It’s all in the Math: Financial Mechanisms, Structures and Questions Under the Accountable Care Organization Proposed Regulations
By Alan S. Gassman1, Gassman, Bates & Associates, P.A., Clearwater, FL;
Mike Segal2, Broad and Cassel, Miami, FL;
Martha Sosa3, Gassman, Bates & Associates, P.A., Clearwater, FL
and Dr. Pariksith Singh4 , CEO of Access Health Care, LLC, Spring Hill, FL
This article discusses one of the most important aspects of Accountable Care Organizations (“ACOs”) – the potential financial rewards and risks under the Medicare Shared Savings Program (“MSSP”) pursuant to the proposed ACO regulations (the “Proposed ACO Regs”).5
The Preamble to the Proposed ACO Regs (the “Preamble”) predicts that the MSSP could result in a net savings to the Centers for Medicare & Medicaid Services (“CMS”) of $510 million during the three year period from 2012 through 2014.6 HHS officials have estimated that the net savings over the first three years could be as high as $960 million.7 The Preamble also estimates that bonuses paid to ACOs could be anywhere from $560 million to $1.13 billion over three years.8
However, some commentators are concerned that these projected profits may be erroneous and inflated, and that many ACOs will be unsuccessful.9 Taxpayers will not want the government to “bail out” ACOs that are failing, but it may be pressured from irate patients, physicians, and investors to do so. Previously, during the practice management company boom years in the 1990s, millions of dollars were lost when most of those companies failed.
The overall concept for the MSSP is that Medicare will calculate a “benchmark” based on how much it would normally cost to pay for Part A and Part B services for Medicare fee-for-service patients assigned to the ACO over the previous three years10, and if Medicare actually pays less overall for the patients assigned to the ACO during each agreement period, then the ACO will generally receive between 50 percent and 60 percent of the savings. If Medicare pays more than the benchmark for the patients assigned to the ACO, then the ACO may be responsible for a portion of the losses.
Each physician or other provider participating in an ACO (each a “Participant”) can continue to be paid directly by Medicare as in the past, but in addition may derive profits from the ACO if the ACO performs well. Savings achieved by an ACO under the MSSP will be paid to the ACO, and will then be distributed to Participants as the ACO’s governing documents provide.
Each ACO and its Participants will be required to enter into an MSSP Agreement with CMS, with a term of not less than three years. It is not clear whether Participants could become individually liable for ACO losses or obligations to CMS; the Proposed ACO Regs do not indicate that any entity other than the ACO will be responsible. Unless otherwise specified, the ACO’s annual performance period under an MSSP Agreement will be on a calendar year basis.11
1. The Minimum Savings Rate and 65 Quality Measures
Before being eligible to receive any bonus payments under the MSSP, an ACO must (1) achieve a minimum savings rate, and (2) meet a minimum standard with respect to 65 quality measures.
Table 1 at Section II.E.2.c. of the Preamble describes the 65 quality measures.12 The 65 quality measures are subdivided into five categories, (1) Patient/Care Giver Experience, (2) Care Coordination, (3) Patient Safety, (4) Preventative Health, and (5) At-Risk Population/Frail Elderly Health. 13 For the first year of the MSSP, CMS proposes that the required quality performance standard for ACOs be the complete and accurate reporting on all quality measures.14 For subsequent years, the quality performance standard for ACOs will be actual ACO performance against each quality measure.15 In those instances where an ACO fails to meet the minimum attainment level for one or more domains, CMS proposes to give the ACO a warning and to re-evaluate the following year. 16 If the ACO continues to underperform on the quality performance standards in the following year, the agreement may be terminated. 17
The minimum savings rate for a “Two-Sided Model” ACO, which is described below, is two percent.18 The minimum savings rate for a “One-Sided Model” ACO varies from two percent to 3.9 percent depending on the number of patients, as shown below.19 Although 5,000 patients is generally the minimum in order for an ACO to be eligible to participate in the MSSP, One-Sided Model ACOs will likely want to have more patients, because the minimum savings rate for a One-Sided Model ACO is reduced as the patient base increases. The following chart illustrates how the minimum savings rates for One-Sided Model ACOs will vary based on the number of patients20:
Number of Patients
Minimum Savings Rate
5,000 - 5,999
3.9 - 3.6 percent
6,000 - 6,999
3.6 - 3.4 percent
7,000 - 7,999
3.4 - 3.2 percent
8,000 - 8,999
3.2 - 3.1 percent
9,000 - 9,999
3.1 - 3.0 percent
10,000 - 14,999
3.0 - 2.7 percent
15,000 - 19,999
2.7 - 2.5 percent
20,000 - 49,999
2.5 - 2.2 percent
50,000 - 59,999
2.2 - 2.0 percent
For example, a One-Sided Model ACO with 9,000 patients will have a minimum savings rate of 3.1 percent, and a One-Sided Model ACO with 9,999 patients will have a minimum savings rate of 3.0 percent.
