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12 Things We Have Learned About ACOs

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Gary J. McRay
Foster Swift Health Care Law E-News
November 16, 2012

Many hospitals and groups of physicians are forming Accountable Care Organizations (ACOs) to cover Medicare fee for service beneficiaries under the Medicare Shared Savings Program (MSSP).  In the past, we have described many possible ACO formations. For reasons previously discussed and purposes of this article, the ACO formation of choice is the physician hospital organization (PHO).  A PHO is generally a combination of a local hospital with large groups of physicians (independent and hospital employee).  As such, what issues must this new ACO keep in mind in its proceeding to qualify for the MSSP program? This article discusses that question below.

  1. ACOs are designed to be physician led.  ACO participants (i.e., providers or suppliers) must control 75% of the ACO’s governing body.  Thus, physicians are important leaders in the ACO.

    Many PHOs are 50% owned by the local hospital and 50% by physician providers.  As such, the hospital and physician providers would traditionally control 100% of the ACO governing body.  Together they do not have to elect 75% of the board as physicians, but they have the flexibility to do so.  Physicians are critical to the success of an ACO so their participation on the board of directors is desirable.

  2. Medicare Beneficiary Representative; Beneficiaries' Rule in the Board.  The ACO regulation commentary makes it clear that conflict of interest is not created if the Medicare beneficiary appointed to the board receives services by the ACO as one of the 5,000 covered ACO members (discussed below).  Conflict would exist if the Medicare beneficiary has a contract with the ACO as an ACO provider or supplier in the ACO networks.  Moreover, there must be at least one Medicare beneficiary representative on the board of directors who does not have a conflict of interest with the ACO and has no immediate family member with a conflict of interest with the ACO.
  3. Management of the ACO.  It is not surprising that management of an ACO is critical.  The executive manager or the officer of the ACO has to demonstrate the ability to influence or direct clinical practice to improve the efficiency processes and outcomes of the ACO.  The ACO’s leader must be subject to appointment and removal by the ACO board of directors.  In addition, clinical management and oversight must be provided by a senior-level medical director who is a physician and one of the ACO providers or suppliers.  This means that the hospital cannot have as a reserved power the appointment and removal of the president or executive manager of the ACO.  However, it appears that the hospital could continue to have other normal reserve powers that are often found in PHO arrangements.
  4. Meaningful commitment by ACO providers.  The ACO regulations require that each ACO participant and each ACO provider/supplier demonstrate a “meaningful commitment” to the mission of the ACO.  This can be achieved by sufficient financial or human investment, (such as ACO participants paying a significant amount for the stock or membership in the ACO).  For example, potential loss of significant investment is likely to motivate an ACO participant and thus create a meaningful commitment.  A meaningful commitment may also be shown if the ACO participant agrees to comply with the processes which encourage quality performance and reduce costs and the participant is held accountable for meeting these performance standards.
  5. Required processes.  In addition to certain management requirements, the ACO regulations require the ACO to follow certain processes or to have in place certain processes.  The required processes include: (a) determining diagnoses with significant potential for the ACO to achieve quality improvements; (b) promoting patient engagement; (c) developing an infrastructure for ACO participants and ACO providers/suppliers to create an internal report on quality and cost metrix that allow the ACO to monitor, provide feedback and evaluate ACO participants; and (d) coordinating care across and among primary care physicians, specialists and post-acute providers and suppliers.
  6. Having the required ACO beneficiaries.  In order for an ACO to participate in MSSP, the ACO must have at least 5,000 assigned beneficiaries.  An ACO has satisfied this requirement, if the number of beneficiaries historically assigned to ACO participants in each of the three years before the start of the ACO contract with CMS is 5,000 or more.  Beneficiaries are assigned to an ACO using a “step wise” process based upon the beneficiary's use of primary care services.  This works as follows:
    1. Beneficiaries are initially assigned to the ACO if the allowed charges for primary care services furnished to the beneficiary by all the primary care providers (PCP) who are ACO providers are greater than the allowed charges for primary care services furnished by:  (i) PCP physicians who are in any other ACO providers; and (ii) those PCPs not affiliated with any ACO.
    2. The second step for determining whether or not a beneficiary is a member of the ACO is looking at beneficiaries who have received at least one primary care service from an ACO physician, but have not had a primary care service rendered by any PCP either inside or outside the ACO.
    3. The beneficiaries are then assigned to the ACO if the allowed charges for primary care services furnished to the beneficiaries by all ACO professionals who are ACO providers/suppliers in the ACO are greater than the allowed charges for:  (i) primary care services furnished by all ACO professionals who are ACO providers/suppliers in any other ACO; and (ii) those who are not affiliated with any other ACO.
    4. There is a preliminary assignment at the beginning of the performance year, the assignments are updated quarterly and then there is a final assignment of the beneficiaries determined at the end of each performance year based on the data from the performance year.  Therefore, each ACO needs to recruit sufficient PCPs who have Medicare beneficiaries as a large part of their practice.
  7. Having a sufficient panel of providers.  As discussed previously, the regulations require each ACO to have at a minimum, 5,000 assigned Medicare beneficiaries. During the application process to CMS, the ACO must demonstrate that it has enough physicians to attain this threshold of Medicare beneficiaries at the beginning of a performance year
  8. Antitrust Enforcements Policy Statement.  A full discussion of the antitrust issues raised by setting up an ACO is beyond the scope of this brief overview.  The final policy statement was  issued October 2011 and differs from the proposed policy statement, which we discussed in an earlier article in two respects.  First, the final policy statement applies to all collaborations of providers that are eligible and have been approved to participate in the MSSP.  Before it was limited to those formed after March 23, 2010.  Additionally, the final rule no longer requires a mandatory antitrust review for certain collaborations as a condition of entry into the MSSP.

