11.30.2011 Federal Agencies Issue Final Regulations and Related Guidance for ACOs Participating in the Medicare Shared Savings Program



Introduction. On November 2, 2011, the Centers for Medicare & Medicaid Services (“CMS”) published its final rule (“Final Rule”) on the establishment of accountable care organizations (“ACOs”) as a key component of the Medicare Shared Savings Program (“MSSP”) under the Patient Protection and Affordable Care Act (“PPACA”).[1]  The Final Rule made a number of changes to the March 31, 2011 MSSP proposed rule (“Proposed Rule”) that we wrote an Alert about earlier this year.[2]  The changes were primarily designed to enhance provider participation by making the program more flexible and attractive to potential participants.   


        An ACO is an integrated group of health care providers who voluntarily agree to work together to deliver the full spectrum of care to an assigned pool of Medicare fee-for-service beneficiaries.  The ACO will be rewarded with shared savings payments for satisfying certain cost and quality benchmarks and may be liable for shared losses if it falls short.  Under PPACA, the MSSP is to be implemented by January 1, 2012, with the first ACO contracts to begin on April 1, 2012.    


Changes in the Final Rule.  Taking into account more than 1,300 comments from stakeholders, revisions to the Final Rule are intended to reduce the burdens and financial risks associated with participation in the MSSP.  Highlights of some of the key changes are set forth below.  


        Enrollment Date.  An ACO is required to enter into a three year agreement with CMS.  However, the Final Rule will permit a so-called “rolling” initial start date, rather than the uniform date set forth in the Proposed Rule.  Thus, ACOs may now start on April 1, 2012 or July 1, 2012.  Beginning in 2013 and in subsequent years, the start date for ACOs will be January 1.  Allowing a rolling start date in 2012 should make it easier for a proposed ACO that has limited experience in measuring and monitoring its patient population to wait until all of its protocols are in place and tested before joining the program.  


        ACOs starting in 2012 will have a longer first performance year, compared to subsequent years (21 and 18 months for April 1 and July 1 starters, respectively).  To provide for timely payment, CMS is allowing ACOs starting in 2012 to opt for an interim payment calculation, based on the first 12 months of participation in the MSSP, with a final reconciliation at the end of the first performance year.  Participants must opt for the interim payment calculation as part of their ACO application.   


        No Risk Option.  Importantly, the Final Rule changes the requirement that an ACO agree to assume risk for shared losses.  Under the Proposed Rule, an ACO had to either (i) share in both savings and losses during each performance year (“Two-Sided Model”), or (ii) share in savings only for the first two performance years and share in both savings and losses in the final performance year (“Track 1”).  Under the Final Rule, Track 1 has been changed to shared savings only for all three performance years (“One-Sided Model”).  Participants in the Two-Sided Model will continue to share in savings and losses for the entire term.  In addition, once an ACO achieves its minimum savings rate in either model, it will share in the savings on a first dollar basis.  Track 1 ACOs under the Proposed Rule did not start to share in savings until the threshold was exceeded by 2%.  


        ACOs under the One-Sided Model that elect an interim payment calculation will also need to demonstrate their ability to repay CMS for any money owed after the first performance year reconciliation, similar to that required of Two-Sided Model ACOs and their ability to repay any shared losses.  The ability to repay must be demonstrated in the ACO’s application.  Such documentation must include details supporting the ability to repay equal to at least 1% of the ACO’s total per capita Medicare Parts A and B fee-for-service expenditures for its assigned beneficiaries, based either on expenditures for the most recent performance year or expenditures used to establish its benchmark.  The ability to repay may be demonstrated by obtaining reinsurance, placing funds in escrow, obtaining surety bonds, or establishing a line of credit, or through another appropriate repayment mechanism.


        Quality Reporting.  A central component of the ACO model is the reporting of performance measures to assess the quality of care furnished by an ACO.  The Proposed Rule had suggested 65 measures organized among five different domains, and providers had complained that the cost of establishing the infrastructure to measure and monitor the quality components could be prohibitive. The Final Rule reduced the number of quality measures to 33 and reduced the number of domains to four (e.g., patient/care giver experience, care coordination/patient safety, preventative health, and at-risk population).  In doing so, CMS sought to remove measures perceived as redundant, operationally complex or burdensome, yet retain those measures that would focus on areas of high prevalence and high costs in the Medicare population.


        The Final Rule also affords the ACO a longer period of time to phase in the quality performance standard.  During the first performance year, an ACO can satisfy its quality performance standard by providing complete and accurate reporting for all 33 quality measures.  During subsequent performance years, an ACO must continue to report all measures, but will be assessed on performance based on achieving required minimum levels of performance for each measure.     


