So You Want to Be an ACO? Prospects Improve, but Challenges Remain

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Contributed by Jeffrey R. Ruggiero, Thomas Gustafson, Theodore Lotchin, and Hanna Fox, Arnold & Porter LLP

Accountable Care Organizations (ACOs) are an innovation in the organization of care delivery within fee-for-service Medicare. In an ACO, providers voluntarily come together and agree to accept accountability for the quality and cost of care delivered to a group of beneficiaries. The beneficiaries remain free to seek care from any Medicare provider, without financial or other types of penalties, and Medicare pays the providers in the ACO using the normal fee-for-service methods. At the end of each year, CMS will review quality measures and the cost of treatment for those beneficiaries assigned to ACOs participating in the MSSP, and if measured quality is satisfactory, the participating ACOs will share in any savings realized by Medicare.

Although the health care sector does not have available a large body of operational experience to guide the development of successful ACOs, the business case for ACOs was substantially improved by changes made by the Centers for Medicare and Medicaid Services (CMS) in the final rule for the Medicare Shared Savings Program (MSSP), which will launch in 2012 after being introduced as part of the Patient Protection and Affordable Care Act (ACA).1 As a result, interested parties around the country are developing ACOs with the intent of participating in the MSSP.


Design Concepts

ACOs are designed to bring many of the advantages ascribed to managed care to Medicare’s fee-for-service program, while preserving major features of the fee-for-service program, two of which help to define ACOs. First, although beneficiaries are “assigned” to the ACO, they remain free to seek care from any Medicare provider, whether or not the provider is associated with the ACO. Second, the providers will be paid using Medicare’s standard fee-for-service payment methods. As explained below, both of these aspects have profound effects on how ACOs will operate.

Beneficiaries. A Medicare beneficiary will be assigned to an ACO if the beneficiary receives a plurality of his or her primary care services (as listed by CMS) from the ACO’s primary care physicians.2 The ACO is not permitted to control or incentivize the beneficiary to receive care only from those providers participating in the ACO. Furthermore, the ACO will be accountable for the total cost of the care for the beneficiary, regardless of whether the care is provided by physicians participating in the ACO. The ACO model thus does not involve enrollment by beneficiaries, as would be the case in a traditional health maintenance organization.

ACO primary care physicians may serve as case managers for beneficiaries but not as gatekeepers controlling access to care by specialists, hospitals, or other providers. In fact, the ACO and its providers will not know for sure which beneficiaries the ACO is accountable for in a given year until after the year is over: CMS will provide information about probable matches, but the final determination will be based on service use over the year and hence is established retrospectively. Both of these features present challenges to the ACO in “managing” its caseload, though persistence and strength of relationships between beneficiaries and their primary care physicians will help.

Providers. In the ACO model, providers are paid under Medicare’s fee-for-service rules (with some minor exceptions). That means providers are paid at the rates otherwise applicable, and savings to be shared as part of the MSSP cannot come from reduced payment rates. The savings at issue are those to Medicare, and such savings must emerge largely from reductions in use of services or substitution of less expensive for more expensive services, which will cause ACOs to focus on clinical care protocols, utilization guidelines, referral patterns, and stringent credentialing of participating providers.

Although ACOs employ some of the same techniques used by HMOs, beneficiaries are not “locked in,” and savings from reduced provider payment rates, perhaps justified by the prospect of assured caseloads, are not part of the picture. Instead, ACOs face the challenge of assuring that providers work well together in a beneficiary-centered care model that promotes beneficiary satisfaction, reduces unnecessary services, and promotes high quality care.