    The final policy statement applies to the review process to collaborations among otherwise independent providers and provider groups, who have been approved to participate in the MSSP.  The review process does not apply to single fully integrated entities, who can achieve antitrust protection by actually sharing substantial financial risk or being clinically integrated.  Generally, the antitrust laws treat price fixing among competitors as “per se illegal.”  See, Arizona v Maricopa Co Medical Society (457 U.S. 332 (1982)).  However, through their final policy statement, the FTC and the DOJ have determined that they will provide a “rule of reason” treatment to an ACO that meets the requirements for and participates in the MSSP, if certain criteria are met and the market share held by the independent competing physicians is not too great.  This is the antitrust safety zone.

    To meet the antitrust safety zone (so that the agencies will not challenge the ACO absent extraordinary circumstances), independent ACO participants that provide the same service (common service) must have a combined share of 30% or less of each common service in each participant’s “primary service area (PSA).”  The PSA for each participant is defined as the lowest number of postal zip codes from which the ACO participant draws at least 75% of the participant’s patients.  Each inpatient hospital will have a separate PSA for its: (i) in patient services; (ii) outpatient services; and (iii) physician services provided by its physician employees.

    To be in the antitrust safety zone, any hospital or ambulatory surgery center (ASC) participating in the ACO must be nonexclusive to the ACO.  Physicians may be exclusive to the ACO, unless they are dominant in the PSA.  There is also more flexibility if the physician or physician group practice’s primary office is in a zip code classified as “isolated rural” or “other small rural.”  For example, if a physician has greater than a 50% share in its PSA of any service that no other ACO participant provides to patients in the PSA, then the ACO participant must be nonexclusive to the ACO in order for that ACO to still fall within the safety zone.  Despite the safety zone, ACOs should still avoid improper exchanges of prices or any other competitively sensitive information among competing participants.

    It is clear under the policy statement that the federal agencies encourage an ACO with high PSA shares to stay away from the following activities:

