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Author's Bio: Tom Ealey has three decades of health care experience including work as a CPA, management consultant, writer, seminar leader, public policy wonk and medical practice executive.

Tom is an associate professor of business administration at ALMA College in Alma Michigan. Disclaimer: This information is not intended to provide accounting, consulting or legal advice, and should be relied on exclusively for information. Professional advice should be obtained from experienced and licensed professionals. Living Document: This document will be updated as events warrant, and will likely be followed by a longer document as ACOs evolve. If you want to be certain of receiving updates please send a note specifying email. The reproduction of and quotation from this paper is encouraged, with proper attribution. Contact Information: Tom Ealey, or (989) 463-7135 For quick updates see:

Š Tom Ealey 2011

Contents Prologue: Should Physician Groups Sponsor and Manage ACOs? The Current Environment Is This a Rush? The First Round Second Round Defining the ACO Likely Sponsors of ACOs Due Diligence Appendices #1 Core Competencies Expected From an ACO #2 Additional Readings #3 Updates: Pioneer and Advanced Pay ACOs

Prologue: Should Physician Groups Operate ACOs Should physician groups operate ACOs? Probably not. What would be required? The ability to meet the core competencies laid out in the pages below. Major impediments? Financial Capital Management strength and governance structure Sophisticated IT (financial, clinical, communications) Could a physician group start and successfully operate an ACO? Possible a very strong and diverse multi-specialty group with a commending market presence, a strong reputation, a strong capital base and a reasonable relationship (or a strong arm relationship) with local hospital/s. Perhaps a large and well capitalized primary care group in a market without a dominant hospital or IDS. (Physician groups already owned by or tied to Integrated Delivery Systems (IDS) may be directed into an ACO without much option or choice,) But likely most physician groups will not be able to create and operate an ACO. And that leaves the question, when and how should physician groups join ACOs? Update: On May 1, 20111 the American Medical Group Association, a trade association representing about 400 of the country’s largest and most sophisticated physician groups, let loose a withering blast at the draft regulations for Medicare ACOs (see link in Readings). The Obama administration had hoped these groups would be leaders in setting up first Medicare ACOs and later broad population ACOS. The AMGA blasted the draft regulations as being too prescriptive, too overbearing, and with incentives almost impossible to earn, and several other criticisms. The final regulations are due out by late summer, with a seeming unrealistic implementation date of January 1, 2012 for Medicare ACOs.

The Current Environment The U.S. health care system is, by general agreement, broken. Too little coverage, too much expense, a lack of proper outcomes, a poor cost-benefit trade off. There is no general agreement, however, on how to fix the problem.

PPACA The Patient Protection and Afforable Care Act (Public Law 111-148 (March 23, 2010), H.R. 3590, then supplemented by P. L. 111-152, The Health Care and Education Reconciliation Act of 2010) usually referred to as “PPACA” or “Obamacare,” is a seismic reform of the U.S. Health care system. The outcomes and effectiveness of PPACA are still very much in doubt, the law has a long implementation period and is very complex, but the impact is not in doubt. PPACA adds to various other pressures to reform and reorganize the U.S. Health care system.

Economic Pressure The United States spends more on health care as a percentage of Gross Domestic Product (GDP) than any other country, yet cannot provide superior outcomes. Changes in business and employment patterns and premium pressures on employers have businesses demanding change. The impacts on Medicare will be staggering. Economic inequality and job dislocation are driving more people to an expanded Medicaid program.

Demographic Pressures The much heralded and much discussed baby boomers (born 1946 – 1964) are headed for retirement and geriatric status. The impacts on Medicare will be staggering. Medicare is already growing too fast, and now the population is going to make it grow much faster, without some significant changes.

Is This A Rush? There may be a great deal of pressure to join ACOs, especially from hospital-based and large integrated delivery systems (IDS). The first push will likely be for primary care physicians, especially if the ACO entity starts a Medicare SSP-ACO in 2012. This push may also create additional pressure to sell, merge or somehow integrate with the parent entity, especially in a market with one or more large IDS structures. As the concept takes root there will likely be a push to expand provider panels beyond primary care physicians, and also to ancillary and allied providers. Specialists, particularly surgeons, may have bigger risks in joining an ACO, dependent on the needs and competence of the ACO sponsor. The possibility of gain sharing in single directional ACOs may be very tempting, but there are costs. Although the providers continue with fee-for-service, there will be intense pressure for improved quality (according to ACO benchmarks) with lower costs, and no guarantee of gain sharing.

