Friday, June 25, 2010

ACOs Key to Health Care Reform Law

Accountable Care Organizations Are Key to Health Reform Law


Now that the federal health reform legislation (the Health Reform Act)1 has been enacted, efforts have turned to its implementation. Although so far the attention has been focused on the provisions relating to health insurance coverage, the most revolutionary portion of the act may turn out to be those provisions that aim to improve the quality and efficiency of health care services, particularly through payment and delivery system reform. Such reform is designed to set in motion a process that will lead to the restructuring of the organization of the health care delivery system with the aim of improving its "value," i.e., its quality and efficiency. It entails reforming the way providers are paid to incentivize them to change the way they deliver care in a manner that improves the value of such care.

Among the most significant of the payment and delivery reforms in the Health Reform Act are those that would encourage providers to organize into new entities known as "accountable care organizations" (ACOs). ACOs are intended to serve as a vehicle through which physicians can become integrated with each other and other health care providers to improve the coordination of their care and be rewarded for improving the quality and efficiency of their care.

Specifically, the Health Reform Act requires the federal Centers for Medicare and Medicaid Services (CMS) to establish an ACO program under Medicare, which is known as the "Medicare Shared Savings Program." With Medicare being the largest third party payer in the United States, the establishment of the Medicare Shared Savings Program has the potential to drive payment and delivery system reform throughout other public and private health care programs.

Why ACOs?

Health spending has reached unsustainable levels. It accounts for almost $1 of every $5 spent in the United States and is growing faster than the economy. Studies have shattered the myths that have justified such rising spending in the past, including that it is the price our society has to pay for achieving higher quality,2 or that it is due to the aging of the U.S. population.3

Cost containment efforts are being pursued through a new approach, which is commonly referred to as "payment and delivery system reform." As mentioned earlier, this entails changing the way providers are paid to promote changes and greater efficiency in the delivery of care. The central target of payment reform is the fee-for-service (FFS) payment methodologies, which pay providers a fee for each separate medical procedure they perform. FFS reimbursement is viewed as the primary culprit of rising health care spending because it rewards providers for performing more procedures, regardless of the health outcomes achieved. Payment reform aims to gradually phase out FFS methodologies and replace them with value-based payment (VBP) methodologies, which reward or penalize providers based on their successes in improving "value," i.e., in achieving better health outcomes at reduced costs.

What Is an ACO?

An ACO is a health care organization in which providers are accountable for the quality and total costs of care for a specific subpopulation of patients whom they jointly serve by accepting value-based payment with respect to such patient population. The ACO becomes "accountable" for the care it provides to its patients by contracting with the third party payer for VBPs with respect to the patients. Importantly, certain VBPs have been designed specifically for ACOs, including shared savings bonuses, in which the ACO receives a portion of the savings it achieves for the third party payer by improving the value of the care it delivers to the third party payer's beneficiaries.

The ACO concept gained traction when it was taken up in 2008 by MedPAC, an independent agency that advises Congress on issues relating to Medicare, which recommended it to Congress as a way to reduce the growth of health spending. The ACO program that was ultimately included in the Health Reform Act, the Medicare Shared Savings Program, is modeled after the Medicare Physician Group Practice Demonstration Project (PGPD). The PGPD was a five-year demonstration project that ran from April 1, 2005 to March 31, 2010. It involved 10 large multi-specialty group practices, which represented approximately 5,000 physicians (ranging from 292 to 1,291 affiliated physicians) and over 220,000 Medicare fee for service patients. In the third year, five of the 10 practices achieved savings of $32 million in the aggregate, of which $26 million was shared with the practices.

The Health Reform Act

The Health Reform Act requires CMS to establish ACO programs under Medicare and Medicaid. With respect to Medicare, it requires CMS to establish a "Shared Savings Program," which must begin no later than Jan. 1, 2012. With respect to Medicaid, it requires CMS to establish a Medicaid Pediatric ACO Demonstration Project, which would give states the opportunity to establish a pediatric ACO demonstration project under their state Medicaid programs. The Health Reform Act also requires CMS to create a new Center for Medicare and Medicaid Innovation (the Innovation Center) to develop, test, and expand new VBPs in Medicare and Medicaid, and it is possible that the Innovation Center may establish other types of ACO pilot programs under Medicare and Medicaid.

Although the principal features of the program are set forth in the Health Reform Act, many of the specifics were left by Congress to be developed by CMS through administrative rulemaking. Because CMS has not yet issued the implementing regulations regarding the Shared Savings Program, there are still a number of issues that remain open at this point, as noted below.


The Health Reform Act provides that five types of organizations are eligible to serve as an ACO:

(a) Physician group practices (i.e., multispecialty group practices);
(b) Networks of individual physician practices (i.e., independent practice associations);
(c) Partnerships or joint ventures between hospitals and physicians (i.e., a physician hospital organization);
(d) Hospitals employing physicians (i.e., an integrated delivery system); and
(e) Other groups authorized by CMS.

In assessing the precise configuration of an ACO, the key practical issue is identifying the combinations of providers among which there are opportunities to coordinate care in order to improve value. For example, in an ACO consisting of physicians only, which may consist of a group practice or an independent practice association (IPA), primary care physicians and specialists work together through the multi-specialty group practice or IPA to improve care for medical conditions for which hospital inpatient admissions are potentially preventable through better outpatient care.

