Can non-MSSP ACOs qualify for Tax-Exempt Status?

The Internal Revenue Service (IRS) recently affirmed its decision to deny 501(c)(3) tax-exempt status to an accountable care organization (ACO) that did not participate in the Medicare Shared Savings Program (MSSP). The IRS initially denied the ACO’s request for tax exempt status in a determination letter dated August 25, 2014. While neither the determination letter nor subsequent appeal is precedential, they provide valuable guidance for ACOs operating as tax-exempt organizations or pursuing tax-exempt status.

The ACO was formed by an existing exempt 501(c)(3) organization (System). The ACO’s purported purpose was furthering the triple aim health care reform goals (Triple Aim Goals) established by the Patient Protection and Affordable Care Act (PPACA), i.e. reducing healthcare costs, improving patient access to and the quality of medical care, and improving population health and patient experience. The ACO strove to further the Triple Aim Goals by acting as the representative for its providers in the negotiation and execution of agreements with third-party payers. The ACO’s providers included physicians employed by System, independent practice groups whose physicians were employed by System, and providers unaffiliated with System. Approximately half of the physicians participating in the ACO worked for independent practices or independent hospitals unaffiliated with System.

The IRS denied the ACO tax exempt status on two separate grounds. First, the IRS determined that the ACO was not operated exclusively for exempt purposes within the meaning of the Internal Revenue Code. The IRS then determined that the ACO was also not operated primarily for a public purpose.

Operated Exclusively for Exempt Purposes:

In order to qualify for 501(c)(3) status, an organization must be organized and operated exclusively for an exempt purpose. An organization is regarded as being operated exclusively for one or more exempt purposes, if it engages primarily in activities that accomplish an exempt purpose. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Two exempt purposes recognized by the IRS are lessening the burdens of government and the promotion of health.  In its determination letter, the IRS applied both exempt purposes to the ACO, before determining that the ACO was not operated exclusively for an exempt purpose.

Lessening the Burdens of Government:

In order for an activity to lessen the burdens of government, there must be an objective manifestation that government considers the activity to be its burden. Provisions of the PPACA encourage and support ACO cost sharing arrangements. In its determination letter, the IRS acknowledged that participation in the MSSP by an ACO will generally further the exempt purpose of lessening the burdens of government. The IRS continued, however, that the government has not provided an objective manifestation that it considers the activities of ACOs that do not participate in the MSSP to be its burden, regardless of their furtherance of the Triple Aim Goals. Accordingly, the IRS determined that the ACO’s activities did not further the exempt purpose of lessening the burdens of government.

This conclusion suggests that ACOs that do not participate in the MSSP may not be able to qualify for tax-exempt status by lessening the burdens of government. Such non-MSSP ACOs may be able to lessen the burdens of government through other means, however, furthering the Triple Aim Goals of the PPACA alone appears to be insufficient. ACOs who intend to further the Triple Aim Goals, should either participate in the MSSP or establish an exempt purpose other than lessening the burdens of government.

Promoting Health:

The promotion of health has long been recognized as an exempt purpose. However, not every activity that promotes health furthers exemption under Code Section 501(c)(3). For example, selling prescription pharmaceuticals promotes health, but is not a tax-exempt activity. In its determination letter, the IRS provided that while the Triple Aim Goals generally promote health, not all activities that that support the Triple Aim Goals further the promotion of health for purposes of Code Section 501(c)(3). The ACO’s primary activity was negotiating with private insurers on behalf of its providers, many of which were unrelated to the ACO. The IRS determined that the link between negotiating with private insurers and promoting health was insufficient. Accordingly, the IRS concluded that the ACO was not operated exclusively in furtherance of the exempt purpose of promoting health.

This conclusion provides two insights. First, it indicates that an ACO whose purpose is furthering the Triple Aim Goals can qualify as being operated exclusively for the exempt purpose promoting health. This is a valuable insight for ACOs that would prefer not to participate in the MSSP, but would like to receive tax-exempt status. Second, the IRS’ determination letter indicates that negotiating with private insurers likely is not sufficiently connected to promoting health. Accordingly, the activities of ACOs that do that participate in the MSSP will require a closer nexus to promoting health, in order for such ACOs to qualify as tax-exempt organizations.

Benefiting a Public Purpose:

In addition to being organized and operated exclusively for exempt purposes, organizations seeking tax-exempt status must be organized and operated primarily for a public purpose. Organizations that primarily serve private interests instead of public interests are not eligible for tax-exempt status. Notwithstanding the foregoing, limited private benefits are permissible, when a benefit to the public cannot be achieved without necessarily benefiting private individuals and the private benefits are insubstantial to the public benefit conferred by the activity. In its determination letter, the IRS determined that the ACO conferred an impermissible private benefit.

