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ACO Regulations


The Patient Protection and Accountable Care Act (ACA) of 2010 included dozens of novel policies designed to cover 33 million uninsured Americans and slow the exponential rise of costs in our health care system.  The legislation introduced various new payment and delivery models that will encourage payers and providers to coordinate care and incentivize efforts that lower costs.

Among these are a National Pilot Program on Payment Bundling[1] and a five-year Pediatric Accountable Care Organization (ACO) Demonstration Project. The bill also created the Center for Medicare and Medicaid Innovation within the Centers for Medicare and Medicaid Services (CMS) to test new payment and delivery models for their ability to lower costs and increase quality.[2] The law also expands the Medicare Rural Flexibility Program to allow ACO incentive payments.

ACOs have been tested with successful outcomes in patient care, cost, and quality improvements.[3] The model has been embraced by both the Medicare Payment Advisory Commission[4] (MedPAC) and the Institute of Medicine (IOM).[5] California has the opportunity and strong infrastructure to expand on previous pilots and programs.[6] California providers[7] (such as Health Care Partners, Sharp, Monarch, Hill Physicians Group, Brown and Toland) are already developing ACO pilots for California’s privately insured with major health plans including Anthem, Blue Shield, Aetna and United, as well as payers like CalPERS.

The ACO concept has moved quickly to the fore as a model with the potential to radically change the way hospitals, doctors, and payers relate and interact. CMS has defined a Medicare ACO as a group of providers and suppliers who work together to coordinate care for the Medicare fee-for-service beneficiaries they serve. According to the ACA, this group could include health professionals (such as physicians or hospitals), networks of individual practices, partnerships or joint ventures between hospitals and ACO professionals, and hospitals employing ACO professionals.[8] As an ACO, a team of providers – including the primary care doctor, specialists and a hospital – would more closely coordinate care and therefore be able to produce better health outcomes for patients at a lower price to the system. The ACO network will negotiate a price, benefit structure and improved patient outcomes with Medicare programs, and both patients and doctors can choose to participate in an ACO or not.

The ACA provides for ACO formation through the Medicare Shared Savings Program (MSSP). The law offers a loose framework for ACO structure, governance and means of attainment of shared saving. The specifics of the program – requirements, parameters, and scope – were left to CMS, former Virginia Health Secretary Marilyn Tavenner and Jonathan Blum, former staffer to Senate Finance Committee chair Max Baucus.[9] In order to gain recognition as an ACO, organizations must apply to the Secretary of HHS for certification by January 1, 2012.

Summary of Proposed ACO Regulations

On March 31st, 2011, CMS released proposed regulations for the design and regulation of ACOs under the MSSP.[10] Organizations that intend to become ACOs will have to abide by the requirements that are included in the final rules. There will be a 60-day public comment period on these proposed rules. CMS is currently accepting public comments that will be considered for inclusion in the final rule. The final day to submit comments is June 1st, 2011.

Structure & Size

Under the rules, CMS envisions two types of ACO models – one in which the members share savings but do not share losses (one-sided) and one in which the members share both the savings and losses (two-sided). For the first three years, organizations must choose either (a) using the one-sided model for two years, followed by adoption of the two-sided model in the third year, or (b) start as a two-sided ACO from the beginning. Regardless of initial arrangement, after three years, all ACOs must operate under a two-sided model.[11] The ACO is required to establish a mechanism for guaranteed repayment to Medicare for losses under the two-sided model, including reinsurance, funds in escrow, surety bonds, or credit.  The ACO must also become a legal entity.[12]

An ACO must have a governing body, including representation from ACO participants (at least 75% of the board) and Medicare beneficiaries. There must also be incentives for providers’ and suppliers’ commitment to the ACO, including financial or meaningful human investment.[13]

In order to qualify as an ACO, an organization must have at least 5,000 beneficiaries and include a sufficient number of primary care physicians to care for this beneficiary population. All ACO agreements must be made directly with CMS and must last for at least three years.[14]


The MSSP will reward ACOs that meet quality performance standards and lower costs.  On March 21, 2011, HHS presented the National Quality Strategy to help better coordinate quality initiatives among public and private providers.[15]

ACOs are required to have a physician-led committee that oversees quality assurance and improvement, including the establishment of standards for quality and cost-effectiveness, as well as process and outcome improvements. These standards will be used to hold providers and suppliers accountable and there must be a mechanism to identify and correct non-compliance.[16]

Evidence-Based Medicine

ACOs must implement evidence-based practice guidelines and processes. Although the guidelines should cover diagnoses with “significant potential” to improve quality and cost, flexibility based on an individual beneficiary’s circumstance will be allowed. There will be a process for measuring compliance, as well as remediation or expulsion of providers and/or suppliers who do not comply.[17]