Savings on hospital expenses are achieved by keeping patients healthy and out of the hospital. In an ACO consisting of physicians and at least one hospital, primary care physicians, specialists, and the hospital or hospitals work together through an integrated delivery system or other organizational structure to improve quality and efficiency throughout the continuum of care, such as by reducing lengths of stay, readmissions, and so on.


The Health Reform Act sets forth 11 minimum requirements that must be satisfied by an eligible organization for it to quality as an ACO. Although the legislation does not do so, these requirements may be organized into five categories, as follows:

Capabilities to Serve a Specific Subpopulation of Patients. The Health Reform Act sets forth three requirements relating to the ACO's capabilities to serve a specific subpopulation of patients:

(i) The ACO must be willing to become accountable for the quality, cost, and overall care of the Medicare FFS beneficiaries assigned to it. Accordingly, an ACO must be able to provide or manage the continuum of care for a specific subpopulation of patients as a real or virtually integrated delivery system. Moreover, the ACO must be able to place a strong emphasis on the promotion of health and prevention of disease, and, in connection with the foregoing, ensure that each patient has access to and obtains appropriate primary care and coordinated specialist care.
(ii) The ACO must have at least 5,000 Medicare beneficiaries assigned to it.
(iii) The ACO must include primary care physicians who are sufficient for the number of Medicare beneficiaries assigned to it.

Capabilities to Improve the Value of Care. The Health Reform Act sets forth three requirements relating to the value of the care the ACO delivers to its assigned patients:

(i) It must define processes to promote evidence-based medicine and patient engagement, report on quality and cost measures, and coordinate care. To be successful, an ACO must continuously make improvements to the value of the care it delivers. It also must possess health information technology that improves patient care by enabling clinicians to share the clinical information of a patient across all clinicians involved in that patient's care, regardless of where such care is delivered.
(ii) The ACO must demonstrate that it meets "patient centeredness" criteria established by CMS. These criteria will be developed by CMS through administrative rulemaking.
(iii) It must meet certain quality performance standards. These quality standards will be developed by CMS through administrative rulemaking.

Capabilities to Contract for Shared Savings. Pursuant to the Health Reform Act, the ACO must enter into an agreement with CMS to participate in the program for at least three years. Accordingly, an ACO must be capable of contracting with Medicare (or another payor), distribute shared savings, and administer and manage its ACO-related activities.

Capabilities to Govern its Internal Operations. The Health Reform Act sets forth three requirements relating to the ACO's abilities to govern its internal operations:
(i) The ACO must have a formal legal structure that would allow it to receive and distribute shared savings bonuses.
(ii) It must have a leadership and management structure that includes clinical and administrative systems.
(iii) It must have a mechanism for shared governance.

Capabilities to Report on Value. Finally, the Health Reform Act requires that an ACO be capable of reporting to CMS data regarding the quality of the care it delivers.

How Does an ACO Get Paid?

The Medicare Shared Savings Program establishes a shared savings payment arrangement for ACOs, which works as follows:

• At the beginning of each applicable annual period, Medicare and the ACO would establish budget targets for the Medicare spending incurred during that year by the Medicare beneficiaries assigned to the ACO. Medicare beneficiaries will be assigned to the ACO based on their utilization of primary care services, with the specific methodology to be established by CMS through administrative rulemaking. Such assignment will take place between CMS and the ACO; the beneficiaries will not be required to enroll. The spending benchmark will be determined by CMS using the most recent available three years of per-beneficiary expenditures for physician and hospital services for the beneficiaries assigned to the ACO.
• During that year, the ACO would render medical services to such Medicare beneficiaries and would be paid in the same manner as it would otherwise be paid (i.e., FFS payments for physicians and "diagnosis-related group" payments for hospitals).
• At the end of the year, the actual spending and the target spending would be reconciled. If there are sufficient savings and certain quality criteria are met, then Medicare would pay to the ACO a bonus equal to a percentage of the savings.

Under the above shared savings payment methodology, there is no penalty. If the ACO fails to achieve savings or meet the quality standards, the only consequence is that it does not receive the shared savings bonus. The primary financial risk is that the ACO may not recover its up-front investment to become an ACO (such as by investing in health information technology to develop the ability to collect and report data or investing in redesigning its care processes to achieve efficiencies).

What's Next?

Now that the Health Reform Act has been enacted, the most important next step with respect to the Medicare Shared Savings Program is for CMS to issue regulations implementing the program. It also can be anticipated that there will be complementary developments on the state level and in the private sector. As is often said, "all health care is local," so the success of ACOs ultimately depends on local action.

David A. Manko is a partner in the Health Services Group of Rivkin Radler, where he concentrates on healthcare regulatory and transactional matters. George Choriatis is an associate in the firm's Health Services and Corporate & Commercial Practice Groups. The authors can be reached at and, respectively.


2. See e.g., Fisher, E. S., et al. 2009. Slowing the Growth of Health Care Costs—Lessons from Regional Variation. NEJM 360(9):849-52 (examined the difference in quality and costs across providers and regions and concluded that higher costs had no relation to higher quality); Skinner, J., F. Elliott, and J. E. Wennberg. 2005. The efficiency of Medicare. In Analyses in the Economics of Aging, edited by D. Wise. Chicago, IL: University of Chicago Press and National Bureau of Economic Research. Pp. 129-157 (estimating that 20 percent to 30 percent of health care spending is for either too much, too little, or the wrong type of medical treatments and technologies, relative to the evidence of their effectiveness).
3. Congressional Budget Office. 2007. The Long Term Outlook in Health Care Spending.

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