December 2011 ACO Special Edition

Final ACO Rules Lower Thresholds and Refine Guidelines:
ACOs Are Really Going to Happen, but Will They Work?

By Alan S. Gassman, Gassman, Bates & Associates, P.A., Clearwater, FL;
Erica Pless, The Pless Law Firm, P.A., St. Petersburg, FL
and Dr. Pariksith Singh, CEO of Access Health Care, LLC, Spring Hill, FL


The new Final Accountable Care Organization (“ACO”) Regulations1 for the Medicare Shared Savings Program (“Final Regulations”) were released on October 20, 2011 and include many improvements over the Proposed Regulations2 that were released in March 2011. The Centers for Medicare & Medicaid Services (“CMS”) received over 1,300 comments on the Proposed Regulations from various groups and individuals, and has obviously worked hard to adjust its ACO model to enhance the chance that some ACOs will be viable.3

CMS’ several hundred page commentary to the Final Regulations is full of detailed explanations, and it will take weeks (if not months) to organize and fully understand the many pages of regulations that were issued. However, the following should be useful for those who are trying to determine the feasibility and/or impact of ACOs in each local market.

CMS estimates in the preamble to the Final Regulations may not be indicative of actual financial amounts but are of interest to many. When one takes the total amount that the preamble estimates will be spent by ACOs on formation and compliance, and divide it by the number of ACOs expected, one can conclude that each ACO will cost just under $600,000 in formation expenses, and $1.3 million a year in administrative and upkeep expenses.4

CMS also estimates in the preamble that the average ACO will recoup its expenses by a ratio of 2.9, meaning that if the ACO spends $3 million to become established and to be maintained then it should earn $5.7 million in profits (2.9 times $3 million is $8.7 million and $8.7 million minus $3 million is $5.7 million). This does not include profits that ACOs may derive from private insurance carrier incentive arrangements and HMO risk contracts that an ACO may service.

Readers should be aware that many experts believe that CMS’s estimates of costs are low, and that profits may not be as easy to attain as CMS predicts. Time will tell what the real numbers and experience will be.

It seems clear from the commentary in the preamble to the Final Regulations that the medical groups that were studied in the design process are very large, already systematized, and far more experienced at managing care in a large structure than any new start-up ACO organization that has never worked as a system will be.

The major changes and highlights under these Final Regulations and the preamble are discussed below.


The Final Regulations continue to provide that Medicare will pay normal fee-for-service amounts under the Medicare system for ACO Medicare patients, and will additionally pay bonus amounts to ACOs who successfully manage the Medicare expenses for the ACO patients. This payment by CMS only applies to regular Medicare enrolled patients who are "signed into" the ACO by way of their primary care doctor. Primary care doctors can include internists, geriatric physicians, family doctors and general practitioners. Nurse practitioners and physician assistants can also be included.

Of course, those non-primary care physicians and entities participating in the ACO should also derive benefits from patient volume at normal fee for service rates, and all ACO participants may be able to benefit from providing services and systems for Medicare HMO systems and non-Medicare insurance and other health system services. Providers will be permitted to participate in multiple ACOs, but providers who participate in certain other CMS projects will not be permitted to participate in ACOs.5


As with the Proposed Regulations, the Final Regulations allow an ACO to elect to operate under a "One-sided Model" or a “Two-sided Model.” Each ACO can select “Track 1” or “Track 2”, as described in the chart and text below.

ACOs that choose Track 2 will begin and stay on the Two-sided Model. A Track 1 ACO will not be responsible for any shared losses during the initial two year period. The first two years under the agreement period are structured using a "One-sided Model" but for the third year the ACO is automatically transitioned into a "Two-sided Model," as explained below. Under Track 2, the ACO operates under the "Two-sided Model," and shares both savings and losses.6 After the initial agreement period, the ACO can only operate under the Track 2, "Two-sided Model."7 ACOs electing Track 2 assume more risk but also have the opportunity to receive an increased share of savings.


