As part of the Affordable Care Act, Congress directed the Center for Medicare and Medicaid Services ("CMS") to establish a “shared savings program” to bring together groups of providers and suppliers to deliver better quality and more cost-effective care for Medicare beneficiaries. These forms of joint ventures or collaborations are referred to as “Accountable Care Organizations” or ACOs."  CMS is currently engaging with physicians, hospitals, employers, and consumer groups to help plan this program, which the statute requires be established no later than January 2012.

Section 3022 of the Affordable Care Act amends Title XVIII of the Social Security Act (SSA) (42 U.S.C. 1395 et seq.) by adding a new § 1899, which directs the Secretary of the Department of Health and Human Services (“HHS”) to establish a Medicare shared savings program that promotes accountability for care of Medicare beneficiaries, improves the coordination of Medicare fee-for-service items and services, and encourages investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Under § 1899(b)(1), groups of healthcare service providers and suppliers that have established a mechanism for shared governance and that meet criteria specified by HHS are eligible to participate as ACOs under the program.  It is anticipated that from 75 to 150 ACOs will be formed once the final rules are adopted.

Although ACOs are starting out under the auspices of the U.S. Medicare program, it is expected that the ACO business model will also be used extensively for private medical services as well.  Historically, Medicare has often led the entire healthcare system in the adoption of quality and payment innovation. For example, Medicare’s physician fee- schedule, Diagnosis-Related Groups (DRG) for inpatient hospitals, and risk-adjustment systems for private plans – which are intended to encourage quality and efficiency – have since their inception been regularly used by private payers. One of the primary drivers of the Affordable Care Act is to use the extensive Medicare system to serve as a leader (or a test bed) for the widespread adoption of innovative quality and payment strategies.

ACOs are intended to create delivery systems that encourage and support teams of physicians, hospitals, and other health care providers to collaboratively manage and coordinate care for Medicare beneficiaries. If these providers meet certain quality and efficiency benchmarks, they may receive a share of any savings from reducing duplicative services, improving productivity, minimizing paperwork, or otherwise improving cost efficiency.

While the CMS Office of the Actuary (“OAct”) estimates that the implementation of ACOs will be budget neutral,
the Congressional Budget Office (“CBO”) has projected that it will reduce Medicare spending by nearly $5 billion over the next ten years. CMS is required under the ACA to make the program operational by January 1, 2012.

On March 31, 2011, CMS proposed the long-awaited regulations for ACO implementation.  In return, the government has offered financial rewards to healthcare providers that slow spending growth and meet detailed federal standards for the quality of their services. The proposed rules explain how doctors, hospitals, nursing homes and home health agencies can qualify for federal bonus payments by forming joint ventures known as accountable care organizations.  Comments on the proposed rules will be accepted from all interested parties
until May 31, 2011, after which time the final rules will likely be adopted.

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