December 2011 ACO Special Edition

Hospital Participation In ACOs and the Impact on Employed Physican Agreements

By Amy K. Fehn, Wachler & Associates, P.C., Royal Oak, MI
and Michael J. Watson, Brown & Connery, LLP, Westmont, NJ

AuthorAuthorOn October 20, 2011 the Centers for Medicare & Medicaid Services (“CMS”) issued the Final Rule for the formation and operation of Accountable Care Organizations (“ACOs”) participating in the Medicare Shared Savings Program (“MSSP”). Under the Final Rule, eligible ACOs could begin participating as early as April 1, 2012. Prior to that date, physicians and hospitals alike should review their existing physician-hospital employment agreements and determine whether the hospital’s participation in an ACO will require amendments to the agreement to reflect changes in the physician’s duties, or whether ACO-related obligations and compensation should be contained in a separate agreement. Some provisions that should be examined include: (a) the term of the agreement; (b) the agreement’s job responsibilities; (c) distribution of shared savings received by the hospital; (d) physician compensation for ACO-related leadership and management responsibilities; and (e) addition of language reflecting the federal Anti-Kickback statute and Stark law waivers.

Amendments to Term

As part of the MSSP application process, ACOs must submit documents, such as participation agreements or employment agreements that demonstrate providers’ obligations in and representation in the ACO. ACOs that rely heavily on beneficiary assignment attributed to hospital employed physicians will want to demonstrate that the physician commitment will last for the full term of the ACO participation agreement. However, it is unlikely that existing employment agreements will align with the ACO’s participation term. Thus, hospitals and physicians will likely need to amend the employment agreement to revise the term or request that physicians sign a separate participation agreement for purposes of demonstrating a commitment to participate in the ACO. Either of these requests by the hospital will open the door for physicians to negotiate the terms of their existing employment agreements and will also allow hospitals to align compensation and responsibilities in a manner that will more likely result in successful participation in the MSSP.

Modification of Job Responsibilities and Related Compensation

When hospitals choose to participate in an ACO, the hospital’s employed physicians will likely be asked to take on additional responsibilities and focus on aspects of care that may not be reflected or rewarded in the physicians’ existing employment agreements. For instance, a hospital participating in an ACO will want the physician’s job responsibilities and associated compensation to emphasize and reward cost control, care coordination, and the meeting and reporting of quality measures. Because many physicians are currently compensated on a productivity-related basis, such as through the use of work RVUs, hospitals may want to revise job responsibilities and compensation in a manner that focuses more on rewarding cost containment and quality rather than productivity and revenue generation.

Physicians employed by a hospital that is an ACO participant will likely be required to demonstrate meaningful use of electronic health records,1 as well as report quality assurance measures. These quality assurance measures relate to the following domains: (a) patient experience; (b) care coordination; (c) preventative health practices; and (d) at-risk population. These four domains will each be weighted at 25 percent, so no domain is more important than another in determining whether the ACO achieves its cost savings benchmark. Although the final rule has reduced the number of quality assurance measures from 65 to 33,2 compliance with those standards will still impose many new administrative responsibilities upon physicians for which physicians may expect additional compensation.

Also, since ACOs will encourage adherence to evidence-based treatment plans and clinical guidelines, the hospital and physicians may wish to define the physician’s role in establishing such treatment plans, as well as any incentives or disincentives for diverging from or modifying the treatment plan.

Sharing in the ACO’s Cost Savings and Losses

Under the final rule, ACOs will receive payment through the traditional fee-for-service method and will also be eligible to share in Medicare cost savings at a maximum rate of 50 or 60 percent.3 CMS has left the manner of distributing shared savings to be “negotiated and determined” by the ACO’s participants.4 Comments to the proposed rule raised concerns that physicians, particularly primary care physicians, “will not be rewarded for the significantly increased work that will be required on their part in order for an ACO to be successful.”5 CMS responded to these concerns by pointing out that ACOs, as part of the application process, will be required to demonstrate how any shared savings will be used to further the goals of the MSSP. ACOs that rely significantly on hospital-employed physicians for beneficiary assignment and care coordination should consider the extent to which the hospital participant’s shared savings are distributed to individual employed physicians. The failure to include physicians in the distribution could be viewed negatively by CMS in the ACO application process.

ACOs participating in a two-sided model will also be required to share risk of loss for CMS.6 The impact on physician compensation, if any, in the event of an ACO’s need to compensate CMS for shared losses should be addressed.

Compensation for ACO-related Leadership and Management Positions

The Final Rule also contemplates that certain physicians will fill many roles within the ACO’s management and governance, participation on committees such as quality assurance and process improvement committees and committees formed to establish and evaluate clinical processes. In exchange for these responsibilities, physicians who agree to serve in these roles will likely expect additional compensation. Compensation, however, should only be given after the physician has demonstrated to the hospital that he or she can effectively serve in these new capacities, in a manner that advances the ACO’s cost savings goals. Physicians may also seek additional compensation if they are asked to fill board of director spots representing the hospital as a participant. 7

Anti-Kickback and Stark Waivers

Payments to referral sources as compensation for ACO participation or distribution of the shared savings achieved can potentially subject ACOs and their participants to federal Anti-kickback8 or Stark law9 scrutiny. For this reason, CMS and the Department of Health and Human Services’ Office of the Inspector General (“OIG”) have issued an interim final rule establishing waivers of the federal Anti-Kickback statute and Stark law.10 These waivers protect downstream payments and distributions, such as those made from a hospital to its employed physicians, to the extent that they are reasonably related to the purposes of the MSSP. To the extent that the payments do not meet an existing Anti-kickback safe harbor or Stark exception, the relevant waiver authority should be set forth in the employment agreement for the protection of both parties.


An ACO’s emphasis upon cost savings and integrated care will change the way a hospital and its employed physicians conduct business and practice medicine. In order to effectuate these changes, physicians must be appropriately incented and compensated for different behavior and employed physician agreements should be reviewed accordingly.


Although the Final Rule has eased the requirement of using electronic health records, such use is nevertheless a heavily weighted quality assurance measurement. See Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg. 67802, 67985 (November 2, 2011) (to be codified at 42 C.F.R. § 425).


Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg. at 67891.


Id. at 67930.


Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg. at 67816.




Under the “two-sided model,” an ACO can share in 60 percent of cost savings, but can also be obligated to reimburse up to 60 percent of costs that exceed the CMS benchmark. Id. at 67937.

7 Subject to a few exceptions, the Final Rule requires an ACO to have a governing body that is controlled by at least 75 percent of ACO participants. See Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg. at 67816-19.

42 U.S.C. § 1320a-7b(b).


Often referred to as the “Stark Law,” the federal physician self-referral statute is available at 42 U.S.C. § 1395nn.


The interim final rule is available at: (last checked November 6, 2011). The comment period for the interim final rule will remain open until January 3, 2012.

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