Don't be stampeded into joining an ACO until satisfied the ACO is a viable and until satisfied there is advantage for the group. The First Round of ACOs – Medicare SSPs With a January 1, 2012 deadline expect a rush of Medicare Shared Savings Program ( SSP) ACOs to be formed very soon. The rules and regulations are not final, but a (very long) draft was issued by CMS on March 31, 2011 (referred to as “draft regulations” throughout this paper). According to the draft regulations (page 15) the objectives of the Shared Saving Program are: 1) better care for individuals; 2) better health for populations; 3) and, lower growth of expenditures These regulations will encourage some, as we finally know what we are dealing with, but the length and complexity may discourage others. Some might see the rules are comprehensive, others will see the rules are overbearing. In a strange maneuver, SSP-ACO beneficiaries will be assigned retroactively after the year begins based on utilizing ACO member primary care physicians (PCP). This will likely smooth out in the second and later years. The rules tend to focus on PCPs are the source of real primary care and once again as gatekeepers to the system.

One key element – your group may only be a member of 1 Medicare SSP at a time, and you are probably going to locked in for three years. The Medicare ACO will be required to do “screening” (likely similar to credentialing) and must operate a compliance plan including conflict of interest policies. There are very lengthy how-to governance rules. The Medicare SSP-ACO may be one-sided (sharing qualified gains) or two sided (sharing qualified gains but also subject to penalty) so your due diligence is very important.

Round Two PPACA anticipates the ACO as a model for much of the nation’s future health care delivery. It is the “next new thing” that could bring quality up and level off cost growth. If this wave continues to the question will not be “should we join as ACO” but will evolve to “since we must, which ACO should we join.” Physicians groups in smaller cities may have only one viable ACO option, simplifying the decision but curtailing options. If the one and only ACO is poorly managed, is under funded or lacks significant capabilities this will be a huge problem. CMS anticipates ACO will move to a two-sided model, that is, sharing both gain and risk. This will make ACO more complex and deciding “who shares the risk and how?” will be a serious issue.

The Pessimistic View Many of us remember the early and mid nineties when capitation was the next new thing, merged with hospital-based MSOs. Could ACOs go the way of capitation? Certainly. Could we waste immense amounts of scarce resources? Certainly.

Defining an ACO We Know It When We See It: The definition of ACOs is still rather fuzzy. We know what we want them to do, we have an idea of how that might get done, but there is no exact definition of an ACOs. ACOs will be invented on the fly, fixed on the run, and will evolve over some period of time. So where to start? From the Department of Health and Human Services, Center for Medicare and Medicaid Studies, Office of Legislation, comments on an Open Forum regarding Medicare ACOs, in February 2011: Q. What is an “accountable care organization” A. an Accountable Care Organization, also called an “ACO” for short, it an organization of health care providers that agrees to be accountable for the quality, cost and overall care of the Medicare beneficiaries who are enrolled in the traditional fee-for-service program [and] who are assigned to it (ACO). (While these ACOs are to be in operation by January 1, 2012 CMS will not finish “listening” to various constituencies until June 2011. Not much time!) The Q & A memo give us some idea of what the federal government is expecting in the way of ACOs, who will likely operate them, and the specifics for a Medicare ACO. Another definition provides give us more substance: “ What's an ACO” “An ACO is generally defined as a local health care organization with a network of providers such as primary care physicians, specialists and hospitals that are accountable for the cost and quality of care delivered to a particular population. The purpose is to deliver more efficient and coordinated care that is rewarded with a financial bonus for achieving perfromance benchmarks set by the Centers for Medicare and Medicaid Services (CMS). The Patient Protection and Affordable Care Act (PPACA) refers to an ACO as a legal entity that includes both physcians and hospitals, has at least 5000 [Medicare] lives under contract, has the ability to pay participants, and includes both Medicare and commercial lives. Managed Care, October 2010, by Boland, Polakoff, Schwab

So What More Do We Know? Then Director of CMS Donald Berwick, MD, MPP, spoke at a February 2011 seminar and described ACOs as: “a new care design, a context of open choice, fee-for-service payment, and the absence of restrictions.” That amounted to bureaucratic mishmash. Berwick said something more useful, when he outlined general principles for ACO creation. “ the patient and family will be at the center; teamwork will now become “paramount”; [the ACO will] respect resource and reduce waste; [the ACO will] reinvest where investment counts; measure and manage outcomes partially through electronic health records; establish a solid health care workforce foundation” Still general, but we get a sense of expectations. Better care at lower cost.

Update: Too Little then Too Much On March 31st, 2011 the DHHS – Center for Medicare and Medicaid Services issued draft regulations on the new Medicare ACOs due to be formed by January 1, 2012. The draft runs 429 pages (see reading list for cite and web location) and much of it is bureaucratic gibberish. There are, however, several sections worth reading as CMS struggles to define an ACO and delineate the operating and reporting regulations. First impression – CMS has created such a complex entity with such complex operating and reporting rules it will be tough to form and operate an ACO. But then it was never going to be simple.