2. Track 1 and Track 2.
The Proposed ACO Regs establish two alternative programs into which an ACO may elect to participate, “Track 1” and “Track 2”.21 Each Track will be subject to the same measurement regarding whether the ACO has financially provided Medicare with an annual savings or loss by comparing the benchmark with the actual ACO costs. A Track 1 ACO will bear no risk and have only an upside for two years, but its profit potential will be less than a Track 2 ACO.
If for any year net Medicare savings exceed the minimum savings rate, a Track 1 ACO will generally receive 50 percent of the additional net Medicare cost savings in excess of such rate. The Track 1 ACO will operate under the “One-Sided Model” for the first two years, and therefore will not be liable for any losses that occur in the first two years of the MSSP Agreement. 22 For the third year, however, the ACO under Track 1 converts to the “Two-Sided Model” which is described below, and will be subject to the risk of loss. For an ACO in Track 1 that has entered its third year, the amount of shared losses for which the ACO would be liable is limited to five percent of the benchmark.23 The Proposed ACO Regs are not clear on whether the savings rate increases from 50 percent to 60 percent when a Track 1 ACO switches from the One-Sided Model to the Two-Sided Model in the third year. Hopefully HHS will confirm that the rate will increase to 60 percent, as this appears to be what was intended.
Under the One-Sided Model, the 50 percent shared savings rate may be increased based on the number of proactive patient visits to a Federally Qualified Health Center24 or Rural Health Center25. For example, if 25 percent of patients are seen three times a year on average by the primary care physician at a Federally Qualified Health Center or Rural Health Center, then the One-Sided Model ACO would receive 51.5 percent of the savings.
The following Chart shows how much the Share Savings Rate Percentage will increase for a One-Sided Model ACO based on how many patients are seen more than once per year at a Federally Qualified Health Center or Rural Health Center 26:
One-Sided Model ACO Chart
Percentage of ACO Patients With one or More Visits to a Federally Qualified Health Center or Rural Health Center During the Performance Year
Percentage Point Increase in Share Savings Rate for a One-Sided Model ACO
0.5 increase for a total of 50.5 percent
1 increase for a total of 51 percent
1.5 increase for a total of 51.5 percent
2 increase for a total of 52 percent
2.5 increase for a total of 52.5 percent
A Track 2 ACO operates under the “Two-Sided Model” for all three years of the MSSP Agreement. If for any year in which net Medicare savings exceed two percent, the Track 2 ACO will generally receive 60 percent of all the net Medicare cost savings, including the initial two percent savings. However, the Track 2 ACO would also be responsible for the same 60 percent plus (as modified in the “Two-Sided Model ACO Chart” pictured below) of any loss incurred for any of such three years.27 The amount of shared losses for which the ACO would be liable is capped at five percent of the benchmark in the first year, 7.5 percent in the second year and 10 percent in the third year.28 The Proposed ACO Regs are not clear on what happens to the cap if a Track 2 ACO signs on for another three year contract. Does the cap reset to five percent? Does the cap stay at 10 percent and never increase? Does the cap start at 10 percent for the fourth year and keep increasing? Hopefully this will be answered by HHS in the near future.