Health Information Technology

ACOs must have the ability to collect and evaluate data in order to provide feedback to providers and suppliers, such as an electronic health record that meets meaningful use guidelines. This system must be available across the ACO and must be able to provide patient data at the point of care. By year two, 50% of primary care providers in the ACO must meet the meaningful use guidelines for Electronic Health Records (EHR) implementation.[18]

Beneficiary Assignment

CMS beneficiaries will be assigned to the ACO in which their primary care provider is a participating member or in which they receive the plurality of primary care services. This, however, does not limit the patient’s free choice of where to receive services.[19]


CMS will establish a fixed savings benchmark that will take into consideration overall growth, as well as beneficiary characteristics and health status. This benchmark will be updated annually based on growth in Medicare Part A and B expenditures under the original fee-for-service program. In order to receive savings under the one-sided model, ACOs must have costs below the benchmark by more than a “minimum savings rate” (capped at 2% below benchmark), which will be determined by CMS.

If an ACO meets this threshold, they will be eligible to receive 50% of their savings (rural hospitals or federally qualified health centers could receive 52.5%). The payment is capped at 7.5% of the benchmark. In a two-sided ACO, CMS will determine a minimum savings rate and a minimum loss rate (both capped at 2% below or above the benchmark). Two-sided ACOs can receive 60% of the savings (rural hospitals or federally qualified health centers could receive 62.5%). These savings cap at 10% of the benchmark.

Both the one-sided and two-sided models will have to meet minimum specific quality measures to be eligible to receive savings. These metrics include: patient experience, care coordination, patient safety, preventive health, and at-risk populations. Once ACOs meet this minimum and are eligible for savings, these measures will also be used to determine the percentage of savings the ACO will ultimately receive.[20]

Administration & Governance

The methodologies described above attempt to remove the incentive to “cherry-pick” patients based on their health status; however, in the rules, CMS reserves the right to terminate any ACO that appears to be avoiding the sickest or most at-risk beneficiaries. CMS will also monitor ACO performance data to make sure it is meeting the standards. If these standards are not met, the ACO will be given a warning and reviewed again the following year. If the standards are still no met, the ACO will be terminated.[21]

Transparency & Data Sharing

ACOs will receive monthly claims data from CMS that will comply with the Health Insurance Portability and Accountability Act (HIPPA) standards and ACOs must provide a way for beneficiary to opt-out of having their information shared for ACO activities. ACOs will be required to publicly report their quality performance scores, shared savings or losses, the distribution of shared savings among participants and the total proportion used to support improved quality performance.[22]

Critiques & Analysis

Since the release of the long-awaited proposed regulations, various stakeholders and observers have offered considerable pushback and specific criticisms of the rules. Below please find a summary of the most vocal and substantive critiques. Many have minor suggestions to better the rules, while others argue that unless the rule is drastically changed, organizations will not apply to become ACOs and we will have missed huge opportunities to bend the cost curve.

Too Many Requirements, Too Few Rewards

Michael Millenson, a health care consultant who writes the HealthCare Blog,[23] makes the case that the, “central problem with the draft regs… is that the risk-reward ratio is highly skewed.”[24] He feels that the proposed ACO impose a “dizzying litany of hurdles to surmount, from documenting progress on 65 different quality measures to Medicare editing your marketing materials and to government monitors descending upon your offices” yet the financial “rewards are wrapped in a fuzzy package of impenetrable risk-adjustment algorithms and wait-till-next year financial commitments.”[25]

Similarly, Steven Lieberman contends that, “[t]he proposed regulation adds substantial requirements and significant costs, raising barriers to entry which restrict the number and types of ACOs.  Even if CMS shifted to prospective attribution and substantially improved financial terms, the extraordinary range of requirements (including quality measures) brings into question the economic viability of ACOs and shared savings.”[26]

While Millenson and Lieberman present an important issue for CMS and other stakeholders to consider, CMS must balance the desire to have as many ACOs as possible with the very real need to assure that ACOs actually improve patient outcomes at a reduced cost.

Unrealistic Timeline

Health Affairs blogger, Ron Klar, M.D. [27] is generally critical of the two sided model, arguing that Congress wanted to reward ACOs for the program cost savings they achieved, not put them at financial risk. He also points out that the proposed rule anticipates a two year timeline for transition from one sided to two sided that is too stringent for both CMS and potential ACOs. He argues that it would take CMS at least a year to collect the data on individual ACOs and then probably a year to analyze and disseminate the results. This wouldn’t give the ACOs that initially pursue a one-sided model sufficient opportunity to evaluate their own position and determine the feasibility of switching to a two-sided model. What’s more, ACOs would be assuming risk as they transition to two sided without knowing how they performed as one sided.


