News / Resources

• Introduction
• What’s an ACO?
• Assignment of Beneficiaries
• Shared Savings and Losses
• Legal Structure and Governance
• Quality Measure Guidelines
• Quality Measures
• Data Sharing
• Compliance, Conflicts of Interest, Screening
• Monitoring
• Suspension of Payment for Avoiding At-Risk Beneficiaries
• Termination
• Reconsideration Review Process—Appeal Rights
• Fraud and Abuse Waivers
• The FTC/DOJ Proposed ACO Statement of Enforcement Policy
• Tax-Exempt Organization Participation
• Protect Your Interests . . . Join Baker Hostetler’s Comment Consortium
• Questions and Next Steps . . .

Introduction

After much anticipation and consternation, the Patient Protection and Affordable Care Act’s (PPACA) Medicare shared savings program (MSSP) proposed rule, implementing Section 3022 of PPACA, was released to the public on March 31, 2011 (hereafter, Proposed Rule). Concurrent with the publication of the Proposed Rule, the Federal Trade Commission (FTC), in concert with the antitrust division of the U.S. Department of Justice (DOJ), the Centers for Medicare and Medicaid Services (CMS), the HHS Office of Inspector General (OIG) and the Internal Revenue Service (IRS), issued proposals intended to address some of the legal issues surrounding ACOs and the waiver authority of the Secretary of the U.S. Department of Health and Human Services (HHS) relating to the formation of Accountable Care Organizations (ACOs). CMS will be accepting comments on the Proposed Rule, published in the Federal Register on April 7, 2011, through June 6, 2011. PPACA requires CMS to implement the MSSP by January 1, 2012.

Despite having had no regulatory guidance for the better part of a year, the healthcare industry rocketed ahead with the creation of what some thought were ACOs, in anticipation of the opportunity to participate in PPACA’s promised shared savings bonus component. PPACA’s overt indication that the Secretary would give preference to ACOs participating in arrangements with other payers undoubtedly fueled this market activity. Moreover, the multiple transformative demonstration projects, pay for performance and penalties for providers under governmental programs were clear indications that Medicare and Medicaid were serious about transforming the existing healthcare system into one that rewards quality and moves toward clinically integrated and coordinated care.

To say that the MSSP regulatory requirements are detailed is an understatement. CMS has set the bar quite high with regard to the elements required to establish an ACO. The Proposed Rule and commentary provide significant detail and go far in answering the gaping holes and mysteries relating to beneficiary assignment, the mechanics of shared savings bonus payments, the utilization of benchmarks for quality, the establishment and governance of ACOs and the application requirements for the MSSP. The collaboration among the federal agencies also is reflected in the Proposed Rule.

The FTC/DOJ, OIG and IRS, which met frequently to address stakeholder concerns, have inextricably linked, in the case of the antitrust analysis, eligibility for the MSSP to an affirmative showing of an ACO’s anticipated competitive effect in its Primary Service Area (PSA)—a new acronym and new analysis for health industry experts. Every applicant for the MSSP must perform, at least initially, a market-share analysis of its intended PSA to determine whether an application to the FTC for mandatory review will be necessary for inclusion in its ACO application to CMS. A more detailed analysis of this proposal is below, but the key issue, for summary purposes, is that a would-be ACO must analyze its market share and, if certain thresholds are met, obtain a letter from the FTC for CMS to use in evaluating whether to grant the ACO a three-year agreement to participate in the MSSP. Never before has a CMS program been so inextricably linked with an antitrust analysis. This unprecedented linkage will assuredly lend itself to a unique and new class of healthcare consultant/antitrust analyst.

The Proposed Rule makes clear that the MSSP is intended only for the Medicare fee-for-service (FFS) population—that is, Medicare Advantage or other capitated payment models will not be a part of the MSSP. If specific savings and quality benchmarks are hit, a performance bonus will be paid in addition to the FFS payment. ACOs will only share in savings to the Medicare program if they first generate shareable savings and then meet the quality standards.

The Proposed Rule also demonstrates CMS’s deference to beneficiary choice and concern for privacy and transparency.

Providers should consider whether such deference may detract from the innovations CMS desires in the MSSP. For example, with regard to care management initiatives that might be attempted by an ACO, there is no requirement to assure that an ACO will be able to obtain the medical or other information necessary to manage a beneficiary. Additionally, as detailed below, beneficiary assignment will not be prospective, but rather retrospective based upon a look-back period and assessment of receipt of primary care services. These issues may hinder the ability of an ACO to engage in proactive care coordination or to proactively medically manage the care of those individuals for whom it will become accountable. Moreover, since the calculation of the shared savings amount eventually will require the ACO to share in the potential losses associated with its assigned beneficiaries, the lack of ability to manage beneficiary care proactively may result in the loss of revenue or the ability to collect the shared savings bonus.

The Proposed Rule also sends a clear signal that CMS intends to use the MSSP as a primary means to shift how healthcare is delivered in the U.S. by incentivizing ACOs to improve quality and effect cost savings for all patients seen by providers, whether or not they belong to an ACO. If, however, providers and suppliers are overwhelmed by the sheer complexity of the regulatory process, CMS’s policy gamble may not accomplish the change it seeks.

These issues are discussed in more detail below. We have divided the Proposed Rule into several general themes, for summary purposes, and also have provided summaries of the agency guidance documents from the OIG, the FTC/DOJ and the IRS.

What’s an ACO?

The Proposed Rule defines an ACO as an entity identified by a specific taxpayer identification number (TIN) that is comprised of an eligible group of providers and suppliers (ACO participants) that work together to manage and coordinate care for at least 5,000 Medicare FFS beneficiaries and have an established mechanism for shared governance that provides the ACO participants with appropriate proportionate control over the ACO’s decision-making process. The ACO must be a legal entity authorized to conduct business under state law.

ACO participants eligible for the MSSP include ACO professionals in group practice arrangements, networks of individual practices of ACO professionals, partnerships or joint venture arrangements between hospitals and ACO professionals, hospitals employing ACO professionals and other providers or suppliers recognized that are not otherwise defined as ACO professionals or hospitals. The term “ACO professionals” is further defined to include physicians, physician assistants, nurse practitioners and clinical nurse specialists. The preamble to the Proposed Rule also clarifies that the term “hospital,” as defined, excludes hospitals and units that are not paid under the prospective payment system, such as psychiatric, rehabilitation, long-term care and children’s hospitals. These hospitals, it is explained, have access to shared savings or other innovative payment initiatives through demonstration programs under PPACA, such as the Center for Medicare and Medicaid Innovation.

Additionally, the Secretary has used her discretion to add critical access hospitals paid under Method II to the list of eligible participants. The preamble to the Proposed Rule references numerous stakeholder comments regarding the requested participation of Federally Qualified Health Centers (FQHCs) and Rural Health Clinics (RHCs). CMS concludes that FQHCs and RHCs cannot participate in the MSSP by forming their own ACO, primarily due to the lack of data elements necessary to assign beneficiaries under the proposed assignment methodology. However, the preamble indicates that FQHCs and RHCs may join another ACO as ACO participants.

