The Proposed Regulations on Accountable Care Organizations and the Role of Long Term Care, Home Care, and Other Providers Across the Continuum

May 04, 2011

Enacted by Congress in March 2010, the Patient Protection and Affordable Care Act (“PPACA”) required the Federal Centers for Medicare and Medicaid Services (“CMS”) to establish a Shared Savings Program, under which Accountable Care Organizations (“ACOs”) would assume responsibility for the cost and quality of care for Medicare fee-for-service (“FFS”) beneficiaries and share in the savings achieved in accord with financial and clinical benchmarks set by CMS.  In our November 30, 2010, Clients & Friends Memo, “National Health Care Reform Promotes Accountable Care Organizations”, we discussed some of the legal and regulatory issues surrounding ACOs posed by PPACA.  We also noted that many key issues related to ACO formation, governance, operation, and financial incentives would be addressed in the regulations.

On March 31, 2011, CMS issued the much-awaited proposed ACO regulations (the “Proposed Regulations”).  On the same day, the Office of Inspector General (“OIG”) within the Department of Health and Human Services (“HHS”), CMS, the Department of Justice (“DOJ”), the Federal Trade Commission (“FTC”), and the Internal Revenue Service (“IRS”) released regulatory guidance to explain how the federal laws within their respective jurisdictions would be waived or interpreted to promote the formation and operation of ACOs.  The Proposed Regulations solicit comments on numerous issues, underscoring that further changes will be made prior to final adoption.  At the same time, the Proposed Regulations provide significant insight into the direction of federal policy on ACOs in relation to ACO governance, shared savings, and clinical/quality standards, among other important areas.

Under PPACA and the Proposed Regulations, the main participants are (i) health care professionals who deliver primary care -- principally, physicians or medical groups -- and (ii) hospitals; only entities comprised of primary care professionals and/or hospitals are eligible to form an ACO.  However, other providers that serve Medicare beneficiaries, including nursing homes and other long term care facilities, home care agencies, and hospice programs, can also participate in an ACO and contribute to meeting the financial, quality, and administrative goals of the ACO.  Participating providers can also receive shared savings and be responsible for shared losses.  For this reason, providers along the continuum of care should evaluate carefully the benefits and risks associated with ACO participation.

This memorandum summarizes key provisions of the Proposed Regulations on ACOs, with a focus on the role and relevant provisions for long term care, home care, and other providers.  It also briefly talks about the ACO Demonstration Program established under the New York State Budget Bill adopted on March 31, 2011, and the opportunities that the Demonstration Program presents for New York State providers in particular.

We emphasize that the Proposed Regulations are not final and are expected to elicit extensive comments, which can be submitted on or before June 6, 2011.  Thus, further regulatory guidance is expected on the policies discussed in this memorandum.  It is also important to recognize that other initiatives under federal and state health reform may confer a more central role to long term care and home care providers in the development and implementation of alternative models for delivery of health care.  We will provide further information about those initiatives in subsequent Clients & Friends Memoranda.

I.        Proposed Regulations on ACOs

The Proposed Regulations address a broad array of requirements for ACOs including: ACO formation; governance; operations; shared savings models; quality measures and goals; HIPAA obligations; assignment of beneficiaries to the ACO and beneficiary rights; marketing; the application process, and grounds for termination from the Shared Savings Program.  Notably, the regulations reserve to CMS the right to change Shared Savings Program standards unilaterally, with some exceptions, during the term of an ACO’s participation agreement with CMS. 

Set forth below is a summary of the key areas covered by the Proposed Regulations.

A.         ACO Formation and Governance

  • ACOs must apply to and be accepted by CMS in order to participate in the Shared Savings Program, and must commit to a three-year agreement with CMS.  The Proposed Regulations did not set a date for applications.  However, the Shared Savings Program is slated to begin January 1, 2012.  Recognizing that all ACO applications for 2012 may not be submitted in time for that start date, the Proposed Regulations state that CMS is also considering July 1, 2012, as the start date for a participation term of 3.5 years.
  • The ACO must be constituted as a legal entity authorized to conduct business under applicable state law and must have a Taxpayer Identification Number.
  • Although under the Proposed Regulations, only hospitals and primary care practitioners can form an ACO, all ACO participants must be given some role in ACO governance, with “proportionate control” over ACO decision-making.  Thus, long term care providers participating in an ACO have the right to a role in governance and it will be important for them to negotiate effectively with the entities forming the ACO on governance issues, especially if they are expected to share in the gains -- and the losses -- of its operation.
  • Similarly, the calculation for shared savings will be based on all Part A and B Medicare services delivered to FFS beneficiaries assigned to the ACO.  As such, the Shared Savings Program provides an incentive for ACOs to encompass a full continuum of care in order to achieve the cost and quality targets that determine eligibility for shared savings.
  • All ACO participants must make a “meaningful commitment” to the success of clinical integration, which may include a financial or human (time and effort) investment in the ACO’s operations.
  • The ACO’s governing body must include at least one Medicare beneficiary. 
  • The governing body must otherwise be responsible for the administrative, fiduciary, and clinical operation of the ACO. 