As discussed above, the ACO’s primary activity was negotiating with private insurers on behalf of its providers. The IRS determined that the ACO’s negotiations only indirectly benefitted the community, compared to the benefit conferred to the ACO’s providers. Further, the IRS determined that the ACO’s activities were not the only means of conferring the benefit to the community. Accordingly, the IRS determined that the ACO conferred an impermissible private benefit to its providers. This example stands is reminder, that the primary benefit of an organization’s activities must flow to the public and not private interests, in order for the organization to receive tax-exempt status.


The IRS’ determination letter and holding on appeal provide three valuable lessons for ACO’s operating as tax-exempt organizations or pursuing tax-exempt status. First, in the opinion of the IRS, the activities of ACOs that do not participate in the MSSP do not further the exempt purpose of lessening the burdens of government. Second, while the Triple Aim Goals generally promote health, not all activities that support the Triple Aim Goals adequately further the promotion of health. For example, negotiation with private insurers on behalf of healthcare providers is not sufficiently tied to promoting health. Third, regardless of whether an ACO is organized and operated exclusively for an exempt purpose, the primary benefit an ACO’s activities must flow to the public and not private interests.

A Question of Privilege: Protecting Data in a Clinically Integrated Network


In this emerging era of healthcare reimbursement based on value, many providers are considering different ways to provide services to patients.  The old fee-for-service model, which often awarded providers based on volume, is being replaced with a model that incentivizes providers to provide quality care at reduced costs.

In order to position themselves for value-based reimbursement, many providers have banded together to form clinically integrated networks (CINs) to coordinate and standardize patient care across various service lines.

Whatever term given to these networks (e.g. CINs, accountable care organizations, accountable care networks etc.), the goal of these entities is to enable a diverse array of independent providers to provide high quality, value-based care.

Many CINs have entered into “shared savings” contracts with payors, under which a CIN’s provider-members have the monetary incentive to meet certain quality-based metrics.

In order for these networks to be truly “clinically integrated,” it is critical that provider-members transmit data to the CIN related to their treatment of patients.

For example, in order to ensure the proper care of patients, primary care providers may be required to provide the CIN with the blood pressure levels of patients who are managing high blood pressure.

To incentivize high quality care, the providers whose patients have blood pressure levels consistently within an acceptable range will receive a larger payout of any “shared savings” money than providers whose patients consistently have higher levels.

Without the receipt of detailed treatment data from providers, CINs would not be able to effectively set quality-based metrics, recommend best practices, and incentivize value-based care.

But there is an important question that CINs should consider: Is the data submitted by a CIN’s provider-members privileged and protected from discovery in a lawsuit?

The Peer Review Privilege

The importance of protecting sensitive information related to a healthcare provider’s services is not a new concept.

Many states throughout the country have recognized the “quality improvement” or “peer review” privilege, which protects certain documents and information that are created during the course of a quality assurance review of a provider’s treatment of patients.

The privilege is a critical mechanism to ensure that peer reviewers engage in frank and open discussion of a provider’s practice without the threat of having all of their discussions obtained by a patient or the patient’s attorney.

For example, let’s assume that a peer review committee of a hospital is reviewing the competence of an OB/GYN physician whose patient had complications during childbirth.  The patient has provided her notice of intent to sue the hospital and the physician for malpractice.

In order to ensure that physician-error did not contribute to the bad result, the hospital’s peer-reviewers closely scrutinize the physician’s performance, and also the performance of the hospital’s support staff.  Their objective is to find any deficiencies that can be corrected for future cases.

Without the peer review privilege, the hospital could be forced to release the peer reviewers’ frank discussions related to the providers’ and hospital’s potential culpability to the patient’s malpractice attorney.  These self-critical discussions and documents could be a goldmine for the patient’s case against the hospital.

Clearly, the peer review privilege is essential for a healthcare provider’s risk management.

Peer Review Privilege and Clinically Integrated Networks

Providers and CINs commonly assume that the peer review privilege applies to any data transmitted between the CIN and the CIN’s provider-members.

But this might not be an accurate assumption.

In reality, the peer review privilege in many states is very narrow and only applies if the provider has met strict requirements.

For example, the Washington State peer review privilege solely applies to information created specifically for, and collected and maintained by a regularly constituted “coordinated quality improvement committee.”

The privilege is waived if any of the information or documents are disclosed to anyone outside of the committee.  One key exception is that a coordinated quality improvement committee of one entity may share information with a coordinated quality improvement committee of another entity.

The primary issue for CINs is that Washington State law only allows certain entities, such as hospitals, medical facilities, provider groups of five or more providers, and health carriers, to form a coordinated quality improvement committee.  WAC 246-50-005.

The rules do not explicitly permit a clinically integrated network or accountable care organization that is a separate legal entity from a medical facility or hospital to form a coordinated quality improvement committee.

