-day comment period on the Notice of Proposed Rulemaking will end June 6, 2011. To facilitate the ACO development process, CMS has launched a dedicated web page at  for Medicare FFS providers and other providers of services and suppliers. CMS expects to update the new web page on a regular basis.

This alert covers six main topics:

  • What Is an ACO?
  • Beneficiary Participation in ACO
  • Payment Structure
  • Proposed Quality Standards
  • Legal Issues
  • Comment Period

What Is an ACO?

An ACO refers to a group of providers and suppliers of services (e.g., physicians, hospitals and others involved in patient care) that will coordinate care for Part A and Part B Medicare beneficiaries.

CMS notes that pursuant to the ACA, the intent of the Shared Savings Program is to promote accountability for a population of Medicare beneficiaries, improve the coordination of fee-for-service (FFS) items and services, encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery, and create incentives for higher value care. ACOs that successfully meet quality and savings requirements may share a percentage of the savings with the Medicare Program.


CMS proposes the following formal definitions for ACO, ACO Participant and ACO Provider/Supplier:

  • An Accountable Care Organization (ACO) is a legal entity that is recognized and authorized under applicable state law, is identified by a taxpayer identification number (TIN), and comprised of an eligible group (as further described in the Proposed Rule) of ACO participants that work together to manage and coordinate care for Medicare FFS beneficiaries and have established a mechanism for shared governance that provides all ACO participants with an appropriate proportionate control over the ACO’s decision-making process.
  • An ACO Participant is a Medicare-enrolled provider of services and/or a supplier, (as discussed further in the Proposed Rule and as identified by a TIN).
  • An ACO Provider/Supplier is a provider of services and/or a supplier (as discussed further in the Proposed Rule) that bills for items and services it furnishes to Medicare beneficiaries under a Medicare billing number assigned to the TIN of an ACO participant in accordance with applicable Medicare rules and regulations.


The ACA states that an ACO can be comprised of the following providers and suppliers of Medicare services:

  • ACO professionals (physicians and hospitals meeting statutory definition) in group practice arrangements
  • networks of individual practices of ACO professionals
  • partnerships or joint ventures between hospitals and ACO professionals
  • hospitals employing ACO professionals
  • other providers and suppliers as defined by the Secretary

In the Proposed Rule, the Secretary determined that some critical access hospitals (CAHs) are also eligible to participate in the Shared Savings Program. The Secretary also reviewed whether federally qualified health centers (FQHCs) and rural health clinics (RHCs) should be eligible; however, due to a lack of data needed to assign beneficiaries, these entities will not be able to form their own ACOs at this time. In the interim, CMS proposes to provide an incentive for ACOs to include RHCs and FQHCs as ACO participants, by allowing ACOs that include such entities to receive a higher percentage of any shared savings under the program.

Program Requirements

Providers must form or join an ACO and apply to CMS to participate in the Shared Savings Program. Existing ACOs will not be automatically accepted in the Shared Savings Program. CMS proposes that applications will be received on an annual calendar year basis, with the three-year agreement beginning January 1 following approval of the application. If an ACO is approved to participate, it must agree to participate in the program for three years and serve at least 5,000 Medicare beneficiaries. Due to the short timeframe to establish ACOs, CMS is also considering a July 1, 2012 start date with a 3.5-year agreement period.

The ACO will also be required to establish a governing body consisting of ACO participants and Medicare beneficiaries. The ACO must have at least 75 percent control of the governing body. CMS also provides detail on the leadership and management structure that includes clinical and administrative systems. In addition, CMS proposes to monitor ACO performance by analyzing financial and quality data, reviewing quarterly and annual aggregated reports, conducting site visits, and assessing beneficiary surveys and claims analysis. An ACO will also need to include in its application an explanation of how it will use the shared savings to meet the goals of the program.

The Proposed Rule provides circumstances under which CMS may terminate the agreement with an ACO, including failure to meet quality standards and avoidance of at-risk beneficiaries. If the ACO wishes to terminate its agreement in the Shared Savings Program, it must provide a 60-day advance written notice.