With regard to the participation of health plans or other entities such as management companies that may have expressed an interest in forming ACOs, the preamble to the Proposed Rule makes clear that it is CMS’s intention that an ACO may not include outside entities that might manage or direct a provider’s or supplier’s day-to-day operations or otherwise arrange for care. CMS believes that the ACO should be operated and directed by Medicare-enrolled entities that directly provide healthcare services to beneficiaries. As such, CMS proposes that with regard to the governance of the ACO, at least 75 percent control of the governing body be comprised of ACO participants and the balance be composed of Medicare beneficiaries and others selected by the ACO.

CMS is requesting specific comments on the types of providers and suppliers that should be included as potential ACO participants, thus indicating its intention to consider varied kinds of ACO arrangements that might evolve.

Generally, ACO operations will be managed by an executive under the control of the ACO’s governing body. The ACO’s leadership team must have demonstrated the ability to directly influence clinical practice and the ability to improve efficiency processes and outcomes. Clinical management and oversight must be managed by a senior-level medical director, who is a board certified physician, “licensed and physically present” in the state in which the ACO operates. ACO providers and suppliers also must demonstrate a meaningful commitment to the ACO’s clinical integration program. “Meaningful commitment” can mean a financial investment in the ACO or meaningful human investment of time and effort to assure success of the clinical integration program. The quality assurance programs of an ACO should be physician-directed, and the ACO must develop evidence-based medical practice and clinical guidelines and processes for delivering care consistent with the triple aim of CMS—better care for individuals, better population health and lower growth in expenditures. The ACO must have information technology and infrastructure to collect and evaluate data.

In setting forth the parameters establishing the types of entities that can form ACOs and the mechanism by which an ACO must be governed, CMS has set forth the criteria for ACOs in the commercial marketplace as well. Thus, it appears that entities that may have labeled themselves an ACO previously, might need to regroup and determine whether they qualify under the detailed CMS definition of an ACO. If not, such entities may wish to provide comments to CMS.

Additionally, to the extent that states are moving ahead with implementation of PPACA and creating statutes defining ACOs for purposes of state law and Medicaid, it still is unclear how the Proposed Rule and state laws will intersect.

Assignment of Beneficiaries

The issue of prospective or retrospective assignment of beneficiaries to an ACO was a concern for many stakeholders and the Proposed Rule has answered the burning question—after consideration of both perspectives, CMS has proposed that retrospective assignment of beneficiaries is the preferred option.

CMS is concerned about assuring beneficiary choice and freedom and also accuracy in the assignment process. The assignment of beneficiaries will be made based on a beneficiary’s actual primary care service utilization within an ACO performance year.

Pursuant to the Proposed Rule, the following assignment methodology will be employed: (1) CMS will identify all primary care physicians who were ACO participants during the performance year for each ACO; (2) at the end of the performance year, all the beneficiaries who received services from primary care physicians in each ACO will be determined; (3) CMS will determine the total allowed charges for primary care services (as identified by the Healthcare Common Procedure Coding System (HCPCS) code in the definition of primary care services) that each of the beneficiaries received from any provider or supplier during the performance year; (4) for each beneficiary, then, CMS would add together the allowed charges for primary care services provided by the primary care physicians in each ACO; and (5) assign a beneficiary to an ACO if the beneficiary received a plurality of his or her primary care services (as determined by the sum of the allowed charges for such services) from primary care physicians who are ACO participants in any single ACO.

For purposes of the Proposed Rule, the term “primary care physician” is defined as a physician whose primary specialty designation is family medicine, internal medicine, geriatric medicine or general practice. While the statutory definition includes nurse practitioners, clinical nurse specialists and physician assistants, services provided by such professionals will not be counted since only primary care physician services will be included in the allocation methodology.

CMS also discusses the exclusivity of physicians within an ACO in defining the assignment and complexion of ACOs. Primary care physicians for whom beneficiary assignment will be retroactively based must be exclusive to one ACO in the MSSP. The exclusivity only applies to primary care physicians (as defined above) by whom beneficiary assignment is established. Thus, any ACO participant upon whom beneficiary assignment is not dependant, would not be restricted to participation in a single ACO. That includes hospitals, surgical and medical specialties, RHCs and FQHCs. It is clear in the discussion of assignment of beneficiaries, that assuring marketplace competition and beneficiary choice are key goals of the Proposed Rule.

ACO participants will be required to notify beneficiaries of their participation in the MSSP and also may receive some basic information about the ACO’s beneficiaries, provided certain advance disclosures and notices are given to beneficiaries. This information would be provided by CMS to the ACO with regard to all Medicare FFS beneficiaries served. In conjunction with the establishment of the benchmark for payment, discussed elsewhere in this Alert, CMS will provide the ACO with a list of beneficiary names, dates of birth, sex and other information derived from an assignment algorithm used to generate the benchmark. As a result, CMS calls its approach a hybrid prospective and retrospective assignment process. Practically, however, an ACO’s knowledge of the beneficiaries for whose care it is accountable will not be known until after the performance year. Thus, CMS assures that an ACO applies its quality and cost savings initiatives and care management protocols uniformly across its patient population, regardless of whether the beneficiary will be assigned to the ACO.

CMS solicited comments on the assignment methodology and whether there should be a minimum threshold number of primary care services that a beneficiary should receive from physicians in the ACO to be assigned to the ACO.

CMS further proposes to develop a communications plan to educate beneficiaries about the MSSP, the possibility of being assigned to an ACO, how their health information may be shared with an ACO and their ability to opt-out of that data-sharing.

Shared Savings and Losses

Medicare will continue to make payments to ACO participants under the original Medicare FFS Part A and B programs in the same manner as they would otherwise be made. However, ACOs also will be entitled to receive payment for shared Medicare savings measured against a benchmark of expected average per capita Medicare FFS expenditures, provided the ACO satisfies the quality performance standards established by CMS.

The benchmark for determining savings will be based on an estimate of what the total Medicare FFS expenditures for ACO beneficiaries would otherwise have been in the absence of the ACO, even if all of those services would not have been delivered by providers in the ACO. The benchmark will be adjusted to take into account beneficiary characteristics and other factors that may affect the need for healthcare services. Furthermore, the benchmark will be updated for each performance year within a three-year performance period.

The goal of the MSSP is to use a portion of the difference between the ACO’s actual expenditures and the benchmark to reward participating ACOs for coordinating care, controlling expenditures and meeting established standards for quality of care. CMS has developed two models to share the savings. ACOs will be permitted to select whether they want to participate in a one-sided risk model (sharing of savings only for the first two years and sharing of savings and losses in the third year), or in a two-sided risk model (sharing of savings and losses for all three years). An ACO may voluntarily elect to participate under the two-sided model from day one. ACOs electing to participate under the one-sided model will be automatically transitioned to the two-sided model in their third year of MSSP participation.

CMS believes the one-sided option will provide an entry point for organizations with less experience with risk models, such as some physician-driven organizations or smaller ACOs, thereby giving them a chance to gain experience with population management before transitioning to a two-sided risk-based model. The two-sided model provides an opportunity for more experienced ACOs that are ready to share in losses to enter into an arrangement that provides an opportunity for a greater share of savings to be paid to the ACO coupled with the risk of having to repay Medicare a portion of any losses. CMS considered a number of downside risk models, including shared savings and losses, capitation and a combination thereof, but is initially proposing a structure simply of shared savings and losses. Thus, two-sided model participants will receive incentive payments for realized savings over the minimum savings rate or will be required to pay Medicare a portion of the cost incurred over the benchmark, if such cost exceeds a minimum loss rate.