Track 1

Track 2

Year 1

One-sided Model

Two-sided Model

Year 2

One-sided Model

Two-sided Model

Year 3

Two-sided Model

Two-sided Model

An ACO that elects to start with the "One-sided Model" can share up to 50 percent of what CMS saves on its fee for service and other direct costs for the ACO patients, and has no repayment exposure if its patients cost CMS more than the average.  The 50 percent reward percentage will be reduced if the 33 quality measurement criteria are not considered completely satisfactory based upon a factoring analysis that will doubtlessly be problematic to implement. Also, the reward amount earned cannot exceed ten percent of the established benchmark. The Proposed Regulations had provided for a 7.5 percent cap.

A "Two-sided Model" can earn up to 60 percent of what CMS saves, but can also be required to pay up to 60 percent of CMS' excess costs, if its patients cost CMS more than the average.  As with "One-sided Models," the 60 percent sharing percentage will be reduced for ACOs not meeting the still to be determined threshold of satisfactory performance on the 33 quality measurement criteria. The Final Regulations also increased the performance payment limit cap to 15 percent of the ACO's benchmark. The Proposed Regulations had provided for a 10 percent cap.

The Final Regulations adopt the proposed methodology for establishing an ACO's benchmark under both the One-sided and Two-sided Models.8 The utility of the benchmark methodology as an accurate indicator of quality performance will be interesting to see in application given the vagueness and subjectivity that will doubtlessly apply to criteria and evaluation.


ACOs will need to report on only 33 quality measures, rather than the initially proposed 65, but the number of quality measures and the implementation and monitoring associated therewith are still considerable. The quality measure indicators are generated from a combination of patient experience surveys, claims, Electronic Health Record (“”EHR") Incentive Program Reporting, and the Group Practice Reporting Option (“GPRO”) Web interface. The Final Regulations removed the hospital patient safety measures as a quality indicator. ACOs will be required to report on all 33 measures for all reporting periods in each performance year. Pay for performance initiatives will be phased in during the 2 nd and 3 rd performance years as shown in the table below.

ACO Agreement Period Pay for Performance Phase-In Summary  


Performance Year 1

Performance Year 2

Performance Year 3

Pay for Performance




Pay for Reporting








Electronic medical records (“EMRs”) will not be required under the Final Regulations, but the preamble to the Final Regulations notes that they can be an essential part of a well balanced system. It is difficult to contemplate how a well organized ACO satisfying the 33 measures will not have working EMRs.

ACOs must achieve the quality performance standard on at least 70 percent of the measures within each of the four categories noted in the Final Regulations: 1) patient/caregiver experience; 2) care coordination/patient safety; 3) preventative health; and 4) at-risk populations.9 This is a change from the Proposed Regulations, which required meeting a 100 percent performance standard in order to participate in the shared savings and included five categories.


An ACO will need at least 5,000 or more dedicated primary care patients to be in the Medicare Shared Savings Program (“MSSP”).10 For example, 10 primary care doctors having over 5,000 Medicare patients may form or join an ACO with a hospital and other specialists.  CMS will measure only the cost of the medical care of the enrolled primary care patients in determining any incentive payments. Patients will have complete choice of freedom with respect to whether to have their medical services provided by the ACO participants or outside the ACO, but will presumably be encouraged by their primary care doctors, protocols, and literature to stay within the ACO for most treatment.

While 5,000 patients is the minimum, CMS is expecting that most ACOs will be much larger. CMS' discussions in the preamble to the Final Regulations estimate that there will be between 1 million and 5 million Medicare patients enrolled in between 50 and 270 ACOs.11 That comes to 15,625 patients per ACO on average, which is approximately three times the minimum requirement. This suggests that the minimum threshold requirement will not be an issue for most ACOs.

It is beneficial for ACOs under the "One-sided Model" to increase the number of assigned patients because the Minimum Savings Rate ("MSR") decreases as the number of assigned patients increases. CMS uses the MSR and the quality standards as benchmarks for shared savings paid to the ACOs. The table below shows the MSRs that an ACO operating under the "One-sided Model" would need to meet before savings could be shared based on the number of assigned patients.


