Background

Prompting physicians and hospitals to change how they are both clinically organized and paid for services has been identified as essential to improving health care quality and efficiency.^[1] In 2009, U.S. health expenditures represented more than 17 percent of the gross domestic product (GDP) and are predicted to rise to almost 20 percent by 2019.^[2] Medicare expenditures alone are expected to almost double from approximately 500 billion dollars in 2009 to almost one trillion in 2019.^[3]

In recent years, 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.^[4] 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.

In 2009, the Medicare Payment Advisory Commission (MedPAC), Congress’s Medicare-policy advisory arm, identified ACOs as a potential tool for restructuring traditional Medicare coverage.^[5] MedPAC defined ACOs as a group of physicians (possibly including a hospital) that assumes responsibility for annual Medicare spending for a defined patient population.^[6] Under MedPAC’s recommendations, ACOs would be compensated through an arrangement that combines traditional fee-for-service payments with financial incentives to reduce costs, improve quality, and achieve greater information transparency. MedPAC indicated that the success of the model would depend on the adoption of clear quality standards combined with a payment methodology that rewards quality while reducing current financial incentives for uncontrolled practice and volume expansion.

Changes Made by the Health Reform Law
Pub. L. 111-148, §§ 3022 and 10307

• The law introduces ACOs on a voluntary basis by directing the Secretary of Health and Human Services to develop a “Medicare Shared Savings Program” whose purpose is to “encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery”^[7] aimed at reducing expenditure growth and improving health outcomes through accountable care organizations.
• The law identifies two further goals: First, to “promote accountability for a patient population and coordinate items and services” covered by Medicare (inclusion of items and services covered by Parts A and B is required); second, to reward physician practices and other physician organizational models for quality and efficiency.^[8]
• To participate, an ACO must:
  • be willing to become accountable for the quality, cost, and overall care of a defined population of Medicare fee-for-service beneficiaries;
  • agree to participate in the program for at least three years;
  • have a formal legal structure allowing it to receive and distribute payments for shared savings;
  • include enough primary care professionals to cover the Medicare beneficiaries assigned to it;
  • have in place leadership and management structures that include clinical and administrative systems;
  • define processes to promote evidence-based medicine and patient engagement; and
  • demonstrate to the Secretary that it meets patient-centeredness criteria.^[9]
    • Additionally, the Secretary may give preference to ACOs that are participating in arrangements with other payers.^[10]
• The following groups of providers and suppliers of services that have established a mechanism for shared governance are eligible to participate in ACOs:
  • professionals in group practice arrangements;
  • networks of individual practices of professionals;
  • partnerships or joint venture arrangements between hospitals and professionals;
  • hospitals employing professionals; and
  • such other groups of providers and suppliers of services that the Secretary deems appropriate.^[11]
• The Secretary shall determine the appropriate quality performance standard to assess the care furnished by the ACO, measuring clinical processes and outcomes, patient and caregiver experience of care, and utilization rates. The ACO shall submit data to the Secretary, who shall use such data to evaluate and improve the quality of the care furnished through these ACOs. The Secretary is expected to select measures that reflect national priorities for quality improvement. To receive the payment incentives under this pilot, the ACO must meet the quality performance standard set by the Secretary in addition to controlling costs. The Secretary may also terminate an agreement with an ACO if it does not meet the established quality performance standard.^[12]
• Because the goal of the law is to test payment and delivery innovation, the legislation establishes specific payment incentive models to be tested through the new Medicare Shared Savings Program. Two principal models are identified:
  • Providers participating in ACOs shall continue to receive payments under the original Medicare fee-for-service program Parts A and B. However, these providers shall be eligible to receive additional payment for shared savings if (1) the ACO meets the quality performance standard set by the Secretary, and (2) the ACO’s estimated average per capita Medicare expenditures for Parts A and B (as adjusted for beneficiary characteristics) is at least a specified level below the applicable “benchmark” set by the Secretary. The ACO’s benchmark, which is reset for each agreement year, will be calculated “using the most recent available three years of per-beneficiary expenditures for Parts A and B services for Medicare fee-for-service beneficiaries assigned to the ACO,” as adjusted for beneficiary characteristics and other such factors that the Secretary deems appropriate. Therefore, if the ACO’s annual expenditures are far enough below the benchmark, and the ACO meets the quality performance standard, the ACO shall be eligible to receive payment for a portion of the savings it has brought to the Medicare program (Medicare retaining the other portion). Incentive payments may not exceed the amount that the Secretary estimates would be expended for such beneficiaries if the pilot program were not implemented.^[13]
  • The Secretary is also expected to test a “partial capitation” model. This model would be similarly limited to the amount “estimated” to have been spent in the absence of the Medicare Shared Savings Program, with the ACO at “financial risk” for the patient population for “some but not all” of the items and services covered under Parts A and B. The Secretary has the authority to limit this model to “highly integrated” ACOs that are “capable of bearing risk.”^[14]
• If the Secretary determines that the organization has purposefully avoided expensive patients in an effort to reduce costs, the Secretary shall impose sanctions on organizations operating under either payment model.^[15]
• Medicare beneficiaries eligible for participation in the pilot are those who receive traditional Medicare, who are not enrolled in a Medicare Advantage plan or the Program for All-inclusive Care for the Elderly (PACE), and who meet other criteria established by the Secretary.^[16]
• The Secretary is authorized to waive certain provisions of Medicare including §1877 (related to physician self referrals) and Title XI (related to activities that federal law would otherwise consider an illegal bribe or kickback) as deemed appropriate. This authority is available in order to permit specific types of referrals that foster the integration of care.^[17]

