Despite Minor Modifications in Final Rules, ACOs Still Face Large Start-Up Costs and Uncertain Savings


Under final rules issued by the Centers for Medicare and Medicaid Services (CMS), Accountable Care Organizations (ACOs) will continue to face large start-up costs and uncertain savings, despite a decreased regulatory scheme and increased financial incentives. Responding to more than 1,300 public comments filed in response to earlier draft regulations, CMS made a number of modifications that it says will result in greater flexibility of ACO operations, increased financial incentives for ACO participants and simpler, more streamlined quality performance standards. Nonetheless, the modifications are minor and unlikely to change the cost-benefit analysis that healthcare providers will face when deciding whether to participate in the ACO program.

In an implicit acknowledgement that healthcare providers will be slow to warm to the idea of ACOs, CMS lowered its range of anticipated ACOs to between 50 and 270, a drastic decrease from the 300 to 800 potential ACOs it estimated in its draft regulations. However, CMS maintains that start-up and ongoing annual operating costs will remain at approximately $1.7 million per ACO, despite a widely-publicized American Hospital Association (AHA) study that estimated such costs to be in the range of $11.6 million to $26.1 million, depending on the size of the ACO.1 CMS also estimates the median savings shared with ACO participants to be $1.3 billion over a four-year period. Due to the lower number of anticipated ACO participants, CMS claims that ACOs will enjoy a benefit-cost ratio of 2.9. However, if the AHA estimates of start-up and operating costs are correct, ACOs will not achieve any savings and will face enormous losses.

History of ACO Regulations

ACOs were authorized under the Patient Protection and Affordable Care Act of 2010 in an attempt to increase health care quality while reducing costs. They are organizations of health care providers that agree to be accountable for cost, quality and the overall care of Medicare beneficiaries. On April 7, 2011, CMS issued proposed rules that were heavily criticized for containing burdensome data collection requirements, large start-up costs, uncertain savings, possible financial losses and troublesome governance mandates.2 In an attempt to blunt heavy criticism of the draft regulations, CMS announced the creation of so-called “Pioneer ACOs” and “Advance Payment ACOs.”3 However, “Pioneer ACOs” provided only slight modifications to the draft ACO regulations. At the same time, CMS announced it was seeking comments on “Advance Payment ACOs” that would allow ACOs to receive up-front financial assistance to lessen the burden of high start-up costs.

Even after the “Pioneer ACO” and “Advance Payment ACO” regulations were released, CMS received approximately 1,320 public comments on the draft regulations that addressed issues on multiple topics. In response to those comments, CMS announced changes in three general areas: ACO operations; financial incentives; and quality performance standards.

Greater Flexibility of ACO Operations?

CMS claims its final rules give greater flexibility for ACO operations. However, a close examination of the final rules shows these modifications to be minor, at best. For example, the proposed regulations required that primary care physicians be exclusive to one ACO. However, the final regulations allow a primary care physician to be part of multiple ACOs if he or she has not been billing under an individual taxpayer identification number. Additionally, ACOs will be allowed to choose between two start dates if they begin operations in 2012, rather than the January 1, 2012 start date in the proposed regulations. For those ACOs that start in 2012, a longer performance period than three years will be allowed; though the period will only be extended by approximately six months. It is not likely that these changes will substantially alter the large operational issues that ACOs will face.

ACOs will be given slightly greater flexibility in their governance structure under the final rules. The proposed requirement that each ACO participant be on the ACO governing board has been eliminated in favor of a requirement that ACOs simply provide for meaningful participation in the composition and control of the ACO’s governing body by ACO participants or their designees. However, ACO governing boards will still be required to have a Medicare beneficiary from the patient population served by the ACO.

In an important concession to the realities of operating a healthcare organization, CMS will allow ACO participants to be added or subtracted during the course of the agreement period, with appropriate notification to CMS. CMS has also eliminated the requirement that at least 50 percent of an ACO’s primary care physicians be “meaningful EHR users” by the start of the second performance year.

The final rule further eliminates the earlier requirement that certain ACOs be subject to mandatory review by antitrust agencies prior to their enrollment in the ACO program. This review is now voluntary; however CMS has stated it will still coordinate closely with antitrust agencies throughout the ACO application process and the duration of the program to ensure that ACOs do not have a detrimental impact upon competition.