Number of Beneficiaries

MSR (low end of assigned beneficiaries)

MSR (high end of assigned beneficiaries)

5,000 – 5,999

3.9 percent

3.6 percent

6,000 – 6,999

3.6 percent

3.4 percent

7,000 – 7,999

3.4 percent

3.2 percent

8,000 – 8,999

3.2 percent

3.1 percent

9,000 – 9,999

3.1 percent

3.0 percent

10,000 – 14,999

3.0 percent

2.7 percent

15,000 – 19,999

2.7 percent

2.5 percent

20,000 – 49,999

2.5 percent

2.2 percent

50,000 – 59,999

2.2 percent

2.0 percent

60,000 +

2.0 percent

Whereas CMS uses a sliding scale for "One-sided Models," a flat two percent MSR applies to ACOs operating under the "Two-sided Model."

Additionally, the Final Regulations allow for sharing on first dollar savings for ACOs under both Models once savings meet the defined MSR. This is a change from the Proposed Regulations which required "One-sided Models" to produce savings in excess of two percent above the MSR before being able to participate in shared savings payments.12 The Final Regulations also removed the 25 percent withholding of shared savings that the Proposed Regulations included under both Models.13 These are additional examples of how the Final Regulations have increased the savings potential of ACOs.


Similar to the Proposed Regulations, the Final Regulations require that the ACOs, their participants, providers/suppliers and affiliated entities agree to be held accountable for the "quality, cost, and overall care" of the patients assigned to the ACO.14 An ACO executive must certify that all parties are willing to be held accountable.15 The duration of the agreement period will be at least three years.16

The ACO must disclose in the application any prior participation under the MSSP and, if it was previously terminated, the cause of the termination and whether it was voluntary or involuntary.17

Similar to the Proposed Regulations, the Final Regulations require the ACO to submit numerous documents with the application in order to establish its eligibility.18 The ACO must provide documentation regarding its management and organization structure as well as sufficient evidence that the ACO participants have at least 75 percent control of the ACO, and there must be at least one Medicare beneficiary who has no conflict of interest on the governing organization board as well.19 CMS received requests to modify the participants' control percentage and increase the Medicare representatives but CMS declined to do so. Additionally, CMS did not specify how the voting control should be apportioned among the ACO participants.

The Final Regulations confirm that the ACO must include in its application a list of all ACO participants, their Medicare-enrolled TINs and National Provider Identifiers (“NPI”s).20 The ACO must also disclose how it intends to utilize the savings under the MSSP, indicate its selection of Track 1 or Track 2 and provide assurance of its ability to repay any losses sustained under the program.21

Consistent with the Proposed Regulations, each ACO is also required to publicly disclose its identifying information including its participants, governing body members, committee members, and shared savings and losses.22


Organizations considering application for the ACO process should keep in mind that the Final Regulations contain significant detail on termination procedures. CMS means business! The Final Regulations confirm that there is no administrative or judicial review available for certain determinations made by CMS including the specification of quality and performance standards, the assessment of an ACO's quality of care, assignment of patients, determination of shared savings, and termination due to failure to satisfy the quality performance standards.23

The Final Regulations also provide for a Corrective Action Plan (“CAP”), as was contemplated in the Proposed Regulations.24 Under The Final Regulations, CMS may require ACOs to submit a CAP if CMS determines the ACO has committed minor violations. For example, if the ACO does not have required minimum number of patients assigned to it during an agreement period, the ACO will be issued a warning and placed on a CAP.25 The ACO must then submit a CAP detailing the corrective measures it will implement. If the required number of assigned patients is not met by the end of the next performance period, the ACO will be terminated.26 An ACO may also be terminated if it fails to submit a CAP or institute CAP policies.27 If an ACO is terminated during an agreement period, it will not be eligible to begin another agreement period until the original agreement period has lapsed.28 It is important to note that if an ACO is terminated more than halfway through an agreement period it will only eligible for reinstatement under the "Two-sided Model."29

Major violations are not processed under the relaxed CAP procedures. For example, an ACO may face automatic termination if CMS determines that the ACO or its participants are avoiding at-risk patients, i.e. high cost patients.30

A Reconsideration Review Process is implemented in the Final Regulations as initially proposed.31 An ACO will be permitted to request a review under the Reconsideration Review Process within 15 calendar days after receiving a notice of determination denying an application or terminating an existing agreement.32 The review will be conducted by an independent CMS official who did not participate in the initial determination. An "on-the-record review" may be requested by either CMS or the ACO if either disagrees with the CMS official.33 The "on-the-record review" is conducted by a different CMS official and constitutes the final agency determination.34


