By Eric Klein, Kenneth Yood, Aytan Dahukey and Lynsey Mitchel

This blog entry will be the first of a series of entries discussing the long anticipated 400 plus-page Accountable Care Organization proposed regulations (the “Proposed Rule”) released on March 31, 2011, by the Centers for Medicare & Medicaid Services (“CMS”). The Proposed Rule is designed to implement Section 3022 of the Affordable Care Act which contains provisions relating to Medicare payments to providers of services and suppliers participating in ACOs. Under these provisions, ACO participants can continue to receive traditional Medicare fee-for-service payments under Parts A and B, and be eligible for additional payments based on meeting specified quality and savings requirements. 

This entry discusses the Proposed Rule’s provisions regarding the legal structure and governance of ACOs.

The Affordable Care Act requires an ACO to “have a formal legal structure that would allow the organization to receive and distribute payments for shared savings” to “participating providers of services and suppliers.” Operationally, an ACO’s legal structure must provide both the basis for its shared governance as well as the mechanism for it to receive and distribute shared savings payments to ACO participants and providers/suppliers.

 As stated in the Proposed Rule, CMS believes “that it is necessary for each ACO to be constituted as a legal entity appropriately recognized and authorized to conduct its business under applicable State law in order to best achieve the objectives of the Shared Savings Program and that it must have a TIN.” The ACO’s legal entity may be structured in a variety of ways, including as a corporation, partnership, limited liability company, foundation, or other entity permitted by State law. 

As many states do not allow for the vertical integration of healthcare services into single legal entities (e.g., California and other states that have corporate practice of medicine laws that prevent non-professional entities from employing physicians), ACOs are not required to be singular legal entities. Section II(B) of the Proposed Rule states that groups of providers of services and suppliers are eligible to participate as an ACO. The specific groups that can aggregate to form an ACO are:

  1. ACO professionals in group practice arrangements (i.e., medical groups);
  2. Networks of individual practices of ACO professionals (i.e., independent physician associations);
  3. Partnerships or joint venture arrangements between hospitals and ACO professionals (i.e., medical foundations and medical groups contracting through professional services agreements to provide care to patients);
  4. Hospitals employing ACO professionals (i.e., traditional hospital employers without corporate practice of medicine restrictions); and
  5. Such other groups of providers or services and suppliers as the Secretary deems appropriate.

What about an existing entity that is eligible to participate as an ACO with its current legal structure? CMS is proposing that if the existing legal entity meets the eligibility requirements to be an ACO it may operate as an ACO as long as it is recognized under applicable State law. However, CMS stated it recognized that the absence of a separate legal entity to operate the ACO may make it more difficult for CMS to audit and otherwise assess ACO performance. CMS is soliciting comments on whether it should require all ACOs to be formed as a distinct legal entity or whether an existing legal entity could be permitted to participate as an ACO. 

The Affordable Care Act requires that an ACO have a “mechanism for shared governance” and that an ACO “have in place a leadership and management structure that includes clinical and administrative systems.” CMS envisions a mechanism that is “transparent, accountable to the affected beneficiary community, and also accountable and responsive to the ACO participants and the ACO providers/suppliers they represent.” 

CMS is proposing that an ACO must establish and maintain a governing body with adequate authority to execute the statutory functions of an ACO. The governing body may be a board of directors, board of managers or any other governing body that provides a mechanism for shared governance and decision-making for all ACO participants and that has the authority to execute the statutory functions of an ACO. 

Many ACOs may choose to form several layers of governance. In California, it is typical for medical foundations to have an overall board of directors but to also have physician advisory boards which report to the main board of directors and joint operating committees providing a shared forum for ACO professionals and the hospitals and other participants in ACOs to make critical decisions affecting the beneficiary community.

CMS believes that ACOs should be operated and directed by Medicare-enrolled entities that directly provide health care services to beneficiaries. Recognizing that medical management companies and health plans desire to be included in the formation of ACOs and that small groups of providers may lack the capital and infrastructure necessary to form an ACO and to administer the ACO program requirements, CMS is proposing that ACO participants (defined as Medicare-enrolled providers of services and/or suppliers) have at least 75% control of an ACO’s governing body. Also, each ACO participant would be required to choose an appropriate representative from within its organization to represent them on the governing body. These requirements may prove to be difficult for ACOs comprising of hospitals, medical management companies and health plans to implement given the high level of control given to providers. CMS is requesting comments on this requirement and it is anticipated that there will be significant push-back by non-providers on this matter.

In subsequent entries, we will discuss other aspects of ACO operation and reimbursement, including establishing an agreement with CMS, assignment of Medicare fee-for-service beneficiaries, quality and other reporting requirements, and shared savings determination. 

If you have questions about ACO formation, please contact Eric Klein at  (310) 228-3728 or Kenneth Yood at (310) 228-3708.