The benchmark will be based on an estimate of the FFS expenditures of beneficiaries, who would have been assigned to the ACO in each of the three years prior to the start of the ACO’s agreement with CMS. CMS, however, has solicited comments on using the FFS expenditures of beneficiaries who are actually assigned to the ACO, as an alternative methodology to establish the benchmark.

However, in order for the ACO to be eligible to receive payment for shared savings, the estimated average per capita Medicare FFS expenditures under the ACO, adjusted for beneficiary characteristics and other factors, must be at least a certain percent below the benchmark. This percent is known as the Minimum Sharing Rate (MSR).

The proposed MSR under the one-sided model will be based on a sliding scale confidence interval (CI), which, in turn, would be based on the number of assigned beneficiaries. Larger ACOs (i.e., those serving larger Medicare beneficiary populations) would have a larger CI and, therefore, a smaller MSR under the one-sided model. Smaller ACOs, on the other hand, would have a smaller CI and, therefore, a larger MSR to overcome under the one-sided model. CMS is proposing a flat two percent MSR under the two-sided approach.

CMS would prefer ACOs to adopt the two-sided model. Consequently, to entice providers to voluntarily participate in the higher-risk two-sided model, CMS increased the MSR to 60 percent based upon quality performance and up to an additional 5 percent for the inclusion of FQHCs and/or RHCs as compared to 50 percent in the one-sided model for quality performance and up to an additional 2.5 percent for the inclusion of FQHCs and/or RHCs. Additionally, ACOs in the two-sided model will receive shared savings for the first dollar after the minimum savings rate is achieved. ACOs in the one-sided model, on the other hand, would begin sharing only after a 2 percent threshold is met, except for small ACOs in rural or underserved communities. Further, instead of a maximum sharing cap of 7.5 percent of the ACO’s benchmark, as under the one-sided model, two-sided model participants will enjoy a maximum savings cap of 10 percent.

This increased shared savings, however, comes with significant risk on the downside. If the ACO exceeds its benchmark costs by more than the 2 percent minimum loss rate, the ACO will be responsible for a percentage of first dollar losses, determined by taking into account its quality performance scoring, up to a cap. Specifically, the percentage of excess cost over benchmark for which the ACO will be responsible is equal to the excess cost over benchmark multiplied by one minus the sharing rate that would have been applied had the ACO fallen below benchmark. For example, if the ACO’s quality performance scores would have given it the full 60 percent sharing rate had there been savings, the ACO will be responsible for up to 40 percent of the excess over benchmark. The actual amount of shared loss is then capped on a sliding scale based on the number of years the ACO has participated in the two-sided model—5 percent of benchmark in year one, 7.5 percent of benchmark in year two and 10 percent of benchmark starting in year three and beyond.

To ensure that ACOs have the financial wherewithal to repay CMS in the event of a loss, the agency proposes implementing two financial security measures. First, CMS proposes to annually withhold 25 percent of the ACO’s earned performance payment. Such withheld amounts would then be applied toward repayment of an ACO’s losses, if the ACO owed CMS money. Repayment may also, for example, be recouped from Medicare payments to the ACO’s participants. In addition, CMS proposes to require each two-sided model participant to establish a self-executing method for repaying losses to Medicare. In addition, ACOs will be required to provide assurances of repayment by, for example, obtaining reinsurance, placing funds in escrow, obtaining surety bonds or establishing lines of credit as evidence by a letter of credit that the Medicare program can draw upon. An ACO must demonstrate that its chosen self-executing method is sufficient to ensure repayment of losses equal to at least 1 percent of per capita expenditures for its assigned beneficiaries from the most recent year available. Sufficiency of an ACO’s self-executing method will be evaluated at the time of its application to the MSSP and annually thereafter. All other eligibility requirements to participate in the two-sided model are identical to the eligibility requirements for participating in the one-sided model.

CMS welcomes comments on all aspects of the two-sided model, but particularly invites comments regarding the inclusion of a two-sided model, transitioning one-sided model participants to the two-sided model, the shared savings and loss formulas, and methods to ensure that two-sided participants are financially capable of paying their potential share of loss.

Legal Structure and Governance

As part of PPACA, an ACO must have “a formal legal structure that would allow the organization to receive and distribute payments for shared savings . . . to participating providers of services and suppliers” and “a mechanism for shared governance.” While seeking comment on some aspects, the Proposed Rule provides relatively clear guidance on what will constitute an appropriate legal structure and shared governance. Whether it can be easily implemented, however, may be a separate question.

The Proposed Rule does not prescribe that a particular type of entity be used for an ACO. Rather the Proposed Rule provides great flexibility in terms of entity selection, essentially deferring to state law. However, an ACO must be a legal entity capable of receiving and distributing payment and have a TIN. CMS also believes an ACO should be an entity capable of contracting (it would have an agreement with Medicare) and an entity against which CMS can exercise certain audit and repayment rights. In other words, the ACO cannot be a virtual entity, rather, it must be an actual, legally-recognized entity.

Hospitals, health systems and physician organizations have a variety of considerations when selecting an entity, including start-up capital, tax-exempt status of the members, membership mix, governance and handling of distributions. Consequently, there is not a one-size-fits-all approach. For example, where a hospital or health system forms an ACO with physicians (employed and/or independent), one option to consider may be a state nonprofit corporation that does not obtain federal tax-exemption because it is already a subsidiary of the tax-exempt entity.

An existing organization can be an ACO if all of the participants already are part of the organization, but that may not last. The Proposed Rule provides that an existing organization can be an ACO so long as it meets the other requirements for being an ACO (e.g., shared governance, ability to receive and make distributions, repay losses). However, CMS has asked for comment on whether it should require a separate legal entity to be utilized. Additionally, the Proposed Rule provides that where an existing entity will have participants that are not already part of the existing entity, a new entity must be used to provide all participants a mechanism for shared governance.

An ACO must have a governing body which employs shared governance. Shared governance requires that an ACO establish and maintain a governing body with adequate authority to execute the statutory requirements of an ACO.

The Proposed Rule requires that at least 75 percent of the board be controlled by ACO participants. The Proposed Rule also provides that a Medicare beneficiary who is otherwise independent from the ACO (i.e., not a provider or otherwise has a conflict of interest) must serve on the board. While asking for comment on this requirement, CMS believes that this is fundamental to the patient-centered criteria associated with an ACO. Finally, the Proposed Rule recognizes that nonproviders may own a portion of an ACO and may be members of the governing body. However, the non-ACO participants’ ability to influence the governing body is limited in that at least 75 percent of the governing body must be controlled by ACO participants. The Proposed Rule is unclear whether each ACO participant (defined by a TIN) is entitled to a governing body representative, or whether each ACO participant has proportionate control over governing body decisions. The Proposed Rule also requests comment on the 75 percent threshold and the overall governing body composition. If an ACO is comprised of a single entity that is financially and clinically integrated, and if at least 75 percent control of the ACO’s governing body is comprised of representatives of the member, the ACO governing body may be the same as the governing body of the member, provided the organization otherwise meets the requirements for an ACO.