        Advance Payment.  Contemporaneous with the issuance of the Final Rule, a notice was issued by CMS on the establishment of an “Advance Payment Model” initiative for eligible ACOs that enter the MSSP in April or July 2012 that would provide additional incentives for participation in the MSSP.[3]  Under the Advance Payment Model, eligible participants will receive advance payments from CMS that will be recouped from the shared savings that the ACO subsequently earns.  This initiative is designed to permit providers to recoup early on the fixed and variable start-up costs associated with ACO development.


        Participation in the Advance Payment Model is limited to the following two types of organizations:

  • 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.


An ACO that is co-owned with a health plan is ineligible.  Also, the criteria for evaluating applications will favor ACOs (i) with the least access to capital, (ii) that serve rural populations, and (iii) that serve a significant number of Medicaid beneficiaries.  To apply for the Advance Payment Model, parties must complete an application that is separate from its MSSP application.    


        Beneficiary Assignment.  The process for assigning beneficiaries to an ACO was revised by the Final Rule.  The proposed process called for beneficiaries to be assigned to an ACO retrospectively, based on where a beneficiary received care during the previous year.  Under the Final Rule, beneficiaries will be assigned to an ACO on a preliminary prospective basis, whereby CMS will provide ACOs with a list every three months that identifies beneficiaries.  At the end of each performance year, CMS will do a reconciliation to finalize beneficiary assignment lists based on the patients served by the ACO.  This change is intended to provide ACOs with more certainty about their beneficiary population.


        Under the Final Rule, beneficiaries will also be assigned to an ACO in a two step process if they receive at least one primary care service from an ACO physician, rather than the one step assignment in the Proposed Rule.  The first step assigns a beneficiary to an ACO if the beneficiary receives the plurality of his primary care services from a primary care physician in the ACO.  The second step is for beneficiaries who have not received a primary care service from a primary care physician.  In the second step, a beneficiary is assigned to an ACO if the beneficiary receives a plurality of his primary care services from physicians or other non-physician practitioners in the ACO (e.g., nurse practitioners, physician assistants and clinical nurse specialists).


        Eligible Entities.  The Final Rule expands the number of entities eligible to independently form an ACO by permitting federally qualified health centers (“FQHCs”) and rural health clinics (“RHCs”) to do so.  Under the Proposed Rule, FQHCs and RHCs could only participate in an ACO but could not form one.


        EHR Use.  The Final Rule removed a proposed requirement that at least 50% of an ACO’s primary care physicians be determined to be “meaningful EHR users,” as defined in 42 CFR § 495.4, by the beginning of the second performance year in order to continue participation in the MSSP.  The Final Rule retained the EHR adoption as a quality measure.  However, to emphasize the importance of EHR adoption to succeed in the MSSP and to provide an incentive for greater levels of participation, CMS has weighted the EHR measure twice that of any other measure for scoring purposes.


Related Regulatory Issues.  Contemporaneously with the issuance of the Final Rule, CMS, the U.S. Department of Health and Human Services’ (“HHS”) Office of Inspector General (“OIG”), the Federal Trade Commission (“FTC”), the Department of Justice (“DOJ”) and the Internal Revenue Service (“IRS”) all issued guidance designed to provide clarity with respect to key regulatory issues that had been hindering the establishment of ACOs due to perceived risks and uncertainty for participants. 


        Regulatory Overview.  To succeed in the MSSP, an ACO must foster extensive cooperation among actual or potential competitors in the market, some of which likely will be tax-exempt hospitals and other providers.  It also requires rewarding providers and patients for lowering costs and following treatment guidelines.  As such, the opportunity for conflict with various broadly written fraud and abuse, antitrust and tax-exempt laws and regulations can present substantial uncertainty and risk for ACO participants.


        Fraud and Abuse Waivers.  On November 2, 2011, CMS and OIG issued an interim final rule (“Interim Final Rule”) that establishes waivers of the application of the Physician Self-Referral Law (“Stark Law”), the Federal Anti-Kickback Statute, and the gainsharing and beneficiary inducement provisions of the Civil Monetary Penalties Law to specified arrangements involving ACOs.[4]  The comment period expires on January 3, 2012.  Designed to protect financial arrangements that foster ACO development, the aim of CMS and OIG was to issue waivers that facilitate flexibility, adaptability and innovation, provided the arrangements are consistent with the goals of the MSSP.