Quality Measurement

CMS has established a sliding scale for sharing savings based on quality scores. Therefore, achieving high quality scores is critical to the financial viability of the ACO. CMS has established a set of 33 measures in four equally-weighted domains: patient/care giver experience; care coordination/patient safety, preventive health, and at risk populations (the latter is aimed at diabetes and heart disease). In the first year, an ACO would get credit merely for reporting on these measures; in subsequent years, performance on most measures will be assessed relative to benchmarks (which CMS plans to release later). CMS will award points if a minimum attainment level is achieved or exceeded for each measure, and savings will be awarded depending on the number of points. ACOs must achieve the minimum attainment level on 70 percent of the measures in each domain or face a corrective action plan and possible termination from the ACO program.

Data for the measures comes from four sources: a survey of patient and care giver experience; claims data; reports from the electronic health record incentive program; and information from medical records entered by the ACO directly through a web-based interface. ACOs must have the infrastructure to harvest and report the data for which they are responsible, and the burden of data collection is likely to grow over time. CMS will conduct and pay for the patient survey in the first two years of operation, but responsibility for its funding shifts to the ACO in subsequent years.


Electronic Health Records

Electronic health records (EHRs) are likely to be critical for successful operation of ACOs, especially given the requirements for care coordination, including effective transitions between sites of care, and for quality data reporting. CMS strongly and explicitly promotes their use. One of the 33 quality measures is on EHR use: percent of primary care practitioners who successfully quality for a payment under CMS’s EHR Incentive Program. To emphasize its view of the importance of EHRs, CMS gives this measure twice the weight of other measures in determining scores on quality measures, which in turn influence shared savings payments.


Implementation Challenges

To set up an ACO, interested parties must develop and implement the mechanisms to govern the ACO, subject to a set of detailed requirements in the regulations. The ACO must coordinate care and promote high-quality, evidence-based medicine, engage with the local community, and gather and report information on quality of care and the experiences of beneficiaries with that care. Further, ACOs must accept accountability for cost and quality of care of a fluid beneficiary population with a voluntary group of providers. The challenge of organizing for this task should be not be minimized.


Key Elements in Application

The application for ACO participation in the MSSP was recently published by CMS.3 The application form, combined with the final rule, regulations, and agency guidance, provides a reasonably-detailed framework of the minimum requirements for ACO eligibility and participation in the MSSP. Careful attention to each of the required elements should improve the odds of a successful endeavor.

CMS has made clear in the application instructions a number of key elements that the agency believes necessary for an ACO to participate in the MSSP. In the context of the application, these items appear as “essay questions,” requiring a narrative presentation. These include:

  • Promoting use of evidence-based medicine.
  • Promoting beneficiary engagement, including evaluation of health needs of the patient population and partnership with community stakeholders to improve the health of the ACOs population; communicating clinical knowledge and evidence-based medicine in ways that are understandable to beneficiaries; engagement of beneficiaries in shared decision-making; and written standards for beneficiary access and communications (including a process beneficiaries can use to access their medical records).
  • Internal reporting on quality and cost metrics to enable the ACO to monitor, evaluate, and provide feedback to individual providers, in order to continually improve care and service.
  • Promoting coordination of care in development, implementation, and revision of care protocols, including a program for individualized care plans for high-risk patients.
  • In addition, the application makes clear that each ACO must have in place a compliance plan that includes methods and training (as discussed further below).


Costs of an ACO

Costs of establishing and operating an ACO are considerable. With some (potentially significant) variation, CMS estimates start-up costs will average almost $600,000 and operating costs will average about $1.3 million per year.4 Assuming reasonable performance and continued compliance with the MSSP’s requirements, ACOs can count on a continuing relationship with Medicare that may, at least in part, justify investments in start-up costs.

Start-up costs include building organizational, financial, legal, and reporting infrastructure; negotiating with participants and other providers that may provide services to those assigned to the ACO; and developing processes for care coordination, quality assurance, quality measure reporting, beneficiary engagement, and community involvement. Ongoing operating costs include the basic supervision and running of the organization’s processes, quality reporting, conducting effective care coordination processes, updating evidence-based care protocols, engaging in community education and outreach efforts, tailoring approaches to diverse populations, and conducting patient surveys.