The Proposed Rule sets forth multiple criteria establishing how and by whom an ACO must be managed. For instance, due to antitrust concerns, it was important that ACO participants have a high level of commitment to the ACO. Additionally, in the Physician Group Practice (PGP) demonstration project, CMS found certain elements critical to the success of a MSSP. As such, the Proposed Rule contains specific management criteria including the following:

• The ACO must have an executive leader who reports to, and may be removed by, the board. The executive’s leadership team must demonstrate the ability to influence or direct clinical practice to improve efficiency processes and outcomes.
• The ACO must have a medical director, board-certified, licensed and present in the state in which the ACO is located, responsible for clinical management and oversight.
• ACO participants and providers must have a meaningful commitment to clinical integration to give it the best chance for success. While not specifically defined, commitment may include a financial commitment or an investment of time and effort.
• The ACO must have a physician-directed quality assurance and process improvement committee that would oversee an ongoing quality assurance and improvement program.
• The ACO must develop and implement evidence-based medical practice or clinical guidelines and processes for delivering care consistent with the goals of better care for individuals, better health for populations and lower growth in expenditures. ACO participants would have to comply with the guidelines, with evaluations and potential penalties for noncompliance.
• The ACO must have sufficient infrastructure to collect and evaluate data and provide feedback to ACO participants, including to influence care at the point of care.

An ACO must demonstrate compliance with the management requirements through the submission of documents with its initial application. While the application is not part of the Proposed Rule, the Proposed Rule states that many of the ACO’s documents and policies that evidence compliance must be included with its participation application. It is also important for would-be applicants to consider how such data is submitted to avoid potential disclosure of competitively sensitive data under the Freedom of Information Act (FOIA). Flexibility is provided through the anticipated application by allowing an applicant to describe an alternative method for compliance (i.e., a leadership team rather than a single chief executive). Given the requirements and the variation in ACO structures, the application process and review will not be an easy task. Comment was sought by CMS on alternative methods to demonstrate compliance.

Quality Measure Guidelines

Before an ACO can share in any shared savings, it must demonstrate that it delivers high quality care. Meeting the quality standards is a precondition for shared savings. Depending on whether the ACO is under the one-sided or two-sided risk model, the quality standards account for 50 percent or 60 percent of the shared savings, respectively. The overarching goal of the Proposed Rule is to provide (1) better care for individuals, (2) better health for a population and (3) lower growth in expenditures. The quality requirements are designed to address the first two goals.

CMS seeks to base the quality measures on well-established and accepted quality standards and which are endorsed by the National Quality Forum, in hopes of gaining wide acceptance from the provider community. It also seeks to align these measures with reporting requirements for other incentive programs, such as the Physician Quality Reporting System (PQRS), eRx, electronic health records (EHR) incentives, and the Hospital Inpatient Quality Reporting programs, so as to limit the administrative and reporting burden for the ACO. However, some of the required measures will require new reporting tools and additional infrastructure.

Quality Measures

The Proposed Rule contains 65 individual quality measures in five domains. The ACO must submit data demonstrating attainment of each of the quality measures. It must meet all of the applicable performance criteria in accordance with the requirements detailed in the Proposed Rule for each of the three performance years. Year 1 is set at the reporting level based on 100 percent complete and accurate reporting and having met a minimum standard. Subsequent years will be measured using Year 1 as a benchmark and with higher performance expected. The ACO must meet all quality performance thresholds for all measures or it will not share in the savings. If an ACO does not meet the quality thresholds, a warning will be given and the ACO will be reevaluated the next year. If the ACO underperforms for a second year, the termination process will be instituted. Similarly, accurate and complete reporting is expected. If a pattern of inaccurate or incomplete reporting arises, the termination process will be instituted. Further, the ACO will be disqualified from shared savings each year that it underperforms.

The Proposed Rule contains a table of the currently proposed quality performance measures, which also includes the corresponding domain, a brief description of the data the measure captures, other incentive programs, the method of data submission and the measure type. Each measure correlates to one of five domains: (1) patient/caregiver experience; (2) care coordination; (3) patient safety; (4) preventative health; and (5) at-risk population/frail elderly health.

The Proposed Rule sets forth two standards for determining quality performance: rewards for better performance or a minimum quality threshold, with CMS favoring the performance standard.

The performance standard rewards ACOs for better quality with potentially larger percentages of shared savings. The calculation of the ACO’s performance score on each measure is benchmarked and scored on a sliding scale yielding the percentage of quality shared savings. Performance that is greater than the minimum attainment (i.e., 30 percent), but less than the benchmark, receives points on a sliding scale which gives the quality shared savings score. All measures are worth a maximum of two points and all domains are weighted equally.

The minimum threshold standard allows the ACO the full share of the quality portion of shared savings if the ACO meets or exceeds a minimum quality threshold in each of the quality measures at or above the 50th percentile for each domain. If the ACO does not meet the 50th percentile in each measure, it is not eligible for shared savings.

Data Submission

The ACO will be required to submit quality data, depending on the measure, based on claims review, the Group Practice Reporting Option (GPRO) collection tool and survey instruments. The GPRO tool is derived from the PQRS currently in use. The survey instrument required for some measures introduces a new method of reporting and a reporting tool not currently in use by providers.

An eligible professional participating in the PQRS program would submit quality data through the ACO, and the ACO would report and submit data on all measures on behalf of the eligible professionals, using the GPRO tool as well as the other measures for the ACO. There are two incentives at play with the ACO shared savings and the eligible physicians’ PQRS incentives. The ACO must report on all measures or the ACO and physician may lose both incentives. However, the physician still may obtain the PQRS incentive even if the ACO does not qualify for the shared savings, if the physician, and in turn, the ACO reports the measures and the physician meets the incentive requirements.

CMS retains the right to audit and validate anything entered into the GPRO tool and if the audit reveals greater than a ten percent mismatch, the ACO will not be given credit for meeting the quality target for measures where the mismatch exists. Recurrence could lead to termination of the ACO.

Public Reporting

The Proposed Rule recommends transparency of the quality measures of the ACO with public reporting by the ACO, designed to provide more informed patient choice, offer incentives and feedback to improve quality, lower cost of care and improve program integrity oversight. Under the Proposed Rule, the ACO publically would report: (1) providers and suppliers in the ACO; (2) parties sharing the governance of the ACO; (3) quality performance standard scores; and (4) general information on how the ACO shares savings with its members.

Invited Comments

CMS has requested comments on the following issues:

• Including or excluding any of the proposed measures.
• Suggested variations or substitutions of measures that are substantially equivalent.
• Whether measures should be narrowed.
• Whether some measures should be excluded for scoring purposes and only used for quality monitoring purposes.
• Retiring or adjusting the weights of domains, modules or measures over time.
• Data submission requirements, alternative methods, or limiting them to only claims-based and survey.
• Performance standards vs. minimum threshold and the pros and cons of each.
• Scoring methodology.
• Reporting on all measures or only a subset.
• Hospitals also having an EHR requirement similar to the primary care physician requirement.
• The incorporation of the PQRS requirements and payments.
• Transparency of the information and public reporting.
• Whether public reporting should be by the ACO or CMS.
• Best way to align quality domains, categories, specific measures and rewards across other federal healthcare programs to ensure highest possible quality of care.
• Whether the same measures should be used with other programs even though they may have differences in patient population and other affected parties.

