By Sara Rosenbaum, Katherine Jett Hayes, and Joel Teitelbaum

Background

While a primary aim of the Affordable Care Act (ACA) was to increase access to affordable health insurance coverage, a critical, although less publicized, component of the law is a series of provisions designed to improve health care quality and efficiency and to advance the concept of “value-based purchasing.” The Agency for Health Care Research and Quality (AHRQ) defines the concept of value-based purchasing as holding “providers of health care accountable for both the cost and quality of care.” AHRQ notes that “value-based purchasing brings together information on the quality of health care, including patient outcomes and health status, with data on the dollar outlays going towards health. It focuses on managing the use of the health care system to reduce inappropriate care and to identify and reward the best-performing providers. This strategy can be contrasted with more limited efforts to negotiate price discounts, which reduce costs but do little to ensure that quality of care is improved.”^[1]

The ACA introduces concepts of “value-based purchasing” into private coverage^[2] and Medicaid,^[3] but the most prominent reforms were enacted as part of the law’s Medicare provisions. Without doubt, the most prominent advance was the introduction of “accountable care organizations” as part of Medicare’s Shared Savings Program (MSSP).^[4] The ACO provisions of the ACA build on earlier demonstrations conducted by the Centers for Medicare and Medicaid Services (CMS) and is a response to a report of the Medicare Payment Advisory Commission (MedPAC).^[5] MedPAC’s recommendations were based on a series of prominent studies by researchers at the Rand Corporation, Dartmouth College, and others that reported wide variation in health care spending by Medicare providers without corresponding evidence of better quality in exchange for higher spending.^[6]

The ACO provisions are in addition to the Medicare and Medicaid pilots and service delivery innovations to be developed, launched, and evaluated by Center for Medicare and Medicaid Innovation (CMMI) as well as other payment reforms such as bundled payments that correlate to episodes of care involving hospitalization,^[7] the establishment of care teams designed to promote the delivery of services at home and in community-based settings,^[8] and an initiative whose purpose is to reduce hospital readmissions.^[9]

The aim of the MSSP is to generate savings to Medicare through the formation and implementation of ACOs.^[10] The ACO model was designed to incentivize coordination and collaboration among health providers, as well as to promote greater accountability for high quality care and patient health outcomes. The ACA authorizes the HHS Secretary to share savings with ACOs that both generate program savings while furnishing demonstrably high quality care. As envisioned by proponents of broader delivery system reform, ACOs have been characterized as generating a “bottoms-up” health system transformation by incentivizing collaboration in place of the existing fragmentation in health care delivery.

On April 7, 2011, the Obama Administration issued a proposed rule implementing the MSSP, along with a proposed Statement of Antitrust Enforcement Policy applicable to ACOs (whose collective actions otherwise might be considered anti-competitive) and related policies in the area of tax treatment of revenues generated by nonprofit ACOs. CMS and the Office of the Inspector General also issued a notice of intent to develop waiver standards for ACOs participating in the MSSP for purposes of federal fraud and abuse laws. (For more information, click here).^[11]

The proposed rule was met with considerable resistance from physicians, hospitals, and other health care providers. Many organizations viewed the proposed rules as too onerous in terms of performance measures and too extreme in the level of up-front costs imposed.^[12] Others protested the fact that providers would not be told which patients would be assigned to their ACO in advance of any performance year, leaving ACOs uncertain as to the population for whom their performance would be measured. Still others objected to the fact that even relatively small and inexperienced ACOs would be required to assume a risk of financial loss by their third year of participation, rather than a simpler model employing only performance bonuses. Rural health clinics (RHCs) and federally qualified health centers (FQHCs), two of the nation’s largest providers in medically underserved urban and rural communities, objected to the fact that they would be barred either from forming ACOs or, if they participated in an ACO, from having their patients count in calculating the number of patients assigned to the ACO.^[13] (Patient assignment determines both the scope of an ACO’s obligations as well as the potential size of shared savings).

