June 2011 ACO Special Edition

A Historical Framework for Accountable Care Organizations:
Will CMS Meet Its Long-Term Goals with this Initiative?

By Jeffrey D. Zigler*, Director, Global Health Economics, Reimbursement & Public Policy, Musculoskeletal Clinical Regulatory Advisers, LLC (MCRA)

AuthorOn March 31, the Centers for Medicare & Medicaid Services (CMS) announced proposed rules1 which would establish and govern Accountable Care Organizations (ACOs) to “ improve coordination and communication among doctors and hospitals, improve the quality of the care their patients receive, and help lower costs” by incentivizing providers through a cost-sharing program with CMS, according to Kathleen Sebelius, Secretary of Health and Human Services (HHS).2 The three-part aim of ACOs is to provide 1) better care for individuals, 2) better health for patients, and 3) lower growth in expenditures. The ACO program will ideally achieve cost reduction for the Medicare Program, as well as establish quality metrics for enhanced clinical care, as part of CMS’ value based purchasing initiatives. Two key aspects of CMS’ well publicized “roadmap” for implementing value driven healthcare involve identification and promotion of quality measures through pay-for-reporting and pay-for-performance, both of which are underpinnings of the ACO program.3

The economic responsibility encouraged by the ACO program is certainly worthy of praise – but will the intended cost savings to the Medicare Program actually be realized over the long-term? Or will further strain be placed on the nation’s healthcare system five, eight or ten years following inception of ACOs under the rule? This article will summarize key elements of the proposed rule including the structure of ACOs; consider the need for such a program in light of value based purchasing initiatives currently underway; and discuss a historical framework by offering examples of the impact that establishing such a cost-sharing program has had on another healthcare system in the recent past.

Rationale for and Structure of ACOs, Generally
Under the proposed Medicare Shared Savings Program (MSSP) regulations4 , which follow from Section 3022 of the Patient Protection and Affordable Care Act (PPACA)5 , ACOs would enter into cost- (read: potential profit-) sharing programs with doctors and facilities which provide medical services to Medicare beneficiaries.6 The premise of these cost-sharing programs is that the incentivized coordination of care and enhancement of communication would lead to a reduction of redundancies and inefficiencies, resulting in an overall cost savings to the Medicare Program.7 ,8 CMS allows for ACOs to be developed under two types of tracks: those participating in the two-sided risk model where ACOs share not only in the savings but also in the losses, thereby potentially receiving greater reward under the program because of the increased risks; and those participating in the one-sided model, which are not willing to accept downside risk of shared losses, but which may share in a lower amount of cost savings, if savings are realized.

Pursuant to the proposed MSSP regulations, ACOs are structured as legally recognized entities (e.g., LLCs, PCs) under three-year-term agreements, receiving and distributing payments for shared savings to participating providers, which may be summarized under four major requirements:

  • The ACO must include an adequate number of primary care professionals (i.e., medical doctors or osteopaths), proportionate to the number of Medicare fee-for-service beneficiaries assigned to the ACO (minimum required number of beneficiaries to an ACO: 5,000 participants). Beneficiaries may opt-out;
  • The ACO must define processes and metrics which promote, and report on the following to the Secretary: a) the professionals participating in the ACO, b) the implementation of quality and other reporting requirements, and c) the determination of payments for shared savings;
  • The ACO must have in place a leadership and management structure that includes clinical and administrative systems, and which are in accordance with compliance with applicable laws under the proposed rule (to be reviewed jointly by the Federal Trade Commission and the Department of Justice); and
  • The ACO must demonstrate to the Secretary that it meets patient-centeredness criteria specified by the Secretary, such as the use of patient and caregiver assessments or the use of individualized care plans.

With an estimated 75-150 ACOs expected to start-up in 2011 and 2012, a potential of $500 million or more in savings may be realized over the first three years under this program.9 The savings realized from the MSSP would be shared among the participating providers based on the track the ACO participated in: one- or two-sided risk model. As with any risk-sharing arrangement, there is a possibility that ACOs will incur losses in either model. But even if ACOs show savings in the short-term, what assurances are there that goals of longer-term savings to the Medicare Program will be realized?

The Case Study for Pay-For-Performance Healthcare: A Double-Edged Sword

The impetus behind CMS’ development of the ACO program is noble, but it is not a novel idea. CMS has already implemented other value-based purchasing (VBP) arrangements that link provider reimbursements to quality metrics including a “pay-for-performance” or “P4P” model in addition to the current fee-for-service model. However, if long-term savings are sought by CMS as a response to rising healthcare costs, the ability of such a P4P program to meet the goal of sustainable, long-term savings for the Medicare Program should be considered in a historical context.

