Final ACO Rule: Retooled Risk and Reward Model

December 1, 2011Articles
American Bar Association

As seen on The American Bar Association Health eSource

On November 2, 2011, the Centers for Medicare & Medicaid Services’ ("CMS") “Medicare Shared Savings Program: Accountable Care Organizations” Final Rule was published, after its release on October 20, 2011.1 The Final Rule, effective January 1, 2012, implements Section 3022 of the Patient Protection and Affordable Care Act and has been met with mixed reviews from leaders across the healthcare industry.2 Under the Medicare Shared Savings Program ( “MSSP”), providers who organize as ACOs would continue to receive fee-for-service payments under Parts A and B and be eligible for additional payments if they meet specified quality and savings requirements, but not without risk, at least in the long term.Jennifer Mitchell and Tyler Williams contributed an article to the American Bar Association regarding the Final Rule for "Medicare Shared Savings Program: Accountable Care Organizations."

Most would agree that the changes from the Proposed Rule3 to the Final Rule are both welcome and significant, signaling a clear intent on the part of CMS to respond to and address the over 1,300 comments it received in reaction to the Proposed Rule. Many of the key changes in the Final Rule and related governmental initiatives will impact provider organizations’ financial and legal risk assessments as they now consider whether to establish and operate as an ACO, including:

  • Creation of a financially risk-free (one-sided) model during the initial three-year contract period, in addition to a risk-bearing (two-sided) model;
  • Allowing all ACOs to share in first-dollar savings generated to Medicare once the minimum savings rate has been achieved;
  • Reduction of the number of quality measures from 65 to 33;
  • Changes in the beneficiary assignment process to prospective rather than retrospective;
  • Removal of the 50 percent electronic health record (“EHR") meaningful use requirement for participating providers;
  • Multi-agency coordination among CMS, the Department of Justice, the Federal Trade Commission, the Internal Revenue Service, and the Health and Human Services Office of Inspector General to adjust antitrust, fraud and abuse, and tax rules to better accommodate ACOs; and
  • Creation of a complementary “advance payment model”4 for certain ACOs providing for pre-payment of a portion of future shared savings.5

While all of these and other provisions of the Final Rule will affect risk, the focus of this article is on the two payment models, the function of shared savings and losses in the MSSP, and the financial and legal risks associated with choosing to apply to participate in the MSSP.

Two Tracks: One-Sided or Two-Sided Payment Model

As discussed above, ACOs may choose between two payment models during the first agreement period: (1) a one-sided model (Track 1), in which providers only share in savings; or (2) a two-sided model (Track 2), in which providers share in both savings and losses.6 Each ACO must be responsible for at least 5,000 beneficiaries annually for a period of three years.7 The Final Rule permits an ACO that chooses Track 1 to share in savings with CMS without any financial risk of also sharing in potential losses during the entire initial three-year agreement period.8 Under the Proposed Rule, Track 1 ACOs would have been required to transition to a two-sided model during the third year of their initial agreement. CMS explained this change as being “designed to help organizations with less experience coordinating care, such as some physician organizations or small or rural providers, to gain experience before taking on the responsibility of sharing losses.”9 At the same time, Track 2 “allows more experienced providers to take on the responsibility of losses in exchange for greater potential rewards.”10 Thus, a provider that chooses Track 2 agrees to share in losses with Medicare in exchange for the potential for a larger share of Medicare’s savings.

After the initial agreement period, all ACOs must participate in a two-sided model if they wish to continue to participate in the MSSP.11 In addition, the Final Rule eliminates the provision in the Proposed Rule that ACOs with net losses be barred from continued participation in the Program. Rather, such ACOs may still apply for a subsequent agreement period but must explain in their application what caused the losses and identify safeguards implemented to prevent future losses.

