ACOs Under the Microscope: Still in their infancy, Accountable Care Organization may be proving their worth

Thursday, September 29, 2016 - 16:46
Charles H. Newman
Jillian L. Romaniello

Charles H. Newman

Jillian L. Romaniello

On March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) was enacted. The goal of PPACA was to reform healthcare by decreasing healthcare spending and increasing the quality of care provided. One of the vehicles created to accomplish this goal was the accountable care organization (ACO). An ACO is an entity, often a limited liability company, whose members consist of doctors, hospitals and other healthcare providers who have agreed to participate in certain activities designed to provide coordinated care to patients. These providers do not have to be in the same medical group, and ACO participation is voluntary. As discussed below, an ACO that has been approved by the Center for Medicare and Medicaid Services (CMS) to operate as an ACO will have financial incentives to provide quality care at a lower cost, incentives that can be shared with its member providers. ACOs operate under the theory that better quality care will be provided to patient populations at a lower overall cost if all of the patient’s providers are communicating with each other and sharing information. For example, if the patient’s primary care physician orders certain lab work, and the patient’s nephrologist has access to the results of that lab work, unnecessary duplicate testing can more easily be avoided.

There are three types of ACOs: a Medicare shared savings program (SSP), an advanced payment ACO model (a supplementary incentive program for selected participants in the SSP) and the pioneer ACO model (a program designed for ACOs created prior to the adoption of the formal ACO regulations; the pioneer ACO program is no longer accepting applications). There are currently over 400 ACOs enrolled in the program. This article will focus on the SSP, which is by far the most common.

On June 9, 2015, CMS published final regulations amending the ACO program. ACOs must have a minimum of 5,000 Medicare beneficiaries assigned to the ACO in order to participate in the SSP. Beneficiaries are assigned retrospectively to an ACO when a patient receives the majority of his or her primary care services from a primary care provider who is a member of the ACO. The regulations establish quality performance measures and are a method for linking quality and financial performance. The ACO must also develop a governing body that is responsible for routine self-assessment, monitoring and reporting. ACOs must enter into a participation agreement with the CMS and agree to participate in the SSP for a period of at least three years. ACOs may begin participation with a one-sided risk agreement, whereby it will share in savings (i.e. the overall cost to Medicare of treating the ACO’s patient population as compared with a benchmark established by CMS) but not be accountable for any losses. ACOs may also be operated under a two-sided performance-based risk model, under which the ACO is at risk for a share of any losses (i.e. the excess of cost over the benchmark) but receives a higher percentage of savings achieved. Under the original ACO regulations, any ACO that elected to participate in the one-sided risk model was required to convert to the two-sided model after three years. Under the revised regulations, ACOs have the option of continuing in the one-side risk model after the initial three-year agreement.

The regulations require ACOs to have procedures and processes in place to promote evidence-based medicine, beneficiary engagement and coordination of care. This includes instituting electronic health records and reporting quality and financial data to CMS.

 How Are Savings Calculated?

Under the program regulations, CMS pays individual providers and suppliers for specific items and services furnished to Medicare beneficiaries assigned to an ACO (which is how all Medicare providers are compensated under the Medicare fee-for-service payment systems). Under an SSP, CMS assesses an ACO’s quality and financial performance based upon its assigned beneficiaries to determine whether the ACO has reached certain quality performance standards and reduced spending.

CMS compares yearly data with a historical financial benchmark (each ACO has its own unique benchmark). In the final regulations, CMS has implemented an option to set a regional benchmark based on trends in regional fee-for-services costs instead of the entity’s own financial history. ACOs that meet or exceed a minimum of cost reductions (expenditures under the benchmark) and satisfy minimum quality performance standards are eligible to receive a portion of the savings they generate (the shared savings).

To account for normal variation, CMS establishes a percentage under the benchmark that an ACO must reach in order to receive a portion of the savings. The one-sided model is based upon the number of assigned beneficiaries and ranges from 2 percent to 3.9 percent. Under the two-sided model, there is no requirement to base the percentage on the number of assigned beneficiaries, and it is set at a flat 2 percent.

Are ACOs Achieving Shared Savings?