Increased Financial Incentives May Not Be Enough

CMS was persuaded by the comments to the draft regulations to improve the financial attractiveness of the program to encourage broad participation by providers and suppliers, especially those likely to comprise smaller ACOs such as small and medium sized physician practices and rural and safety net providers. However, it is unclear whether the changes made in the final rules will be enough to persuade providers to become ACO participants. Most importantly, CMS has removed the proposed 25 percent withhold of shared savings that it sought to ensure repayment of any future losses. Also, ACOs that choose to enroll in the so-called “one-sided” ACO program containing no risk of repayment losses can stay in that program for the duration of the agreement, instead of being transitioned to a risk-based model in the third year of the agreement. However, in subsequent enrollment periods, those ACOs will have to participate in the two-sided risk model, and assume any subsequent financial losses. CMS hopes this change will increase participation by those ACOs not yet ready to assume risk.

To further the financial attractiveness of ACOs, CMS eliminated its proposal that one-sided model ACOs could only share in savings after savings had surpassed a minimum savings rate to be established by CMS. Instead, one-sided ACOs will be able to share in first-dollar savings.

To attract academic medical centers and safety net hospitals, CMS will exclude IME and DSH payments from ACO benchmark and performance year expenditures, which should make it more financially more attractive for these institutions to participate in ACOs.

CMS will also allow two-sided ACOs, who will carry the risk of repaying losses, additional time in which to repay any losses. This time period has been extended from 30 to 90 days.

CMS further announced that it will pay for the cost of mandatory patient experience of care surveys in 2012 and 2013; though in 2014, ACOs will have to select and pay a vendor for this function.

The claims runout at the end of the agreement period will also be shortened from six to three months, in an attempt to provide a final accounting in a quicker manner, and so that ACOs will be able to receive shared savings faster.

Finally, CMS has increased the shared savings cap, which will enable ACOs to potentially receive a greater percentage of shared savings.

Simpler, More Streamlined Quality Performance Standards

In perhaps the biggest structural change to the ACOs, CMS announced it will assign Medicare beneficiaries to ACOs on a prospective, rather than a retrospective, basis. This will allow ACOs to identify in advance those patients for whose care they will be given responsibility and to measure performance standards. However, CMS stressed that it will continue to monitor the operations of ACOs to detect if they are engaged in avoidance of high-risk or high-cost beneficiaries. Such behavior by an ACO could result in its termination from the program.

Equally important, CMS announced it was reducing the number of quality indicators from 65 to 33. CMS removed those measures perceived as redundant, operationally complex or burdensome and retained those that would still demand a high standard of quality while focusing on priority areas. The new measures are designed to include both process and outcome measures that will be able to measure short-term outcomes while lessening the burden of data reporting by the ACOs. These 33 measures will be divided into 4 domains: patient/caregiver experience; care coordination/patient safety; preventive health; and at-risk population. CMS also modified its earlier requirement that ACOs meet all performance indicators. Instead, under the final rule, ACOs will only have to achieve quality performance standards on 70 percent of the measures in each of the 4 domains.

Are These Modifications Enough to Overcome Significant Regulatory and Financial Burdens?

Despite having made some modifications to the proposed regulations, there remain significant regulatory burdens and high implementation costs associated with ACOs. They will continue to face a significant outlay of resources to create new legal entities, build a management and leadership structure, provide for IT platforms and comply with the still-numerous CMS regulations, including an unchanged compliance requirement from the draft regulations. Especially concerning is the wide divergence of estimates for start-up and operating costs between studies produced by CMS and the AHA. If even a fraction of the higher AHA costs are realized, ACOs will lose money in this endeavor. Healthcare providers should therefore exercise caution before joining an ACO.

More Information

For more information please contact one of the following Haynes and Boone, LLP lawyers.

AHA Press Release, May 13, 2011, New Study Finds the Start Up Costs of Establishing an ACO to be Significant; CMS underestimates the investment needed to create an ACO, available at:
2 For a fuller discussion of the draft ACO regulations, see Haynes and Boone Client Alert of April 4, 2011, available at:
3 For a fuller discussion of the “Pioneer ACO” regulations, see Haynes and Boone Client Alert of May 19, 2011, available at:

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