On October 20, 2011, HHS, the IRS, and the Department of Justice (DOJ) and Federal Trade Commission (FTC) released final rules and regulatory policies governing the MSSP and ACO formation and participation.^[14] Specifically, CMS issued a final rule establishing ACOs under the MSSP^[15] and unveiled a new Advance Payment Model to assist in ACO formation, to be administered by its Center for Medicare and Medicaid Innovation (CMMI).^[16] The HHS Office of the Inspector General (OIG), together with CMS, released an interim final rule establishing waivers of certain federal fraud and abuse laws for ACOs that meet program requirements.^[17] DOJ and FTC jointly issued a final policy statement regarding antitrust enforcement with respect to ACOs.^[18] Finally, the IRS posted a fact sheet explaining its final decision regarding treatment of revenues generated by tax-exempt organizations under §501(c)(3) of the Internal Revenue Code that participate in MSSP.^[19]

Key Changes in the Final ACO Rule and Regulatory Policies

According to CMS, the significant revisions to the proposed rule are designed to ease burdens and costs associated with participation in an ACO. Specifically, CMS modified its rule to reduce the requirements applicable to newly formed ACOs, to lessen the number of quality performance measures, to create an ACO model that carries no risk of financial loss, to permit more flexibility in legal and governance structure, and to permit FQHCs and RHCs to form their own ACOs and to recognize their patients as being assigned to ACOs in which such providers are members. The DOJ’s final Antitrust Statement represents a further easing of antitrust review policies for ACOs participating in Medicare as well as in private insurance markets,^[20] while the IRS policies clarify that nonprofit ACOs can realize revenues from the MSSP and from other payers using a shared savings approach without jeopardizing their tax exempt status.

ACO Structure and Requirements

As in the proposed rule, the final rule requires an ACO to be a legal entity (corporation, partnership, limited liability corporation, foundation, or other entity formed under federal, tribal or state law), comprised of eligible providers and suppliers, capable of receiving and distributing shared savings, repaying shared losses, and ensuring that participating members of the ACO comply with federal program requirements. However, the final rule eases the capabilities that ACOs must be able to demonstrate. In particular, the final rule gives ACOs broader latitude in terms of how they demonstrate processes related to performance measurement, beneficiary engagement, and the use of patient-centered care techniques. The final rule also eases proposed requirements related to how ACOs enforce their standards on individual participants, as well as proposed requirements related to the use of electronic health records (EHRs). Furthermore, the final rule eliminates the requirement for a governance role for all participants as long as they have “meaningful participation” opportunities; in another change from the proposed rule, the final rule allows an ACO’s governance structure to deviate from the basic requirement that participants maintain 75% control over ACO governance, in order to allow for flexibility and innovation.^[21] At least one commenter recommended that ACO governing bodies include local employers and multi-state employer plan sponsors with experience in quality improvement and reporting and reducing costs. However, CMS stressed that this requirement would be inconsistent with the approach adopted in the final rule, which was designed to provide flexibility in the design of ACO governing bodies.^[22]

As in the proposed rule, ACOs must have a leadership and management structure with clinical and administrative systems to support the goals of the MSSP.^[23] The clinical aspects must be managed by a physician licensed in the state in which the ACO operates; however, in response to comments from small and rural providers, the final rule does not require a full-time medical director.^[24] The final rule maintains the requirement that ACOs have quality assurance and improvement programs, implement evidence-based medicine or clinical guidelines, and have an information technology structure allowing for data collection, evaluation, and feedback to ACO providers and suppliers.^[25] At the same time, the final rule incentivizes (through the shared savings provisions) but does not require that participating primary care physicians be meaningful users of EHRs.

The final rule preserves the proposed rule’s three-year participation requirement but eases the start dates to permit late starters; proposed start dates are expanded to include starters who begin on April 1, 2012 or July 1, 2012. For 2013 and subsequent years, agreements will begin on January 1 and remain effective for 3 years.^[26] As with the proposed rule, ACOs must comply with requirements related to submission of data measures. Data and information must be submitted by an individual with legal authority to bind the entity, and the individual must certify that the ACO and its affiliated entities are in compliance with all program requirements each performance year.^[27]

Eligible Entities to Form and Participate in ACOs

The final rule broadens the list of entities eligible to form an ACO and thus qualify for the MSSP. Under the final rule, ACOs may be formed not only by health care professionals, professional networks, and hospitals, but also FQHCs and RHCs. Furthermore, FQHCs and RHCs that participate in more broadly structured ACOs will be able to do so more effectively because the patients for whom they furnish primary care will be counted as assigned to the ACO.