Under the Two-Sided Model, the 60 percent shared savings rate is to be increased based on the number of proactive patient visits to a Federally Qualified Health Center or Rural Health Center. For example, if 25 percent of patients are seen three times a year on average by the primary care physician at a Federally Qualified Health Center or Rural Health Center, then the Two-Sided Model ACO would receive 63 percent of the savings.
The following Chart shows how much the Share Savings Rate Percentage for a Two-Sided Model ACO will increase based on how many patients are seen more than once per year at a Federally Qualified Health Center or Rural Health Center 29:
Two-Sided Model ACO Chart
Percentage of ACO Patients With one or More Visits to a Federally Qualified Health Center or Rural Health Center During the Performance Year
Percentage Point Increase in Share Savings Rate for a Two-Sided Model ACO
1.0 increase for a total of 61 percent
2.0 increase for a total of 62 percent
3.0 increase for a total of 63 percent
4.0 increase for a total of 64 percent
5.0 increase for a total of 65 percent
After the initial three year agreement, an ACO may only operate under the Two-Sided Model sharing in savings or losses with the Medicare program.30
3. Adjustments for the One percent Most Expensive Patients.
ACOs may not avoid at-risk beneficiaries in order to keep their costs down. An “at-risk beneficiary” is defined as a patient who “(1) Has a high risk score on the CMS-HCC risk adjustment model; (2) Is considered high cost due to having two or more hospitalizations each year; (3) Is dually eligible for Medicare and Medicaid; (4) Has a high utilization pattern; or (5) Has had a recent diagnosis that is expected to result in increased cost.”31 However, the highest cost one percent of patients will be considered to have a cost equal to the cost of providing Part A and Part B Medicare services to the patient who is the very highest cost in the 99th percentile of patients.32 For example, as the authors read the regulations, it appears that in a population of 10,000 patients the most expensive 100 patients will be considered to have costs equal to the 101st most expensive patient.
4. Mandatory 25 Percent Withholding.
Under both a One-Sided Model and a Two-Sided Model, 25 percent of the ACOs share of the savings for each year must be withheld and placed in escrow to cover future losses.33 At the end of each three year agreement period, if the ACO has a positive balance, the escrowed monies will be returned to the ACO.34
The authors are concerned that the escrow of 25 percent for future losses may not always be sufficient to absorb future losses, and that the government needs to create a better mechanism of risk structure to ensure success of ACOs.35
HHS has done an excellent job of putting together a financial system to provide significant impetus for economically controlling a primary care managed patient population. The system proposed is no more complex then the factual circumstances that will be faced by each ACO. The ability to concentrate on the primary care patients, and to include or exclude any specialty, facility, or supplier category from financial and management participation in the ACO gives well managed primary care oriented Participants an opportunity to continue to provide excellent services for patients while deriving additional profits from appropriate care management.
The questions that remain as to the exact financial parameters will hopefully be addressed by HHS in the near future. In addition, state laws regarding risk-bearing entities should also be addressed.
CMS is clear that not all ACO applications will be accepted. Careful evaluation of proposed ACO structures will hopefully increase the chances of success, if CMS can develop practical objectives. However, it is still likely that not all ACOs will succeed, and that the ultimate success of ACOs will be possible only with proper data management and assignment, and coordination of patients and physicians. Without proper systems ACOs may not succeed and, unfortunately, the government does not currently have systems in place to evaluate, study or assist in this process.
Practicing good medicine is said to be goal-based, patient-centered, and grounded in objective indicators that create quality, but not necessarily profit. The question as to whether the ACO savings feature will make it worthwhile to endure the complexities and bureaucracy caused by having to satisfy the 65 quality measures and other rules and regulations will only be answered billions of dollars and many years from today.