Therefore, under Washington State law, there is a risk that provider data shared with a CIN will be unprotected from discovery in a lawsuit.

A Possible Alternative: The Patient Safety and Quality Improvement Act

It may come to a surprise to many CINs and providers that data shared between a CIN and a provider could be subject to discovery in a legal proceeding.  However, unless a state law allows a CIN to take advantage of the peer review privilege, quality data received by a CIN is potentially at risk.

One alternative that CINs should consider is the privilege set forth in the federal Patient Safety and Quality Improvement Act (PSQIA).

The PSQIA is federal law enacted in 2005 that created a broad privilege for “patient safety work product,” which a provider may disclose to a “patient safety organization.” These terms are defined as follows:

  • Patient Safety Organization (PSO): A private or public entity (or component of such entity) that is listed as a PSO by the Secretary of Health and Human Services.
  • Patient Safety Work Product (PSWP): Includes any data, reports, records, memoranda, analyses, or written or oral statements which could improve patient safety, health care quality, or health care outcomes; and
    • Which are assembled or developed by a provider for reporting to a PSO and are reported to a PSO; or
    • Are developed by a PSO for the conduct of patient safety activities; or
    • Which identify or constitute a provider’s deliberations, analyses, or reporting related to information disclosed to a PSO.  A provider’s procedures for collecting and reporting information to a PSO are known as the provider’s “patient safety evaluation system” (PSES).

Importantly, PSWP does not include the original medical record of the patient or other information that is collected or maintained separately from the provider’s collection and reporting to the PSO.

Therefore, if a CIN were to create a PSO, quality information shared between a CIN and its provider-members could be protected from discovery in a lawsuit.  Even better, the PSQIA privilege is never waived – even if the information or documents are subsequently improperly disclosed by the PSO.

In comparison to the Washington State peer review privilege, the privilege under the PSQIA appears to be broader and more appropriate for the activities of a CIN.

Creating a PSO for a Clinically Integrated Network

Although the privilege protections of the PSQIA should interest CINs and their participating members, it is important to review the major steps needed for the proper creation of a PSO.

  1. Eligibility: The first step is to confirm that the CIN is eligible to create a PSO.  Under the rules, any private or public entity can create a PSO, so long as the entity is not listed as “excluded” by the PSQIA. The list of excluded entities includes:
    • Health insurers;
    • Regulatory agencies;
    • Accreditation and licensure entities; and
    • Entities that administer a federal, state, local, or tribal patient safety reporting system to which health care providers are required to report.

If one of these types of agencies has an ownership interest in the CIN, it is critical that the CIN’s governing documents make clear that such entities do not exercise any control over the operation of the PSO.

  1. Separate Legal Entity: In order to ensure compliance with the PSQIA, and insulate liabilities, the CIN should considering forming the PSO under a separate legal entity (e.g. limited liability company). The primary mission of the separate PSO entity must be the improvement of patient safety and the quality of health care delivery. Under the PSQIA rules, the PSO would be a “component” of the CIN.
  2. Workforce: The PSO must be staffed by a qualified “workforce,” which must include employed or contracted licensed healthcare providers. The CIN can share staff with the PSO, but such staff members should sign confidentiality agreements stating that they will not improperly disclose PSWP to the CIN.
  3. Policies: The PSO must create policies and procedures to meet the eight patient safety criteria in the PSO:
    • Efforts to improve patient safety and the quality of health care delivery;
    • The collection and analysis of PSWP;
    • The development and dissemination of information with respect to improving patient safety, such as recommendations, protocols, or information regarding best practices;
    • The utilization of PSWP for the purposes of encouraging a culture of safety and of providing feedback and assistance to effectively minimize patient risk;
    • The maintenance of procedures to preserve confidentiality with respect to PSWP;
    • The provision of appropriate security measures with respect to PSWP;
    • The utilization of qualified staff; and
    • Activities related to the operation of a PSES and to the provision of feedback to participants in a PSES.
  1. Participation Agreement: The PSO should enter into a template Participation Agreement with the CIN’s provider-members. Among other requirements, the Agreement should specify a standardized manner for the providers’ transmission of data to the PSO. The PSO and the CIN’s provider-members should also enter into a HIPAA Business Associate Agreement.
  1. Patient Safety Evaluation System: Each provider entity should set up its own policies and procedures for reporting PSWP to the PSO. This reporting structure will be each provider’s “patient safety evaluation system.”
  1. Consent for Disclosure to the CIN: The PSQIA permits a PSO to disclose PSWP back to a participating provider for “patient safety activities.”  However, due to the fact that a CIN is not a “provider” of healthcare services, it is not able to contract with the PSO and receive PSWP. This could be a problem if the CIN needs access to identifiable PSWP in order to develop quality metrics, create best practices for the members, or distribute any shared savings money.  In order to ensure that the CIN is able to receive PSWP from the PSO, each CIN provider-member should sign a consent that permits the PSO to disclose PSWP to the CIN for the purposes of clinical and financial integration.
  1. Apply for Certification: In order to officially become a PSO, the PSO entity should apply for certification from the Agency for Health Research and Quality ( After approval, the PSO will be listed for a period of three years. The PSO must renew its listing after the three year period.