Additionally, CMS proposes to reevaluate an ACO’s application every time the ACO changes a business process or when a provider joins or leaves the ACO.

Beneficiary Participation in ACO

CMS proposes to retrospectively assign beneficiaries to ACOs based upon where they receive the plurality of their primary care services. Assignment would occur at the end of a performance year based on the beneficiary’s utilization of primary care services. Of particular note, CMS states in the Proposed Rule that beneficiary assignment to an ACO “in no way diminishes or restricts the rights of beneficiaries assigned to an ACO to exercise free choice in determining where to receive health care services.”

To better coordinate care among ACO providers, an ACO would be able to request personal health data about the patient from CMS. Prior to doing so, the ACO must notify the beneficiary in writing that they will request the data from CMS. Beneficiaries would be allowed to opt-out of sharing claims data with the physician and ACO. The ACO will only be able to request data from beneficiaries who have visited a primary care provider and have not chosen to opt out of data sharing. In addition, ACOs would only be allowed to use patient data for legally permissible purposes under the HIPAA Privacy Rule.

CMS also proposes requiring ACO providers to notify beneficiaries at the time the beneficiary seeks services that they participate in an ACO, post signs in the facilities saying they participate in an ACO and provide written information about the ACO to beneficiaries.

CMS addresses potential beneficiary concerns about quality of care in a separate Q&A document. Because the Proposed Rule requires all ACOs to bear risk, there may be concern that ACOs will limit access to care in order to make a profit or avoid repaying CMS. CMS states that ACOs that skimp on care will not be eligible for bonuses and that the Proposed Rule also includes strong protections to ensure quality of care. These protections include quarterly and aggregated reports, on-site visits, beneficiary surveys, and a monitoring program that includes analyzing claims as well as financial and quality data.

Payment Structure

Medicare will continue to pay individual providers and suppliers in an ACO for specific items and services as it currently does under Medicare Parts A and B (primarily fee-for-service). CMS will establish a benchmark against which it will compare each ACO’s performance. The benchmark is an estimate using the most recent available three years of per-beneficiary expenditures for Parts A and B services for Medicare FFS beneficiaries assigned to the ACO. When determining the benchmark, CMS would take into account beneficiary characteristics and factors that affect the utilization of services. The ACO would be measured against this financial benchmark and the ACO would share the savings if its costs fell below the benchmark, or be held accountable if its costs were over the benchmark. This benchmark would be updated annually during the agreement period, according to statute, based on the absolute amount of growth in national per capita expenditures for Parts A and B services under the original Medicare FFS program.

CMS proposes to give ACOs the option of participating in either a one-sided risk model (i.e., sharing savings for the first two years, then sharing savings and losses in the third year) or a two-sided risk model (i.e., sharing savings and losses for all three years). ACOs participating in the one-sided model would be facing less risk, but ACOs participating in the two-sided model would be eligible for a greater share of the savings. Specifically, ACOs in the two-sided model will be eligible to share up to 60 percent of savings, while ACOs in the one-sided model will be eligible to receive up to 50 percent of savings.

CMS also proposes establishing a minimum savings rate, or floor, which is a percentage of the benchmark that ACOs must exceed in order to qualify for a share of the savings. CMS wants to ensure that an ACO’s savings are the result of its practices and interventions, and not normal variations in medical spending. In the one-sided model, an ACO must reach 2 percent to 3.9 percent of the benchmark, depending on the size of the ACO. In the two-sided model, the minimum savings rate is 2 percent of the benchmark. CMS also proposes a 2 percent threshold for the sharing of losses.

To prevent ACOs from failing to fulfill the three year obligation, CMS is proposing to withhold 25 percent of each annual performance payment. At the end of the three year performance period, the withheld amount would be returned. If the ACO fails to complete its three year agreement, the amount would be forfeited. Additionally, the total amount of shared savings payments would be limited. For ACOs in the one-sided model, payments would be limited to 7.5 percent of the benchmark in the first two years and 10 percent in the third year. Payments would be limited to 10 percent of the benchmark for all three years of the two-sided model.

The Proposed Rule includes the following table that provides a direct comparison of the two risk models.

Please click here to view table.