Allowing physicians to be responsible for patient management and making them a ccountable is an excellent concept, but if the structural requirements, licensing methods and government oversight is not proper, the financial roadmap to savings may not be realized. The country that put men on the moon and iPads in the hands of millions can succeed in having a successful and economic medical system, but only with proper design, management, integrity and resources. Business leaders can make ACOs successful under the general financial model if the costs of formation, compliance and complexity can be properly designed and implemented.
|1 ||Alan S. Gassman is the senior partner at Gassman, Bates & Associates, P.A. in Clearwater, Florida. He received his J.D. and his LL.M. in taxation from the University of Florida. He can be reached at Alan@gassmanpa.com. He would like to thank Lester J. Perling of Broad and Cassel for his assistance with this article.|
|2 ||Mike Segal is a partner in the Miami office of Broad and Cassel. He can be reached at firstname.lastname@example.org.|
|3 ||Martha Sosa is an associate at Gassman, Bates & Associates, P.A. She received her J.D. from Stetson University College of Law. She can be reached at Martha@gassmanpa.com.|
|5 ||The Proposed ACO Regs were released by the Department of Health and Human Services (“HHS”) on Thursday, March 31, 2011.|
|6 ||Section III.F. of the Preamble. Federal Register Vol. 76, No. 67, page 19640.|
|7 ||10 Key Points in Newly Released Proposed Rules on ACOs by Leigh Page, published in Becker’s ASC Review March 31, 2011.|
|8 ||Section III.C.3. of the Preamble. Federal Register Vol. 76, No. 67, page 19639.|
|9 ||The ACO Model — A Three-Year Financial Loss? by Trent T. Haywood, M.D., J.D., and Keith C. Kosel, Ph.D., M.B.A., M.H.S.A., published in the New England Journal of Medicine March 23, 2011, available at http://healthpolicyandreform.nejm.org/?p=13937&query=home|
|11 ||Section 425.18(c).|
|12 ||Federal Register Vol. 76, No. 67, pages 19571 - 19591.|
|13 ||Section II.E.6.b.(1) of the Preamble. Federal Register Vol. 76, No. 67, page 19594.|
Section II.E.2.c. of the Preamble. Federal Register Vol. 76, No. 67, page 19570.
|15 ||Section II.E.2.c. of the Preamble. Federal Register Vol. 76, No. 67, page 19570.|
|16 ||Section II.E.2.c. of the Preamble. Federal Register Vol. 76, No. 67, page 19570.|
Section II.E.2.c. of the Preamble. Federal Register Vol. 76, No. 67, page 19570.
|18 ||Section 425.7(d)(2).|
|19 ||Section 425.7(c)(2).|
|20 ||Section 425.7(c)(2).|
|21 ||Section 425.5(d)(6)(i).|
|22 ||Section 425.7(c) describes the One-Sided Model. [NOTE TO EDITORS: the hyphen is used in the regulations] “(1) Savings determination. For each performance year, CMS determines whether the estimated average per capita Medicare expenditures under the ACO for Medicare fee-for-service beneficiaries for Parts A and B services, adjusted for beneficiary characteristics, is below the applicable benchmark determined under paragraph (b) of this section. To minimize variation from catastrophically large claims, CMS truncates that assigned beneficiary's total annual Parts A and B fee-for-service per capita expenditures at the 99th percentile as determined for each performance year. In order to qualify for a shared savings payment, the ACO's average per capita Medicare expenditures for the performance year must be below the applicable benchmark by more than a minimum savings rate established for the ACO under paragraph (c)(2) of this section.”|
|23 ||Section 425.7(d)(9).|
42 C.F.R. 405.2401(b) defines a Federally qualified health center as “an entity that has entered into an agreement with CMS to meet Medicare program requirements under §§405.2434 and (1) Is receiving a grant under section 329, 330, or 340 of the Public Health Service Act, or is receiving funding from such a grant under a contract with the recipient of such a grant and meets the requirements to receive a grant under section 329, 330 or 340 of the Public Health Service Act; (2) Based on the recommendation of the PHS, is determined by CMS to meet the requirements for receiving such a grant; (3) Was treated by CMS, for purposes of part B, as a comprehensive federally funded health center (FFHC) as of January 1, 1990; or (4) Is an outpatient health program or facility operated by a tribe or tribal organizations under the Indian Self-Determination Act or by an Urban Indian organization receiving funds under title V of the Indian Health Care Improvement Act.”