Please note that this is not an exhaustive list of requirements for PSOs, but it does contain many of the major steps that should be considered in forming a PSO.

By going through the process of forming a PSO, a CIN may have a better chance of protecting sensitive quality data than relying on state peer review privilege laws.

For more information on the peer review privilege, clinically integrated networks, and patient safety organizations please contact Casey Moriarty.


On January 10, 2013, the Centers for Medicare & Medicaid Services (“CMS”) announced that it selected 106 new Accountable Care Organizations (“ACO’s”) to participate in the Medicare Shared Savings Program.

CMS Acting Principal Deputy Administrator Jonathan Blum blogged about the aim of ACO’s and described them as having the potential to improve the US health system:  

“In other words, great health care requires a team that will work together at every stage of your care, which can lead to better health at lower cost.  That’s the aim of the ACOs.  Affordable Care Act reforms such as ACOs have helped to set Medicare on a more sustainable path today and into the future, as well as serve as a model for what improvements are possible for our nation’s health care system.”

Northwest organizations were included on the complete list of 106 new ACO’s, including the Billings Clinic in Montana, Franciscan Northwest Physicians Health Network, LLC in Washington, and St. Luke’s Clinic Coordinated Care, Ltd. serving Idaho and Oregon. 

CMS plans to issue dates for the January 2014 application cycle sometime during the spring, 2013.  For more information about ACO’s and ACO development, please contact Adam Snyder at (206) 442-1317.

NCQA Awards First ACO Accreditations

The National Committee for Quality Assurance (“NCQA”) awarded its first Accountable Care Organization (“ACO”) accreditations in December, 2012.  Established as a voluntary accreditation program in 2011, the NCQA awarded accreditations to the following organizations:  Billings Clinic, Crystal Run Healthcare, HealthPartners and Kelsey-Seybold Clinic.   The NCQA website contains detailed information regarding ACO Accreditation.

In general, NCQA Accreditation includes evaluation of seven categories:

  • ACO Structure and Operations
  • Access to Needed Providers
  • Patient-Centered Primary Care
  • Care Management
  • Care Coordination and Transitions
  • Patient Rights and Responsibilities
  • Performance Reporting and Quality Improvement

In contrast to those organizations that raced to the ACO accreditation finish line, overall ACO readiness has been elusive for hospital/health system ACOs.  The Commonwealth Fund published a report from the Premier Research Institute (Premier) in December, 2012, finding a generally low level of readiness across 59 hospital organizations who were members of the Premier Partnership for Care Transformation (PACT) Readiness Collaborative.

To assess readiness, Premier assessed ACOs progress by evaluation of six core components:  a patient-centered foundation, primary care medical home, a high-value network, payer partnership, population health data management, and ACO leadership.  Although the hospital organizations were part of PACT for the purpose of easing the transition to accountable care, the report finds that no organization achieved full implementation of the six core components and several failed to undertake a single activity relative to the core components.

For more information contact Adam Snyder at 206.442.1317 or

ACO: Understanding Beneficiary Assignments

In the final rule, CMS chose to adopt a preliminary prospective assignment methodology with final retrospective reconciliation.  Under this model, CMS will create a list of beneficiaries likely to receive care from the ACO based on primary care utilization during the most recent periods for which adequate dates are available, and provide a copy of the list to the ACO.  During the performance year, CMS will update the list periodically on a rolling basis to allow the ACO to adjust to likely changes in its assigned population.  At the end of each performance year, CMS will reconcile the list to reflect beneficiaries who actually meet the criteria for assignment to the ACO during the performance year.  Determination of shares savings or losses for the ACO will be based on this final, reconciled population.

CMS chose this approach because it believes that it will provide the ACO with adequate information to redesign care processes while also encouraging ACOs to standardize care for all Medicare FFS beneficiaries instead of a subset.  At the same time, CMS believes that the model will provide adequate incentives for each ACO to provide quality care to its beneficiary population.

CMS has also announced a Pioneer ACO Model which will test alternative savings and alignment.  The Pioneer ACO Model will provide CMS with the opportunity to gain experience and evaluate a more prospective hybrid model than the approach explained above.  CMS will study the Pioneer ACO Model and will consider its experiences in the next rulemaking.