Cost Prohibitive

Many are concerned about the large start up costs associated with making the transition to an ACO. For instance, while the American Medical Association’s Jeremy Lazarus acknowledges that “ACOs offer great promise for improving care coordination and quality while reducing cost… For this to happen, significant barriers must be addressed, including the large capital requirements to fund an ACO and to make required changes to an individual physician’s practice…” Mr. Lazarus’s concerns are based on a 2008 Government Accountability Office (GAO) analysis that estimated that start-up and first year costs would be over $1.7 million based on their assessment of “The Physician Group Practice Demonstration”.[28]

Role of CMS

Some observers have concerns about the CMS’s oversight role under the rules as they’re currently envisioned. The rule empowers CMS to withhold 25% of the shared savings to offset possible losses and requires a guarantee that losses will be paid with reinsurance and credit lines. In addition, there are 16 ways that an ACO can be terminated, all of which are at the sole discretion of CMS. Termination would require that all withheld amounts would be forfeited, and these termination conditions apply even if CMS changes the rules in the first three years. Also, instead of the traditional personal “attestation,” CMS requires multiple guarantees from providers, including the potential for an audit.

CMS is clear about communication to beneficiaries: all materials have to be approved by CMS and they must state that CMS doesn’t endorse the ACO, participant or providers/ suppliers.

The federal government also has the right to inspect all aspects of the MSSP, and materials must be kept for ten years from the end of the agreement for audit, evaluation, or inspection.

While CMS does assume significant responsibility under these proposed rules, it is also clear that if entities are going to share in the financial benefits associated with ACOs, there must be a body with sufficient oversight authority to regulate their implementation and administration on behalf of the tax payer and the patients. Perhaps, the rules should be amended to add some oversight over CMS and/or due process to an ACO if and when CMS unilaterally terminates its status as ACO.

Beneficiary Assignment

A provision in the rule that might deter participation of multi-specialty practices is the fact that beneficiary assignment is based on utilization of primary care services by only primary care physicians. Dr. Klar argues that the ACA allows the Secretary to decide how to assign beneficiaries based on their use of medical services, with no distinction between primary and specialty. In this respect CMS over stepped the legislative boundaries. Dr. Klar points out that in some communities, non-primary care doctors provide as much as 60% of primary care services to Medicare beneficiaries and in a time of vast primary care provider shortages the exclusion of specialists is not realistic.

Conclusions & Recommendations

The draft ACO regulations issued by HHS on March 31, 2011 offer the details of what ACOs will look like, outline the requirements by which potential entities will need to abide in order to qualify as ACOs, and delineate CMS’s role as regulator of the program.

The rules have inspired much discussion as to the merits of the ACO concept as well as criticisms of the rules themselves. That said, there are a few changes that CMS should consider when drafting the final ACO rules, namely: easing stringent timeline requirements on potential ACOs to move from one sided to two sided gain and loss sharing; allowing both specialty and primary care providers to be the focal point of ACOs; and allowing CMS the flexibility to ease certain regulations that prevent a sufficient pool of potential entities from achieving ACO status.

ACO Regulations ACO Regulations.pdf

[1] ACA § 3023.

[2] ACA § 3021.

[3] Physician Group Practice demonstration, at https://www.cms.gov/DemoProjectsEvalRpts/downloads/PGP_Fact_Sheet.pdf

[4] Medicare Payment Advisory Commission: http://www.medpac.gov/documents/jun08_entirereport.pdf

[6] McClellan & Fisher, Accountable Care Organizations: A Framework For Evaluating Proposed Rules,

[8] Summary of proposed rule provisions for Accountable Care Organizations under the Medicare Shared Savings Program, Centers for Medicare and Medicaid. March 31, 2011 at https://www.cms.gov/sharedsavingsprogram/.

[9] Watson, S. Accountable Care Organizations. Insure the Uninsured Project. September 2010, at http://itup.org/Reports/Health%20Reform/ACO_100610.pdf.

[11] Proposed Rule 425.5(d)(6).

[12] Proposed Rule 425.5(d)(7).

[13] Proposed Rule 425.5(d)(8).

[14] Proposed Rule 425.18.

[16] Proposed Rule 425.5(d)(9)(v).

[17] Proposed Rule 425.5(d)(9)(viii).

[18] Proposed Rule 425.5(d)(9)(viii) and 425.11.

[19] Proposed Rule 425.6(b).

[20] Proposed Rule 425.7.

[21] Proposed Rule 425.12(b) and 425.12(c).

[22] Proposed Rule 425.19(d) and 425.23.

[25] Id.