Summary of CMS Proposed Rule on Accountable Care Organizations

(Second in a series. See Part 1.)

CMS recently released the proposed rule that will regulate PPACA’s Medicare Shared Savings Program (MSSP). The MSSP relies on the accountable care organization (ACO) model in order to generate and distribute savings. HealthReformWatch.com has discussed the general framework for ACOs before. Clocking in at nearly 500 hundred pages, the proposed rule helps to flesh out what was largely a philosophical exercise in cooperative health care delivery. Below are what I believe to be a number of key pieces of the proposed rule.

Proposed Rule Highlights

The 2 ACO Models – (425.7)

There will be two ACO models. The choice between models appears to be largely geared towards minimizing ACO risk while hospitals and providers are first bringing their ACOs online.

  • One-Sided Model: A one-sided ACO shares in the savings, but is not on the hook to share in any of the losses (i.e., costs surpassing the ACO’s benchmark as determined by CMS, see below).
  • Two-Sided Model: A two-sided ACO shares in both the savings as well as the losses.

Basic Time frame and Structure

Not surprisingly, ACO hopefuls must form an agreement with CMS directly. ACOs under the MSSP must last for not less than three years after the application has been approved. (425.18).  The performance period will be 12 months. The ACO must have at least 5,000 beneficiaries, and must include a sufficient number of primary care physicians to treat the ACO beneficiary population.

  • First 3 years of ACO life: Choose a Track – 425.5(d)(6).
    • Track 1:  ACO operates under a one-sided model for two years, and under a two sided model for the third year. With the exception of quality performance, the third year of this track will be measured using the methodologies that measure the first year of the Track 2 ACOs.
    • Track 2: ACO operates under the two-sided model, sharing both savings and losses with the Medicare program for three years.
  • After 3 years
    • ACOs operate under the 2-sided model, thus sharing both gains and losses with Medicare.

Regulating Risk and Payment — 425.5(d)(6)(b)(4)

ACOs must obtain reinsurance, place funds in escrow, obtain surety bonds, establish a line of credit that Medicare can draw upon, or establish other repayment mechanisms that will provide for payment of losses to Medicare under the 2-sided model.

Legal Structure — 425.5(d)(7)

ACO must be constituted as a legal entity for the purposes of, among other things, receiving and distributing shared savings, repaying shared losses, and establishing reporting.

Governance — 425.5(d)(8)

The ACO must establish and maintain a governing body to fulfill and execute ACO functions. It must be comprised of ACO participants or their representatives, as well as representatives of the Medicare beneficiaries in the ACO. At least 75 percent of the governing body must consist of ACO participants. ACO participants and ACO providers/suppliers must have a meaningful commitment to the ACO’s clinical integration, which may consist of a financial investment or a meaningful human investment in the ongoing operations of the ACO, such that potential loss or recoupment is likely to motivate that participant.

Overseeing Quality and Performance — Accountability Internally Enforced by Physician-directed Committee — 425.5(d)(9)(v)

ACOs will be required to have a physician-directed committee tasked with overseeing a quality assurance and improvement program. This program must establish internal performance standards for quality of care, cost-effectiveness, and process and outcome improvements. The committee must hold the ACO providers/suppliers accountable for meeting these standards. The program must have processes and procedures to identify and correct poor compliance.

Evidence-Based Medicine — 425.5(d)(9)(viii)

The ACOs are required to implement evidence-based medicine or clinical practice guidelines and processes in an effort to improve individual care, better the health of the population, and lower the growth of health care expenditures. The guidelines and processes must cover diagnoses with “significant potential” for the ACO to achieve quality and cost improvements, taking into account the circumstances of individual beneficiaries. All ACO participants and suppliers/providers must agree to abide by these guidelines and processes, and must be evaluated for their compliance. Remedial actions must be a possibility for non-compliance, and ACOs must have policies and procedure for ACO expulsion of participants and/or providers/suppliers.

Health Information Technology — 425.5(d)(9)(viii) & 425.11

ACOs are required to have an infrastructure, such as information technology (which may include EHR technology that is certified for the meaningful use program) that enables the ACO to collect and evaluate data and provide feedback to ACO participants and ACO providers/suppliers across the entire ACO, including providing information to influence care at the point of care.

By the second year, at least 50 percent of an ACO’s primary care physicians must be meaningful users of EHR technology. Failure to fulfill this obligation could lead to ACO termination.

Assigning Beneficiaries to ACOs — 425.6

The general approach of the CMS is to assign beneficiaries to ACOs based on the utilization of primary care. 425.6(a). Beneficiaries are assigned based on their utilization of primary care services by a primary care physician who is an ACO provider/supplier during the performance year for which shared savings are to be determined. Assignment to an ACO in no way diminishes or restricts the right of the beneficiaries assigned to an ACO to exercise free choice in determining where to receive health benefits.