Majority vs. Plurality Rule for Beneficiary Assignment

The Act requires that beneficiaries be assigned to “an ACO based on their utilization of primary care services” furnished by an ACO professional who is a physician, but it does not prescribe the methodology for such assignment.  For its methodology, CMS adopted a plurality of primary care services model, defined in terms of allowed charges, as follows:

CMS considered whether to assign beneficiaries to an ACO when they receive a plurality of their primary care services from an ACO, or to adopt a stricter standard under which a beneficiary will be assigned to an ACO only when he or she receives a majority of their primary care services from an ACO.  CMS chose a plurality methodology because it would result in a greater number of beneficiaries being assigned to an ACO, thus promoting statistical stability and a greater incentive for ACOs to redesign care processes.  Additionally, CMS voiced that the plurality methodology promotes ACO accountability for patients that might otherwise fall through the cracks because they would not meet a majority standard.

  • No Plurality Threshold:  CMS declined to set a threshold requirement on the plurality of primary care services methodology.  This will maximize the number of patients assigned to an ACO.
  • Simple Service Count vs. Accumulated Allowed Charges:  CMS could determine the plurality of services on the basis of a simple service count for each visit or on the basis of the accumulated allowed charges for services delivered.  The method of using a plurality of allowed charges would place greater weight on more complex primary care services in the assignment methodology, while a simple service method count would weigh all primary care encounters equally in determining assignment.  CMS chose to adopt the accumulated allowed charges method count, which put responsibility on the ACO providing the highest complexity and intensity of primary care services.  Additionally, this method results in the assignment of responsibility for containing costs to the provider who generates the most costs.

Assigning Patients to ACOs

A hotly contested area of the proposed ACO rules concerns the assignment of Medicare Fee-for-Service (“FFS”) beneficiaries to ACOs.  Once a Medicare beneficiary is assigned to an ACO, the ACO will then be held accountable “for the quality, cost and overall care” of that beneficiary.  The ACO may also qualify to receive a share of any savings that are realized in the care of these assigned beneficiaries due to appropriate efficiencies and quality improvements that the ACO may be able to implement.

As the final rule explains, assigning Medicare beneficiaries requires several elements:

  1. An operational definition of an ACO, as opposed to a formal definition of an ACO, so that ACOs can be efficiently identified, distinguished, and associated with the beneficiaries for whom they are providing services;
  2. A definition of primary care services for purposes of determining the appropriate assignment of beneficiaries;
  3. A determination concerning whether to assign beneficiaries to ACOs prospectively, at the beginning of a performance year on the basis of services rendered prior to the performance year, or retrospectively, on the basis of services actually rendered by the ACO during the performance year; and
  4. A determination concerning the proportion of primary care services that is necessary for a beneficiary to receive from an ACO in order to be assigned to that ACO, as compared to the proportion of primary care services from other ACOs or non-ACOs.

ACO Application Requirements and Procedures

The final ACO regulations outline the process and required content for ACO applicants to participate in the Shared Savings Program.  For the initial applications in 2012, the required term of the agreement will be either (i) April 1, 2012 through December 31, 2015, or (ii) July 1, 2012 through December 31, 2015.  Thereafter all agreements will commence on January 1 and have a three year term.  An ACO must submit an application on a form required by CMS that includes extensive information, disclosures and certificates.  Some (but not all) of the more significant requirements are that the ACO applicant must:

  • certify that the ACO, its participants, providers and suppliers have agreed to become accountable for the quality, cost, and overall care of the Medicare beneficiaries assigned to the ACO;
  • provide documents sufficient to describe the ACO’s participants and providers rights and obligations to receive shared savings and to adhere to the quality assurance and evidence based clinical guidelines, which, for example, include participation agreements, employment contracts, and operating policies;
  • include a description of how the ACO will implement the required patient-centeredness criteria, including the potential remedies and penalties, including expulsion;
  • provide materials documenting its organizational structure, including an organization chart, a list of committees with the names of the members, and key job descriptions;
  • either include a description or copy of a compliance plan;
  • list all ACO participating providers, along with their Medicare enrolled TINs;
  • describe (i) how the ACO plans to use shared savings payment, including the criteria for distributing the savings; (ii) how its plan will achieve the specific goals of the Shared Savings Program; and (iii) how the plan will achieve the general aims of better care for individuals, better health for populations, and lower growth in expenditures; and
  • include documentation that it is capable of repaying losses or other monies determined to be owed upon the first year reconciliation.

The detailed requirements for the application will make it imperative that ACO applicants comprehensively organize and document the ACO structure before applying.  Compliance with the extensive application requirements will require significant financial and other resources.

