On March 31, the Department of Health and Human Services ("HHS") and the Centers for Medicare and Medicaid Services ("CMS") released the highly anticipated proposed rule under the Affordable Care Act of 2010 (commonly referred to as the "Healthcare Reform Law") regarding the formation and operation of accountable care organizations ("ACOs"). The proposed rule, which will be published in the Federal Register on April 7, 2011, is the predecessor to the final rule that will be issued by HHS/CMS sometime after the 60 day public comment period (which began on March 31).

In addition, because the proposed rule will necessitate certain changes to the current regulatory framework, CMS issued a joint notice related to waivers of the federal physician self-referral law, anti-kickback statute, and the civil monetary penalty law related to the Shared Savings Program (the "Program"); the FTC and DOJ also jointly issued a "Proposed Statement of Enforcement Policy Regarding Accountable Care Organizations Participating in the Shared Savings Program;" and the IRS issued a notice requesting comments regarding participation by tax-exempt organizations, including hospitals, in ACOs in the Program.

ACOs – What are they and who can form them?

As defined in the proposed rule, an ACO is a legal entity that is recognized and authorized under applicable State law, as identified by a Taxpayer Identification Number ("TIN"), and is comprised of an eligible group of Medicare-enrolled providers and/or suppliers ("ACO participants") that work together to manage and coordinate care for Medicare fee-for-service beneficiaries. The ACO must have a mechanism for shared governance that provides all ACO participants with proportionate control over the ACO's decision making process. ACOs are also required to have a formal legal structure that allows the organization to receive and distribute payments for shared savings to the ACO participants.

Tracking the language from the Healthcare Reform Law, the proposed rule provides that an ACO can only be independently formed by (1) ACO professionals (which are physicians as defined in section 1861(r)(1) of the Social Security Act and/or practitioners as described in section 1842(b)(18)(C)(1) of the Social Security Act) in group practice arrangements, (2) networks of individual practices of ACO professionals, (3) partnership or joint venture arrangements between hospitals and ACO professionals, (4) hospitals employing ACO professionals, and (5) such other groups of providers of services and suppliers as the Secretary deems appropriate. The proposed rule goes beyond the text of the Healthcare Reform Law in providing that a critical access hospital ("CAH") billing under the method specified in section 1843(g)(2) of the Social Security Act can also independently form an ACO.

This does not mean, however, that these are the only providers and suppliers that can participate in ACOs. On the contrary, the proposed rule makes clear that other Medicare-enrolled providers and suppliers can participate in ACOs as well, as long as such participation is in collaboration with one of the entities that are eligible to independently form an ACO. In fact, the proposed rule even provides incentives for entities eligible to form ACOs independently to collaborate with entities that are not. Specifically, if an independently eligible entity collaborates with a federally qualified health center ("FQHC") and/or a rural health clinic ("RHC") to form an ACO, the proposed rule provides that the resulting ACO will receive a higher percentage of any shared savings than it would otherwise receive if it were not collaborating with an FQHC or an RHC. As expressly noted in the proposed rule, there is no requirement that an existing legal entity (appropriately recognized under State law) form a separate new entity for the purpose of forming an ACO and participating in the Program. Rather, if the existing legal entity meets all of the eligibility requirements to be an ACO, or if it can be made to do so, it may operate as an ACO and there is no need to form a new entity.

In California, it may be possible for a medical foundation clinic established under section 1206(l) of the Health and Safety Code to independently operate as an ACO. In order to do so, the clinic would have to qualify as one of the types of entities that can independently form an ACO, as listed above. For example, a 1206(l) medical foundation clinic may arguably qualify as a "partnership or joint venture arrangement" between a hospital and ACO professionals depending upon its corporate structure and ownership or affiliation. It is not yet known whether the terms "partnership" and "joint venture" will be interpreted to require an actual legal partnership (or other corporate structure) with each "partner" owning some percentage or equity interest or other ownership or membership interest, or whether those terms should be understood in a broader sense that would involve contractual relationships and affiliations rather than actual ownership or membership by multiple parties (we suspect the latter interpretation is more likely). Alternatively, it may be argued that a 1206(l) medical foundation clinic qualifies as "some other group of providers...as the Secretary deems appropriate." Assuming a 1206(l) medical foundation clinic meets the applicable criterion to independently form an ACO, it would still have to meet all of the other requirements under the Healthcare Reform Law and the proposed rule in order to qualify as an ACO and participate in the Program including, but not limited to, governance requirements, as discussed below. In all likelihood, an existing 1206(l) medical foundation clinic that wants to be an ACO and participate in the Program may have to amend its governance structure to some degree in order to do so.

Governance: Provider-Driven and Patient-Centeredness

The Healthcare Reform Law requires ACO participants to have a mechanism for shared governance in order to participate in the Program. The proposed rule mandates that ACOs establish and maintain a governing body that provides a mechanism for shared governance and decision-making for all ACO participants and that has adequate authority to execute the statutory functions of an ACO. It is not clear whether this governing body must be an ACO's Board of Directors, or whether it can be a committee within the ACO that is delegated sufficient operational authority.

CMS wants ACOs to be both provider-driven and patient-centered. In an effort to make sure that ACOs are provider-driven, the proposed rule requires ACO participants to have at least 75 percent control of the governing body. Additionally, in an effort to emphasize the patient-centeredness of ACOs, the proposed rule requires ACOs to demonstrate a partnership with Medicare fee-for-service beneficiaries by having representation by a Medicare beneficiary serviced by the ACO on the governing body. This provision and the overall provisions pertaining to governance are likely to generate significant comments before the final rule is released, and it will be particularly interesting to see how much flexibility ACOs are given to demonstrate their respective "patient-centeredness."

Shared Savings – Two Models

ACO participants will receive reimbursement under the traditional fee-for-service Medicare payment system just like they always have, but they will also have an opportunity to receive a portion of shared savings to Medicare based on benchmarks developed by CMS. Once formed and applying for participation in the Program, ACOs must elect one of two paths. The first path is the one-sided risk model ("Method One"), under which the ACO can receive 50 percent of the shared savings for the first two years of participation. In the third year of participation (it is required that ACOs commit to participate in the Program for three years), the ACO shares not just in the possible savings, but also the losses generated by the ACO.

The second path is the two-sided risk model ("Method Two"). ACOs that choose this path share in both the savings and losses in each of the three years of participation (not just year three, as is the case in Method One), but they receive a higher percentage of the shared savings than those ACOs that choose Method One (Method Two ACOs receive 60 percent of savings, compared to 50 percent for Method One ACOs). The two path approach put forth in the proposed rule is likely meant to encourage as much participation as possible in the Program, as it offers organizations that form an ACO a couple of options to consider as each organization makes its own determination about what Method to pursue based upon its perceptions of, among other things, risk versus reward under the Program. The fact that Method Two ACOs (and Method One ACOs in the third year of participation) are held directly accountable for the total cost and quality of care that they provide represents a significant shift for the Medicare fee-for-service program, which traditionally has not included a means of incentivizing providers and/or suppliers to reduce the costs to the program.

Take Away

It is important to remember that this is just a proposed rule and that there are likely to be changes to the final rule that comes out after the comment period is over. Providers and suppliers should give the proposed rule a close review and consider whether pursuit of an ACO makes sense for them from a quality of care and financial standpoint. If an organization is fairly certain that it will pursue an ACO, it would be wise to begin considering how it may need to revise current governance structures and take other steps in order to participate in the Program, but should be prudent and measured in taking action or expending resources to actually implement any revisions to governance structure before the final rule is released.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.