Due to concern over possible antitrust violations, the Proposed Regulations required certain ACOs to be subject to mandatory review by the Antitrust Agencies prior to acceptance into the MSSP. The F inal Regulations removed this requirement as CMS acknowledged there are enough safeguards in place to prevent collusion and promote a free market.35 The Federal Trade Commission and the Department of Justice issued the final version of their joint statement regarding antitrust enforcement of ACOs on October 20, 2011. The statement removes the mandatory antitrust review, replacing it with a voluntary review.36 According to the Agencies' joint statement, they will not investigate ACO's under the antitrust rules absent extraordinary circumstances if they qualify under a safe harbor test. ACO's with providers whose services do not account for more than 30 percent of services within their primary service area are considered to be in the safe harbor. ACO's that do not qualify for the safe harbor will be at a higher risk of investigation under the antitrust rules. ACO activities that involve non-Medicare fee for service patients will still be subject to antitrust and price fixing issues that should be carefully reviewed.

The Final Regulations also relaxed the compliance burden under the Physician Self-Referral and Anti-Kickback statutes.37 The Physician Self-Referral Law, technically named the Ethics in Patient Referrals Act and known as the Stark Law, prohibits physicians from making referrals for Medicare "designated health services" to entities which they have a financial stake in.38 The federal Anti-Kickback Statute (“AKS”) imposes criminal penalties for knowingly and willfully offering to pay, solicit, or receive remuneration to induce or reward the referral of business that is reimbursable under any federal health programs.39 CMS issued a final interim rule on November 2, 2011 with a sixty day comment period that established special waivers of the application of the Stark Law, the AKS and certain civil monetary penalties.40 CMS stated these waivers were necessary for the proper development of the ACOs but has structured these to ensure that the ACOs are not utilized for fraudulent purposes. There are five waivers in total: 1) Shared Savings distributions waiver; 2) Compliance with the Physician Self-Referral Law waiver; 3) Patient Incentive waiver; 4) ACO participation waiver; and 5) ACO pre-participation waiver. The waivers will apply uniformly to each ACO and ACO participants, providers, and suppliers. These waivers will reduce concerns about civil and criminal penalties in order to help encourage providers and facilities to participate in ACOs, but there is the potential that the waivers will be misused, so legal analysis and oversight will be essential.

The Medicare AKS and Stark Law waivers allow the ACO to pay surplus moneys to physicians and other entities who refer to the ACO and its members based upon acceptable
ACO financial agreements, but do not relieve ACO members and participating groups from
otherwise complying with these laws.

The Internal Revenue Service (“IRS”) has announced that ACOs can be designed and operated to be tax exempt entities, per Fact Sheet 2011-11 that was issued by the IRS on October 20, 2011. This Fact Sheet confirmed Notice 2011-20 that was issued on March 31, 2011.41 However, an ACO that is treated as a partnership or is disregarded for federal tax purposes will not qualify for exempt treatment. The IRS anticipates that a charitable organization's participation in an ACO will not result in private inurement or private benefit if the participation is structured in accordance with the following five requirements: 1) The terms of the participation are set forth in a written document that was negotiated at arm's length; 2) CMS has accepted the ACO into the MSSP and it has not been terminated; 3) The extent of the charitable organization's economic benefits is proportional to the benefits or contributions it provides to the ACO; 4) The charitable organization's share of losses does not exceed the share of ACO economic benefits it receives; and 5) All contracts and transactions between the ACO, its participants, and the charitable organization are negotiated at fair market value. Although a charitable organization is not required to satisfy all five factors, it is best practice to do so to avoid inurement or private benefit. Of course, compensation paid by an ACO to its participants for services rendered will be taxable to the recipient.


The Final Regulations provide for multiple start dates in 2012. ACOs that are accepted by CMS will be permitted to start on either April 1 or July 1 of 2012, or on January 1, 2013.42 The performance periods for 2012 starters are extended from 12 months to 21 months and 18 months, respectively. The agreement periods in both cases will cease at the end of 2015.

