The Nuts and Bolts of Determining Shared Savings and Losses for ACOs.

Under the final rules released by CMS on Accountable Care Organizations (“ACOs”), CMS offers ACOs the opportunity to participate in one of two models — a shared savings only model during the duration of the ACO’s first agreement period (Track 1), or a two-sided model in which there is a sharing of both savings and losses (Track 2).

Track 1 – Shared Savings Only Model

Citing the importance of attracting broad participation in the ACO program, including from small, rural, safety net and small and medium-sized physician groups, CMS created a shared savings only model for the duration of the ACO’s first three-year agreement period.  Under Track 1, which CMS deems a “gentler on ramp” into the ACO world, the ACO shares in the savings without the financial risk of sharing in the losses.  After the initial agreement period, the ACO must move to the two-sided model under Track 2.  Unlike in the Proposed Rule, ACOs who experience net losses under Track 1 in their first agreement period may renew their participation under Track 2.

Track 2 – Shared Savings/Losses Model

Track 2 is known as a two-sided model in which the ACO shares in both the savings and losses, with the opportunity for higher reward in exchange for performance-based risk.  Track 2 is available for ACOs during their first agreement period, and is the only option available for ACOs who have exhausted their first agreement period under Track 1.

Determining Shared Savings

In order to determine shared savings, CMS must take the following steps for each ACO:

Step 1.  Establish the expenditure benchmark.  The expenditure benchmark is a three-year benchmark (one year for each year in the agreement period).

Determining Patient Population for Whom the Benchmark is Calculated

 CMS’ methodology for establishing an ACO’s expenditure benchmark is based on the Medicare FFS Parts A and B expenditures of beneficiaries who would have been assigned to the ACO in any of the three years prior to the start of an ACO’s agreement period using the ACO participants’ TINs identified at the start of the agreement period.  CMS indicated, however, that it favors a benchmarking methodology based on an ACO’s actual  assigned population and intends to revisit whether it should adopt such a methodology in future rulemaking.

CMS calculates the benchmark expenditures by categorizing beneficiaries in the following cost categories:  ESRD, disabled, aged/dual eligible Medicare and Medicaid beneficiaries and aged/non-dual eligible Medicare and Medicaid beneficiaries.  CMS also finalized its proposal to truncate an assigned beneficiary’s total annual Parts A and B FFS per capita expenditures at the 99th percentile of the national Medicare FFS expenditures for each benchmark performance year, which has the advantage of excluding outlier payments from the expenditure benchmark calculations.  CMS adopted its proposed policy of weighting benchmark expenditures for each benchmark year as follows:  BY1 = 10%, BY2 = 30% and BY3 = 60%.

Benchmark Adjustments

 CMS adopted the CMS-HHC risk adjustment model that has been used under the Medicare Advantage program for adjusting the ACO’s benchmark expenditures. CMS will make additional risk adjustments for performance years to take into account changes in assigned beneficiaries.  For newly assigned beneficiaries, CMS will annually update the ACO’s CMS-HHC risk scores.  For continuously assigned beneficiaries, if there is no decline in the ACO’s CMS-HHC risk scores, CMS will use demographic factors to adjust for severity and case mix.  However, if the continuously assigned population shows a decline in its CMS-HHC risk scores, CMS will lower the risk score for that population.  An ACO’s updated benchmark will be restated in the appropriate performance year based on the health status of the ACO’s assigned beneficiaries.  In addition, CMS will make adjustments for  ESRD, disabled, aged/dual eligible Medicare and Medicaid beneficiaries and aged/non-dual eligible Medicare and Medicaid beneficiaries.

Trending Factors

CMS finalized its proposal to trend forward the most recent three years of per-beneficiary expenditures using growth rates in per beneficiary expenditures for Medicare Parts A and B services in order to estimate the benchmark for each ACO.  In addition, CMS will make calculations for separate cost categories for ESRD, disabled, aged/dual eligible Medicare and Medicaid beneficiaries and aged/non-dual eligible Medicare and Medicaid beneficiaries.  For initial expenditure determinations in the performance period, CMS finalized its proposed rule to use the national growth rate in expenditures for Part A and B services for FFS beneficiaries.  During the rest of the agreement period, CMS will update the benchmark by a flat amount, using the projected absolute amount of growth in national per capita Medicare Part A and B expenditures.

Step 2.  Determine per capita Medicare expenditures in each performance year of the agreement period.

Step 3.  Determine the appropriate minimum savings rate (MSR).

 CMS stated that the purpose of the MSR is to account for normal variation in expenditures.

Track 1 MSR Sliding Scale – Under Track 1, CMS adopted a sliding MSR scale to account for normal variation in expenditures based on the number of Medicare fee for service beneficiaries assigned to the ACO.  For Track 1 the sliding scale varies from a high of 3.6% – 3.9% for 5,000-5,999 assigned beneficiaries, to a low of 2% for 60,000+ assigned beneficiaries.

Track 2 – Flat 2% MSR.  Under Track 2, CMS will apply a flat two percent MSR to all ACOs.

Step 4.  Determine the appropriate sharing rate for ACOs meeting or exceeding the MSR.

 For those ACOs that have realized savings by meeting or exceeding the MSR, the following shared savings rate percentages will apply:

Track 1 – The ACO may earn up to 50% of the shared savings.

Track 2 – The ACO may  earn up to 60% of the shared savings.

Both Track 1 and Track 2 ACOs will share on a first dollar savings once the ACO achieves savings in excess of the MSR.

Step 5.  Determine the required sharing cap.

 CMS adopted the following payment limits, which are the maximum amounts of shared savings that can be realized by the ACO in any performance year and are intended to avoid creating incentives for excessive reductions in utilization.

Track 1 – 10% of the ACO’s updated expenditure benchmark for the performance year.

Track 2 – 15% of the ACO’s updated expenditure benchmark for the performance year.

Determining Shared Losses

 Just as shared savings must be calculated for ACOs, shared losses for Track 2 ACOs must also be determined.  The methodology for determining shared losses under Track 2 will mirror the methodology for determining shared savings, including a formula for calculating shared losses based on the final sharing rate, use of a MLR to protect against losses resulting from random variation and a loss sharing limit to provide a ceiling on the amount of losses an ACO will be required to repay.  To be responsible for sharing losses with the Medicare program, an ACO’s average per capita Medicare expenditures for the performance year must exceed its updated benchmark costs for the year by at least two percent.  Once losses meet or exceed the MLR (which is calculated as one minus the final sharing rate), an ACO would be responsible for paying the percentage of excess expenditures, on a first dollar basis, up to the proposed annual limit (60%) on shared losses.

For more information regarding the shared savings model or ACO’s in general, please contact Carrie Soli.