Background

Prior to the passage of the Patient Protection and Affordable Care Act (PPACA), the Congressional Budget Office (CBO) projected federal spending under the Medicaid program to increase by 6.7 percent over the next decade, without taking into account expansions of Medicaid and the Children’s Health Insurance Program enacted as part of health reform.^[1] Those expansions are expected to increase Medicaid and CHIP enrollment by 16 million at a cost of $434 billion in federal spending over the next decade.^[2] Moreover, state Medicaid agencies are under extraordinary pressure to reduce costs, due to the recession coupled with the end of the enhanced Federal Medical Assistance Percentage (FMAP) under American Recovery and Reinvestment Act (ARRA, the economic stimulus law) at the end of this year (or at the end of June 2011 at the latest). Both ARRA and the new health reform law prohibit eligibility cuts, making alternative cost containment mechanisms attractive and essential. The health reform law seeks to slow the rate of growth in health care costs and to improve the quality of care provided under federal health programs. To achieve these goals, Congress authorized a series of pilot programs and demonstrations under Medicare and Medicaid.

One criticism of the U.S. health care system is that provider reimbursement does not include appropriate incentives for providers to improve quality and value by coordinating care. Particularly problematic is the traditional fee-for-service mechanism which rewards the volume of services provided rather than the value or quality of the services. The health reform law authorizes the U.S. Department of Health and Human Services (HHS) to test payment models that will incent providers to better manage the care of their patients and thereby reduce the cost of care while maintaining or improving the quality of the care. To help control costs while improving the quality of care, experts have proposed using financial incentives to create a new type of health care entity called an “accountable care organization” (ACO). While experts still have not reached a consensus on the exact components of an ACO, health services and policy literature generally describe them as structures dedicated to quality and efficiency with the mission and the authority to impose practice, reporting, and compensation standards (including penalties and rewards) across a group of physicians on behalf of the patient population.^[3] These features have been identified as carrying certain advantages, including fostering quality through the greater clinical integration of care across health care settings, greater financial efficiency, and increased transparency and information about the process, costs, and outcomes of health care.

Changes Made by Health Reform Law
Pub. L. 111-148, § 2706

• The law introduces ACOs on a voluntary basis by directing the Secretary of Health and Human Services to establish a “Pediatric Accountable Care Organization Demonstration Project.” This demonstration project would authorize a participating state to allow certain qualified Medicaid providers to organize themselves into an ACO for the purposes of receiving incentive payments “in the same manner as an accountable care organization is recognized and provided with incentive payments”^[4] under the health reform law’s Medicare ACO pilot program.^[5] The Medicaid ACO demonstration, akin to the Medicare ACO pilot, is aimed at reducing expenditure growth and improving health outcomes.
• Because this section of the law states that only “. . . pediatric medical providers that meet specified requirements” shall be recognized as an ACO “in the same manner as an accountable care organization is recognized and provided with incentive payments”^[6] under the health reform law’s Medicare ACO pilot program, one can infer that the new law’s Medicare ACO requirements for provider participation will also apply to this Medicaid ACO demonstration. Therefore, to participate, an ACO must: 1) be willing to become accountable for the quality, cost, and overall care of a defined population of Medicaid beneficiaries; 2) agree to participate in the program for at least three years; 3) have a formal legal structure allowing it to receive and distribute payments for shared savings; 4) include enough primary care professionals to cover the Medicaid beneficiaries assigned to it; 5) have in place leadership and management structures that include clinical and administrative systems; 6) define processes to promote evidence-based medicine and patient engagement; and 7) demonstrate to the Secretary that it meets patient-centeredness criteria.^[7] Additionally, the Secretary may give preference to ACOs that are participating in arrangements with other payers.^[8]
• Also, because of the express reference to the new law’s Medicare ACO pilot program, the following groups of providers and suppliers of services that have established a mechanism for shared governance are eligible to participate in the Medicaid pediatric ACO demonstration: 1) professionals in group practice arrangements; 2) networks of individual practices of professionals; 3) partnerships or joint venture arrangements between hospitals and professionals; 4) hospitals employing professionals; and 5) such other groups of providers and suppliers of services that the Secretary deems appropriate.^[9]
• The law requires the Medicaid pediatric ACO demonstration project to begin on January 1, 2012 and end on December 31, 2016.^[10]
• To participate in the demonstration project, a state must submit an application to the Secretary “at such time, in such manner, and containing such information as the Secretary may require.”^[11]
• The law requires the Secretary to consult with the states and pediatric medical providers to “establish guidelines to ensure that the quality of care delivered to individuals by a provider recognized as an accountable care organization under this section is not less than the quality of care that would have otherwise been provided to such individuals.”^[12]
• For the Medicaid pediatric ACO to receive an incentive payment, the ACO must reach an “annual minimal level of savings in expenditures for items and services covered under the Medicaid program . . . and the CHIP program . . . .”^[13] The participating state, in consultation with the Secretary, is responsible for setting the “annual minimal level of savings.”^[14]
• The law states that an ACO shall receive an incentive payment if it both “meets the performance guidelines established by the Secretary . . . and achieves savings greater than the annual minimal savings level established by the State . . . .”^[15] The amount of the incentive payment will be equal to a portion of the excess savings as determined by the Secretary, and the Secretary may set annual caps on incentive payments to an ACO.^[16]
• A group of qualified providers desiring to participate in the Medicaid pediatric ACO demonstration project must enter into an agreement with the state and commit to a minimum of three years in the project.^[17]