CMS will evaluate applications and provide a notice of determination to the applicant.  If the application is denied, the reasons will be provided.  If the application is approved, the ACO must sign the participation agreement, agreeing to comply with all provisions of the regulations.  Interestingly, ACOs that sign a three year agreement are still subject, with a few exceptions, to all statutory and regulatory changes that are effective during the term of the agreement.  The exceptions are limited to (i) eligibility requirements concerning the structure and governance of ACOs, (ii) calculation of the shared savings, and (iii) beneficiary assignment.  An ACO that fails to modify its processes as required by a change in the law or regulations will be placed on a corrective action plan, and if the ACO fails to comply with the corrective action plan it will be terminated.  It is likely that there will be material revisions to the ACO regulations to address issues identified as the first ACOs qualify and commence operation.  Therefore it will be important for ACOs to be structured in a manner that provides for effective governance and management as the rules change over time.

For more information regarding the ACO application or ACO’s in general, please contact Doug Albright.

ACO Final Rule – Drastically Reduces Quality Measure Requirements

The Accountable Care Organization (“ACO”) final rules show that comments to CMS really do make a difference.  The public outcry against the 65 quality measures proposed in the spring led to CMS’ 50% cut of the number quality measures.  Along with the large cut, CMS explained its plan for allowing ACOs to meet the measure requirements by reporting on the measures in the first year and receiving “pay for performance” in the following years based on the weighted scores received in each quality measure.

Quality Measures

The revised list of quality measures are broken out into 33 different measures (predominately with NQF measure numbers) with four umbrella categories and five subcategories as follows:

  1. Patient/Caregiver Experience (7 measures)
  2. Care Coordination/Patient Safety (6 measures, includes the EHR Incentive Program)
  3. Preventative Health (8 measures)
  4. At Risk Population (12 measures)
    1. Diabetes (6 measures)
    2. Hypertension (1 measure)
    3. Ischemic vascular disease (2 measures)
    4. Heart failure (1 measure)
    5. Coronary Artery Disease (2 measures)

The tables provided in the final rule at pages 67889-90 are particularly helpful in visually identifying the measures, the method of data submission and whether the particular measure is pay for reporting or pay for performance.  The measures will be submitted to CMS through either surveys (for patient/caregiver experience measures), claims, the EHR Incentive Program, or the Group Practice Reporting Option (“GPRO”) Web Interface.  The surveys will be conducted using the Consumer Assessment of Healthcare Providers and System (“CAHPS”) surveys for 2012 and 2013, in future years, ACOs will have to select a CMS approved vendor to administer the surveys.

EHR Incentive Program

One of the significant changes to the quality measures was the expansion of the EHR incentive program related measure.  The quality measure no longer requires that 50% of the primary care providers to achieve meaningful use in order for the ACO to participate.  The EHR quality measure now recognizes those participating in the Medicaid EHR Incentive Program do not have to meet meaningful use requirements in their first year of participation.  As such, the new measure now includes primary care providers that successfully qualify for the EHR Incentive Program under either Medicare or Medicaid.  In addition, CMS cut previously proposed measures that were redundant with the EHR Incentive Program such as the measure concerning clinical decision support and electronic prescribing.

CMS still emphasizes the importance of the usage of the EHR technology by giving the EHR quality measure a higher weight.  Eligible professionals participating in ACOs are still eligible to separately participate in the EHR Incentive Programs or the e-prescribing incentive program.

Pay for Reporting vs. Pay for Performance

In the first year of participation, all of the quality measures may be satisfied by merely reporting on the quality measures.  For pay for reporting, ACOs will earn the maximum sharing rate for complete and accurate reporting of 100% of the required data, and no quality threshold must be met.  In the second year, 25 of the quality measures will be pay for performance, and eight will continue to be pay for reporting.  In the third year, all but one quality measure will be on a pay for performance basis.

In the pay for performance years, each domain will be given equal weight of 25% in the calculation of the ACOs overall quality performance score.  Each of the individual measures will be equally weighted within the domains, except for the EHR Incentive Program quality measure which is double weighted.  ACOs must minimally attain 30% (or be in the national 30th percentile) for that quality measure.  Subregulatory guidance will indicate the quality performance rates an ACO needs to achieve in order to earn the maximum quality points in a domain.

Recognizing that meeting all 33 measures in a given year may be difficult, CMS is requiring that ACOs achieve the quality performance standards on 70% of the measures in each domain.  Failure to achieve the 70% standard will result in a corrective action plan and re-evaluation in the final year.  However, if an ACO scores a zero for an entire measure, it will not be able to share in the savings generated.  Due to the double weight of the EHR measure, failure to meet the EHR measure in the Care Coordination domain would cause the ACO to miss the 70% cut-off.

Reporting Calendar & PQRS

ACOs are expected to report on the quality measures on a calendar year basis, beginning with the reporting period starting January 1, 2012 through December 31, 2012.  Even though a “performance year” in the regulations may begin in April or July of 2012 and end in December 2013, the quality performance for the first performance year will be based on reporting of the measures from January 1, 2013 through December 31, 2013.  Eligible professionals participating in an ACO that start the agreement in April or July of 2012 will also qualify for the 2012 PQRS incentive under the Shared Savings program by reporting the ACO GPRO measures for the full 2012 Physician Quality Reporting System (“PQRS”) calendar year reporting period.