B.         Assignment of Beneficiaries

  • In an evident attempt to prevent “cherry picking,” Medicare beneficiaries will be assigned to an ACO, retroactively, at the end of the year based on the primary care physician who provided the plurality of primary care services.  This means that an ACO will not be able to identify which FFS beneficiaries are within the ACO during the fiscal year, although CMS will provide the names of beneficiaries who would have been assigned to the ACO based on past data.
  • Primary care physicians, relied upon as the vehicle to assign beneficiaries, can participate in only one ACO.  On the other hand, specialist physicians and hospitals, as well as long term care, home care and other providers, can participate in more than one ACO and are prohibited from agreeing to participate exclusively in one ACO.
  • Although beneficiaries cannot opt out of an ACO, they are not limited in their choice of providers even if they are assigned to an ACO.  In this regard, unfettered beneficiary choice combined with retroactive assignment of beneficiaries will present challenges to ACOs seeking to meet the care coordination and cost saving goals of the Shared Savings Program.

C.         Risk Sharing Models – the Formula for Shared Savings

  • CMS will establish a “benchmark” for shared savings relying on historic costs for Part A and Part B services for ACO beneficiaries.   CMS will compare actual expenditures against the benchmark to determine shared savings and losses.  The benchmark will be risk-adjusted based on beneficiaries’ health status.  Catastrophic claims -- those at or above the 99th percentile per beneficiary -- will be capped.  To address potential incentives to avoid caring for the terminally ill, CMS has invited comments on possibly excluding the typically higher expenditures for beneficiaries in the last year of their lives from the costs used as the comparison to benchmark expenditures.
  • The Proposed Regulations set forth two risk-sharing models that an ACO may adopt.  Under one model, the ACO shares only in the savings in the first two years (the “one-sided risk model”), and then shares in both savings and losses in the third year.  For the second model (the “two-sided risk model”), the ACO shares in both savings and losses in all three years, with bigger upside potential on shared savings because of the risk assumed. 
  • Under the one-sided model, ACOs are entitled to receive up to 50% of the savings, if the ACO achieves the quality goals set by CMS, or an amount reduced by the ACO’s quality scores, subject to respectively minimum savings and loss rates ranging from 2-3.9%, depending upon an ACO’s size.  For example, if an ACO achieves an 80% quality score, it will be entitled to 80% of 50% of shared savings, or 40% of the shared savings in that year. 
  • Under the two-sided model, ACOs are entitled to receive up to 60% of shared savings and will participate in losses at an escalating rate; losses are capped at 5% of the benchmark in year one, 7.5% in year two, and 10% in year three.  As with the one-sided model, the percent of savings allocated to the ACO will depend on the ACO’s quality score.  Under both models, ACOs that include a federally qualified health center or a rural health clinic are entitled to a higher percent of shared savings.
  • The formula for shared savings under both models is complex, and depends on performance along the twin goals of cost savings and quality -- the better the ACO’s quality score, the higher the percentage of shared savings will be allocated to the ACO.  In the first performance year, ACOs will be deemed to have met all the quality goals solely by reporting the mandated quality measures to CMS.  ACOs must satisfy the minimum quality standards in all measured domains of care to be eligible to participate in shared savings in the following two years.
  • All ACO participants, including nursing homes, home care agencies, and other providers ineligible to form an ACO, nevertheless may receive shared savings and be responsible for losses, in accord with regulatory guidance on the distribution of shared savings and losses and the terms of their agreement with the ACO.  Here, too, long term care providers may need to bargain effectively with the ACO-forming entities to ensure a fair and equitable distribution of the ACO’s financial gains and losses.