Client Concerns

Clients contemplating becoming an ACO may want to consider the following:

• How will the outcomes and patient experiences be adjusted for risk and other appropriate patient population or provider characteristics?
• How will baseline measures be determined in areas where there is no national standard or if the ACO has limited data to provide?
• Will these measures be applicable to specialty driven ACOs?
• How will the measures be focused for each specific provider category since they all look the same in the Proposed Rule?
• What is proposed to retain consistency across ACOs in quality measures regardless of composition, since CMS contemplates different types of ACOs?
• If an ACO underperforms one year but improves that domain the next, but underperforms in a different domain, what will be the consequences?
• How will the survey of patient/caregivers be administered and what will the burden on ACOs be?
• Will the surveys be standardized for all ACOs?
• For certain ACOs, what if there is limited or no data on a certain measure due to patient population?
• What if an ACO does not utilize an EHR?
• What is the impact of publically reported information and transparency of information in medical negligence and other litigation?

Data Sharing

CMS will share both aggregate and beneficiary identifiable data with an ACO provided that the ACO: (1) does not place unnecessary restrictions on the use or disclosure of data it compiles from ACO participants, within and outside of the ACO; and (2) complies with applicable laws regarding the use and privacy of the data, including HIPAA and state medical privacy laws.

Aggregate data will be provided at the start of each agreement period and quarterly thereafter. The data, while not identifiable, will include de-identified claims history of the services rendered for the ACO’s Medicare FFS assigned beneficiaries. The data also will include information on financial performance, quality performance, utilization data and aggregated metrics on the ACO’s assigned beneficiaries.

Upon the ACO’s request, CMS also will provide the ACO with its assigned beneficiaries’ names, dates of birth and health insurance claim numbers to be used for population-based activities relating to improving health or reducing healthcare costs, protocol development, case management and care coordination. To receive this data, the ACO must provide a certification to CMS that the request reflects the minimum data necessary to perform healthcare operations work. Assigned beneficiaries cannot opt out of the sharing of this data to the ACO, as they can with other individually identifiable data CMS may share with an ACO.

Beneficiary identifiable data also may be shared with the ACO for purposes of evaluating ACO provider/supplier performance, conducting quality assessment and improvement activities, and conducting population-based activities relating to improved health, if the ACO (1) makes a formal request for the data, (2) enters into a data use agreement with CMS, (3) provides a certification to CMS that the request reflects the minimum data necessary to perform healthcare operations work, (4) provides notices to beneficiaries about how the ACO may use identifiable claims data and (5) gives the beneficiary an opportunity to opt out of having their individually identifiable data shared by CMS. The use of identifiers and claims data will be limited to developing processes and engaging in activities related to coordinating care and improving the quality and efficiency of care that are applied uniformly to all Medicare beneficiaries assigned to the ACO. The individually identifiable data cannot be used to reduce, limit or restrict care for specific beneficiaries.

Improper use of shared data may result in CMS refusing to provide any further data, termination of the ACO from the MSSP and/or additional sanctions and penalties available under applicable law, including HIPAA.

Compliance, Conflicts of Interest, Screening

The Proposed Rule requires all ACOs to establish a compliance plan that includes at a minimum the following elements: (1) a designated compliance officer who is not legal counsel to the ACO and who reports directly to the ACO’s governing body; (2) mechanisms for identifying and addressing compliance problems related to the ACO’s operations and performance; (3) a method for employees or contractors of the ACO or ACO providers/suppliers to report suspected problems related to the ACO; (4) compliance training of the ACO’s employees and contractors; and (5) a requirement to report suspected violations of law to an appropriate law enforcement agency. The Proposed Rule clarifies that an ACO may build on existing compliance programs and coordinate compliance efforts with ACO participants and ACO providers/suppliers to meet this requirement. ACOs must submit their compliance plans to CMS with their applications. If an ACO has not adopted a compliance plan at the time it submits an application to CMS, it must submit a description of the plan that will be in place at the time the agreement with CMS becomes effective.

The Proposed Rule requires ACOs to comply with federal criminal law, the False Claims Act, the Anti-kickback Law, the civil monetary penalties (CMP) law and the physician self-referral law. Likewise, the ACO must require its ACO participants, ACO providers/suppliers, and contracted entities who perform functions on behalf of the ACO to comply with those provisions. An authorized representative of the ACO, namely an executive with the power to legally bind the ACO, will be required to certify the accuracy, completeness and truthfulness of information contained in the program application, three-year agreement and submissions of quality data and other information to CMS. Similarly, a representative with legally binding authority will be required to make a written request for payment of the shared savings earned by the ACO to certify the ACO’s compliance with program requirements and the accuracy, completeness and truthfulness of any information submitted by not only the ACO, but ACO participants and providers/suppliers as well. The entity that generates quality data also will be required to make the same assertions with respect to the data.

CMS also requested comments on its proposal to require an ACO governing body to have a conflicts of interest policy applicable to members of the governing body. According to the preamble, the policy must require members of the governing body to disclose relevant financial interests, provide a procedure for the ACO to determine whether a conflict of interest exists, set forth a process to address any conflicts that arise and identify remedial actions applicable to governing body members who fail to comply with the policy.

CMS has requested comments on implementing an ACO screening protocol during the application process to determine an applicant ACO’s program integrity history, including any history of program exclusions or other sanctions and affiliations with individuals or entities that have a history of program integrity issues. ACOs with negative screening results may have their applications rejected or may be subject to additional safeguards or assurances against program integrity risks. Comments are specifically requested with respect to the advisable scope of screening and what types of screening results would justify the proposed sanctions.

Parties should carefully consider the Proposed Rule and the parameters of the mandatory compliance programs, reporting requirements, and certifications. Contrary to years of commentary from the OIG that compliance plans are not mandatory and should be tailored to each provider, the Proposed Rule sets certain mandatory criteria that may not easily work within each ACO.

Entities should note, in particular, the requirement that the compliance officer cannot be legal counsel to the ACO. This issue has been debated for years and clearly CMS does not favor the compliance officer as legal counsel, perhaps because it may result in compliance issues falling under attorney-client privilege when an enforcement agency would like them to be discoverable. For whatever reason, the Proposed Rule heightens the need for ACOs to involve legal counsel quickly in the process as legal issues are identified through a compliance program.

Another issue in the Proposed Rule is a requirement that an ACO report suspected violations to a law enforcement agency. It is unclear how this provision may be interpreted and what agencies may qualify as law enforcement agencies. There may be situations where a payment issue arises and a provider may take corrective action to make appropriate refunds directly to a payor. If the law is a strict liability law, the Proposed Rule would not necessarily allow the ACO to take corrective action with the payor without also making a report to law enforcement.

Additionally, the government is keenly focused on individuals being held accountable and ACOs should recognize that erroneous certifications may be converted to fraudulent statements and impose liability on the person providing the certification.

Finally, the Proposed Rule recognizes but does not fully address the fact that the different parties to an ACO may already have their own individual compliance programs. As parties work to form ACOs, the interaction of their individual compliance programs and a separate ACO program will need to be fully analyzed.

