On October 20, 2011, the Centers for Medicare & Medicaid Services (“CMS”) issued final regulations (the “Final Rule”) that will govern the implementation of the Medicare Shared Savings Program (the “Medicare Program”) and the formation of accountable care organizations (“ACOs”). 

The Medicare Program encourages doctors, hospitals and other healthcare providers to work together in ACOs to redesign care processes in order to deliver high-quality and efficient care. As an incentive to ACOs that successfully meet quality and savings requirements, the Medicare Program will be able to share a percentage of the achieved savings with the ACO. 

The Final Rule responds to many concerns raised by healthcare providers in response to CMS’ proposed ACO regulations published in March 2011 (the “Proposed Regulations”).  Many providers objected that the Proposed Rule required participants to bear too much financial risk, left participants in the dark as to what Medicare beneficiaries are actually assigned to any given ACO, included too many quality measures, and generally made it too difficult to become eligible to share in the savings achieved. Having received more than 1300 comment letters, some with stinging criticism of its proposed regulations, CMS regrouped and made numerous changes in response. The key changes are outlined below.

A.        Participation Agreement

As in the Proposed Regulations, ACOs must apply to and be accepted by CMS in order to participate in the Medicare Program, and must commit to a three-year agreement with CMS. CMS will begin to accept applications on a rolling basis after January 1, 2012.  The initial agreement periods are set to begin on either April 1, 2012 or July 1, 2012. In the Final Rule, CMS extended the length of the initial performance year to eighteen or twenty-one months, depending upon the initial agreement’s start date, in an effort to allow ACOs more time to ramp up and begin realizing savings.

B.         Risk Sharing Models

The Final Rule sets forth two risk-sharing models that an ACO may adopt. Under one model, the ACO shares only in the savings during the initial three-year term (the “one-sided risk model”). For the second model (the “two-sided risk model”), the ACO shares in both savings and losses in all three years, with greater upside potential on shared savings because of the risk assumed.

The Final Rule represents a significant shift from the Proposed Regulations, which would have required ACOs participating in the one-sided risk model to share losses in the third year of the participation agreement.  By eliminating the deterrent of possibly sharing in losses under the one-sided risk model, the Final Rule is likely to encourage greater participation in the Medicare Program.

Under the one-sided risk model, ACOs are entitled to receive up to 50% of the savings if they achieve the quality goals set by CMS in all domains of care. In accordance with the two-sided risk model, ACOs are entitled to receive up to 60% of shared savings and will participate in losses at an escalating rate throughout the three-year participation agreement.



Judd Harwood is an associate in Balch & Bingham, LLP’s Health Care Law Practice Group.

C.        Prospective Beneficiary Assignment

In a major change from the Proposed Regulations, the Final Rule establishes that CMS will assign Medicare beneficiaries prospectively at the beginning of a performance year on a preliminary basis, with final retrospective adjustment at the end of the year. Under the Final Rule, ACOs will receive a preliminary list of assigned beneficiaries at the beginning of each performance year that will be updated quarterly throughout the performance year. CMS believes that the prospective assignment of beneficiaries will enable ACOs to manage care for ACO members more effectively in order to meet the goals of improved quality and lower cost.

D.        Quality Measures

In a significant shift from the Proposed Regulations, the Final Rule reduces the number of quality measures used in calculating incentive payments from 65 quality measures in five categories to 33 quality measures in four categories. The four categories (referred to as “domains” in the Final Rule) include (i) patient experience, (ii) care coordination and patient safety, (iii) preventive health and (iv) at-risk populations. CMS believes that the reduction in the number of quality measures and domains will reduce the burden of participation, and, as a result, increase participation in the Medicare Program.

E.         Modified Savings Rates

The Final Rule eliminates the Proposed Regulations requirement that ACOs produce savings of at least 2% in order to be eligible for shared savings payments. Under the Final Rule, ACOs will share savings with Medicare from the first dollar saved as long as the minimum savings rate has been reached.

Providers who decided not to participate based on the Proposed Regulations may want to reconsider that decision. The elimination of down-side risk in the one-sided risk model, the change to prospective beneficiary assignment and the relaxation of a number of burdensome requirements make participation in the Medicare Program more promising.



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