April 2011 ACO Special Edition

ACO – Legal Structure, Governance and Leadership

By Andrew J. Demetriou, FULBRIGHT & Jaworski L.L.P., Los Angeles, CA
and J. A. (Tony) Patterson, Jr., FULBRIGHT & Jaworski L.L.P., Dallas, TX

AuthorAuthorThis article will provide a brief overview of the key elements of the legal structure, governance and leadership of an Accountable Care Organization (“ACO”) that seeks to participate in the Medicare Shared Savings Program (“MSSP”) created under Section 3022 of the Patient Protection and Affordable Care Act of 2010 (“PPACA”).1 On March 31, 2011, the Centers for Medicare & Medicaid Services (“CMS”) proposed a rule, to be incorporated at 42 CFR Part 425 (the “Proposed Rule”), governing the formation of ACOs and their participation in the MSSP.2

Legal Structure
The basic command of PPACA requires an ACO to have a formal legal structure that would allow the organization to receive and distribute payments for shared savings to participating providers of services and suppliers.3 CMS is open to permitting an ACO to have any legal structure recognized by state law, including corporations, limited liability companies, partnerships and nonprofit organizations (including foundations). In addition, CMS has suggested that “certain specified groups of providers of services and suppliers who have a mechanism of shared governance may be eligible to participate as ACOs in the Shared Savings Program” and that it is prepared to exercise its discretion under Section 1899(b)(1)(E) of the Social Security Act to expand the list of groups eligible to participate in the MSSP. CMS has requested comments on more specific standards for legal structure, in order to provide more definitive guidance by rule.4

The two most important considerations are that the ACO have a recognizable structure under state law and have a federal tax identification number (“TIN”). The ACO must be able to certify its status as a legal entity and provide evidence of its existence, presumably certified copies of filings with a state agency, such as articles of incorporation or similar charter documents, certificates of formation and certificates of good standing or status.5

The ACO itself does not need to be a Medicare provider, although all of its constituent providers must both have a TIN and be enrolled in the Medicare program.6 It is also not necessary for an existing provider organization to form a new entity to qualify as an ACO as long as its existing structure meets the criteria of the regulations. For example, in the Proposed Rules, CMS specifically stated that an existing hospital employing physicians could qualify as an ACO, although using an existing entity with substantial non-ACO operations may create problems in auditing and assessing compliance with program objectives. As a consequence, CMS has requested comments on whether to establish a requirement that the ACO be a distinct legal entity which would be separately auditable.7

PPACA requires that an ACO have a mechanism for “shared governance,” but does not define this term. In the Proposed Rule, CMS stated the following principles:

We believe that such a governance mechanism should allow for appropriate proportionate control for ACO participants, giving each ACO participant a voice in the ACO's decision making process, and be sufficient to meet the statutory requirements regarding clinical and administrative systems. We envision a mechanism that is transparent, accountable to the affected beneficiary community, and also accountable and responsive to the ACO participants and the ACO providers/suppliers they represent.8

From this premise, CMS has proposed two standards for ACO governance that will significantly challenge the formation of ACOs. The first is a requirement that a minimum of 75 percent of the governing board be composed of ACO providers and that each ACO participating provider be afforded appropriate proportionate control of the governing board.9 The second is that the ACO governing body include at least one Medicare beneficiary, to ensure that the beneficiary community has a voice in ACO operations and management.10

The purpose for the 75 percent requirement is to ensure that ACO participants exercise meaningful control over the ACO’s financial and clinical operations. While admitting that non-ACO providers may play an important role in providing capital and management expertise to ACOs, CMS is plainly unwilling to permit such entities to exercise control over the ACOs’ activities.11 This may limit the ability of ACOs to attract capital, except from ACO providers, and correspondingly limit their growth. Further, the requirement that each provider have a representative on the governing board may complicate management in situations in which multiple unrelated ACO providers participate, as they will need to either agree on a limited number of representatives or saddle the ACO board with a large number of members. CMS considered the pros and cons of explicitly requiring a Medicare beneficiary be included on the governing board of an ACO, and concluded that inclusion of a beneficiary on the governing board will contribute to the ACO being more patient-centric.12 CMS also stated that the ACO governing board must be distinct from the boards of participating ACO providers, unless the ACO is already a self-contained, financially integrated entity whose governing board meets the ACO criteria.13