In sum, compliance programs are a valuable tool for all healthcare providers and arguably an industry standard today. Accordingly, requiring a compliance program should not be a disfavored proposal. However, ACOs should recognize that the Proposed Rule leaves many unanswered questions that warrant comment. In addition, ACOs must recognize that compliance programs and activities will certainly be an operating cost that needs to be included in any financial analysis on the viability of an ACO.

Monitoring

The Proposed Rule includes provisions related to the monitoring of ACOs with respect to compliance with Medicare program and program integrity requirements. Drawing on its experience in past monitoring efforts, CMS proposes various methods to monitor ACOs and their participating providers and suppliers. CMS proposes that monitoring methods may include: (1) analysis of specific financial and quality data; (2) site visits; (3) assessment of beneficiary and provider complaints; and (4) audits, including analysis of claims, chart review, beneficiary surveys, and coding audits.

To assist CMS in oversight, ACOs must retain records of their activities under the MSSP for at least 10 years from the end of the agreement period. Additionally, a number of factors may trigger heightened oversight of ACOs by CMS, including close examination of ACOs that incur large losses to the Medicare program. Based upon the monitoring findings, CMS may terminate the ACO from the MSSP, may warn the ACO of the performance issue, may request a corrective action plan (CAP), or may place the ACO on a monitoring plan.

The proposed monitoring activities should not be a surprise to providers and suppliers. Current program integrity activities could result in the same monitoring techniques and sanctions. As program integrity continues to be a focus for Medicare and enforcement agencies, ACOs should expect that their activities will be equally scrutinized as any other type of provider. CMS seeks comment on additional actions that may be appropriate prior to termination.

Suspension of Payment for Avoiding At-Risk Beneficiaries

CMS recognizes a concern that ACOs may attempt to avoid beneficiaries who present a high risk of increasing costs to the ACO. CMS identifies various factors that it considers would qualify patients as being “at-risk.” Some of the factors include multiple emergency room visits each year, high utilization patterns, or chronic conditions. ACOs that are found to be avoiding at-risk patients during a performance year will be notified by CMS of such determination and will be required to submit a CAP for approval. CMS proposes that the ACO would not receive shared savings payments while it is under the CAP and that the ACO would not be eligible to earn any shared savings for the performance period attributable for the time the ACO was under the CAP. If the ACO continues to avoid at-risk beneficiaries, the ACO would be terminated from the MSSP. CMS is seeking comments on whether lesser sanctions may be appropriate when an ACO avoids at-risk beneficiaries; such proposed lesser sanctions include: cessation of (or a reduction in) the assignment of new beneficiaries to the ACO, a reduction in the amount of the shared savings payment, or a fine for each instance of at-risk beneficiary avoidance.

ACOs will need to be vigilant not to discourage high-risk patients from their patient population. ACOs with fewer at-risk patients naturally will be positioned to perform better and reap the financial benefits of the MSSP, setting up incentives for ACOs to enroll fewer at-risk patients if the benchmarks are not properly risk-adjusted. However, this issue is not new to the health industry. Insurance companies analyze patient risk factors as they decide on enrollment and premiums. The patient risk factor is arguably a key decision in setting premium rates for insurance companies. Hence, while CMS may be attempting to protect the at-risk patients, the Proposed Rule may need some additional work to fully address risk-sharing issues in ACOs. For example, potential ACOs may want to comment that ACOs with higher patient acuity levels for the beneficiaries assigned to the ACO should be given a greater portion of the shared savings or have different benchmarks for evaluation or risk adjusters.

Termination

PPACA specifically authorizes CMS to terminate ACOs that fail to meet established quality performance standards or ACOs that have taken steps to avoid at-risk patients. CMS has additionally identified 13 other distinct actions that may result in termination of the ACO:

• Any material change impacting the ability to meet eligibility requirements;
• Failure of the ACO to effectuate required regulatory changes during the agreement period after given the opportunity for a CAP;
• Failure of an ACO to demonstrate that it has adequate resources in place to repay losses and to maintain those resources for the agreement period;
• Noncompliance with requirements regarding beneficiary notification of provider/supplier participation in an ACO;
• Failure to completely and accurately report or failure to make timely corrections;
• Material noncompliance, or a pattern of noncompliance, with public reporting and other CMS reporting requirements;
• Limiting or restricting internally compiled beneficiary medical records from providers and suppliers both within and outside of the ACO;
• Failure to offer beneficiaries the option to opt out of sharing claims information;
• Improper use or disclosure of claims information received from CMS in violation of the HIPAA Privacy Rule, Medicare Part D Data Rule, Privacy Act, the data use agreement, or other applicable laws or regulations;
• Violation of physician self-referral prohibition, civil monetary penalty laws, Anti-kickback Law, other antifraud laws, antitrust laws, or other applicable Medicare laws, rules, or regulations that are relevant to ACO operations;
• Submission of false, inaccurate, or incomplete data and or information, including but not limited to, information provided in the MSSP application, quality data, financial data, and information regarding the distribution of shared savings;
• Failure to submit payment which is due in a timely manner; and
• Use of marketing materials or activities or other beneficiary communications subject to approval requirements that have not been approved by CMS.

CMS seeks comments on additional conditions that could merit the termination of an ACO agreement. For violations that CMS considers minor in nature and pose no immediate risk or harm to beneficiaries or impact on care, CMS proposes to allow ACOs the opportunity to submit a CAP before termination.

Termination of an ACO from the MSSP will result in a loss of the mandatory 25 percent withhold of shared savings. An applicant may be eligible for reapplication after termination only after the end of the original three-year agreement period and if the deficiencies that led to termination have been corrected.

Reconsideration Review Process—Appeal Rights

PPACA provides that certain actions are not subject to administrative or judicial review, including the termination of an ACO for failure to meet quality performance standards. The statute is silent on other matters such as the right to contest decisions on eligibility to participate in the MSSP or termination for avoidance of at-risk patients. CMS proposes to implement a reconsideration review procedure similar to the review process used by the durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) competitive bidding process and the Medicare Part C and Part D programs for initial determinations. Initial determinations include the denial of an ACO application or the termination of an ACO participation agreement. An ACO or ACO applicant can appeal by requesting a reconsideration from a CMS reconsideration official within 15 days of the adverse initial decision. Reviews may be held orally or on the record, and the burden of proof is on the ACO or ACO applicant. If an ACO or ACO applicant disagrees with the recommendation of the reconsideration official, the Proposed Rule allows ACOs the opportunity to request a record review by an independent CMS official. CMS invites public comment on the structure and procedure of an appropriate review process for ACOs terminated for avoidance of at-risk beneficiaries or other reasons not exempted for review by statute.

Parties should comment on the Proposed Rule and consider what appeal rights would be fair, such as whether a third party should be involved as compared to the CMS proposal which would have an appeal reviewed by a CMS official. Also, the proposed deadline to appeal any unfavorable determinations in 15 days is arguably destined to create many issues on timeliness of appeals and the ability of ACOs to adequately prepare any such appeals. The 15-day deadline to appeal is particularly aggressive when compared to various other Medicare program appeal deadlines and the data analyses that may be required.