For example, an ACO accepted into the program with a start date of July 1, 2012 will benefit from an initial performance period of 18 months, ending on December 31, 2013 whereas an ACO with a start date of January 1, 2013 will only have an initial performance period of 12 months. An ACO that starts July 1, 2012 will benefit from the longer performance period because it is eligible for an optional interim payment based on the first 12 months of operations.43 The optional interim payment allows the ACO to increase its capital prior to the completion of the initial performance period.



In response to numerous requests to allow additional entities to participate in the program, the Final Regulations have expanded the list of eligible participants. The Proposed Regulations did not permit Federally Qualified Health Centers (“FQHC”s) and Rural Health Centers (“RHC”s) to establish their own ACOs, restricting their participation level to members of ACOs. The Final Regulations have removed this impediment and now permit FQHCs and RHCs to form independent ACOs.44


The Final Regulations revise the Proposed Regulations by providing for a preliminary prospective assignment of patients to ACOs. Under the Proposed Regulations, the ACO providers were not informed which patients were assigned to the ACO until the end of the performance year. Under the Final Regulations, the preliminary assignments will be updated quarterly based on the most current data available.45 Final assignment of patients will occur after the end of each performance year based on information from the prior year.46 Furthermore, patients will only be assigned to one ACO.47

The Final Regulations determine the patient assignments on a plurality of primary care services, modified by a "step-wise approach."48 The "step-wise approach" assigns those patients who have used a primary care physician who is an ACO supplier/provider first.49 Patients in this category will be assigned to an ACO based on a comparison of allowed charges by ACO providers/suppliers and non-ACO providers.50 Patients who have not received medical care from a primary care physician will be assigned to an ACO if he or she has received medical care from any physician (including specialty physicians) based on a comparison of allowed charges between ACO providers/suppliers and non-ACO suppliers/providers.51 This is an important change because the Proposed Regulations did not take into consideration primary care services provided by specialists.


The Final Regulations still leave open questions regarding the operations of ACOs and their possible impact. Several concerns include:

1) Reduced Risk: The reduced risk to ACOs under Track 1 will make it easier for providers to band together and shield themselves from incurring huge losses while in the learning phase. However, this puts CMS at more risk.

2) Accountability: The four areas of focus are patient experience and customer satisfaction, patient safety, coordination and integration of care and preventive services, and case management for special needs populations. These have not been sacrificed and appear to be constant in both the Proposed Regulations and the Final Regulations but whether the ACOs will be able to meet the patient demands remains to be seen.

3) Funding: Due to the current budget deficit and the possibility of government spending cuts, it is not clear how CMS will gear up to allow for this program.

CMS has done a good job refining the ACO concept for those large players who can afford to spend millions of dollars putting together a system that may not work. The Final Regulations also provide managed care plan systems with criteria to be developed, even if the plans do not intend to qualify as an ACO under the rigorous and exhaustive standards. There will almost certainly be further governmental pronouncements and guidance on ACO formation, but the revisions from the Proposed Regulations to the Final Regulations make it clear that the large players that were planning to put ACOs into place will be able to do so. The rest of the healthcare world, therefore, will need to decide whether to actively participate in efforts to launch these types of integrative systems, or to see where the dust settles before making a decision.


42 CFR Part 425, 76 Fed. Reg. 212, Nov. 2, 2011.


76 Fed. Reg. 19528.


Sections II.B and II.E of the Preamble to the Final Regulations.


Section IV.C. of the Preamble to the Final Regulations.


Section II.B of the Preamble to the Final Regulations.












Section IV.C. of the Preamble to the Final Regulations.




Section II.G of the Preamble to the Final Regulations.





























28 425.222(a).





Subpart I. 425.800 – 425.810.



33 425.806(a)(1).



Section II.H. of the Preamble to the Final Regulations.


76 Fed. Reg. 67026


CMS 42 CFR Chapter IV, OIG 42 CFR Chapter V.


42 U.S.C. 139nn.


42 U.S.C. 1320a-7b(b).


76 Fed. Reg. 67999.


Notice 2011-20, 2011-16 I.R.B. 652 (April 18, 2011).






425.102(6); 425.102(7).

45 425.400(a)(2)(ii).








50 Id.


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