Note that ACO participant entities that want to qualify for PQRS must participate as group practices and not separately participate or earn a PQRS incentive outside of the Shared Savings Program.  Individual ACO providers may not seek to qualify for the individual PQRS incentive under the traditional PQRS plans.  CMS also relaxed its requirements regarding the PQRS incentives.  If an ACO fails to meet the Shared Savings Program quality performance measures and therefore is not eligible for shared savings, the participating entities may still be eligible to receive the PQRS incentive under the Shared Savings Program.   

More Updates Coming

ACO participants should keep an eye out for subregulatory guidance which will detail the annual measure specifications.  CMS plans on releasing specifications in December and in the first quarter of 2012.

For more information regarding the ACO quality measures or ACOs in general, please contact Elana Zana.

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.

ACO Fraud and Abuse Law Waivers

In conjunction with the issuance of the final rules related for Accountable Care Organizations (“ACOs”) under the Medicare Shared Savings Program, the OIG published an interim final rule establishing waivers to fraud and abuse laws in connection with the Shared Savings Program.

The waivers were created to address industry concerns that restrictions in certain laws aimed at preventing fraud and abuse of federal health care programs, i.e., the Physician Self-Referral law (commonly known as the “Stark Law”), the federal anti-kickback statute (“AKS”), and the federal civil monetary penalties (“CMP”) law, would limit or otherwise impede development of innovative integrated care models envisioned by the Shared Savings Program.  The goal of the waivers is to effectively balance the need for ACO innovation and flexibility in the Shared Savings Program while protecting beneficiaries and the Medicare program.

The interim final rule establishes five waivers to the fraud and abuse laws which CMS and the OIG deemed necessary to carry out provisions of the Shared Savings Program.  Parties seeking to ensure that an arrangement is covered by a waiver for a particular law may look to any waiver that applies to that law.  An arrangement may meet the criteria of more than one waiver.

Key Points/General Overview:

  • To qualify for a waiver, the arrangement must meet all of the conditions set forth in the waiver.
  • A waiver of a specific fraud and abuse law is not needed for an arrangement to the extent that the arrangement: (1) does not implicate the specific fraud and abuse law, or (2) implicates the law, but either fits within an existing exception or safe harbor, as applicable, or does not otherwise violate the law.  Arrangements that do not fit a waiver have no special protection and must be evaluated on a case-by-case basis for compliance.  Failure to fit in a wavier is not, in and of itself, a violation of the fraud and abuse laws.
  • For purposes of the waivers, “reasonably related to the purposes of the Shared Savings Program” means the purposes of promoting accountability for the quality, cost, and overall care for a Medicare population; managing and coordinating care for Medicare fee-for-service beneficiaries through an ACO; and encouraging investment in infrastructure and redesigned care processes for high quality and efficient service delivery for patients, including Medicare beneficiaries.
  • CMS, OIG, and HHS will closely monitor ACOs entering into the program in 2012 through June 2013, and plan to narrow the waivers if they result in the unintended effect of shielding abusive arrangements.  The waivers could be narrowed by modifying the waivers to add or substitute conditions to the waivers; limiting ACO arrangements involving referral sources to those that are fair market value or commercially reasonably or involve services performed by the referral sources; preclude waiver protections for arrangements that involve individuals or entities that are not part of the ACO; or include a requirement that ACOs submit reports regarding their arrangement.  CMS and the OIG seek comments on these approaches to narrow the waivers.

Detailed summaries of the five waivers are provided below:

“ACO Pre-Participation” Waiver.  This waiver of the Stark Law, the AKS, and the gainsharing CMP applies to ACO-related start-up arrangements in anticipation of participation in the Shared Savings Program, but which pre-date an ACO’s participation agreement.

  • The parties must act with the good faith intent to develop an ACO that will participate in the Shared Savings Program starting in a particular year, must submit a completed application to participate in a Shared Savings Program for that year, and must be taking diligent steps to develop an ACO.
  • The ACO’s governing body must make a bona fide determination that the arrangement is reasonably related to the purposes of the Shared Savings Program.
  • Certain documentation of the arrangement must be maintained for at least 10 years following completion of the arrangement and made available to HHS upon request.
  • An ACO may use the pre-participation waiver (including any extensions granted) only one time.
  • As used in the waiver, “start-up arrangement” means any items, services, facilities, or goods (including non-medical items, services, facilities, or goods) used to create or develop an ACO that are provided by such ACO, ACO participants, or ACO providers/suppliers.  Commentary on the waiver provides a non-exhaustive list of examples of items, services, facilities and goods considered as start-up arrangements.
  • The start and end dates for when the waiver applies varies based on the ACO’s target year, whether an ACO’s participation application is accepted or denied, whether the ACO failed to submit an application for the target year, and whether the ACO was granted an extension of the waiver.
  • This pre-participation wavier does not cover arrangements involving drug and device manufacturers, distributors, DME suppliers, or home health suppliers.