The United Kingdom’s (U.K.’s) National Health Service recently reported its findings on a P4P program of its own, the Quality and Outcomes Framework (QOF). Introduced in 2004, QOF is a voluntary incentive scheme for general practitioners in the U.K. Working in conjunction with the National Institute for Health and Clinical Excellence (NICE)10 , physician practices were rewarded under the P4P program according to their performance based on discrete measures, including the quality of clinical care, patient experience, and other pre-defined scoring metrics.

A review of the QOF program after three years of data collection revealed gradual improvement in the achievement of “clinical targets” based on pre-defined scoring.11 One such clinical target was the improvement and impact on diagnosis and treatment of diabetes, relating to cognizable health gains for patients. The data reviewed covered over 17,000 patients admitted to facilities within one county. The data showed that improvements in the quality of diabetes care increased nearly 20 percent after three years under the QOF program.11

However, despite the improvements realized in the quality of diabetes care, the QOF program also revealed evidence of a rapid increase in the number of diagnoses of diabetes. In fact, annual diabetes diagnoses actually doubled during the program, placing further strain on the U.K. healthcare system. Whereas other programs launched by HHS, like Partnership for Patients, which projects saving 1.6 million U.S. patients from lengthened inpatient hospital stays or unnecessary readmissions due to hospital-acquired conditions,12 ACOs may create an environment where new patients would actually be entering and utilizing the healthcare system at an increased rate, thanks to the efficiencies developed by participating providers. The double-edged sword of providing increased quality of care in a single-payor system reveals itself: improving the quality of care for patients is a good and noble thing, but it has the potential for placing increased utilization and strain on the system in unforeseeable ways.

As history has shown, unforeseeable challenges may arise over time with P4P programs like the MSSP initiative. So even if all ACOs are accountable for their care, positively impacting the system in the short-term by lowering costs and improving quality of care based on Secretary Sebelius’ metrics, the ACO program may not result in longer-term savings to the system. History warns that P4P programs, like the QOF initiative, may result in added financial burden on a healthcare system via potential overutilization of services, which may only first occur after passage of the initial, “honeymoon” period following their inception.

CMS May Not Need ACOs to Accomplish Specific VBP Goals

One major benefit to CMS of the MSSP is data collection. Under the proposed rule, ACOs would maintain infrastructure for the reporting of quality, utilization, and cost data which would further CMS’ VBP initiatives.13 ,14 Such data may provide CMS with additional information to follow-up on hospital-acquired conditions, among other measures, to reduce healthcare expenditures.

VBP initiatives put forth by CMS have involved the implementation of a multitude of programs, many of which are well underway at this time. Despite the recent momentum of the MSSP, there are already a number of programs available to meet CMS’ VBP goals. Independent analysis shows that the 65 quality measures accounted for in the ACO program already overlap with 58 quality measures in one or more other quality reporting programs currently underway by CMS.15 Along with concurrent studies conducted by the Agency for Healthcare Research and Quality (AHRQ)16 , CMS has a more modest, domestic program for informing consumers (and Medicare’s funding habits) within its Hospital Compare program, implemented by HHS in 2002. Although consumer-oriented, this program compiles important data on patient satisfaction and outcomes-related statistics reported by participating Medicare provider facilities across the nation.17

A tool such as Hospital Compare, by which consumers (and Agency decision makers) may compare hospital choices, would help inform healthcare decisions in a similar manner as contemplated under the ACO program. And since the Hospital Compare program’s infrastructure is already well in place, having been created through joint effort of CMS, HHS, and members of the   Hospital Quality Alliance (HQA)18 , CMS would perhaps be better advised to further expand on and develop these databases to include other providers of care, garnering additional support for providers’ use of this infrastructure to collect valuable data on hospital and physician providers, better informing the Agency’s VBP.

The three-pronged goals CMS has for the proposed ACO program overlap with numerous other VBP initiatives currently underway by HHS. Aside from quality measures and reporting to be provided by this program’s structure, the added promise of cost savings to Medicare may never result in long-term sustainability anticipated by the ACO program, based on its comparisons to other P4P programs recently implemented in other jurisdictions, as well as the program’s redundancy to other of CMS’ VBP initiatives already underway.