D.         Quality and Technology Requirements and Measures

  • CMS will calculate the ACO’s quality performance and eligibility for shared savings using 65 proposed performance measures in five domains of care: patient/care giver experience; care coordination; patient safety; preventive health; and measures for at risk, frail elderly patients.  An ACO will receive zero points for performance below a minimum standard for certain measures, with points based on a sliding scale above the minimum.
  • All ACO participants must comply with the evidence-based clinical guidelines adopted by the ACO and report on quality measures as required by CMS.
  • In the application to CMS, an ACO must present its plans to: (i) promote evidence-based medicine; (ii) promote beneficiary engagement; (iii) internally report quality and cost metrics; (iv) coordinate care; and (v) meet criteria for patient-centered care, including systems to identify high risk individuals and improve outcomes for such patients, and a mechanism to coordinate care as beneficiaries move between care settings.
  • The ACO must have a full-time senior-level medical director and a physician-directed quality assurance and process improvement committee and program.
  • At least 50% of primary care physicians in the ACO must be “meaningful” users of electronic health records by the start of the second year of the ACO’s operation.

E.         Regulatory Guidance: Fraud and Abuse Laws, Antitrust, and Tax Requirements for Exempt Organizations

In conjunction with CMS’s issuance of the Proposed Regulations, other federal agencies issued guidance on the waiver or interpretation of federal laws designed to promote ACOs: (i) DOJ and the FTC issued a Proposed Joint Policy Statement (Joint Policy Statement) on the application of antitrust laws to ACOs; (ii) CMS and the OIG released guidance on the waiver of fraud and abuse laws as they would apply to ACOs; and (iii) the IRS issued Notice 2011-20 (the “Notice”) discussing the application of the tax rules for exempt entities participating in an ACO.  Overall, the regulatory guidance on antitrust sets forth bright line policies for providers, including provisions for a “safety zone” while the guidance on tax and fraud and abuse matters articulates certain policy parameters, but suggests that the Federal agencies are seeking further public input on important issues.

            1.          Waiver of Fraud and Abuse Laws

PPACA granted HHS broad authority to waive certain fraud and abuse laws to promote the formation and operation of ACOs, including the Anti-Kickback Law, the Stark Law, and the provisions of the Civil Monetary Penalties Law that prohibit a hospital from paying a physician to limit services to federal health care program beneficiaries (“CMP Gainsharing”).  The joint statement issued by CMS and OIG proposes that CMS will grant the following waivers to ACOs approved to participate in the Shared Savings Program:

  • A waiver of the Anti-Kickback and Stark Laws for ACOs approved by CMS for the allocation of shared savings to or among ACO participants, providers, and suppliers, and for activities necessary for, and directly related to, the ACO’s participation in and operations under the Shared Savings Program;
  • A waiver of the CMP Gainsharing prohibition for the distribution of shared savings from a hospital to a physician, provided that: (i) the payments are not made knowingly to induce the physician to reduce or limit medically necessary services; and (ii) the hospital and physician are or were ACO participants or ACO providers or suppliers during the year in which the ACO earned the shared savings; and
  • A waiver of the Anti-Kickback and CMP Gainsharing prohibition for other arrangements necessary for and directly related to the ACO’s operations that meet an exception under the Stark Law.

The joint statement also seeks comments on expanding the proposed waivers to cover capital expenditures for start-up costs and investment in technological capacity, nonmonetary benefits conferred to establish the ACO, and financial arrangements to achieve cost and quality goals other than the distribution of shared savings.

            2.          Antitrust Guidance

The Joint Policy Statement proposes a “safety zone” for ACOs whose participants together provide 30% or less of a common service in each ACO Primary Service Area, and sets forth the review process for ACO participants with a larger common market share.  Specifically, if independent participants for a proposed ACO provide more than 50% of any common service in a Primary Service Area, an ACO cannot participate in the Shared Savings Program unless it applies for antitrust review and receives approval from the relevant oversight agency (either FTC or DOJ).  FTC and DOJ have committed to provide such review on an expedited basis.  ACOs that are between the 30% and 50% market thresholds for common services may, but are not required to, apply for antitrust review.  The Joint Policy Statement provides guidance on safeguards that these ACOs should follow to avoid antitrust enforcement action.

