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CMS Sweetens the Pot for ACOs

On October 20, 2011, the Centers for Medicare and Medicaid Services (CMS) released its final rule for the creation and operation of Accountable Care Organizations (ACOs), significantly amending the proposed rule it issued in March.

Federal health care reform mandated the creation of ACOs, health care super-entities composed of multiple providers and "accountable" for subsets of the Medicare population. ACOs are intended to increase the quality of health care, and reduce Medicare fee-for-service cost growth, through the use of value-based purchasing concepts, and through clinical and administrative integration.

CMS' proposed rule fleshed out this basic structure, but met a deluge of objections from providers. In response, the final rule increases the financial incentives to participate in the Program, and decreases the thresholds for initial and ongoing participation.

A. More Shared Savings

ACOs first entering the Program may elect one of two shared savings models: (1) the one-sided model, with Medicare sharing with the ACO up to 50% of the savings against a risk and inflation adjusted benchmark of expected beneficiary costs for the ACO's Medicare population, and (2) the two-sided model, with Medicare sharing with the ACO up to 60% of both savings and losses against the benchmark.

Under the final rule, an ACO may elect the one-sided model for its entire three year initial participation agreement with CMS, rather than just for the first two years of the agreement as under the proposed rule. The two-sided model still applies to any subsequent participation agreement.

The final rule also boosts savings shares given one-sided ACOs, allowing them to share in all savings once they hit a minimum savings rate (MSR) target against the benchmark, not just those savings over the MSR, as under the proposed rule. Essentially, the final rule grants a one-sided ACO a fixed bonus for hitting its MSR, the amount of the bonus depending on the ACO's MSR, benchmark, and sharing rate.

Further, the final rule raises the sharing cap for one-sided ACOs from 7.5% of benchmark to 10% of benchmark, and for two-sided ACOs from 10% of benchmark to 15% of benchmark (though losses remain capped at 5%, 7.5% and 10% respectively for the three years of each participation agreement).

B. Sharing Savings - An Example

In light of the foregoing, suppose Medicare paid the following amounts in regard to beneficiaries assigned to a particular ACO: $110 Million in year one, $100 Million in year two, and $110 Million in year three, while CMS benchmarked the ACO spending at $100 Million, $110 Million, and $150 Million, respectively. Then, CMS would assign a $10 Million loss in year one, a $10 Million savings in year two, and a $40 Million savings in year three.

Under the one-sided model, the ACO in the foregoing example would get $0 in year one, up to $5 Million in year two (vs. up to $3.9 Million under the proposed rule due to first dollar sharing under the final rule), and up to $15 Million in year three (vs. $11.25 Million under the proposed rule's lower benchmark cap), for a three-year total of up to $20 Million in shared savings.

Under the two-sided model, the ACO would get up to $5 Million in losses in year one, because of the benchmark cap, while sharing up to $6 Million and $22.5 Million (vs. $15 Million under the proposed rule's lower benchmark cap), respectively, in years two and three, with a three-year net total of perhaps $23.5 Million.

C. Simpler Quality Metrics & Fewer Administrative Mandates

The final rule consolidates CMS' quality tracking metrics into 33 measures in 4 domains, nearly halving the number of separate quality metrics proposed previously. The four remaining domains are patient/caregiver experience, care coordination and patient safety, preventative health, and at-risk population health. An ACO need only meet a "minimum attainment level" on 70% of the measures of 1 of these 4 domains to qualify for shared savings.

CMS also elongated the first performance year for ACOs joining the Program in 2012. For these ACOs, the first performance year will be CY 2013 plus any part of CY 2012 during which the ACO operates. Early adopters thus enjoy a longer period of shared savings without quality mandates, other than compliance with ACO reporting guidelines.

The final rule also drops the requirement that ACO participants meet electronic health record (EHR) adoption mandates, though EHR usage is now the most significant quality metric for shared savings purposes.

D. Beneficiary Selection

Under the proposed rule, CMS assigned Medicare beneficiaries to ACOs retrospectively for any given performance year, based on the plurality of primary care physician services received by the beneficiary, and only if the beneficiary did not decline participation at the point of care.

The final rule now prospectively assigns beneficiaries to ACOs quarterly using estimates based on beneficiaries' past primary care provider selection, while allowing ACOs to contact beneficiaries to notify them of their assignment and offer them the opportunity to decline data sharing and participation. After a performance year, beneficiary assignments are still "trued up" based on the prior rule's retrospective formula, with minor modifications in the final rule.

CMS established the new "hybrid" selection system to address concerns that ACOs would be unable to coordinate care properly and secure patient compliance without some advance identification of assigned beneficiaries. CMS explained that the new beneficiary selection rule would still prevent ACOs from discriminating against fee-for-service beneficiaries, since beneficiary assignment is not finalized until the end of the performance year.

In response to concerns that an ACO could drop below minimum beneficiary enrollment should a major primary care practice quit the ACO midyear, the final rule also allows ACOs to add participating providers within a performance year.

E. New Treatment for FQHCs & RHCs

The final rule drops the shared savings bonus awarded to ACOs that include federally qualified health centers (FQHCs) and rural health clinics (RHCs). However, FQHCs and RHCs may now establish their own ACOs.

F. Conclusion

Health care providers wary of initiating or joining an ACO may find the scales tipped in favor of joining. Providers now may participate in a full three-year ACO cycle without ever sharing in potential losses, and will be rewarded simply for fully complying with ACO reporting guidelines, so long as they create savings from benchmarks.

Indeed, it is difficult to imagine why an ACO would initially participate in the two-sided model under the final rule, unless the ACO anticipated significant cost savings vs. benchmarks. Maximum savings shares are now only slightly higher under the two-sided model than under the one-sided model since, under the final rule, one-sided ACOs share first dollar savings once the MSR is met.

CMS presumably placed its financial sweeteners almost solely into the one-sided model to tempt providers to participate in the one-sided model, with the hope that those providers will stay in the program, even after the program becomes two-sided, because such providers will then have three years of history to rely upon when they eventually have to decide to take risk.


March 19, 2012




Rosen, Barry F.


Health Care