The Centers for Medicare and Medicaid Services released a new proposed rule for Accountable Care Organizations (ACOs) participating in the Medicare Shared Savings Program (MSSP). This advisory expands upon our initial advisory titled “CMS Releases Proposed New Rule for Accountable Care Organizations”, and focuses on CMS’ proposed changes to the existing ACO governance and contracting requirements.

ACO Legal Structure and Governance  The health industry has grappled with ACO governance issues because the existing regulations are flexible - such organizations are not bound to any single legal structure. In the new proposed rule, CMS suggests limiting some of the ACO governance options as they relate to the delegation of authority to governing body committees and governing body composition. These proposed changes are intended to ensure that the ACO is protected against improper influence, and that decision-making is governed by individuals with a fiduciary duty, including a duty of loyalty, to the ACO alone. The practical results of the changes are to shift control of ACOs away from parent corporations and to require true decision-making authority by an ACO governing body that broadly represents the ACO participants.

The key proposed changes include:

  • Requiring an ACO, as well as each entity forming the ACO, each to have its own separate and unique taxpayer identification number (TIN);
  • Requiring the governing body of an ACO to be separate and unique to the ACO and to not be the same as the governing body of any ACO participant (in the case of an ACO that comprises multiple ACO participants);
  • Explicitly including the fiduciary duty of loyalty among the fiduciary duties of the members of an ACO’s governing body;
  • Eliminating the permissive option of ACOs to deviate from the requirement that at least 75% control of the governing body must be held by ACO participants; and
  • No longer allowing an ACO provider/supplier to be the beneficiary representative on a governing body of an ACO.

Some of the implications of these key changes are discussed below:

Governing Body Committees

The success of the ACO turns on its ability to achieve clinical integration, with financial integration and interdependence of the participants, which in turn requires a strong focus on information systems and processes that capture hospital and clinical results across a continuum of care. Monitoring by committees that focus on quality of care, finance, compliance and governance will therefore always be essential components of an ACO. 

The proposed rule clarifies that CMS desires all management of the ACO to take place at the level of the ACO rather than at a parent level. By proposing that the governing body of the ACO be the same of as the governing body of the entity that is the ACO, CMS states they “intend to preclude delegation of all decision-making authority to a committee of the governing body or retention of ACO decision-making authority by a parent company; ultimate decision-making authority for the ACO must still reside with the governing body.” For ACO whose current structures provide for governance through strong parent oversight, restructuring may be necessary to ensure independent governance of the ACO can be achieved at early stages of functioning of the ACO, and that stakeholders with significant skin the game can still feel comfortable that the enterprise will be successfully managed and shared savings achieved, used and distributed properly.

For an entity such as an ACO, which requires careful monitoring to ensure successful integration on a constant basis, strong governance at an entity level is vital, but whether a fledgling entity should strive for such success without heavy parent supervision is something stakeholders may wish to address during the comment period.

Duty of Loyalty

Although the proposed rule discusses the fiduciary duty of loyalty, CMS admits that it does not represent a change in policy but is simply intended for emphasis.

Conflicts of interest are unavoidable in the ACO context over time, and will likely present in two primary ways: (i) in contracts with a governing body member, in which the governing body member has a material financial interest, and (ii) in contracts with the ACO participant that appointed the governing body member. In general, to deal with conflicts of interest there will be a disclosure of the governing body member’s direct or indirect interest, and neither that governing body member nor any other governing body members from his or her organization may participate in the voting on the matter.

In most ACOs, many of the governing body members will be provided or selected because they represent participants in the organization. In these instances, there will be a natural tension between such a governing body member’s loyalty to his or her employer and the need to take actions which are in the best interests of the ACO. The required duty of loyalty is clear. Decisions by an ACO governing body member need to be taken in a manner that he or she believes to be in the best interests of the ACO. To make this a reality will often require board education. In those instances where a governing body member feels he or she is not able to take action which he or she believes to be in the best interest of the ACO, he or she should refrain from voting.

In either case (i.e., a material financial interest or conflicting loyalties or duties), the ACO should consider adopting a conflict of interest policy that provides guidance to the board and management on what constitutes a potential conflict of interest and how the governing board is to deal with such a situation.

Board Composition

The proposed rule states an intention to revise 42 CFR § 425.106(c) to restate the requirement for an ACO to have a mechanism for shared governance among participants, which CMS interprets in this case as having a broad representation of all ACO participants on the governing body. No specific language changes, however, are discussed in the proposed rule.

Coordinating Care

In an addition to the application process for new ACOs, CMS proposes to add a requirement that such prospective participants think through and describe the ways in which they will use “enabling technologies” for improving care coordinate for beneficiaries. Such technologies could include electronic health records, population health management and data aggregation and analytic tools, telehealth services, health information exchanges, or other tools to engage patients in their care utilizing technology. This seems like a topic ACO participants should certainly be thinking through as they enter this arena, as technology and population health management go hand in hand as ACOs move into the future of health care.


CMS issued earlier guidance regarding ACO contracts and strongly recommended good contracting practices in general. In the proposed rule, the agency has formally defined a “participation agreement” as the written agreement between an ACO and CMS that, along with CMS regulations, governs the ACO’s participation in the Shared Savings Program, and an “ACO participant agreement” as the written agreement between an ACO and an ACO participant in which the ACO participant agrees to participate in, and comply with, the requirement of the Shared Savings Program.A few of the key additional proposed revisions include the following:

  • The ACO and ACO participant are the only parties to the agreement;
  • The 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, including imposition of a corrective action plan, denial of shared savings payments and termination of the ACO participant agreement, to address noncompliance with the Shared Savings Program and other program integrity issues; and
  • CMS reserves the right to request copies of executed agreements at any time for audit or monitoring purposes.

Of all topics discussed above, stakeholders will likely view the proposed limitations of certain governance options as having the potential to cause a significant impact on ACO operations, and therefore these proposed changes are likely to garner the most commentary. Theoretically, the duty of loyalty has always applied to governing body members, and CMS issued earlier guidance on contracting that has been steadily moving us in the direction of these proposed changes. The comment period for the proposed rule expires on Feb. 6, 2015.