Recent Developments Related to Healthcare Reform – Accountable Care Organizations

By W. Karl Baker, Director, Feeley & Driscoll, P.C.

The goal of the Patient Protection and Affordable Care Act (ACA) passed in March 2010 was to improve access to healthcare, and to change the healthcare delivery system by improving quality and reducing costs including improving the use of technology.  In March 2011, there were several developments that represented the first steps by the Department of Health and Human Services (HHS) and the Center for Medicare and Medicaid Services (CMS) in issuing required rules to implement the provisions of the ACA.  The HHS secretary, Kathleen Sebelius, said, “The Affordable Care Act is putting patients and their doctors in control of their healthcare.  For too long it has been too difficult for healthcare providers to work together to coordinate and improve the care their patients receive.  That has real consequences:  patients have gaps in their care, receive duplicative care, or are at increased risk of suffering from medical mistakes.  Accountable care organizations will improve coordination and communication among doctors and hospitals, improve the quality of the care their patients receive, and help lower costs.”  With that introduction, the United States has begun formally implementing accountable care organizations.  This quote was given on March 31st with a press release to formally announce the issuance of the proposed rules issued by CMS for implementing ACOs.  However, that was not the only development of rules, issuances and notices in March 2011.  There were several important and interesting issuances released in March as follows:

1. On March 21st, HHS announced the National Quality Strategy, which will serve as guidance to improve healthcare quality between public and private providers.
2. As discussed above, the CMS issued on March 31st the proposed rule entitled “Medicare Shared Savings Program:  Accountable Care Organizations and Medicare Programs:  Waiver Designs in Connection with the Medicare Savings Program and the Innovation Center”.  This rule was issued on March 31, 2011 and can be found in the Federal Register dated April 7, 2011.
3. In conjunction with this rule release, the Federal Trade Commission and the Department of Justice issued on March 31, 2011, a press release seeking public comment on the proposed statement of anti-trust enforcement policy regarding accountable care organizations.
4. In March 2011, the IRS issued a notice requesting comments regarding whether there is a need for additional tax guidance on tax-exempt organizations, including hospitals, participating in the new Medicare Shared Savings Program (MSSP). 

The rest of this article serves to briefly summarize the above rules and notices issued.  All of these rules and notices are being issued concurrently in an attempt to give complete and comprehensive guidance to healthcare providers as they navigate through changes to develop ACOs.

National Quality Strategy

On March 21st, HHS released their National Quality Strategy, providing guidance to coordinate quality initiatives between various non-profit and for-profit healthcare providers.  The issuance of this strategy was required as a provision of the ACA.  In a press release, HHS secretary, Kathleen Sebelius said, “The Affordable Care Act sets America on a path toward a higher quality healthcare system so we stop doing things that don’t work for patients and start doing more of the things that do work.  American hospitals, doctors, nurses and other healthcare providers are among the best in the world.  With this groundbreaking strategy, we are working with local communities and healthcare providers to help patients and improve the health of all Americans.” 

This new strategy outlines three primary goals for the improvement of our American healthcare system:

1. Quality of Care – improving healthcare quality by making healthcare more patient centered, reliable, accessible, and safe.
2. Healthy people and community – improving the health of the US population by supporting proven interventions to address behavioral, social, and environmental determinants of health in addition to delivering high-quality care.
3. Affordable care – reduce the cost of healthcare for all stakeholders including individuals, families, employers, and the government.

Six priorities have been developed to implement these strategies, including:

1. Making care safer by reducing harm caused in the delivery of care.  One key issue often discussed is readmission rates in hospitals.
2. Ensuring that each person and family are engaged as partners in their care.
3. Improving the communication and coordination of care.
4. Promoting the most effective prevention and treatment practices for leading causes of mortality, starting with cardiovascular disease.
5. Working with communities to promote wide use of best practices to enable healthy living.
6. Making quality care more affordable for all stakeholders by developing wide use of new healthcare delivery models.

Look for more developments and issuances relating to this National Quality Strategy.

Proposed Rules on Development of ACOs

The proposed rules for developing ACOs issued on March 31, 2011 are distributed to help doctors, hospitals and other providers better coordinate care for Medicare patients.  The hope is that this better improved coordination will improve access to healthcare by Medicare beneficiaries (and all patients in general) while at the same time lowering healthcare costs for the nation and specifically for Medicare. 

In short, the proposed rules develop the Medicare Shared Savings Program that will reward organizations that are able to effectively coordinate care and lower healthcare costs while meeting certain performance standards on quality of care.  Participation in an ACO is voluntary and organizations will continue to receive fee for service payments for the provision of healthcare to their patients.  The goal of the MSSP is to save as much as $960 million over three years. 

