The U.S. Department of Health and Human Services (HHS) released the final rules governing Accountable Care Organizations (ACOs) on October 20, 2011, to be published in the Federal Register on November 2, 2011. As one of the value-based purchasing models authorized by the Affordable Care Act, the ACO shared savings program encourages health care providers to work together to redesign care processes in order to deliver high-quality and efficient care by offering to share the savings achieved for the Medicare program.

With the hope of increasing interest in participation and in response to the health care industry’s comments to the proposed rules issued on March 31, 2011, HHS made significant changes to the final rules. These changes are designed to allow greater flexibility of the program, reduce the compliance and reporting burdens on providers who participate in the program, and increase the financial benefits of participating.

The release of the final regulations gives health care providers the necessary tools to consider whether participation in an ACO is appropriate for their organization. At a minimum, the program illustrates Medicare’s increased focus on providers’ accountability for the quality and cost of the care they provide to beneficiaries. This alert highlights the changes made in the final rules. See the alert from earlier this year for more information.

Formation and Corporate Governance

  • ACOs are required to enter into a three-year agreement with Medicare and must have at least 5,000 Medicare beneficiaries assigned to the ACO.
  • ACOs must be a legal entity formed under state law, with an identifiable governing body representing ACO participants. While each ACO participant no longer has to have proportionate control of the ACO governing body, ACO participants must have at least 75 percent control of the governing body and there must be at least one Medicare beneficiary representative.
  • Eligibility to participate as an independent ACO is open to ACO professionals (physicians, physician assistants, nurse practitioners, and clinical nurse specialists) in group practice arrangements, networks of individual practices of ACO professionals, partnerships or joint ventures between hospitals and ACO professionals, hospitals, and certain critical access hospitals. The final rules added Federally Qualified Health Centers and Rural Health Clinics to the list of providers eligible to both form and participate as an independent ACO. Other providers may participate in an ACO formed by one of the approved ACO participants.

Beneficiary Assignment

  • Medicare beneficiaries will be assigned to the ACO on a prospective basis at the beginning of the performance year based on recent data with retrospective reconciliation at the end of the year. Beneficiaries will be assigned to an ACO based on where they receive their primary care services, whether from a primary care physician or a specialist.
  • ACO participants upon which an assignment is based (providers of primary care services) may only participate in a single ACO. Other ACO participants are not required to be exclusive to an ACO.
  • Beneficiaries are free to seek care from any provider even if that provider is not participating in the ACO.

Financial Terms

  • Models: The final rules retain two models of shared savings—known as Track One and Track Two—but Track One is now a shared-savings-only model, with no transition to loss sharing in the third year of the agreement. Track Two remains a two-sided model, where the ACO shares in both savings and losses throughout the three-year term. After the end of the initial three-year agreement period, all Track One ACOs must transition to Track Two if they choose to continue in the ACO program.
  • Savings: The final rules still require ACOs to achieve a minimum savings rate (MSR) over a benchmark target before becoming eligible to share in any savings; however, the MSR under Track One is now based on a sliding scale according to the size of the ACO’s population. The MSR under Track Two is 2 percent over the benchmark target. ACOs under the Track One model can earn up to 50 percent of the total savings based on quality performance, while ACOs under Track Two can earn up to 60 percent of the total savings based on quality performance. Most important, the final rules now allow ACOs to share in the first dollar savings after savings meet or exceed the MSR.
  • Payment and Loss Limits: The final rules raise the maximum performance payment limit from 7.5 percent to 10 percent under the Track One model and from 10 percent to 15 percent for Track Two models. For Track Two models, the ACO is responsible for losses when expenditures for the performance year exceed its benchmark costs for the year by at least 2 percent, but losses are capped at phased-in limits of 5 percent, 7.5 percent, and 10 percent, respectively, across the three-year agreement. ACOs under the Track Two model must have reserves to ensure repayment of losses at least equal to 1 percent of per capita Medicare fee for Service Part A and B expenditures for its beneficiaries. The final rules eliminated the proposal to require ACOs to withhold 25 percent of its shared savings to ensure adequate repayment of losses.
  • Academic Medical Centers: The final rules make the ACO shared savings program more attractive to Academic Medical Centers (AMCs) by excluding the Indirect Medical Education (IME) and Disproportionate Share Hospital (DSH) payments from the benchmark costs and performance year expenditure calculations. This change directly addresses AMC concerns with the proposed rule that inclusion of IME and DSH payments would make it more difficult for AMCs to achieve savings under the program because other ACOs would be incentivized to avoid referring to higher-cost AMCs and therefore limit access to high-quality, medically necessary care.

Performance Measures

  • Compared to the proposed rules, the number of performance measures that an ACO must report and be measured against has been pared down in the final rules from 65 to 33 quality measures. In the first year of the three-year ACO agreement period, ACOs are only required to report the quality measures. A portion of the measures will transition to pay for performance the second performance year and all but one of the measures transitions to pay for performance in the third year.
  • ACO participants are not required to achieve 100 percent of the performance standard to be eligible for shared savings, but instead must meet 70 percent of the performance measures in each of four domains: patient/caregiver experience; care coordination/patient safety; preventative health; and serving the at-risk population.

Privacy and Data Sharing

  • Beneficiaries have 30 days from the receipt of notice that their primary care provider is participating in an ACO to decline sharing of their data.
  • The final rules eliminate the requirement that the ACO meet the electronic health record (EHR) meaningful use requirements set forth in the Health Information Technology and Economic and Clinical Health Act and instead add EHR capabilities to the list of quality measures.

Antitrust Issues

  • Eligibility for participation in the ACO program is no longer conditioned on antitrust agency approval, although obtaining a voluntary antitrust review is encouraged.
  • The FTC simultaneously issued a Statement of Antitrust Enforcement Policy Regarding ACOs that sets forth an antitrust safety zone based on the ACO’s share of services in the ACO participant’s primary service area with certain exceptions for rural providers and dominant ACO participants.

Other Regulatory Actions

  • The HHS Office of the Inspector General simultaneously issued an interim final rule addressing waivers for ACOs under the Stark, Anti-kickback, and Civil Monetary Penalties laws.
  • The Internal Revenue Service issued a request for comment on whether further guidance is needed regarding the participation of tax-exempt entities in ACOs alongside private, for-profit entities.

ACO applications will be accepted beginning January 1, 2012. ACO agreement periods will begin on or after April 1, 2012, and July 1, 2012. ACOs must report quality measures for calendar year 2013 to qualify for first performance year shared savings.

Ballard Spahr’s Health Care Group stands ready to advise and assist clients in the formation, participation, and documentation requirements of ACOs. If you have questions about the final rules or would like more information about ACOs, please contact Jean C. Hemphill at 215.864.8539 or, Laura A. Kowal at 215.864.8472 or, or any other member of Ballard Spahr’s Health Care Group.