42 C.F.R. 405.2401(b) defines a Rural health clinic (“RHC”) as “an entity that: (1) Meets the requirements of section 1861(aa)(2) of the Act and part 491 of this chapter concerning RHC services and conditions for approval. (2) Has filed an agreement with CMS that meets the basic requirements described in §405.2402 to provide RHC services under Medicare. (3) Does not share space, staff, supplies, records, and other resources during RHC hours of operation with a private Medicare or Medicaid practice operated by the same physicians and nonphysician practitioners working for the RHC. Operation of a multipurpose clinic with other types of health providers or suppliers is permissible subject to the provisions in paragraph (4) of this definition. (4) Appropriately allocates and excludes from the RHC cost report the net non-RHC costs if it operates at a multipurpose location that involves the sharing of common space, medical support staff, or other physical resources with other health care providers or suppliers.”
|26 ||Section 425.7(c)(7).|
|27 ||Section 425.7(d) describes the Two-Sided Model. “(1) For each performance year, CMS determines whether the estimated average per capita Medicare expenditures under the ACO for Medicare fee-for-service beneficiaries for parts A and B services, adjusted for beneficiary characteristics, is above or below the benchmark determined under paragraph (b) of this section. In order to qualify for a shared savings payment under the two-sided model, or to be responsible for sharing losses with CMS, an ACO's average per capita Medicare expenditures for the performance year must be below or above the benchmark, respectively, by more than the minimum savings or loss rate under paragraph (d)(2) of this section.”|
|29 ||Section 425.7(d)(6).|
|30 ||Section 425.5(d)(6)(ii).|
|31 ||Section 425.4.|
|32 ||Section II.F.3.b. of the Preamble, Federal Register Vol. 76, No. 67, pages 19604 - 19605, states “To minimize variation from catastrophically large claims, we would truncate an assigned beneficiary's total annual Parts A and B FFS [fee for service] per capita expenditures at the 99th percentile as determined for each benchmark year. We would also truncate an assigned beneficiary's total annual Parts A and B FFS [fee for service] per capita expenditures at the 99th percentile as determined for each subsequent performance year.”|
|33 ||Section 425.5(d)(6)(iii). Section II.F.13. of the Preamble, Federal Register Vol. 76, No. 67, page 19615, states “Over the course of the program, an ACO may earn performance payments in some years and incur losses in other years. The issue is whether the full amount of shared savings payments should be paid in the year they are accrued, or whether some portion should be withheld to offset potential future losses. For example, under the PGP [Physician Group Practice] demonstration, a flat 25 percent withhold applied to annual earned performance payments to guard against losses in future years as well as to provide an incentive for PGPs to continue in the demonstration since the withhold was only released at the end of the demonstration period or when the PGPs were rebased. Under the two-sided model discussed in section II.G. of this proposed rule, we propose that an ACO may use a withhold of their earned shared savings payment as one option for demonstrating an adequate repayment mechanism in the event they incur shareable losses. As discussed in sections II.B. and II.I. of this proposed rule, we believe the requirement that ACOs be willing to commit to a 3-year agreement to participate in the Shared Savings Program is necessary to ensure that the program achieves its long-term goal of redesigning health care processes, and our proposal here furthers that intent. Since we want to encourage ACOs to participate for all 3 years of their agreements, protect the Medicare program against losses, and ensure ACOs have an adequate repayment mechanism in the event they incur losses under either the one-sided or two-sided model, we are proposing a flat 25 percent withholding rate will be applied annually to any earned performance payment. Under the two-sided model as discussed in Section II.G. of this proposed rule, we propose that an ACO may withhold an additional portion of its earned performance payment as a mechanism to demonstrate an adequate repayment mechanism in the event they incur shareable losses. Furthermore, we propose that at the end of each agreement period, positive balances will be returned to the ACO. However, if the ACO does not complete its 3-year agreement, the ACO would forfeit any savings withheld.”|
|34 ||Section II.F.13. of the Preamble, Federal Register Vol. 76, No. 67, page 19615.|
|35 ||In his many years of experience, Dr. Singh has seen that there are physicians who run an HMO medical loss ratio of more than 150%, which the 25% escrow will not be able to cover.|
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