On August 25, 2016, CMS released the ACO “2015 Performance Year Quality and Financial Results.” The 2015 results were as follows:

·       The 392 ACOs enrolled in the SSP generated more than $429 million in program savings.

·       Only 119 ACOs qualified for shared savings payments by meeting quality performance standards and savings thresholds.

·       83 ACOs lowered spending below the applicable benchmark but did not receive a portion of the shared savings because they did not meet the minimum savings.

·       ACOs with more experience in the program were more likely to generate shared savings (42 percent of ACOs that had been enrolled since 2012 realized shared savings compared with only 21 percent of ACOs that enrolled in 2015).

New and renewing ACOs will be announced at the end of 2016.

Have ACOS Realized Improvements in Quality of Care?

The evidence suggests that quality outcomes for patients have improved with the implementation of ACOs and electronic health records. Eliminating duplicate testing lowers healthcare costs and saves time in developing treatment plans. ACOs are required to enhance safety in their facilities (one of the quality performance measures). This has led to lower infection rates and lower rates of complications from surgical procedures.

Additionally, screening rates for colorectal cancer and breast cancer have improved among Medicare beneficiaries. Medicare patients reported increased access to care and, for those with multiple chronic conditions, higher ratings of overall care quality.

How Can the ACO Program Be Improved?

Many participants in the program have complaints regarding the methodology used to establish the financial benchmark against which savings are measured. The financial benchmark is set for each ACO based upon prior financial performance. As providers lower costs, the savings targets become more difficult to achieve. Providers who already had lower spending and high quality also have difficulty further cutting costs while raising quality standards. In order to address this issue CMS will begin offering regional benchmarks, which are not based on individual past performance, but ACOs that are in the middle of agreements, or have just renewed agreements, will not be able to take advantage of this change.

It is important to remember that lowering costs doesn’t automatically qualify an ACO to share in the savings. The benchmark must be exceeded by a certain percentage, as set forth above. For example, Westmed Medical Group’s ACO (located in New York) spent $2.8 million below its benchmark, achieving a savings rate of 2.4 percent, but that was not high enough to receive a shared savings payment. It is also possible that an ACO that provides quality care but does not lower costs could be penalized if it participates in the two-sided risk model.

Some physicians also take issue with how the shared savings are distributed to the ACO’s members. If an ACO does receive a shared savings payment, the distribution of those payments to the members is determined by the ACO’s governing documents. In addition, employed physicians may be working under a compensation model that rewards productivity based on revenue and/or volume of services provided (typically measured in relative value units, or RVUs). Physicians in that position may not realize any financial benefit, and may even be penalized, even if their employer receives shared savings payments.

Some criticize the program savings. In 2014, Medicare benefit payments totaled $597 billion. Approximately 26 percent was for Medicare Advantage private health plans, 23 percent for inpatient hospital services, 12 percent for physician services, 11 percent for prescription drugs, 7 percent for hospital outpatient services, 5 percent for skilled nursing facilities, 3 percent for home health services and 14 percent for other services. The $429 million in program savings is a significant amount of money, but it accounts for only approximately 0.07 percent of all Medicare spending, and a portion of that savings was paid back to ACOs in the form of shared savings.

Are ACOs Worth the Trouble?

ACOs are still in their infancy. In four years, the structure has come a long way. While there are some financial kinks to work out, quality of care has risen. When all of a patient’s physicians are working together, the outcome is likely better for the patient.

It is also too soon to determine the ultimate impact of the collateral benefits to providers of being part of an ACO. In particular, the Department of Justice, by a Final Policy Statement issued on October 20, 2011, cleared the way for ACOs to collectively negotiate with commercial third-party payors, and CMS has issued regulations granting ACOs limited waivers from strict compliance with federal anti-kickback and anti-self-referral (Stark) laws. While these factors provide added incentives to participate in the ACO program to the benefit of Medicare, PPACA was intended to reduce the overall cost of healthcare, not just the costs for Medicare, and there is the possibility that these rulings and waivers may have the unintended consequence of increasing the cost of healthcare for the rest of the population.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Sills Cummis & Gross P.C.

Charles H. Newman, of counsel at Sills Cummis & Gross. Jillian L. Romaniello, an associate at Sills Cummis & Gross.

You can reach the authors at or with questions about the article.