Provisions Related to Beneficiary Assignment and Beneficiary Protections

As in the proposed rule, the final rule specifies that ACOs must have a minimum of 5,000 assigned beneficiaries and must include sufficient primary care capacity to serve them. The final rule provides that ACOs that fall below 5,000 beneficiaries during a performance year will receive a warning and be placed under a corrective action plan (CAP), while permitting CMS to terminate its agreement should the ACO not regain 5,000 assigned patients by year’s end.^[28]

Consumer representatives commenting on the proposed rule asserted that the proposed MSSP rule had the potential to achieve savings through inappropriate reduction in patient care and allowed for restriction of patients’ right to choose their provider. Some commenters viewed the MSSP as the antithesis of consumer-driven approaches because it may transfer the locus of responsibility away from the patient.^[29] In addressing these comments, CMS stressed that beneficiaries retain all rights and benefits under the traditional Medicare fee-for-service program, including the right to see the provider of their choice, and further, that the MSSP operates on fee-for-service principles and is not a capitated model, as is the case with Medicare Advantage.^[30] CMS also stressed that beneficiary “patient-centeredness” criteria remain largely unchanged from the proposed rule. The final rule requires ACOs to conduct a health needs assessment of the patient population, including consideration of diversity, and that they develop a plan to address identified health needs.^[31] As with the proposed rule, the final rule also requires ACOs to “coordinate care across and among primary care physicians, specialists, post-acute providers and suppliers” as well as demonstrate a method to “coordinate care through an episode of care and during its transition, such as discharge from a hospital or transfer of care from a primary care physician to a specialist (both inside and outside the ACO).”^[32]

Significantly, the final rule moves beneficiary assignment from retrospective to preliminary prospective in nature, so that ACOs will know who their assigned beneficiaries are at the beginning of a performance year. The final rule requires that beneficiaries be notified in writing that they have been assigned to an ACO, receive information and disclosure materials explaining their ACO assignment, and that they have the right to opt out and seek care from another provider that does not participate in an ACO.^[33] In a departure from the proposed rule, the final rule requires only that marketing materials be submitted in advance, with permission to the ACO to use its materials if not disapproved within 5 days of submission (although CMS reserves the right to disapprove materials at any time).^[34]

Shared Savings and Risk of Loss

A fundamental purpose of the MSSP is to produce savings while increasing quality. The proposed rule required that ACOs assume financial risk for failing to achieve savings. In a major departure from the proposed rule, the final rule allows ACOs that elect a “Track 1” approach to share in savings that are realized without also being liable for losses during their initial three-year agreement.^[35] As in the proposed rule, ACOs participating in Track 2 will be exposed to shared losses but may continue in the program if they can explain their net losses and identify safeguards to prevent future losses.^[36] Consistent with the proposed rule, the potential size of savings to share is somewhat greater for Track 2 ACOs, which take the risk of financial losses.

The final rule preserves the basic method outlined in the proposed rule, in which shared savings are calculated by comparing an ACO’s performance for its assigned patients against anticipated expenditures for the assigned population under the fee-for-service program, with adjustments for health status. ACO performance benchmarks and targets will be reset for each new 3-year agreement period. The final rule clarifies that an ACO’s benchmark will not include indirect medical education or disproportionate share hospital payments.^[37]

The actual shared savings that ACOs can receive rise under the final rule, while their exposure to losses (in the case of Track 2 ACOs) is capped. The final rule provides that an ACO is eligible for shared savings if its average per capita expenditures for a performance year fall below the benchmark by at least the “minimum savings rate.”^[38] The final rule also increases the amount of shared savings that ACOs can retain, with greater retention rights for ACOs that assume risk under Track 2. In addition, the final rule extends the time for ACO repayment of shared losses and eliminates the proposed requirement to withhold 25% of shared savings in advance in order to offset potential losses. Commenters had noted that the proposed withhold would tie up capital and penalize ACOs that realize early savings.

Option for Advance Payment

Along with the final rule, CMS announced the testing of the Advance Payment Model, which is targeted at organizations such as rural and physician-led ACOs and FQHC-led ACOs that need capital to make the investments necessary for coordinating care. Only two types of organizations are eligible for advance payment: (1) ACOs that do not include any inpatient facilities and have less than $50 million in total annual revenue, and (2) ACOs in which the only inpatient facilities are critical access hospitals and/or Medicare low-volume rural hospitals and that have less than $80 million in total annual revenue.

