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Accountable Care Organization Final Regulations Give Health Care Providers More Flexibility


The Centers for Medicare and Medicaid Services (CMS) has released the final rule for the Medicare Shared Savings Program. This highly anticipated regulation for accountable care organizations (ACOs) addresses many of the concerns raised by health care providers after the previously proposed rule was released earlier this year. The new rule should encourage hospitals, physicians, and other health care providers to join together to provide coordinated care that yields better outcomes for patients, and leads to savings for taxpayers and beneficiaries by eliminating unnecessary and wasteful care, as well as by preventing costly complications of chronic diseases such as diabetes.

Accountable care organizations are part of a series of initiatives in the Affordable Care Act intended to move away from the current fragmented system that focuses on the volume of health services provided toward a new system that emphasizes and supports patient-centered, coordinated, accountable care. ACOs can play an instrumental role in achieving this goal, creating a system in which patients are healthier, providers are rewarded for high performance, and society's resources are used to their greatest effect.

The basic mechanics of the new Medicare program remains the same as the previously proposed rule—ACOs would be held accountable for the cost and quality of a defined population of patients (at least 5,000 Medicare beneficiaries) and be able to share in up to 60 percent of any cost reductions achieved contingent on meeting an array of performance standards. (See Table 1 for a more detailed description of how shared savings is calculated.) However, there are some key changes from the earlier proposed rule which should make it more attractive for providers to participate in the program, including:

  • An option for ACOs to participate in a "one-sided risk" model—which means that they would share in any savings they achieve without being at financial risk if their costs exceed their spending target—for the duration of the three-year performance period. As in the previously proposed rule, providers could choose to share a larger proportion of savings under a "two-sided risk" model, but they also would be liable for a share of any excess costs. The previously proposed rule would have required ACOs that start with a one-sided model to switch to a shared-risk model by the third year. Providers just starting to form ACOs or with limited experience taking financial risk may find it more appealing to stay in a one-sided model for a longer period of time.
  • ACOs choosing the one-sided risk model that achieve savings above a threshold percentage will share in the entire amount (first-dollar basis). The previously proposed rule would have restricted shared savings under the one-sided risk model to savings above a 2 percent threshold. These changes should make the program fairer and provide greater rewards to providers who achieve savings.
  • CMS will not require a "withhold" of part of any shared savings. Under the previously proposed rule, 25 percent of the shared savings would be withheld for a period of time. Not having the withhold will allow providers to get more of their shared savings quicker, which can help support quality improvement efforts.
  • The number of quality measures required to be reported has been reduced to 33 from 65 in the proposed rule. While still recognizing the need for robust quality measurement, this change focuses on the most meaningful measures and reduces the reporting burden on providers. There also will be a longer phase-in period, with payment for reporting on the measures during the first year and payment for both reporting and performance during the second and third years. The proposed rule limited payment for reporting to the first year only.
  • The previously proposed rule would have required that 50 percent of primary care physicians in the ACO be defined as meaningful users of electronic health records (EHRs)—the use of EHRs to significantly improve care—by the start of the second performance year. In the final rule, meaningful use of EHRs will be heavily weighted as a quality measure, but not required for participation in the program.
  • ACOs will be notified in advance about the patients for whose cost and quality of care they are likely to be held accountable, with quarterly updates of both the list of patients and information about them. The previously proposed rule would have identified patients at the end of each performance year and provided data annually. Knowing the patients for whom they are being held responsible in advance should give ACOs a better opportunity to focus on improving their care and assessing their progress.
  • Federally Qualified Health Centers (FQHCs) and rural health clinics (RHCs) will be allowed to sponsor ACOs, which should broaden the scope of providers that participate.

 Table 1. Changes in Risk Models

 Design Element

 One-Sided Risk Model

Two-Sided Risk Model

 Proposed Rule

Final Rule

Proposed Rule

Final Rule

 Maximum Sharing Rate 52.5% (50% base rate plus up to a 2.5 percentage point FQHC/RHC participation bonus) Up to 50% 65% (60% base rate plus up to a 5.0 percentage point FQHC/RHC participation bonus) Up to 60%
 Quality Scoring Up to 50% of shared savings is conditional on quality performance Same Up to 60% of shared savings is conditional on quality performance Same
Participation Incentives
Up to 2.5 percentage points No additional incentives (final rule provides other opportunities for FQHC/RHC participation) Up to 5 percentage points No additional incentives (final rule provides other opportunities for FQHC/RHC participation)
 Minimum Savings Rate (MSR) Varies by population size Same Flat 2% regardless of size Same
 Minimum Loss Rate (MLR) Not applicable Same Flat 2% regardless of size Same
 Maximum Sharing Cap Payment capped at 7.5% of ACO's benchmark Cap increased to 10% Payment capped at 10% of ACO's benchmark Cap increased to 15%
 Shared Savings Savings shared once MSR is exceeded First-dollar sharing once MSR is met or exceeded Savings shared on a first-dollar basis once MSR is exceeded First-dollar sharing once MSR is met or exceeded
 Shared Losses None Same First-dollar shared losses once MLR is exceeded. Actual amount of shared losses would be based on final sharing rate that reflects ACO quality performance and any additional incentives for including FQHCs and/or RHCs using the following methodology (1 minus final sharing rate). 1 minus final sharing rate applied to first-dollar losses once MLR is met or exceeded; shared loss rate not to exceed 60%
Loss Sharing Limit None Same Cap on the amount of losses to be shared is phased in over 3 years starting at 5% in year 1; 7.5% in year 2; and 10% in year 3 Same

The changes in the final rule should make the Medicare Shared Savings Program a more feasible and attractive opportunity for a wider variety of providers. CMS will start accepting applications from interested provider organizations shortly after the start of 2012 and aims to have the first Medicare ACOs in the second quarter of 2012.

In conjunction with the ACO program, the Center for Medicare and Medicaid Innovation announced the start of an advance payment model to help support initial capital investments needed to make infrastructure changes to improve the way care is delivered, as well as to meet program requirements. The advanced payments would be recovered from any future shared savings achieved by the ACO. This will be particularly helpful to rural health practices.

CMS actuaries estimate savings for Medicare of approximately $470 million for calendar years 2012 through 2015. The final rule will lead to greater shared savings payments to ACOs—now estimated to reach $1.3 billion—relative to the previously proposed rule. However, the greater generosity should also lead to more participation—CMS estimates up to 240 ACOs participating during this period— which will account for the net savings to the Medicare program and taxpayers. CMS also estimates that the level of shared savings payments made to providers should be roughly three times the amount of money they will need for start-up investment and ongoing annual costs (that does not account for potential lost revenue some ACOs may face from eliminating unnecessary services).

The final rule set forth by CMS should address legitimate concerns of providers while rewarding high-quality care for beneficiaries, and is consistent with recommendations of The Commonwealth Fund Commission on a High Performance Health System. It is an important step toward a high performance health system that achieves better health outcomes, better patient care experiences, and lower cost.

Publication Details



M. Zezza and S. Guterman, Accountable Care Organization Final Regulations Give Health Care Providers More Flexibility, The Commonwealth Fund Blog, October 2011.