CMS has invited comments on whether requirements for the creation of a governing body as a mechanism for shared governance would create disincentives for the formation of ACOs and whether there is an alternative that could be used to achieve the aims of shared governance and decision making. It also seeks comments on the appropriateness of the 75 percent requirement for ACO provider representation and the requirement of inclusion of Medicare beneficiaries on the governing board.14

ACO Leadership
CMS has also proposed requirements for what it describes as Leadership and Management Structure. These requirements are intended to foster goals such as integration of clinical and financial management, with due regard to antitrust considerations implicated by joint and coordinated provider behavior. The proposed standards are the following:

  • The ACO's operations would be managed by an executive, officer, manager, or general partner, whose appointment and removal are under control of the organization's governing body and whose leadership team has demonstrated the ability to influence or direct clinical practice to improve efficiency processes and outcomes.
  • Clinical management and oversight would be managed by a senior-level medical director who is a board-certified physician, licensed in the State in which the ACO operates, and is physically present in that State.
  • ACO participants and ACO providers/suppliers would have a meaningful commitment to the ACO's clinical integration program to ensure its likely success. This may include, for example, a meaningful financial investment in the ACO, or a meaningful human investment (for example, time and effort) in the ongoing operations of the ACO such that the potential loss or recoupment of the investment is likely to motivate the participant to make the clinical integration program succeed.
  • The ACO would have a physician-directed quality assurance and process improvement committee to oversee an ongoing quality assurance and improvement program, with internal performance standards for quality of care and services, cost effectiveness, and process and outcome improvements. It must hold ACO providers/suppliers accountable for meeting the performance standards. The program would also have processes and procedures in place to identify and correct poor compliance with such standards and to promote continuous quality improvement.
  • The ACO would develop and implement evidence-based medical practice or clinical guidelines and processes for delivering care consistent with the goals of better care for individuals, better health for populations, and lower growth in expenditures. The guidelines and care delivery processes would cover diagnoses with significant potential for the ACO to achieve quality and cost improvements, taking into account the circumstances of the individual beneficiary, and could be accomplished, for example, through an integrated electronic health record with clinical decision support. ACO participants and ACO providers/suppliers would have to agree to comply with these guidelines and processes and to be subject to performance evaluations and potential remedial actions.
  • The ACO would have an infrastructure, such as information technology, that enables the ACO to collect and evaluate data and provide feedback to the ACO providers/suppliers across the entire organization, including providing information to influence care at the point of care via, for example, shared clinical decision support, feedback from patient experience of care surveys or other internal or external quality and utilization assessments. 15

CMS believes that adherence to these requirements will promote efficiency in the delivery of care to Medicare beneficiaries but will also have spillover effects on care provided to non-Medicare patients through the ACO. In addition, CMS has shown a willingness to consider and adopt alternative management strategies to complement and advance the objectives of the MSSP.16

The concepts included in the Proposed Rule and the accompanying commentary suggest that CMS is open to considerable flexibility in the types of organizations that may qualify as ACOs and the manner in which they are governed. Prospective ACOs must carefully consider the very real limitations on governing board representation and infrastructure requirements, which reflect CMS policy judgments, and may prove challenging in practice.

1 P.L. 111-148 (March 23, 2010), as amended by the Health Care Education and Reconciliation Act of 2010, P.L. 111-152 (March 30, 2010). Section 3022 of PPACA added § 1899 to the Social Security Act.
2 CMS Release 1345-P, 76 Fed. Reg. 19528 (April 7, 2011).
3 Social Security Act § 1899(b)(1).
4 76 Fed. Reg. 19540.
5 Id., 42 CFR § 425.5(d)(7)(ii).
6 76 Fed. Reg. 19540.
7 Id.
8 76 Fed. Reg. 19541.
9 Id.; 42 CFR § 425.5(d)(8)(iv).
10 76 Fed. Reg. 19549; 42 CFR § 425.5(d)(8)(ii)(B).
11 76 Fed. Reg. 19541.
12 76 Fed. Reg. 19550.
13 76 Fed. Reg. 19541.
14 76 Fed. Reg. 19541, 19550.
15 76 Fed. Reg. 19543; 42 CFR § 425.5(d)(9).
16 76 Fed. Reg. 19543.

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