Implementation

Agency

The Centers for Medicare and Medicaid Services (CMS), through its newly created Center for Medicare and Medicaid Innovation, will implement this program as part of its authority over Medicaid payment and policy, in conjunction with the participating state Medicaid Directors. It is anticipated that CMS will work closely with the Agency for Healthcare Research and Quality (AHRQ) on the development of demonstration quality measures, the Office of the National Coordinator for Health Information Technology (ONC) on criteria applicable to health-information and meaningful-use capabilities, and the Health Resources and Services Administration (HRSA) on the development of ACO criteria for entities operating in or serving medically underserved communities.

Key Dates

Besides the demonstration project dates described above, none.

Process

The health reform law does not provide specific direction to the Secretary regarding the administrative process used to implement the law. The agency therefore has the discretion to use a range of tools to implement the statute, such as publishing regulations in the Federal Register with a public notice and comment period, or using other types of approaches such as posted policy instructions, funding availability announcements (where applicable), official letters to affected entities (such as letters to state Medicaid agencies), and posted rulings and notices. Agency websites can be checked regularly for updates.

Key Issues

• Establishment of ACO qualification criteria
  • What will be the regulatory definition of a Medicaid ACO?
  • How much discretion will states have in establishing the parameters of ACOs?
  • What specific types of health professionals can form an ACO? Must a hospital be included?
  • What will be the minimum size requirement for an ACO?
  • How must an ACO be structured to reach small practices, practices in rural areas separated by large distances, and practices reaching medically underserved communities?
  • What governance requirements will be established, and what capabilities for managing care and costs will be required?
  • What type of legal and management structure will a pediatric ACO be required to have?
• Payment Methodologies
  • How will the participating state set annual minimal level of savings?
  • Will certain medical costs be excluded from this calculation? If so, which ones?
  • What percentage of cost savings below the target will be shared with the ACOs?
  • What quality and efficiency standards will ACOs be encouraged to reach through incentives?
  • Can a Medicaid ACO simultaneously participate in a bundled-payment demonstration under Medicaid?
  • Under what conditions will the Secretary set annual caps on incentive payments to Medicaid ACOs?
• Beneficiary safeguards
  • Will Medicaid beneficiaries be permitted to opt out of receiving their care from an ACO?
  • Can they choose among ACOs?
  • How will beneficiaries be given choice of providers within an ACO?
  • Will incentives to encourage beneficiary participation be adopted?
  • Will the presence of certain risk factors disqualify beneficiaries from participation?
  • What type of “patient-centeredness” criteria will be imposed on ACOs?
  • How will Medicaid beneficiaries be assigned to ACOs?
• Coverage of Benefits
  • Will Medicaid ACOs be able to achieve full coverage for eligible persons and align their operations smoothly with those of other coverage sources?
  • Will the ACO’s coverage be adequate to meet the Medicaid population’s needs?
• Performance measurement and reporting
  • How will provider adequacy be evaluated?
  • What level of public reporting will be encouraged or required?
  • Will information be aggregated to all Medicaid ACOs or will information on individual ACO performance be made available to the public?
  • Will information on the performance of individual physicians within an ACO be made available to the public or to its assigned Medicaid beneficiaries?
  • What information must be reported to the federal government?
  • How will the initial performance measures be established?
  • What standards and procedures will govern the expansion of performance measures?
• Interaction with managed care plans
  • What will be the interaction with Medicaid managed care organizations, which currently serve the majority of Medicaid beneficiaries, given that the demonstration is aimed at reforming traditional Medicaid?
• Interaction with state insurance regulation
  • Will CMS interpret the ACO provisions as preempting state regulation or allow states to develop regulatory standards?
  • Will state insurance commissioners have the power to claim that Medicaid ACOs indeed bear risk and thus should be regulated under state law?
• Interaction with state and federal antitrust law
  • How will state and federal antitrust enforcers view the establishment of Medicaid ACOs?
  • Will ACOs be insulated from potential antitrust claims to the extent that the ACO providers collectively negotiate payments with private third-party payers outside of Medicaid?
  • Will ACO certification include a determination that ACO are “clinically integrated” and thus fall within the federal antitrust exception?
  • Will the federal government create an express safe-harbor from antitrust scrutiny for ACO activities under certain conditions?

Recent Agency Action

There is no recent agency action as of this writing.

Authorized Funding Levels

The law states that “[t]here are authorized to be appropriated such sums as are necessary to carry out this section.”^[18]