    1. Preventing private payors from directing or encouraging patients to choose certain hospitals or other providers, including providers who do not participate in the ACO, with anti-steering or most favored nation (MFN) provisions;
    2. Tying sales so that a private payor’s purchase of non-ACO services is tied to the ACO services;
    3. Contracting on an exclusive basis with ACO providers and hospitals thereby discouraging those providers from contracting with private payors outside the ACO; and
    4. Restricting a private payor’s ability to make information involving cost and quality available to aid enrollees in selecting providers in a health plan, if such information is similar to that used in the MSSP.
  9. Conflict of Interest.  The final regulations require ACOs have a conflict of interest policy that applies to members of its governing body.  The conflict of interest policy requires each member of the governing body to disclose relevant financial interests.  The ACO must have a procedure to determine whether a conflict exists and a process to address any such conflict.  The conflict of interest policy must also address remedial action for members of the governing body who fail to comply with the policy.  This is similar to the conflict of interest requirement recommended by the IRS to protect the federal tax exemption of exempt providers, such as hospitals.
  10. Corporate practice and medicine.  The corporate practice of medicine doctrine typically prohibits a for profit entity from providing medical services unless the entity is organized as a professional corporation or professional limited liability company or a nonprofit corporation such as a hospital.  See Michigan Opinion Attorney General No. 6770 (September 17, 1993).  An ACO that is a PHO avoids the prohibition against the corporate practice of medicine doctrine because the PHO does not render health care itself, it has the health care services provided by its network participants.
  11. Office of Financial and Insurance Regulation (OFIR).  An entity that assumes the risk of healthcare expenses being greater than premium payments will typically have to submit to OFIR’s insurance regulations concerning capital, reserves and solvency requirements.  CMS has concluded that it would not be appropriate to subject ACOs to the same insurance standards as health care plans.  However, in the final regulations, ACOs are based on a risk share model (ACOs have two possible tracks).  Under Track 1, ACOs do not take risk of losses during the first three years.  After three years, the ACO begins to take financial risk.  A Track 2 ACO takes risk during the first three-year period and thereafter shares in certain losses.  To our knowledge, OFIR has not yet opined on whether participating under the MSSP will require ACOs to obtain some type of insurance license.
  12. Waivers concerning Fraud and Abuse.  Those who are setting up ACOs are naturally concerned that the Physician Self-Referral law (Stark), the Federal Anti-kickback Statute (AKS), and the Civil Money Penalties (CMP) law may be violated when entering into the MPPS.  In recognition of this issue on November 2, 2011, CMS and the HHS Office of Inspector General (OIG) jointly published an interim role, which established certain waivers of the Stark law, AKS, and certain provisions in CMP.  There are five waivers protecting certain arrangements:
    1. The first is a pre-participation waiver.  In this waiver, Stark, AKS, and the gain sharing CMP are waived with respect to certain start-up arrangements that exist before an ACO’s participation agreement.  The start-up arrangements include:  items, services, facilities and goods covered by the arrangement.  One clear requirement in order to obtain this waiver is that the board of directors must specifically authorize the pre-participation arrangement and make a determination that the arrangement is “reasonably related” to the purposes of the MSSP.  The pre-participation waiver may be only used one time.
    2. The next waiver is the ACO participation waiver.  Stark, AKS, and the gain sharing CMP are waived with respect to any ACO arrangement if certain conditions are met.  The conditions include: (i) the ACO entered into a participation agreement with CMS and remains in good standing under its agreement; (ii) the ACO governing body has made a duly authorized, bona fide determination that the arrangement is reasonably related to the purposes of the MSSP; and (iii) the ACO complies with the final rule concerning governance, leadership and management.
    3. The third waiver is the shared savings distribution waiver.  Here, Stark, gain sharing CMP and AKS are waived with respect to the shared savings distributions between the ACO and its ACO participants under MPPS.  It is important to note that the shared savings must be distributed among the ACO participants in the year in which the savings were earned by the ACO.
    4. The fourth waiver is a waiver of gain sharing CMP and AKS in connection with the financial relationship between the ACO, its ACO participants, and the ACO providers/suppliers.  This waiver applies only if ACO has: (i) entered into a participation agreement under MSSP and remains in good standing; (ii) the financial relationship is reasonably related to the purposes of MSSP; and (iii) the financial arrangement complies with an existing exception to Stark, set forth at 42 CFR § 411.355 through § 411.357.
    5. The final waiver is a waiver for patient incentives.  Again, the beneficiary inducement CMP and AKS are waived with respect to an ACO, its participants and providers/suppliers in connection with beneficiaries receiving free or below fair market value if certain conditions are met.  The key to this waiver is that the items or services are preventive care items or services and that they advance one or more of the following clinical goals: (i) adherence to the treatment regimen; (ii) adherence to a drug regimen; (iii) adherence to follow-up care plan; or (iv) management of a chronic disease or condition.

      This waiver hopes to incentivize beneficiaries to comply with their health care plan, including preventive services and treatment recommendations.  This waiver is also limited to items and services that are in-kind, and does not protect the waiving or reducing of beneficiary co-payments or deductibles.


The final regulations attempt to provide protection for those entities that are setting up ACOs and give guidance on how to successfully complete and qualify under the MSSP.  It will be interesting to see if large combinations of hospitals and physicians can improve the quality of health care while reducing cost savings to the Medicare program.  If you have any questions on ACOs, please contact Gary J. McRay by telephone at 517.371.8285.