Streamlined Shared Savings and Losses

To share in savings under both Track 1 and Track 2, an ACO's average per capita Medicare expenditures must be below CMS-established benchmark amounts by at least the “minimum savings rate” ("MSR").12 The MSR is a statistical measure intended by CMS to ensure that savings come as a result of delivering quality, cost-effective and coordinated care, not as a result of normal variation or random fluctuation in Medicare spending. Under the Proposed Rule, Track 1 ACOs could only share in savings beyond a MSR that ranged from 2-3.9 percent depending on the number of Medicare patients served, net of the MSR. Track 2 ACOs, however, had a fixed MSR of two percent and shared in all savings from the first dollar. Under the Final Rule, while Track 1 still has a sliding scale for determining MSR, CMS will allow both tracks to share in savings from the first dollar once the applicable MSR has been achieved.13

Practically speaking, the lower the MSR, the better it is for the ACO. The calculation hinges on the difference between the benchmark amounts and the ACO’s actual expenditures. Thus, a lower MSR permits an ACO to share in savings more readily because it need not have as low of expenditures than an ACO with a higher MSR. This is one of many considerations for the potential ACO in choosing which track best suits its delivery model. An ACO may choose Track 2 not only because it can realize a higher percentage of the savings, as discussed below, but also because it is guaranteed the lowest MSR (two percent) regardless of its number of beneficiaries. In addition to meeting or exceeding the MSR, an ACO must achieve the required quality measures and otherwise maintain eligibility in the Program to receive its shared savings payments.

CMS did not, despite comments requesting an increase, change the proposed maximum shared savings amounts for either track. Thus, Track 1 ACOs can receive up to 50 percent of all savings and Track 2 ACOs can receive up to 60 percent.14 Once it is determined that an ACO will share in savings, the actual amounts received depend on the ACO’s performance on the 33 quality measures. Under the Final Rule, for the first performance year ACOs are deemed to have met the quality performance standard by completely and accurately reporting on all 33 quality measures.15 For subsequent years, the amount of the shared savings payment depends on attaining or exceeding minimum levels of performance judged by the quality measures, which are the same year after year.16

There is also a maximum sharing cap of 10 percent of benchmark for a Track 1 ACO and 15 percent of benchmark for a Track 2 ACO, which is up from 7.5 percent and 10 percent, respectively, under the Proposed Rule.17 For an example of how this works, consider that a Track 1 ACO has a total benchmark of $100,000. That ACO can receive only a maximum shared savings payment of $10,000, even if its savings exceed its MSR by more than $10,000. This is increased from the Proposed Rule, under which the same Track 1 ACO would have had a maximum payment of $7,500.

In addition to shared savings, Track 2 ACOs must also consider the impact of potential shared losses. A Track 2 ACO will be responsible for sharing losses with the Medicare program if its Medicare expenditures are above its benchmark by at least its “minimum loss rate” (“MLR”), also two percent.18 The losses for which a Track 2 ACO will be responsible are based on quality measures, similar to the shared savings calculation, and capped. Thus, a Track 2 ACO that performs well from a quality standpoint, but still has Medicare expenditures above its MLR, will be responsible for a lower percentage of the losses than an ACO with the same amount of losses that does not perform as well qualitatively. This is where the pedal meets the metal. If two Track 2 ACOs have the same amount of loss, greater than the MLR, the one performing worse qualitatively will be responsible for more loss. The ultimate amount of loss for which a Track 2 ACO is responsible is based on its performance judged by the quality measures. The cap on the amount of losses to be shared is phased in over three years starting at five percent in the first; 7.5 percent in the second; and 10 percent in the third.19 A new provision added to the Final Rule that did not exist in the Proposed Rule is a limit on the Track 2 shared loss rate at 60 percent.20

Complexity and Risk in the Benchmark

The process finalized by CMS for establishing the benchmark for ACOs is complex. Moreover, there is risk inherent in the benchmark that should not be overlooked by prospective ACOs. CMS establishes the benchmarks below which an ACO must keep Medicare expenditures by considering the beneficiaries who would have been assigned to the ACO historically (during the most recent three years prior to ACO participation).21 CMS then determines the historical expenditures for those beneficiaries, establishing a benchmark. The ACO has virtually no input in the benchmark because CMS considers historical information and uses a complicated trending procedure based on national Medicare expenditure data. With a few exceptions, CMS adopted its Proposed Rule for adjusting the benchmark. It also added some additional risk adjustments and monitoring activities to the Final Rule.22

The benchmark can be adjusted in three ways.23 First, it can be adjusted for an ACO desiring to add or remove participants during the agreement period. For example, an ACO adding a new physician group would have its benchmark adjusted to account for the increased number of Medicare beneficiaries apportioned to it. Second, the benchmark is adjusted annually based on the projected absolute amount of growth in national per capita Medicare expenditures. This “updated benchmark” is the real focus because this is the amount below which the ACO’s expenditures must fall for the ACO to receive a shared savings payment. Third, an ACO’s benchmark is reset at the beginning of each agreement period so that an ACO renewing its agreement will have its benchmark determined by the most recent actual, as opposed to projected, data.