ACOs in the initiative will receive both up-front and monthly payments to allow capitalization; the final rule provides that these payments will be offset by shared savings that materialize but also states that ACOs that do not realize shared savings will not have to pay back advance payments as long as it completed the agreement period.^[39] In its notice, CMS indicated that it will test whether advance payments will increase the amount and speed of Medicare savings generated by ACOs in the program and whether and how pre-payment can increase participation in the shared savings program.

Quality Improvement

As in the proposed rule, ACOs are eligible for shared savings only if they satisfy quality performance requirements based on CMS-designated quality measures. The final rule specifies that over the initial three-year term of ACO agreements, quality measurement will transition from pay-for-reporting to pay-for-performance.^[40] The final rule reduces the number of quality measures from 65 to 33.^[41] As in the proposed rule, ACO performance is measured by both specified measures (yes/no) and by measures that move along a continuum toward a quality performance benchmark, with a minimum attainment level of 30 percent or the 30th percentile of any specified performance benchmark to which a continuum of performance applies. In the case of benchmarks subject to a continuum, ACOs can receive maximum points as their performance strengthens. The final rule provides for termination of ACOs that fail to achieve the minimum attainment level on at least 70% of the measures. The final rule also relaxes the performance standard for ACOs to qualify for the Physician Quality Reporting System (PQRS) on behalf of their eligible professionals.^[42]

Use of Electronic Health Records

A significant change in the final rule is that rather than requiring 50 percent of primary care providers to be meaningful users in the second ACO participation year, the rule encourages ACOs to develop a “robust EHR infrastructure” and gives extra weight to the performance measure for the percent of primary care providers who successfully qualify for an EHR Incentive Program.

Data Sharing

Consistent with the final rule on assignment, the final rule on data sharing provides that CMS will share Medicare claims data for preliminarily (not historically) assigned beneficiaries in addition to aggregate reports. Shared information will include name, date of birth, Medicare Health Insurance Claim Number, and sex. Previously, these data were provided only at the end of the performance period. The final rule also allows ACOs that are HIPAA-compliant (a basic requirement) and that have data use agreements (DUAs) to secure beneficiary-identifiable claims data for preliminarily assigned beneficiaries. The final rule limits use of claims data to “developing care processes and engaging in appropriate activities related to coordinating care and improving the quality and efficiency of care that are applied uniformly to all Medicare beneficiaries with primary care services at the ACO.” The final rule limits ACO access to these data only to prospectively assigned beneficiaries or to beneficiaries receiving care from ACOs, and only if the beneficiary has been given the right to “opt out” of data sharing.^[43]

FTC/DOJ Antitrust Enforcement Policy

The final DOJ/FTC antitrust policy^[44] eliminates the per se illegal standard (i.e., a flat prohibition) on ACOS that negotiate to serve both privately insured patients and Medicare (no mention is made of Medicaid), as long as the entities satisfy the Medicare ACO standards.^[45] ACOs of major size will no longer have to secure a pre-clearance review from the agencies before they can begin to operate, with the agencies instead focusing on post formation enforcement. While mandatory review is eliminated regardless of size, ACOs can request voluntary expedited review.^[46]

Some commenters expressed concerns that under the proposed rule, increased pressure on ACOs to achieve savings in order to offset prevent losses under the risk-based model of care would result in cost-shifting to enrollees in private and employer-based plans. They urged CMS to require public reporting on the cost and price of care and to collaborate with antitrust agencies to collect and analyze data to detect anti-competitive practices, including consolidation.^[47] In response, CMS indicated that the agency will provide aggregate claims data regarding allowable charges and fee-for-service payments for participating ACOs and requested that the enforcement agencies study how MSSP affects the quality and price of health care in private markets. CMS indicated that the study would be used to evaluate future expansions of eligibility criteria.^[48]

Application of Fraud and Abuse Laws

The Secretary of HHS is authorized to waive certain fraud and abuse laws for ACOs.^[49] In the waiver design notice released in April 2011, CMS and OIG proposed several waivers and solicited comments on what other possible waivers would be necessary to carry out the provisions of the MSSP, the duration of such waivers, and the scope of the waivers. The waivers proposed addressed specific provisions of the Physician Self-Referral Law, Federal anti-kickback statute, and Gainsharing Civil Monetary Policy (CMP). The purpose of the waivers, according to the agencies, was to allow shared savings distributions.