The Innovation Center will also be working to test alternate payment methods. The ACA restricts providers/suppliers from participating in multiple shared savings programs. Therefore, the rule proposes a process for ensuring that savings associated with beneficiaries assigned to an ACO participating in the Shared Savings Program are not duplicated by savings earned in another Medicare program or demonstration involving shared savings.

Proposed Quality Standards

ACOs will be accountable for meeting or exceeding quality performance standards in order to be eligible to receive shared savings. The Proposed Rule contains both proposed quality measures and proposed quality performance scoring.

Proposed Quality Measures

For the year 2012, CMS proposes to use 65 measures spanning five quality “domains”: Patient Experience of Care; Care Coordination; Patient Safety; Preventative Health; and At-Risk Population/Frail Elderly Health. CMS sought to align the proposed measures with the National Quality Strategy and with some of the measures used in other CMS quality programs. CMS proposes that the measures be reported to CMS through claims submission, data collection using a tool designed for clinical quality measure reporting, and surveys. CMS proposes to define the first quality performance period as January 1, 2012, through December 31, 2012. After this first period, CMS will determine whether to change or add to the 65 measures.

Proposed Quality Performance Scoring

CMS proposes to score the ACO’s performance on each of the 65 measures. For the first year, ACOs will be required to report on quality measures in order to share in savings, but their shared savings will not be affected by their performance score. However, CMS will score quality performance for informational purposes in the first year and use that information to help set benchmarks for future years. After the first year, ACOs must report and meet the quality standards in order to qualify for the shared savings (in addition to meeting the expenditure benchmarks).

CMS also states that it will provide more details on the quality measures in non-rulemaking guidance.

Public Reporting

CMS proposes that certain information be available to the public, including: providers and suppliers participating in the ACO; parties sharing in the governance of the ACO; quality performance standard scores; and general information on how an ACO shares savings with its members.

Legal Issues

The ACA authorizes the waiver of certain Medicare requirements in order to encourage ACO development. In preparing the Proposed Rule, CMS also worked closely with other federal agencies to address potential legal and tax implications that could arise as a result of creating this program. CMS coordinated with the HHS Office of Inspector General (OIG), the Federal Trade Commission (FTC), the Antitrust Division of the Department of Justice (DOJ) and the Internal Revenue Service (IRS). These agencies released three documents in conjunction with the Proposed Rule:

  1. Joint CMS and OIG Notice and Solicitation of Public Comments on Waivers in Connection with Sections 1899 and 1115A of the Social Security Act

This Notice proposes waivers of certain federal laws for the Shared Savings Program: the Stark Law (prohibits referrals to entities with which the physician or physician’s family has a financial relationship); the Anti-Kickback Statute (criminalizes any offer, payment, solicitation or receipt of remuneration for referrals of business reimbursable under a federal health program); and the Civil Monetary Penalty Law (prohibits hospitals from making payments to induce physicians to limit services to Medicare/Medicaid beneficiaries). The agencies propose to waive the laws in three circumstances:

  • the distribution of the program’s shared savings payments received by an ACO to or among qualified ACO participants and ACO providers/suppliers described in the Notice
  • an ACO’s distribution of Shared Savings Program payments to other individuals or entities for activities necessary for and directly related to the ACO’s participation in the Program
  • for the Anti-Kickback Statute and Civil Monetary Penalty Law only, certain financial relationships that are necessary for and directly related to the ACO’s participation in the Shared Savings Program; however, such relationships must fully comply with an exception to the Stark Law

In its Q&A document, CMS acknowledges that many suggestions for needed flexibility were made during a public meeting and comment solicitation, but it is only proposing waivers related to the payment of shared savings. However, CMS and OIG request comments regarding further waiver design considerations for the Shared Savings Program and the new Innovation Center.

  1. IRS Notice Requesting Comments Regarding the Need for Guidance on Participation by Tax-exempt Organizations in the Medicare Shared Savings Program Through ACOs

The IRS Notice does not constitute a change in or addition to existing policy, but rather solicits comments on whether its existing guidance is sufficient to cover issues that may arise for tax-exempt entities that wish to participate in the Shared Savings Program through ACOs, and if not, what additional guidance should be provided.