Fraud and Abuse Waivers

Seeking to address application of the fraud and abuse laws to ACOs formed in connection with the MSSP in a manner that does not impede development while protecting against abuse, CMS and OIG have proposed a limited waiver program. The waivers would apply to three specific laws: the physician self-referral laws found at Social Security Act (SSA) § 1877 (Stark Law); the anti-kickback statute found at SSA § 1128B(b) (Anti-kickback Law); and the CMP provision addressing hospital payments to physicians to reduce or limit services found at SSA § 1128A(b)(1) and (2) (Gainsharing CMP). In addition, through the waivers, some state laws that incorporate the foregoing laws also may be deemed to be waived; however, that is not universally the case, consequently ACO participants should carefully evaluate their applicable state fraud and abuse laws. Only ACOs that have executed an agreement with CMS to participate in the MSSP and that comply with the agreement, as well as the PPACA provision authorizing the waivers and implementing regulations, are eligible for the waivers. The waivers will apply only during the term of the ACO’s agreement with CMS.

With respect to the Stark Law, the proposed waiver was narrowly drafted to apply only to the financial relationship consisting of distributions of shared savings received by an ACO from CMS under the MSSP. The Stark Law waiver applies in two situations: (1) distribution of shared savings to or among ACO participants, providers and suppliers; and (2) distribution of shared savings outside the ACO, but only for activities necessary for and directly related to the ACO’s participation in and operations under the MSSP. The scope of the activities referenced in the second situation above is not discussed in the Proposed Rule, although the OIG does seek comments regarding the scope of such activities. The OIG provides an identical waiver for the Anti-kickback Law. With respect to the Gainsharing CMP, there is a proposed waiver for distribution to physicians of shared savings received from a hospital by an ACO, provided that the payments are not made knowingly to induce the physician to reduce or limit medically necessary items or services.

Although the waivers under the Stark Law are limited to financial relationships consisting of distribution of shared savings, the potential waivers under the Anti-kickback Law and the Gainsharing CMP are broader. Specifically, the Proposed Rule provides waivers under the Anti-kickback Law and Gainsharing CMP for any financial relationship between or among the ACO, ACO participants and ACO providers/suppliers necessary for and directly related to the ACO’s participation in the MSSP, if the relationship qualifies for an exception under the Stark Law. Under current law, qualification for a Stark Law exception would not confer immunity under the Anti-kickback Law or Gainsharing CMP; however, the OIG states an intent to minimize burdens in establishing ACOs as the reason for the limited exception to the general rule.

The OIG has requested comments on developing waivers for financial relationships other than shared savings distributions. Comments are solicited regarding specified types of financial relationships, all with the caveat that the relationships must support beneficial ACO development while protecting patients and the program from fraudulent and abusive activities. Comments are requested on the following types of relationships: arrangements relating to establishing the ACO; arrangements relating to ongoing operations of the ACO and achieving ACO goals; arrangements with outside entities; and distribution of shared savings received from private payers. In addition to comments regarding additional financial relationships, the OIG is seeking comments regarding the proposed duration of waivers, whether additional safeguards are needed, and the scope of the waivers (i.e., whether they are overly broad or too narrow). Input also is sought as to whether a waiver is needed for the beneficiary inducement provisions of the CMP. Comments are due by June 6, 2011.

The proposed waivers constitute a very useful first step in facilitating development of ACOs. The OIGs extensive list of solicited comments also indicates a willingness to consider expansion of the financial relationships eligible for a waiver. Entities interested in establishing ACOs should take the opportunity to assist the OIG in broadening available waivers by submitting comments.

The FTC/DOJ Proposed ACO Statement of Enforcement Policy

The FTC and the Antitrust Division of the DOJ (collectively the “Agencies”) have proposed an antitrust Statement of Enforcement Policy (Statement) for ACOs that dovetails with the Proposed Rule. The salient feature of the Agencies’ Statement is the creation of a mandatory antitrust approval requirement for ACOs with large market shares.

The Statement would require any ACO with two participants that provides the same service to patients in the PSA, and that has a 50 percent or greater market share in that PSA, to apply to the FTC and the DOJ for a letter stating that the reviewing agency does not intend to challenge the ACO under the antitrust laws. If an ACO does not receive such a letter, it cannot participate in the MSSP.

Mandatory prior approval requirements are rare in U.S. antitrust enforcement. The closest parallel is the premerger notification system for large acquisitions under the Hart-Scott-Rodino Act. Even that requirement, however, does not involve prior approval of acquisitions by the Agencies. In the vast majority of premerger filings, the reviewing agency simply allows the required waiting period to expire without taking action. Here, however, ACOs with large market shares must ask for and receive a positive expression of approval (or nonopposition) from one of the Agencies.

The ACO approval requirement raises numerous issues of administrability and burden:

• The Agencies have commendably promised to respond to applications within 90 days, but both are small organizations that devote the lion’s share of their resources to merger enforcement and (in DOJ’s case) criminal prosecution of hard-core antitrust offenses such as price-fixing. No one knows how many ACOs will be subject to the approval requirement. (The Agencies estimate as many as 200.) Whether the Agencies can deliver on their 90-day promise while carrying out their other law enforcement responsibilities is an open question.
• The approval process and the computation of PSA market shares are unfamiliar tasks for healthcare providers. Many, if not most, ACOs will need the assistance of accountants, economists and lawyers to make the necessary calculations and to complete the approval process, if required. While not all ACOs will have to apply for antitrust approval, many, if not most, ACOs will at least have to perform the market share computations to determine whether an application is necessary. The Statement contains an appendix offering examples to assist ACOs in making market share calculations, but the process still is likely to be uncertain and difficult, especially at the outset.
• ACOs will be required to apply for approval if they trigger the 50 percent threshold in any service for any PSA. Highly diversified multiprovider ACOs will have numerous potential areas in which the approval requirement could be triggered.
• The 90-day response commitment will presumably bind the Agencies only if the ACO submits an application that complies with the Agencies’ requirements. Given the unfamiliarity with the process, there is a considerable potential for delay as puzzled providers and their advisors try to put together an acceptable application package.
• The antitrust review process may competitively disadvantage larger ACOs and ACO participants in quickly submitting an application to CMS.

The Statement sets out other enforcement criteria that affect all ACOs, in addition to the mandatory approval process.

The Statement sensibly accepts CMS’s proposed eligibility criteria as satisfying the requirement that an ACO be sufficiently financially or clinically integrated before it can engage in joint price negotiations with commercial health insurers. The Statement does not create an additional overlay of antitrust integration requirements that an ACO must meet (although the Agencies presumably provided input to CMS’s eligibility criteria). Thus, an ACO that complies with the CMS criteria also will comply with the antitrust Agencies’ requirements.

Complying ACOs will be evaluated under the forgiving antitrust “rule of reason” standard, which means that they will be illegal only if they are proven to have actual anticompetitive effects that outweigh their precompetitive effects. Findings of illegality under the rule of reason standard are rare. Complying ACOs will not be exposed to potential automatic illegality under the antitrust per se rule, which is reserved for extreme anticompetitive practices such as price-fixing, customer allocation, market division or bid-rigging.