More specifically, beneficiaries will be assigned to the ACO where they receive a plurality of their primary care services. 425.6(b). CMS will establish a fixed benchmark which will be adjusted for overall growth and beneficiary characteristics, including health status. This benchmark will be updated annually based on the absolute growth in national per capita expenditures for Medicare Part A and Part B services under the original Medicare fee-for-service program.

Payment and Treatment of Savings — 425.7

  • Shared Savings under One-Sided Model — Each year, CMS will determine whether the estimated per capita Medicare beneficiary expenditures under the ACO are below the benchmark for Medicare fee-for-service. To qualify for savings, an ACO in this model must have costs below the benchmark by more than a “minimum savings rate,” as determined by CMS.  ACOs in the one-sided model that exceed this minimum savings rate (as determined by CMS calculations) are eligible to  share savings net 2 percent of its benchmark.  One sided ACOs can share in a maximum of 50 percent of the savings, with an additional 2.5 percent being allowed for rural hospitals or federally qualified health centers–in certain circumstances. Payment is capped at 7.5 percent of the ACOs benchmark. However, ACOs will not be able to blindly slash costs in an effort to obtain savings. Rather, eligibility of the shared savings will be contingent on the reaching of certain minimum quality performance measures. These measures will focus on five areas, including patient/care giver experience, care coordination, patient safety, preventative health, and at-risk population/frail elderly health. In addition to determining general eligibility for savings, the quality performance measures will also determine the actual percentage of savings that the ACO is eligible to take home.
  • Shared Savings under Two-Sided Model – In the two-sided model, CMS will also determine a benchmark of Medicare Part A and Part B costs. This benchmark will determine whether the ACO is eligible for savings payments or — as is unique to the two-sided model — whether they are liable for losses. To trigger savings or losses, the ACO must be below or above their benchmark by more than a minimum savings rate, or alternatively, a minimum loss rate when considering losses. Unlike one-sided ACOs whose minimum savings rates are calculated based on the beneficiary population, the minimum savings rates for two-sided ACOs are capped at 2 percent below the benchmark rate. Likewise, to be subject to loss, the ACO’s expenditures must be above 2 percent of its benchmark. Two-sided models also use the quality performance measures to determine eligibility as well as the rate of shared savings. Two-sided ACOs can share in a maximum of 60 percent of the savings, with an additional 2.5 percent being allowed for rural hospitals or federally qualified health centers–in certain circumstances. In addition, whereas the shared savings of the one-sided model caps out at 7.5 percent of the ACO’s benchmark, the two-sided model caps out at 10 percent.

Preventing Cherry Picking — 425.12(b)

CMS will use the methodologies it applies to analyzing ACO performance in an effort to prevent ACOs from “cherry picking” the healthiest individuals for their ACOs. CMS reserves the right to terminate an ACO for avoiding at-risk beneficiaries. Other less drastic options are also at the option of CMS.

Ensuring quality performance — 425.12(c)

CMS will be monitoring ACO compliance by analyzing the data provided by the ACO to determine its eligibility for, and its percentage of, shared savings. If the ACO fails to meet CMS performance standards it will be given a warning. An ACO given a warning will be reevaluated the following year. If the ACO is still failing to meet the performance measures CMS may terminate the ACO immediately or take alternative actions as specified in the rule. If the ACO does not submit the requested quality performance data, CMS will request submission of the data, allow for a correction of the data, or allow for a written explanation of why the data was not provided. ACOs that continue to fail in providing the requested data will be terminated immediately.

Beneficiary Data Sharing – 425.19(d)

CMS will provide ACOs with monthly claims data for potentially assigned beneficiaries. CMS makes clear that HIPAA protections will apply to this data sharing. More notably, ACOs must provide the beneficiary with the opportunity to opt-out of sharing his or her personal health information for the purposes of ACO activities.

Public Reporting and Transparency – 425.23

ACOs will be required to publicly report a variety of information, including quality performance standard scores, shared savings or losses information, the total amount of shared savings distributed among ACO participants, and the total proportion that was used to support quality performance.


1. CMS [Proposed Rule]: Medicare Program: Medicare Shared Savings Program:  Accountable Care Organizations on ACOs. For those wanting the rule without the preamble, I have uploaded it here. It is only 59 pages.

2. CMS and HHS Office of the Inspector General [Notice with Comment]: Medicare Program; Waiver Designs in Connection with the Medicare Shared Savings Program and the Innovation Center.

3. DOJ and FTC [Proposed Statement]: Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program.

4. IRS [Notice]: Notice 2011-20: solicitation for comments regarding what guidance, if any, is needed for tax-exempt organizations participating in Medicare Shared Savings Programs through an ACO.

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  1. In West Michigan a number of hospitals are already pursuing designation as ACO’s. The University of Michigan is also organizing an ACO of independent physicians around the state. The demand here seems great; it will be interesting to see how much is accomplished in terms of quality, which is a major focus of the hospitals in my area of West Michigan. In fact, U of Michigan Health Services is very much into Lean and the Patient-Centered Medical Home.