        The waivers are much broader than the initial waivers in the agencies’ notice with comment period issued on April 7, 2011.  The five waivers[5] are separate, independent and intended to be self-implementing.  In other words, there is no approval or filing process to obtain a waiver.  To qualify for a waiver, an ACO must comply with all requirements for the applicable waiver.  CMS and OIG will monitor ACOs that enter the MSSP in 2012 and 2013 and will reduce the scope of the waivers if HHS determines that the waivers have caused the shielding of abusive arrangements.


        Antitrust Relief.  On October 20, 2011, the FTC and DOJ jointly issued a final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (“Policy Statement”), which remained largely unchanged as compared to their proposed policy statement that was issued in March 2011 and based on the Proposed Rule.


        One significant change to the Policy Statement is that the mandatory, pre-operational antitrust review has been eliminated.  There were concerns that the costs and burdens imposed by such mandatory reviews would hinder participation in the MSSP.  The Policy Statement permits an ACO to seek voluntary review if it chooses to do so.  The FTC and DOJ commit to expedite such reviews by reaching a decision within 90 days of filing.


        Rather than seek voluntary review, an ACO that participates in the MSSP may simply commence operations without any such review, subject, of course, to FTC and DOJ oversight and enforcement activity should the agencies subsequently conclude that the ACO has engaged in anticompetitive conduct (in much the same way that health care provider collaborations generally have been addressed since the FTC/DOJ Statements of Antitrust Enforcement Policy in Health Care were issued in 1996).  Given these options, it seems highly unlikely that many ACOs will go to the time, trouble and expense of seeking a voluntary review, but only time will tell.


        Another change worth noting is that the Policy Statement is not limited to collaborations formed after March 23, 2010 (the date PPACA was enacted), as it was under the proposed policy statement.  Now the entire Policy Statement, except voluntary expedited review, applies to all provider collaborations that are eligible and intend, or have been approved, to participate in the MSSP. 


        The Policy Statement confirms that legitimately formed ACOs will, in almost all circumstances, be judged under the antitrust “rule of reason,” balancing the procompetitive benefits of the collaboration against its potential for anticompetitive harm in assessing its lawfulness, and will not simply be condemned as a per se unlawful combination of competitors.  In addition, the Policy Statement preserves the antitrust “safety zone” that was set forth in the proposed policy statement.  As such, where an ACO’s participants providing a common service have a combined share of 30% or less in each participant’s primary service area, absent unusual circumstances, the ACO’s activities will be deemed not to be anticompetitive.  


        Tax-Exempt Guidance.  On October 20, 2011, the IRS issued Fact Sheet 2011-11 confirming that the advice provided in its March Notice 2011-20 concerning ACOs continues to reflect IRS policy in light of the issuance of the Final Rule.[6] As a general matter, the IRS clarifies that:

  • Internal Revenue Code Section 501(c)(3) organizations participating in an ACO will likely be treated as participating in a charitable activity; 
  • it will not be necessary for the tax-exempt organization to be in control of the ACO to retain its tax exempt status;
  • capital contributions and distribution of ACO shared savings payments need not always be proportional to ownership to avoid improper private benefit or investment;
  • non-MSSP revenues will not necessarily constitute unrelated business income; and
  • an ACO could itself qualify for tax-exemption under Section 501(c)(3), whether it engages exclusively in MSSP activities or also participates in other non-MSSP activities. 

Conclusion.  Providers have generally responded favorably to the changes reflected in the Final Rule and the accompanying regulatory guidance as steps in the right direction.  It is clear that CMS has been receptive to stakeholder comments by making participation in the MSSP less burdensome and more attractive to a larger number of providers.  What is not clear is whether the risk-reward proposition is enticing enough for providers to join in 2012.  Ultimately, it will in many ways be a business decision for providers in deciding whether to commit for three years to the MSSP.  Coordinated care is here to stay, and providers may instead opt for participation in one of the many private market ACOs that have proliferated in recent months.

[1]  A copy of the Final Rule may be viewed at the following link:

[2]  A copy of our April 4, 2011 Alert may be viewed at the following link:

[3]  A copy of the Advance Payment Model notice may be viewed at the following link:  

[4]  A copy of the Interim Final Rule may be viewed at the following link:  

[5]  The Interim Final Rule contains two waivers initially proposed, along with three new waivers, which have been reorganized based on the type of arrangement protected as follows:  ACO pre-participation (new), ACO participation (new), shared savings distributions (revised), compliance with the Stark Law (revised), and patient incentive waiver for beneficiary inducements to encourage preventive care and compliance with treatment regimens (new).       

[6]  A copy of IRS Fact Sheet 2011-11 may be viewed at the following link:


For more information about this topic, please contact the authors or any member of the Williams Mullen Health Care Team.