            3.          IRS Notice on Tax Exempt Entity Participation in an ACO

In its March 11, 2011, Notice on ACOs, the IRS recognizes that a tax-exempt organization’s participation in an ACO may take a variety of forms, including membership in a nonprofit membership corporation, ownership of shares in a corporation, ownership of a partnership interest in a partnership (or a membership interest in an LLC), and contractual arrangements with the ACO and/or its other participants.  The Notice sets forth the requirements that an exempt organization participating in an ACO must satisfy to protect the organization’s exempt status and ensure that its participation in the Shared Savings Program does not result in prohibited inurement or confer an impermissible benefit to private parties participating in the ACO.  The IRS also advises that, absent private inurement or impermissible benefit, it anticipates that shared savings distributed by the ACO to an exempt organization would not be treated as unrelated business income.  The Notice requests public comments on further guidance that might be needed by exempt entities participating in activities related to the Shared Savings Program as well as unrelated activities, such as shared savings arrangements with commercial payers.

II.       New York State’s ACO Demonstration Program

In addition to federal guidance on ACOs, New York State, acting on the recommendations of Governor Andrew Cuomo’s Medicaid Redesign Team, established, among other health care delivery and payment innovations, a demonstration program for ACOs in New York (“ACO Demonstration”) as part of the Budget Bill enacted on March 31, 2011 (the “Budget”).

  • Under the ACO Demonstration, as outlined in the new Article 29-E of the Public Health Law, the New York State Commissioner of Health is authorized to issue a certificate of authority to no more than seven ACOs, consistent with the requirements set forth in Article 29-E, and may not issue certificates later than December 31, 2015.  Article 29-E defines an ACO as an organization of clinically integrated “health care providers” that work together to provide, manage, and coordinate health care for a defined population.  Article 29-E does not specify the providers that may form an ACO, but defines “health care providers” broadly to include licensed nursing homes, home care agencies and providers of services to mentally ill, developmentally disabled, and chemically dependent patients as well as hospitals and physicians.  Many aspects of the ACO Demonstration will be defined by regulation. 
  • In consultation with the Superintendent of Financial Services (formerly, the Superintendent of Insurance), the Commissioner is charged to promulgate regulations addressing, among other matters, the governance and management structure of the ACO, the adequacy of the ACO’s provider network, the patient population to be served, patient rights, performance standards, and the mechanisms by which the ACO will coordinate care, promote evidence-based care, and receive and distribute payments. 
  • The Commissioner is also authorized to seek federal waivers and approvals to implement the ACO Demonstration and obtain federal financial participation for the Medicaid program.  In addition, the Commission can establish standards to promote the ability of an ACO certified under Article 29-E to participate in applicable federal ACO programs such as the Medicare Shared Savings Program.  Subject to regulations to be issued, ACOs may enter into full or partial capitation arrangements with third-party payers, which might include incentive payments, and may pool payments received by participating providers from third-party payers and patients.
  • The statute also grants the Commissioner broad authority to promote ACOs by establishing regulatory safe harbors from state laws prohibiting fee splitting and physician self-referrals, as well as state action immunity from antitrust enforcement for ACOs under the Demonstration Program. 
  • Finally, Article 29-E provides that an ACO will be subject to the same requirements under the Public Health Law that govern hospitals pertaining to incident reporting, credentialing, quality assurance programs and the confidentiality of information and liability protection related to those activities.

III.      Conclusion

The Proposed Regulations underscore the complexity of forming an ACO and meeting the associated administrative, financial, clinical, and regulatory requirements.  In particular, creation of an ACO will require a significant investment of capital and time, without the certainty of a return on investment.  ACOs may share in any savings with CMS, but must also share any losses in all three years of operation, or in just the third year, depending on the risk model adopted by the ACO.  The regulations will no doubt be the subject of extensive public comment, and may present a less onerous option in their final form.  While more limited in scope, the New York State ACO Demonstration Program may afford providers more flexibility and impose less demanding clinical and financial burdens, depending on the policies set forth in forthcoming regulations.

Both programs, however configured through final regulations, reflect clearly the goals of the Medicare and Medicaid programs to move to models of care delivery that are actively managed, less costly, and based on pay-for-performance, rewarding higher quality (and penalizing poor performance) instead of higher volume of services.  The programs also embody the long range goals of public payers to eventually move providers from FFS reimbursement to different models of risk sharing.  In this sense, the ACO programs at both the federal and state level, although as yet not fully developed, are noteworthy as markers for broader trends that are underway in the financing and delivery of health care in New York State and the nation as a whole.


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