Under the final rule, CMS and the OIG expanded waivers to include activities beyond the distribution of shared savings and also to clarify that ACOs have special status from the time they are in initial formation, not only after they are fully operational. The new waivers include an “ACO Pre-Participation Waiver” that permits one-time waivers of the Physician Self-Referral Law,^[50] the Gainsharing CMP,^[51] and the Federal Anti-kickback statute^[52] in order to encourage start-ups. The rules also create an “ACO Participation Waiver” that covers the period from start-up into initial operations (6 months). A separate “Waiver for Patient Incentives” is designed to allow ACOs to encourage participation by beneficiaries and suppliers through what otherwise would be considered unlawful inducements or kickbacks (e.g., free goods or services and services designed to encourage beneficiaries to adhere to preventive care regimens).

The rule also creates a “Shared Savings Distribution Waiver”, whose purpose is to waive various federal fraud and abuse laws (e.g., the Physician Self-Referral Law, the Gainsharing CMP, and the Federal Anti-kickback statute) in the case of distributions or use of shared savings earned by an ACO during its participation term. The rule also contains a Compliance with the Physician Self-Referral Law Waiver, which waives these same laws insofar as they would otherwise prohibit any financial relationship among or between the ACO, its participants, and its providers/suppliers that are reasonably related to the purposes of the MSSP and that comply with applicable requirements.

Nonprofit Entities Participating as ACOs

The final IRS guidance to tax-exempt organizations participating in ACOs clarifies that otherwise-prohibited “inurement” (i.e., financial gain) is acceptable if certain requirements are met: a CMS-approved ACO; a written agreement negotiated at arms’ length describing the terms of the organization’s participation in the ACO; savings that are proportional to the benefits the organization provides to the ACO; proportional losses; and fair market value governing contracts. Most importantly the IRS indicates that it will use a “facts and circumstances” test to evaluate arrangements rather than applying flat prohibitions.

Key Issues

Will the final policies encourage participation? Given the widespread objections to the proposed policies and the extent to which the final policies eased various standards and attempted to address concerns raised (particularly risk of loss, patient assignment, the lack of investment capital, performance measurement, and potential antitrust exposure for large ACOs), will entities respond? In the final rule, CMS projects that there will be anywhere between 50 and 270 ACOs participating in the MSSP during the first four years of the program.^[53] Research will be needed to track the pace of formation.

Will the final policies reduce significantly the potential for savings? Given the new model established under Track 1, in which an ACO may realize bonuses without exposure to potential losses, will the possibility of greater potential savings available under Track 2 (which puts ACOs at risk of financial losses) be sufficient to incentivize participants to assume a risk of loss?

Will ACOs grow in medically underserved communities, and will Medicare/Medicaid partnerships develop? With the inclusion of FQHCs and RHCs as entities empowered to establish ACOs, and with patients of these two providers now considered assignable, will these entities form ACOs in medically underserved urban and rural communities? Given the expansion of Medicare policy into medically underserved communities, will this shift encourage Medicaid agencies to follow suit?

Opting out. The final rule promotes beneficiary participation and the sharing of data. Will beneficiaries who are preliminarily prospectively assigned to an ACO opt out, and will assigned beneficiaries opt out of data sharing agreements?

Monitoring and enforcement. The final DOJ/FTC policy uses an approach seen in more recent merger oversight, namely, allowing market conduct that potentially raises anticompetitive concerns but only pursuing such conduct after formation has taken place. The agencies indicate that they will track post-formation conduct through claims data; will they have sufficient resources to actively pursue the measurement of anticompetitive practices in communities with large ACOs?

CMS oversight and meaningful use of HIT. The final rules ease formation standards and eliminate the requirement for rapid and widespread use of EHRs by participating physicians. Will these changes raise performance oversight challenges down the road, and if ACOs begin to grow more rapidly, will they shift to EHR technology regardless of CMS standards as a result of the need to produce performance data?

Will ACOs be sufficiently accountable? The final rules relax the proposed standards for ACOs, reducing some of the rigor of the initial proposed model in favor of an approach that eases the standards for forming and operating an ACO and for ACO performance. At the same time, the enforcement agencies also have adopted policies that encourage ACO formation, with the elimination of mandatory antitrust review for large proposed ACOs. Given these relaxed standards and the policy shift toward encouraging the growth of more — if somewhat less rigorous — ACOs, will the accountability for quality that is the hallmark of value based purchasing be realized?