CMS points to institutional affiliations that may help with access to capital and with experience with quality reporting, pay-for-reporting, and pay-for-performance systems as factors that could influence the start-up and operating costs. In addition, institutional providers may bring experience and capabilities with health information technologies and electronic health records to the ACOs with which they are affiliated. Further, some ACOs may also include beneficiaries of private insurance plans (though under MSSP they are not required to do so), which would help spread overhead further.


Advanced Payment Program

Accordingly, one of the unavoidable tasks for an ACO is to secure the funds necessary for start-up and for ongoing operations. Investment in the ACO by participating providers is likely required to satisfy initial capital requirements. Returns are not certain, however, and in any case any savings to be returned to the ACO will not be available for some time. Apparently in recognition of this concern, CMS will offer certain smaller MSSP participants, such as physician-owned and rural ACOs, the opportunity to participate in the “advanced payment program.” If selected to participate, ACOs can receive advanced payments to cover fixed and variable start up and initial operating costs. Payments will range upwards from about $1.4 million for the smallest ACOs. The payments are in essence loans that CMS will recoup through the participant’s earned shared savings. Eligibility is limited to ACOs without inpatient facility participation and less than $50 million in total annual revenue or ACOs with less than $80 million in total annual revenue and in which the only inpatient facilities are critical access hospitals and/or Medicare low-volume rural hospitals. The advanced payments will be available only to ACOs that enter the MSSP in April or July of 2012.5


Steps Toward an Application for Participation in the MSSP

To participate in the MSSP, an ACO must start by forming an organization meeting the regulatory requirements. Existing organizations may be able, in some circumstances, to meet these requirements without significant changes, but the governance requirements in particular will make this difficult for most organizations. For instance, 75 percent of an ACO’s board must consist of ACO participants. The ACO must be able to receive and distribute shared savings to the participants. The governing body must have authority sufficient to execute the functions of the ACO, including establishment of processes for care coordination, promotion of evidence-based medicine, patient engagement and community involvement, and reporting on quality and cost measures. It must provide oversight and strategic direction and hold management accountable for meeting its goals. The ACO must secure funds, set operating policies, establish job descriptions, and hire staff, including an executive director, a medical director, and a compliance officer.

Each ACO must determine its configuration, including deciding on which providers will participate. Primary care physicians are necessary for ACOs, but the participation of all other Medicare provider types in an ACO is optional. (Providers do not have to be ACO participants in order to serve ACO beneficiaries.) Should specialists and ancillary providers be included, and if so which ones? The ACO must assess which providers will assist it in securing assigned beneficiaries and maximize the chances of meeting and improving on quality metrics while achieving Medicare savings. Depending on its decisions, the ACO will then have to recruit providers accordingly, establish a participation agreement, and execute it with all participants.

Because any shared savings payments will be made by CMS to the ACO, it must also establish a plan for distribution of shared savings, addressing how much will be retained for investment and development and how to distribute the balance among participants, and, as appropriate, provision of incentives for advancing quality and other goals. Although CMS requires a plan of distribution as part of its application, it provides very little specification on these points.


Compliance Plan

The agencies with shared oversight authority for Medicare and other Federal health care programs have started to address concerns about the potential for fraud and abuse by requiring ACOs to implement and maintain robust compliance programs. This requirement should come as no surprise in light of the Department of Health and Human Services Office of Inspector General’s (OIG) work in this area over the past fifteen years.6 Although the OIG’s specific suggestions for the elements of a successful compliance program may vary between industry segments (for example, focusing on financial arrangements with physicians for hospitals7 and medical necessity of services for physicians),8 the agency’s recommendations for the essential minimum elements of such programs remain the same and are largely incorporated into the new requirements for ACOs.9 The OIG has recognized, however, that “the specific design and structure of an effective compliance plan may vary depending on the size and business structure of the ACO.”10 The agency has also noted that an ACO may coordinate its compliance efforts with the compliance functions of the providers and suppliers that participate in the entity.11