Implementation

Agency and timeline

The law provides for implementation of the Medicare Shared Savings Program by January 1, 2012, with multi-year ACO agreements spanning three to five years. The Centers for Medicare and Medicaid Services, an agency within the United States Department of Health and Human Services, will implement this program as part of its authority over Medicare payment and policy. It is anticipated that CMS will work closely with the Agency for Healthcare Research and Quality on the development of pilot quality measures , the Office of the National Coordinator for Health Information Technology on criteria applicable to health-information and meaningful-use capabilities, and the Health Resources and Services Administration on the development of ACO criteria for entities operating in or serving medically underserved communities.

Process

The health reform law does not provide specific direction to HHS 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, 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 Implementation Issues

• Establishment of ACO qualification criteria: What will be the regulatory definition of an ACO? 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?
• Interaction with federal antitrust law: How will federal antitrust enforcers view the establishment of 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 Medicare? 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?
• 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 ACOs indeed bear risk and thus should be regulated under state law?
• Payment methodologies: What methods will be used to risk-adjust historical Medicare costs in setting the benchmark? How far below the benchmark will HHS set the cost-savings target? What percentage of cost savings below the target will be shared with the ACOs? What safeguards against undue financial risk will be adopted? What quality and efficiency standards will ACOs be encouraged to reach through incentives? How will financial risk be managed, particularly in the case of smaller ACOs? Can an ACO pilot simultaneously participate in a bundled-payment pilot under Medicare?
• Beneficiary safeguards: Will Medicare 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 Medicare beneficiaries be assigned to ACOs?
• Multi-payer participation: How will the pilots create incentives for organizational models that encourage multi-provider participation, particularly in the case of Medicaid agencies that are interested in testing models for dual enrollees?
• Performance measurement and reporting: What level of public reporting will be encouraged or required? Will information be aggregated to all 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 Medicare 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?
• Selection and expansion of pilots: How many pilots will be initially undertaken? What criteria will be used to determine which pilots are permitted to continue? How will the Secretary decide to launch additional pilots beyond those that are part of the initial pilot effort?
• Interaction with Medicare Advantage: What will be the interaction with Medicare Advantage organizations, which have some ten million participating beneficiaries, given that the pilot is aimed at reforming traditional Medicare?

Recent Agency Action

• CMS Issues ACO Preliminary Questions & Answers

Authorized Funding Levels

The change is regulatory in nature and therefore does not direct the award of federal funds.