You Spoke, They Listened: The Interim Final ACO Rule

Fourth Quarter 2011Articles Staying Well Within the Law

The proposed Medicare Shared Savings rule for Accountable Care Organizations (ACOs) landed with a thud when it first appeared in March 2011. The rules implementing this highly anticipated program were considered overly burdensome and the potential economic upside too uncertain. The prototype health systems that served as the models for the initiative, including Marshfield Clinic and Geisinger Health System, declined to participate without major changes. More than 1,300 comments were filed with the Centers for Medicare and Medicaid Services (CMS). Were ACOs DOA?

To paraphrase Mark Twain, the reports of ACOs’ demise were at least somewhat exaggerated. In an unusual display of responsiveness, CMS and its sister regulatory agencies adopted nearly all of the recommendations requested by major health care provider advocates and may have breathed new life into a program that had been given up by many as another casualty of government overreaching.

The 2009 Patient Protection and Affordable Care Act (ACA) authorized the Shared Savings program under which qualifying ACOs would be eligible for additional Medicare payments if they achieved savings over historical costs while maintaining quality criteria. An ACO would coordinate all care needed by a pool of at least 5,000 designated Medicare fee-for-service patients. ACOs must include primary care providers and generally would also include specialists, hospitals and ancillary care providers. The proposed rule drew sharp criticism for its requirement that all ACOs share downside risk; the retrospective method of identifying patients whose costs would be tracked, and the lengthy list of quality measurements and statistics that were required to participate in the program, among other concerns.

On October 20, 2011, an advance copy of the interim final ACO rule was released. It was published in the Federal Register on November 2, 2011. Among the changes agreed to by CMS were the following:

• Downside Risk
In the proposed rule, ACOs could choose from two three-year tracks with two levels of shared savings, but both tracks required the ACO be liable for downside risk no later than year three. This proved highly unpopular, particularly with the 10 practices that had participated in the Physician Group Practice demonstration program, which had no downside risk. The final rule has eliminated the risk exposure from Track 1, and ACOs under this option will not be exposed to liability for failure to achieve cost savings. Track 2 would entitle ACOs to a higher percentage of shared savings in exchange for assuming downside risk from year one and would likely only appeal to large, fully integrated ACO applicants.

• Patient Assignment
ACOs need to manage costs with regard to identified patient pools. The proposed rule would have attributed patients to an ACO at the end of each performance year based on whether those patients had utilized that ACO’s members for most of their primary care services during that year. This was intended to assure fairness so that an ACO was not penalized for costs incurred out of its network, keeping in mind that patients have no restrictions on where to obtain care. Commenters suggested that a retrospective system would force them to manage costs in the dark, without knowing what costs they would be ultimately responsible for. In the final rule, CMS opted for a modified system under which ACOs are given a preliminary list of prospective Medicare beneficiaries at the beginning of a performance year based on those beneficiaries’ past use of primary care services, and that list would be reconciled quarterly based on the actual primary care use during the year. It is hoped this approach would allow ACOs to carefully monitor the costs they are incurring for their assigned patients without being held accountable for costs incurred elsewhere if the patient leaves the network mid-year. It is not a foolproof solution, in that a patient could get his or her primary care from an ACO member but seek more expensive specialist and hospital care from non-ACO members.

• Quality Measures
ACOs would have been required to track and report on 65 separate quality measures under the proposed rule and demonstrate improvement or meet performance goals beginning in the second year. The cost and infrastructure required to track these criteria was intimidating to many commenters. In response, CMS reduced the number of quality measures from 65 to 33 and agreed to a longer phase-in for the pay-for-performance elements of the rule.

• Savings Formula
ACOs participating in proposed Track 1 would only share savings in excess of two percent over defined benchmarks. CMS sweetened the pot by eliminating the two percent threshold for both tracks in the final rule. Now, all ACOs will share in first dollar savings once a minimum savings rate has been achieved. Importantly, the proposed “performance payment withhold” of 25 percent of shared savings has been removed. This provision was widely criticized as disproportionately penalizing the most successful ACOs without providing any meaningful security for the struggling ACOs. (It is also now unnecessary for Track 1, which no longer includes any downside liability exposure). CMS will now rely on a provision under which each ACO applicant participating in Track 2 will be required to demonstrate that it has established a repayment mechanism and specify how the liability for sharing losses would be spread among ACO participants and/or ACO providers/suppliers. CMS will determine the adequacy of an ACO’s repayment mechanism prior to the start of each performance year under the two-sided model.

• Start Date
Recognizing there would be no way for the program to be operational by January 1, 2012, CMS modified the start dates so ACOs can join on April 1, 2012, or July 1, 2012, with the first performance period extended to 18 or 21 months, then reverting to the calendar year. Applications will be accepted in early 2012.

• Electronic Health Records
One controversial provision of the proposed rule would have required an ACO to verify that 50 percent of its members met the HITECH Act’s “meaningful use” standards for electronic health records (EHR). The final rule drops the 50 percent requirement but ranks meaningful use as its highest-weighted quality measure to continue to ensure the adoption of EHR. In reality, it would be unlikely that an ACO could achieve savings or quality goals without robust use of EHR systems.

• Advance Payment
ACOs aren’t cheap to develop. CMS’ Innovation Center developed an Advance Payment ACO Model to allow certain ACO participants in the Shared Savings Program to receive advance payments that will be recouped from the shared savings they earn. Under the Advance Payment ACO Model, participating ACOs will receive an upfront, fixed payment; a variable payment based on the number of its historically-assigned beneficiaries; and a monthly payment of varying amount depending on the size of the ACO and the number of its historically assigned beneficiaries The model is designed to provide support to ACOs whose ability to achieve the three-part aim would be improved with additional access to capital, including rural and physician-owned organizations. Only ACOs that do not include any inpatient facilities and have less than $50 million in total annual revenue, and ACOs in which the only inpatient facilities are critical access hospitals and/or Medicare low-volume rural hospitals and have less than $80 million in total annual revenue will qualify, but not those that are co-owned with a health plan.

• Antitrust Guidelines
Along with CMS’ rule, the federal antitrust enforcement agencies (Department of Justice and Federal Trade Commission) eliminated their prior requirement for mandatory review but will offer voluntary expedited review within 90 days. They clarified the safety zones and the method for determining market share based on each participants’ Primary Service Area (PSA) and also clarified the rural exception and rules for “dominant participants” with greater than a 50 percent share of a service within a PSA. Critics (particularly insurance companies) have already suggested these changes will lead to greater concentration and market power among large entities that will then be able to raise prices.

• Stark and Anti-Kickback
The Stark/Anti-Kickback/Civil Monetary Penalties waivers were expanded to protect ACO activities in five different categories: ACO pre-participation; ACO participation; shared savings distribution; compliance with self-referral/waiver of gainsharing; and patient incentives.

• Tax Considerations
Finally, the IRS revised its policy on the impact of participation in the Shared Savings Program on tax-exempt entities. The IRS will apply a case-by-case analysis based on facts and circumstances but sets forth a list of criteria that, if met, will result in no private inurement/private benefit. The IRS remains concerned about tax-exempt participants in ACOs bearing a disproportionate amount of costs compared to their relative investments.

What Next?

The industry got its wish list fulfilled. In early 2012 we will begin to see if these concessions have incentivized a sufficient level of participation in the ACO Shared Savings Program to vindicate those, like outgoing HHS Administrator Dr. Donald Berwick, who have staked the future financial solvency of Medicare on efforts to end pay-for-volume and transition to pay-for-results.

For more information about this topic, please contact William H. Maruca at 412.394.5575 or [email protected].

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