With so much long-term uncertainty surrounding the MSSP initiative proposed by CMS, it is important for all stakeholders to provide comment on these proposed rules. Comments on the proposed ACO rules will be accepted until June 6. CMS will respond to all comments in a final rule to be issued later this year.

*Mr. Zigler is a non-practicing attorney with MCRA, consulting to the medical technology industry. He advises clients on medical technology reimbursement and regulatory matters. He may be reached at jzigler@mcra.com or (202) 552-5800.


The Federal Register announced the proposed legislation on ACOs April 7, 2011 after having placed it on public display March 31, 2011.


HHS News Release: Affordable Care Act to improve quality of care for people with Medicare, available at: http://www.hhs.gov/news/press/2011pres/03/20110331a.html


General CMS Roadmap Overview, available at: https://www.cms.gov/QualityInitiativesGenInfo/downloads/RoadmapOverview_OEA_1-16.pdf

CMS’ Value Based Purchasing Roadmap, available at: https://www.cms.gov/QualityInitiativesGenInfo/downloads/VBPRoadmap_OEA_1-16_508.pdf


42 CFR Part 425; CMS-1345-P, available at http://www.federalregister.gov/regulations/0938-AQ22/medicare-shared-savings-program-accountable-care-organizations-cms-1345-p-


P.L. 111-148, March 23, 2010



42 CFR Part 425 ( CMS-1345-P), available at: http://edocket.access.gpo.gov/2011/pdf/2011-7880.pdf

7 CIGNA News Release, September 7, 2010. CIGNA and Piedmont Physicians Group Launch Accountable Care Organization Pilot Program in Atlanta for Better Care Coordination, available at: http://newsroom.cigna.com/article_display.cfm?article_id=1242

Fierce Health Payer, April 1, 2011. Cigna ACO pilots are improving quality, cutting costs. Available at: http://www.fiercehealthpayer.com/story/cigna-aco-pilots-are-improving-quality-cutting-costs/2011-04-01


McCarthy M. New Health Rules Can Save $960 Million, HHS Says. National Journal, March 31, 2011. Available at: http://www.nationaljournal.com/healthcare/new-health-rules-can-save-960-million-hhs-says-20110331?print=true


The National Institute for Health and Clinical Excellence (NICE) provides guidance to the U.K.’s National Health Service, setting quality standards and managing a national database to improve people's health and prevent and treat ill health. Available at: http://www.nice.org.uk/aboutnice/


Bland D. The New General Practitioners (GP) contract: improving the way healthcare is delivered in the UK. Available at: http://www.bma.org.uk/images/QOFbrief0908_tcm41-178056.pdf


HealthCare.gov Implementation Center: Partnership for Patients: Better Care, Lower Costs. Available at: http://www.healthcare.gov/center/programs/partnership


CMS, VBP Roadmap, available at: https://www.cms.gov/QualityInitiativesGenInfo/downloads/VBPRoadmap_OEA_1-16_508.pdf


McDermott Will & Emery, CMS Releases Proposed Regulations Regarding Formation of Accountable Care Organizations, available at: http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/3bf8ec04-7a4d-4a4e-8ffe-b4281889b282.cfm


Medeanalytics, ACO Proposed Rule: Nine out of Ten Quality Measures Mirror Other Quality Reporting Programs, available at: http://www.medeanalytics.com/healthcare-news-events/pr-2011-04-ACO-Proposed-Rule-Nine-out-of-Ten-Quality-Measures-Mirror-Other-Quality-Reporting-Programs.html


AHRQ is the Agency for Healthcare Research and Quality—the Nation's lead federal agency for research on healthcare quality, costs, outcomes, and patient safety. It is the health services research arm of HHS, focused on:

  • Quality improvement and patient safety.
  • Outcomes and effectiveness of care.
  • Clinical practice and technology assessment.
  • Health care organization and delivery systems.
  • Primary care (including preventive services).
  • Healthcare costs and sources of payment.



HHS Hospital Compare program, available at: http://www.hospitalcompare.hhs.gov/


In December 2002, the organizations representing America's hospitals joined with consumer representatives, physician and nursing organizations, employers and payers, oversight organizations and government agencies to launch the Hospital Quality Alliance (HQA). The HQA is a national public-private collaboration that is committed to making meaningful, relevant, and easily understood information about hospital performance accessible to the public and to informing and encouraging efforts to improve quality. Available at: http://www.hospitalqualityalliance.org/

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