In the proposed rule, an ACO is defined as a group of providers and suppliers of services working together and formally organized to coordinate care for patients that have volunteered to be included in the ACO.  To clarify questions, the proposed rule has clarified that critical access hospitals are eligible to participate in the MSSP.  The proposed rule includes formal guidance and requirements regarding the governance of the formal, legal ACO structure, and the ACO must be able to serve at least 5,000 Medicare beneficiaries for an initial period of three years.  As mentioned earlier, the proposed rule will continue to pay individual providers and all related partners for services provided under current Medicare payment system.  CMS will be developing models and formulas for computing shared performance standards and assessing qualifications for receiving shared savings payments. 

ACOs will need to meet quality standards in five key areas:

1. Patient/care giver care experiences
2. Care coordination
3. Patient safety
4. Preventive health
5. At-risk population/frail elderly health

If ACOs are able to meet these quality standards and do so while saving money for the Medicare program by “getting beneficiaries the right care at the right time” (from the press release issued on March 31, 2011 issued by HHS), then the ACO can receive additional payment over and above the traditional Medicare payment system.  Eventually, ACOs that do not meet these quality standards and do not document savings will be held accountable. 

Initially, the ACO program, which becomes effective January 1, 2012, the proposed rules allow new ACOs to opt into one of a couple options:  a one-sided risk model in which there is a sharing of savings only for the first two years and a sharing of savings and losses in the third year or a two-sided risk model in which there is a sharing of savings and losses for all three years.  The one sided risk model includes lower returns for shared savings with no down side for the first two years and the two-sided risk model includes for those ACOs that believe they can document higher savings, paying higher rewards for savings, offset by the risk of losses in all three years.  The difference in shared savings percentages for option one and option two is about 12.5% (52.5% vs. 65%) and the losses vary by 12.5% (47.5% in year three for option one vs. a maximum of 35% in option two for all three years).  Assuming a successful program, all ACOs will fall under option two after year three, meaning shared savings and risk of loss beginning after year three.  In general, the savings programs will be based on benchmarks computed as cost per beneficiary, and savings will be based on a reduction of these costs per beneficiaries.

The ultimate goal of the new ACO model is to improve care for patients as the hope is that there will be less fragmentation, portable medical records and a sharing of information with the various care providers.

FTC/DOJ Seeking Comment on ACOs

In a defensive measure to ensure that the new ACO model being experimented with in the US healthcare delivery system, the Fair Trade Commission (“FTC”) and Department of Justice (“DOJ”) have issued a statement explaining how these agencies will enforce US anti-trust laws in conjunction with the implementation of new ACOs.  The policy statement will create an anti-trust “safety zone” for certain ACOs and establish expedited anti-trust reviews for other ACOs.  Of course this is necessary as ACOs are now more than ever promoting the joint efforts of several independent healthcare organizations.  Therefore, the worry is that anti-trust laws will be tripped over in the delivery of these new models.  The goal of the statement is to provide guidance in performing competition analyses when CMS is reviewing ACO applications, to ensure that these newly formed structures do not lead to a reduction of competition in communities and higher prices for consumers. 

The statement provides guidance as to whether 1.)  ACOs need to follow these rules.  2.)  When the FTC and DOJ will apply specific anti-trust analyses to these ACOs.  3.)  An anti-trust safety zone for certain ACOs’ required review process.  4.)  Additional options and clarification if an ACO falls outside the safety zone but below a CMS-mandated anti-trust threshold.  In general, the organizations with a higher share of the local primary service area (PSA) will face higher scrutiny as the risk is the ACO will have the opportunity to raise prices charged to commercial health plans above competitive levels.  As this is article is not intended to be a legal analysis, we do suggest you seek legal counsel in understanding these anti-trust policies. 

IRS Notice

Finally, in a comprehensive government effort to coordinate the application and implementation of the ACA, the IRS has issued Notice 2011-20 concerning whether the existing Internal Revenue Code governing tax-exempt organizations are adequate.  The IRS is soliciting public comment by May 31, 2011.  The concern is that tax-exempt organizations will be participating in the MSSP in conjunction with an ACO structure along with private, for-profit parties.  The IRS also anticipates that these tax-exempt organizations may participate in using a variety of corporate infrastructures including membership and non-profit membership corporations, ownership of shares in a corporation, ownership of a partnership interest in a partnership, and/or contractual arrangements with the ACO and/or its other participants.  The risk of these concerns is that adverse tax consequences will occur for the tax-exempt organizations.  These organizations must ensure that their participation in the MSSP is structured in the ACO so that the net earnings do not ultimately benefit private parties.  It will be the IRS’ goal to determine whether prohibited inurement has occurred on a case by case basis, based on facts and circumstances. 