Likely ACO Sponsors According to the draft regulations (page 16) the initial round of SSP-ACOs will focus on the following: •

ACO professionals in group practice arrangements

Networks of individual practices of ACO professionals

Partnerships or joint venture arrangements between hospitals and ACO professionals

Hospitals employing ACO professionals

Other groups deemed appropriate by the (CMS) Secretary

(“ACO professionals” is defined by CMS as physicians, mid-level providers (PA and FNP) and clinical nurse specialists. The provider participants panel in ACOs is expected to expand as the concept matures.) Later rounds are likely to focus on large hospitals and integrated delivery systems trying to take advantage of relative size, sophistication and market penetration to provide ACO opportunities. The successful operation of an ACO will take considerable resources and sophistication, so in the longer run our money is on: •

Integrated delivery system with significant market share and broad and deep provider panels

Large multi-specialty physician groups with significant market share and deep resources

Reading through numerous expert commentaries, there are many divergent opinions on models and sponsors for ACOs. This will evolve over a number of years.

Due Diligence Physician groups must develop due diligence teams willing and able to analyze ACO proposals and able to negotiate terms with ACO sponsors. The size and sophistication of this team will depend on the size and sophistication of the group. The team will be supplemented by the group’s health care transaction legal counsel and accountants, IT geeks and consultants as required. (A small group or sole practitioner has an extra challenge due to a lack of depth, lack of time and lack of resources.) The key question is this:

Can ________ [ sponsoring organization] ________develop and manage a complex organization with a complex mission and numerous participants with varied interests? Due diligence effort must focus on the individual ACO's •

depth of resources




Appendix 1 is a bullet point checklist, as we view the situation, of the core capabilities of an ACO. Feel free to use this as it is useful.


Appendix 1 Core Competencies Other than a few pilot projects, ACOs are relatively new creations with a very limited track record. A successful ACO must be able to DEVELOP AND MAINTAIN..... •

A governance structure adequate to the task

A very strong management team

Adequate financial capital

A strong physician-executive presence

A sophisticated IT structure, robust enough to support future risk management needs

A sophisticated capability to negotiate with multiple payers

An adequate provider network

An ability to negotiate contracts with a large number of diverse providers

An ability to measure performance according to agreed upon benchmarks

An ability to understand and implement clinical standards based on federal “comparative effectiveness” programs

An ability to measure and monitor risk and conduct precise acuity analysis

A structure in compliance with both federal anti-trust and federal Stark laws

A compliance program adequate for a large complex organization

Appendix 2 Additional Readings More detailed reading on this topic may be found at the following sources: Draft Regulations for Comment; Medicare Program; Medicare Shared Savings Program, Accountable Care Organizations, DHHS-CMS, 42 CFR Part 425, PDF available at: Accountable Care Organizations Learning Network (a service of the Brookings Institution) Health Policy Brief: Accountable Care Organizations (what are they and will they work?) HEALTH AFFAIRS,, updated 8-13-2010 Miller, How to Create Accountable Care Organizations Center for Healthcare Quality and Payment Reform © 2009, Rittenhouse, Shortell and Fisher, “Primary Care and Accountable Care – Two Essential Elements of Delivery System Reform,” The New England Journal of Medicine, 361:24, 2009 Boland, Polakoff, Schward, “Accountable Care Organizations Hold Promise, But Will They Achieve Cost and Quality Targets?” Managed Care, pgs. 12 – 19, October 2010

Appendix 3 Update Accountable Care Organizations are the heart-and-soul of Obamacare quality and cost control initiatives. All is not healthy. Ready – Fire – Aim When the Center for Medicare and Medicare Innovation (CMMI) released the draft regulations for Medicare ACOs on March 31, 2011 the reaction was brutal. CMMI was publicly beaten like a rented Oklahoma mule, even by enthusiastic supporters of the ACO concept. Criticisms included 1) the rules are too complex 2) start-up costs will be much higher than CMMI estimates 3) the probably of achieving savings to share is small, and the time lines are too short The Empire Strikes Back In May CMMI burst forth with two new models in an attempt to quiet critics (unlikely) and to improve participation. Advanced Payment Model ACO AP-ACOs are designed to share ACO shavings before the savings created, in effect, an advance for start-up capital. No one has told us yet what happens if the AP-ACO never generates any savings. Pioneer Model ACOs CMMI is hoping large physician groups already involved in the Medicare physician group practice demonstration program will start ACOs before the 1/1/2012 start-up date. CMMI jeopardizes this initiative out of the gate by setting a ridiculous deadline. The deadline has now been extended a slightly less ridiculous deadline of August 21 st. The Pioneer Model is more flexible than the original Medicare SSP-ACO model, and has rules for both regular and “rural” ACOs, but is practically restricted to existing integrated delivery systems capable of moving very, very quickly.

For updates see our blogs.

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