During the initial agreement period, risk lies in whether historical data will accurately benchmark the actual beneficiary experiences of ACOs. Benchmarking assumptions are also based on the expectation that patients will stay with an ACO. With Medicare beneficiaries being able to opt-out of an ACO, there remains uncertainty in the risk/reward balance attempting to be achieved by the benchmark.

Other Considerations Affecting ACO Participation

Additional Final Rule provisions potentially affecting the risk analysis for would-be ACOs are:

  • CMS increased the period in which a Track 2 ACO must repay its losses to 90 days from 30 days;24
  • CMS eliminated the provisions requiring a 25 percent withholding of shared savings and forfeiture in the event of early termination;
  • ACOs who show in advance an ability to repay may choose to receive an interim payment based on financial performance for the first 12 months of the MSSP and quality performance for its first performance year, with the understanding the payment is conditional and subject to repayment in the event an overpayment was made;25 and
  • ACOs retain the ability to determine the best method for repayment but must provide details of this method in their ACO applications.

CMS will start accepting applications from prospective ACOs in early 2012. There will be two application periods, for April 1, 2012 and July 1, 2012 start dates with first performance years of 18 or 21 months, with the initial three-year agreement ending December 31, 2015. For ACOs applying in subsequent years, all agreement terms are three years and begin on January 1 of each year.26


CMS made a number of positive changes in the Final Rule, many designed to encourage smaller or newly-forming organizations to participate in the MSSP. The Final Rule may ultimately achieve its goal of enticing some of those providers to form ACOs who would not have contemplated doing so under the Proposed Rule. While the Final Rule reduces risk on both tracks, these authors are of the opinion that the risks are still too great for a large percentage of key providers. In the current healthcare regulatory environment – one in which providers are grappling with myriad mandatory compliance obligations affecting how they do business – it is understandable why participation in the MSSP, which is voluntary, does not seem to be a high priority to many of the organizations CMS had hoped would participate. Whether CMS’s retooled risk and reward model will convince enough provider organizations to voluntarily make the significant investment of resources necessary to form and operate an ACO remains to be seen. With the effective date of the Final Rule just weeks away, it will be interesting to see what the New Year brings on the ACO front.


(1) The Final Rule is published at 76 Fed. Reg. 67974 (Nov. 2, 2011), accessible at 
(2) “ACO Final Rule:10 Healthcare Leaders Sound Off,” HealthLeaders Media, Oct. 25, 2011 ( ); “ACOs Seen as Tough Sell, Despite Concessions,” HealthLeaders Media, Oct. 24, 2011 ( ); “10 Healthcare Leaders Share Thoughts on Final ACO Rule,” Becker’s Hospital Review, Oct. 21, 2011 ( ); and “ACO Rules Respond to Provider Reluctance But Effect on Participation Remains Unclear,” BNA Health Law Reporter, 20 HLR 1581, Oct. 27, 2011. 
(3) The Proposed Rule is published at 76 Fed. Reg. 19640 (Apr. 7, 2011), accessible at 
(4) The Advance Payment Model notice is published at 76 FR 68012 (Nov. 2, 2011). 
(5) "Proposed Rule versus Final Rule for Accountable Care Organizations (ACOs) in the Medicare Shared Savings Program," Centers for Medicare & Medicaid Services, October 2011 ( ). 
(6) 42 C.F.R. § 425.600. 
(7) Id . at § 426.110. 
(8) Id. at § 425.604. 
(9) CMS Fact Sheet, “New Affordable Care Act Tools Offer Incentives for Providers to Work Together When Caring for People with Medicare,” October 2011 ( ). 
(10) Id . See also, CMS Press Release, “HHS Announces New Incentives for Providers to Work Together Through Accountable Care Organizations,” Oct. 20, 2011 ( ).
(11) 42 C.F.R. § 425.600. 
(12) Id. at §§ 425.604, 425.606. 
(13) Id. 
(14) Id. 
(15) Id. at § 425.502. 
(16) Id. 
(17) Id. at §§ 425.604, 425.606. 
(18) Id. at § 425.606. 
(19) Id. 
(20) Id. 
(21) Id . at § 425.602. 
(22) Id. 
(23) Id. 
(24) Id. at § 425.606. 
(25) Id. at § 425.608. 
(26) Id. at § 425.200.