The Statement also proposes an antitrust safety zone for ACOs with small market shares. That safety zone applies to any ACO with a market share of 30 percent or less in each service provided by two or more of the ACO’s participants in each PSA in which the ACO operates. In addition, the safety zone will apply only if each hospital and ambulatory surgery center participating in the ACO is nonexclusive to the ACO, regardless of its market share. Physicians or other providers participating in the ACO, however, may be exclusive to the ACO without forfeiting the ACO’s eligibility for the safety zone. ACOs in the safety zone “have no obligation to contact the agencies,” according to the Statement.

Under a “Rural Exception,” an ACO in a rural county (as defined by the U.S. Census Bureau) may include one physician per specialty, or “Rural Hospitals,” even if their inclusion pushes the ACO’s share over the 30 percent level, so long as such physicians or Rural Hospitals participate on a nonexclusive basis. Under a “Dominant Provider Limitation,” however, any ACO that includes a participant with more than a 50 percent share of any service that no other ACO participant provides in that PSA will remain in the safety zone only if that participant is nonexclusive, and such an ACO cannot require a commercial payer to contract exclusively with that ACO or otherwise restrict a commercial payer’s ability to deal with other ACOs or provider networks.

For ACOs that fall outside the safety zone, but are not subject to mandatory review, the Statement offers the opportunity for a voluntary submission to the Agencies under the same 90-day turnaround promised to ACOs that are required to apply for approval. The Statement expressly notes that ACOs that are outside of the safety zone are not presumptively anticompetitive.

The Statement sets out five types of conduct that an ACO should avoid; if it does, the Statement declares that the ACO is “highly unlikely to present competitive concerns[.]” Those types of competitively problematic conduct are:

• Preventing or discouraging commercial payers from directing or incentivizing patients to select certain providers;
• Tying sales, under which the ACO expressly requires commercial payers (or pressures them through pricing policies) to buy other services from providers outside the ACO (i.e., requiring a payer to contract with all hospitals in a network if the payer wants to contract with the particular hospital that participates in the ACO);
• Requiring providers (except for primary care physicians) to contract exclusively with the ACO;
• Restricting a commercial payer’s ability to provide its enrollees with information that will help them make informed decisions about selecting providers; or
• Sharing competitively sensitive pricing or other information among ACO participants that they could use to set prices outside the ACO.

Although it is doubtless the Agencies set out to make the antitrust criteria for ACOs as short and as simple as possible, they have, nevertheless, created a brand-new regulatory regime that sets up mandatory hurdles for a substantial number of nascent ACOs. Public comments on the proposed Statement are due by May 31, 2011.

Tax-Exempt Organization Participation

In Notice 2011-20 (Notice), the IRS provided guidance with respect to the participation of tax-exempt organizations in the MSSP, but no guidance was offered for participation in non-MSSP activities.

After providing brief background information on ACOs and the MSSP, the Notice summarized the rules relating to the qualification for tax-exempt status under § 501(c)(3) of the Internal Revenue Code as well as the tax on unrelated business income. While noting that the “promotion of health has long been recognized as a charitable purpose,” the Notice stated that not every activity that promotes health supports tax exemption. Similarly, while the IRS has ruled that lessening the burdens of government by reviewing the quality of services under the Medicare and Medicaid programs constitutes a charitable activity, negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the agreement negotiated involves a program aimed at achieving cost savings in healthcare delivery.

The Notice also summarized the rules with respect to the unrelated business income tax (UBIT). To avoid UBIT, an activity “must contribute importantly to the accomplishment of [exempt] purposes.” Citing Rev. Rul. 98-15, the Notice reaffirms that the activities of a limited liability company (LLC) treated as a partnership for federal income tax purposes are considered to be activities of a nonprofit organization that is an owner of an LLC when evaluating whether the nonprofit organization is operated exclusively for exempt purposes and for purposes of calculating UBIT.

The first issue addressed by the Notice is whether participation in the MSSP through ACOs by tax-exempt organizations might jeopardize the exempt status of such organizations. The IRS indicates that the determination of whether such participation constitutes prohibited inurement or impermissible private benefit must be made on a case-by-case basis, based on all the facts and circumstances. Despite this general rule, the Notice states that because of CMS regulation and oversight of the MSSP,

[A]s a general matter, the IRS expects that it will not consider a tax-exempt organization’s participation in the MSSP through an ACO to result in inurement or impermissible private benefit to the private party where:

• The terms of the tax-exempt organization’s participation in the MSSP through the ACO (including its share of MSSP payments or losses and expenses) are set forth in advance in a written agreement negotiated at “arm’s” length.
• CMS has accepted the ACO into, and has not terminated the ACO from, the MSSP.
• The tax-exempt organization’s share of economic benefits derived from the ACO (including its share of MSSP payments) is proportional to the benefits or contributions the tax-exempt organization provides to the ACO. If the tax-exempt organization receives an ownership interest in the ACO, the ownership interest received is proportional and equal in value to its capital contributions to the ACO and all ACO returns of capital, allocations and distributions are made in proportion to ownership interests.
• The tax-exempt organization’s share of the ACO’s losses (including its share of MSSP losses) does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled.
• All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO’s participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.

While this Notice does not rise to the level of a safe harbor, it provides helpful guidance that, by following these rules, the tax-exempt organization’s participation in the MSSP through an ACO generally will not jeopardize its tax-exempt status.

With respect to UBIT, the Notice states that the “IRS expects that, absent inurement or impermissible private benefit, any MSSP payments received by a tax-exempt organization from an ACO would derive from activities that are substantially related to the performance of the charitable purpose of lessening the burdens of government, . . . as long as the ACO meets all the eligibility requirements established by CMS for participation in the MSSP.”

The IRS also solicited comments as to whether additional guidance is needed regarding what criteria or requirements should be analyzed to determine whether participation by a tax-exempt organization in the MSSP through an ACO is consistent with tax-exempt status and whether the tax-exempt organization is receiving unrelated business income.

Finally, the Notice also addresses an ACO’s conduct of activities unrelated to the MSSP. While negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, the IRS recognizes that certain non-MSSP activities may further or be substantially related to an exempt purpose. Specifically, an ACO that participates in shared savings arrangements with Medicaid may further the charitable purpose of relieving the poor and distressed or the underprivileged. However, the Notice does not address whether, and under what circumstances, a tax-exempt organization’s participation in non-MSSP activities through an ACO will be consistent with an organization’s tax exemption or will not result in UBIT. However, the IRS did request comments on what guidance, if any, is necessary or appropriate regarding a tax-exempt organization’s participation in non-MSSP activities through an ACO.

Public comments should be submitted in writing on or before May 31, 2011.

Protect Your Interests . . . Join Baker Hostetler’s Comment Consortium

Baker Hostetler will be launching a Consortium of interested clients who wish to submit comments to the Proposed Rule and the OIG’s limited waiver program by June 6, 2011. A web portal will be initiated for purposes of amassing comments and providing feedback. We will be creating the comments for submission to the FTC/DOJ and IRS on May 31, 2011, as well and would be happy to speak with you regarding details associated with the Consortium. The Consortium is being coordinated by Susan Feigin Harris and Steve Eisenberg. If you are interested in participating in the comment process, please contact either Susan, or 713.646.1307 or Steve, or 216.861.7903.

QUESTIONS AND NEXT STEPS . . .

Should you have any questions regarding the Proposed Rule and the related agency issuances or the information contained herein, please do not hesitate to contact any member of the Baker Hostetler Healthcare Industry Team.

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