The Notice issues general guidelines and clarifications for the development of ACOs.  It says that the IRS will not consider a tax-exempt organization’s participation in an ACO to result in impermissible private benefit to the for-profit, ACO participant where:

1. The terms of the tax-exempt organization’s participation through the ACO, including share of payments or losses and expenses, are set forth in advance in a written agreement negotiated at arm’s length. 
2. CMS has accepted the ACO into the MSSP. 
3. The tax-exempt organization’s share of economic benefits derive from the ACO, including its share of shared savings payments, is proportional to the benefits or contributions said tax-exempt organization provides to the ACO.  Ownership interests in the ACO need to be proportional and equal in value to capital contributions to the ACO and all relevant returns of capital and distributions are made in proportion to ownership interests. 
4. The tax-exempt organization’s share of the ACO’s losses, including shared savings losses, does not exceed the share of economic benefits to which the tax-exempt organization is entitled. 
5. All contracts and transactions entered into by the tax-exempt organization with the ACO and participants and by the ACO with all participants and other parties are at fair market value. 

The IRS has also questioned or raised the issue of whether shared savings payments will be subject to Unrelated Business Income Tax (UBIT).  The initial guidance indicates that the determination as to whether UBIT will be triggered depends on whether the activities generating the payments are related to the tax-exempt organization’s charitable purposes serving as the basis for its initial exemption.  The Notice seems to indicate that the risk of UBIT being required to be paid seems low since the development of the ACO model is to promote quality improvements and cost savings in the provision of healthcare.

The Notice indicates that they expect that certain ACOs may conduct activities unrelated to the MSSP, including entering into and operating under shared savings arrangements with other types of health insurance payors and this will cause question as to the taxability of these activities for participating tax-exempt organizations.  The Notice gives an example in which the negotiation with private health insurers on behalf of unrelated parties is not a charitable activity, even if the negotiated agreement will result in cost savings and healthcare delivery.  The Notice indicates that the IRS recognizes that certain non-MSSP activities be related to an exempt purpose.  For example, the proposed ACO rule released by the CMS (described above) anticipates that ACOs may participate in shared savings arrangements with Medicaid, furthering the charitable purpose of relieving the poor, distressed or the underprivileged.  The Notice does not provide additional guidance to clarify existing laws and regulations but is essentially asking the public whether additional guidance is needed to ensure that non-MSSP activities further exempt purposes in the absence of safeguards similar to those present in the MSSP. 

The Notice clarifies that the existing law concerning tax-exempt organizations includes two primary principals.  The first principal states that although the promotion of health has been recognized as a charitable purpose, not every activity that promotes health supports tax-exemption.  Secondly, if a tax-exempt organization is a partner of an ACO, treated as a partnership for Federal tax purposes, the ACO’s activities will be attributed to the tax-exempt organization for purposes of determining both whether the organization operates exclusively for exempt purposes and whether it is engaged in an unrelated trade or business.

As organizations are considering the development of ACOs, the questions being posed by the IRS should be taken into consideration.  Look for additional guidance by the IRS after they have processed all comments received by May 31, 2011.

Conclusion

As organizations begin to consider participation in the MSSP by developing an ACO, the above information should be taken into consideration.  The goal of these concepts is to improve the delivery of care to patients in the United States while reducing costs to the Medicare program.  Hopefully, this can be done not at the ultimate expense of healthcare providers’ financial viability.  Several questions need to be asked, including:

1. How do your organization’s quality standards compare with the National Quality Strategy issued by HHS?
2. Where does our organization fall in the FTC and DOJ’s categories of ACOs for purposes of anti-trust competitive analysis?
3. How are our current care activities impacted by unrelated business income rules?  How or will our current activities need to be revised to avoid or minimize unrelated business income taxes and the development and participation in an ACO?
4. How will we fit into an ACO?  Who should we be partnering with?
5. Are we able to commit to serving at least 5,000 Medicare beneficiaries?
6. How experienced are we at coordinating care among doctors, hospitals, and other healthcare providers?  Should we choose option one or option two for the first three year commitment?

For more information on these proposed rules and notifications, contact your Feeley & Driscoll advisor.

To learn more about healthcare reform read my previous articles on this topic:

Patient Protection and Affordable Care Act

Healthcare Reform - Affordable Care Act (ACA)

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