In addition to requiring robust compliance programs, these agencies have implemented a series of waivers to the Stark law, the Anti-Kickback Statute (AKS), and parts of the civil money penalty law (CMP) for ACO arrangements that meet specific requirements.12. These waivers include:

  • an ACO pre-participation waiver for start-up arrangements that pre-date an ACO’s participation agreement with CMS, provided that certain specific conditions are met;13
  • an ACO participation waiver that may apply to any arrangement of an ACO, one or more of its ACO participants or its ACO providers/suppliers, or a combination thereof;14
  • a shared savings distribution waiver for the use of shared savings earned by an ACO;15
  • a waiver that may apply to financial relationships between or among the ACO and its participants that implicate the Stark Law;16 and
  • a waiver for in-kind incentives17 provided by an ACO to its beneficiaries for free or below fair market value in order to encourage preventive care and compliance with treatment regimens.18

As a practical matter, the requirement to implement an enterprise-wide compliance program will create some unanticipated challenges for ACOs that are seeking to meet the requirements of the new fraud and abuse waivers.

One function of an ACO’s compliance structure will be to monitor and report on whether the entity meets the requirements for one of the relevant waivers. In performing this and other duties, an ACO’s compliance officer is likely to encounter a number of complex and operationally delicate questions that might not be encountered under the OIG’s traditional compliance program framework. For example, the MSSP Final Rule recommends that an ACO “coordinate its compliance efforts with the compliance functions of its ACO providers/suppliers” but declines to specify “how various organizations should work together to develop their plan.”19 Although this approach will afford ACOs the flexibility to develop tailor-made compliance programs, it also begs the question of how best to mesh differing compliance frameworks across ACO participants and, potentially, industry segments. The success or failure of this effort will depend as much on the underlying culture of each ACO participant as on the care with which an ACO designs its specific compliance program.

As another example, the MSSP Final Rule requires ACOs to appoint a designated compliance official who reports directly to the entity’s governing body.20 ACOs composed of several independent provider entities will need to consider whether this reporting structure creates the potential for sensitive compliance information about an individual entity to be shared with the ACO’s governing body without such entity’s consent or even knowledge.

Finally, the ACO Final Rule was drafted to allow for “the prompt and thorough investigation of possible misconduct” by ACO participants and other individuals or entities performing functions or services related to ACO activities.21 As such, ACO compliance plans must include a requirement for the entity to report “probable” violations of law to law enforcement.22 Although these provisions are consistent with the OIG’s current policy, entities that participate in the MSSP will have to wrestle with the implications of this reporting requirement for current and future internal investigations. ACOs will also have to create processes for resolving disputes among ACO participants regarding what constitutes a “probable” violation of law. Entities seeking to participate in the MSSP will need to keep these and other compliance questions in mind as they move forward into largely uncharted territory.

The advent of ACOs represents a significant change in the delivery of health care services. At its core, the benefits of meaningful collaboration amongst otherwise disparate providers to achieve higher-quality care and reduction in costs are undeniable. While the statutory and regulatory construct for ACOs could be criticized as imperfect, it is, nevertheless, a critical first step on the right path.

Jeffrey Ruggiero is a partner in Arnold & Porter LLP's FDA and healthcare group. His practice includes the representation of a variety of healthcare providers in corporate, transactional, regulatory, licensure, and litigation matters. Jeff may be reached at or 212.715.1089.  

Thomas Gustafson, PhD, is an advisor in Arnold & Porter LLP's FDA and healthcare group. He concentrates on Medicare reimbursement and related issues and on health policy generally. Tom may be reached at or 202.942.5999.  

Theodore Lotchin is an associate in Arnold & Porter LLP’s FDA and healthcare group. Theodore may be reached at or 202.942.5250.  

Hanna Fox is an associate in Arnold & Porter LLP’s litigation, white collar criminal defense, and FDA and healthcare groups. Hanna may be reached at or 212.715.1320.  


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