“ACO Participation” Waiver.  This waiver of the Stark Law, the AKS, and the gainsharing CMP applies to ACO-related arrangements during the term of the ACO’s participation agreement under the Shared Savings Program and for a limited time thereafter.

  • The ACO must have entered into a participation agreement and remain in good standing under its participation agreement.
  • The ACO’s governing body must make a bona fide determination that the arrangement is reasonably related to the purposes of the Shared Savings Program.
  • Certain documentation of the arrangement must be maintained for at least 10 years following completion of the arrangement and made available to HHS upon request.
  • The waiver period starts on the start date of the participation agreement, and ends six (6) months following the earlier of the expiration of the participation agreement (including any renewals thereof) or the date on which the ACO has voluntarily terminated the participation agreement.  If CMS terminates the participation agreement, the waiver period ends on the date of the termination notice.

“Shared Savings Distribution” Waiver.  This waiver of the Stark Law, the AKS, and the gainsharing CMP applies to distributions and uses of shared savings payments earned under the Shared Savings Program.  The waiver permits shared savings to be distributed or used with the ACO in any form or manner, including “downstream” distributions or uses of shared savings funds between or among the ACO, its ACO participants, and its ACO providers/suppliers.

  • The ACO must have entered into a participation agreement and remain in good standing under its participation agreement.
  • The waiver applies to distributions and uses of shared savings earned during the term of the ACO’s participation agreement, even if the actual distribution or use of the shared savings occurs after expiration of the agreement.  The waiver also applies to individuals or entities that were ACO participants and ACO providers/suppliers at the time the shared savings were earned, even if they are not part of the ACO at the time of the actual distribution.
  • The waiver does not protect distributions of shared savings to referring physicians outside the ACO, unless those referring physicians are being compensation (using shared savings) for activities that are reasonably related to the purposes of the Shared Savings Program or were ACO participants or ACO providers/suppliers during the year in which the shared savings were earned by the ACO.
  • Under this waiver, payments of shared savings distributions made directly or indirectly from a hospital to a physician are not made knowingly to induce the physician to reduce or limit medically necessary items or services to patients to patients under the physician’s direct care.

“Compliance with the Physician Self-Referral Law” Waiver.  This waiver of the AKS and the gainsharing CMP applies to ACO arrangements that implicate the Stark Law but which meet an existing exception under the Stark Law.

  • The ACO must have entered into a participation agreement and remain in good standing under its participation agreement.
  • The financial relationship must be reasonably related to the purposes of the Shared Savings Program.
  • The financial relationship must fully comply with an exception under the Stark Law, as set forth at 42 CFR §411.255 through 411.357.
  • The waiver period begins on the start date of the participation agreement, and ends on the earlier of the expiration of the term of the participation agreement (including any renewals thereof) or the date on which the participation agreement has been terminated.

“Patient Incentive” Waiver.  This waiver of the beneficiary inducement CMP and the AKS applies to medically related incentives offered by ACOs under the Shared Savings Program to beneficiaries to encourage preventive care and compliance with treatment regimes.  More specifically, those fraud and abuse laws are waived with respect to items or services provided by an ACO, its ACO participants, or its ACO providers/suppliers to beneficiaries for free or below fair market value.

  • The ACO must have entered into a participation agreement and remain in good standing under its participation agreement.
  • There must be a reasonable connection between the items or services and the medical care of the beneficiary.
  • The items or services must be in-kind, and must be either preventive care items or services, or advance certain clinical goals (i.e., adherence to a treatment regime, drug regime or follow-up care plan, or management of a chronic disease or condition).
  • The waiver does not protect financial incentives to beneficiaries, such as waiving or reducing patient cost sharing amounts (i.e., co-payments or deductibles).  (Note that the Shared Savings Program itself prohibits ACO, ACO participants, and ACO providers/suppliers from providing gifts or other remuneration to beneficiaries as inducement from receiving items or services from, or remaining in, an ACO.)
  • The waiver also does not protect or the provision of free or below fair market value items or services by manufacturers or other vendors to beneficiaries, the ACO, ACO participants, or ACO providers/suppliers, including any discount arrangements between a manufacturer and an ACO.
  • The waiver period begins on the start date of the participation agreement, and ends on the earlier of the expiration of the term of the participation agreement (including any renewals thereof) or the date on which the participation agreement has been terminated.  However, a beneficiary may keep items received before the participation agreement expired or was terminated, and may receive the remainder of any service initiated before the participation agreement expired or was terminated.

For more information regarding the OIG’s fraud and abuse waiversor ACO’s in general contact Lee Kuo.