Tax-exempt organizations will be required to adhere to the traditional limitations placed on them by the federal tax laws, which means that their participation in the Shared Savings Program must not result in inurement or impermissible private benefit to the private party ACO participants. IRS states in the Notice that it expects tax-exempt entities participating in ACOs approved by CMS will continue to meet the definition of an entity organized for “charitable” purposes, which includes “lessening the burden of government,” as the Shared Savings Program was created to lessen the government’s burden in providing Medicare benefits.

IRS also requests comments on whether guidance is needed regarding tax implications for tax-exempt organizations participating in activities unrelated to the Shared Savings Program, including shared savings arrangements with private insurers, through an ACO.

  1. Joint FTC and DOJ Proposed Statement of Enforcement Policy Regarding ACOs Participating in the Medicare Shared Savings Program

FTC and DOJ propose to apply the “rule of reason” treatment to ACOs seeking to participate in the Shared Savings Program if the ACO will use the same governance and leadership structure and the same clinical and administrative processes in the commercial market as it uses for the Program.

The Proposed Policy Statement in effect creates three levels of antitrust review.

  1. Safety Zone. The safety zone covers independent ACO participants that provide a common service and have a combined market share of 30 percent or less for each common service in each participant’s primary service area (PSA), wherever two or more ACO participants provide that service to patients from that PSA. Absent extraordinary circumstances, the agencies will not challenge ACOs falling within the safety zone.
  2. Mandatory Antitrust Review. ACO applicants that have a market share above 50 percent for any common service that two or more ACO participants provide to patients in the same PSA are subject to mandatory antitrust review. DOJ and FTC commit to provide a 90-day expedited review of such applicants and must receive all required documentation at least 90 days before the last day of the CMS Shared Savings Program application period. If the review results in a determination by the agencies that they are likely to challenge an ACO if it proceeds, the ACO will be ineligible for the Shared Savings Program.
  3. ACOs With 31 Percent to 50 Percent Share. ACOs that fall outside of the safety zone but under the 50 percent mandatory review threshold will not be subject to antitrust review as long as its activities do not impede the functioning of a competitive market. However, such an ACO is permitted to seek the 90-day expedited review if it wishes to have further assurance of its status. The Policy Statement also outlines five types of conduct that an ACO falling outside the safety zone but below the mandatory review line can avoid to reduce the likelihood of antitrust issues, including:
  • preventing or discouraging commercial payers from directing or incentivizing patients to choose certain providers
  • tying sales of the ACO’s services to the commercial payer’s purchase of other services from providers outside the ACO
  • except in the case of primary care physicians, contracting with other ACO physician specialists, hospitals, ASCs, or other providers on an exclusive basis
  • restricting the ability of commercial payers to make information on cost, quality, efficiency, and performance available to its health plan enrollees
  • sharing competitively sensitive pricing information or other data among the ACO’s provider participants

Additionally, there is a “rural exception” that allows certain ACOs to qualify for the safety zone, even if their combined PSA share for common services would exceed 30 percent.

Comment Period

The comment period for the CMS Proposed Rule ends on June 6, 2011. In its Q&A document, CMS defends this relatively short timeframe because of the extensive opportunities it offered for public participation over the past year. In addition, CMS states that it will hold a series of open door forums and listening sessions during the comment period to clarify the Proposed Rule and to ensure public participation. IRS will accept public comments through May 21, 2011. The DOJ/FTC will accept public comments through May 31, 2011.

Additional detailed analysis of the Proposed Rule and its potential impact will be available to Holland & Knight clients. Holland & Knight lawyers and professionals can assist with submitting comments to CMS on the Proposed Rule as well as assessment of the readiness of clients to participate in an ACO, implementation of new ACOs, compliance with CMS requirements, and ongoing monitoring of the ACO’s compliance with the dictates of other federal agencies.

Links to the Proposed Rule and Agency Notices/Statements:

CMS Notice of Proposed Rulemaking
CMS/OIG Notice
DOJ/FTC Antitrust Policy Statement
IRS Notice