The Centers for Medicare & Medicaid Services (CMS) made another push toward quality and coordination in healthcare with a Final Rule (the Final Rule) that seeks to strengthen incentives for eligible organizations to establish and remain in Accountable Care Organizations (ACOs).1  Released on June 6, 2016, the Final Rule attempts to make the payment methodology more attractive for ACOs by gravitating away from an exclusive focus on national data and looking more at an ACO’s performance relative to other providers in the same region. In addition to this potential improvement to the benchmarks used for payment calculations under the Medicare Shared Savings Program (MSSP), the Final Rule provides a new participation option intended to ease the transition from upside-only to two-sided risk and clarifies the time frame during which determinations of shared savings or shared losses may be reopened. The Final Rule takes effect on August 9, 2016, although certain changes apply later, as noted below.

The Medicare Shared Savings Program

Established in 2012 pursuant to the Patient Protection and Affordable Care Act(ACA), the MSSP is an effort to increase the value of care by facilitating coordination and cooperation among providers to reduce unnecessary costs and improve beneficiary outcomes.3 Eligible providers and suppliers may participate in this voluntary program by creating or participating in a Medicare ACO. As of June 2016, the MSSP includes over 430 ACOs that, together, serve more than 7.7 million Medicare beneficiaries.

Providers and suppliers participating in an MSSP ACO continue to receive traditional Medicare fee-for-service (FFS) payments under Part A and Part B. However, an ACO that lowers its growth in healthcare costs (meeting or exceeding a minimum savings rate (MSR)) while satisfying minimum quality performance standards may be eligible to receive a portion of the savings it generated (shared savings). An ACO participating in a two-sided risk model, described in more detail below, may be rewarded with a larger share of savings than an upside-only ACO — but also shares in the risk of financial losses (shared losses) if its expenditures meet or exceed a medical loss ratio (MLR).

Benchmarks: Looking to One’s Own Backyard

To evaluate whether an ACO has generated savings or losses for Medicare in a performance year, CMS compares to a benchmark the Medicare expenditures for an ACO’s assigned patients. In effect, the benchmark is an estimate of what total Medicare FFS expenditures would have been in the absence of the ACO. There are two primary times at which CMS adjusts an ACO’s benchmark:4 (1) at the beginning of each agreement period (i.e., every three years), which is called “resetting” or “rebasing;” and (2) annually, based on projected growth in per capita Medicare expenditures.

a. Benchmarks: First Agreement and Beyond

The benchmark for an ACO is based on the per capita Medicare Part A and Part B costs for Medicare FFS beneficiaries that would have been assigned to that ACO’s providers and/or suppliers (collectively) three years prior to the start of the ACO agreement period.5 Historically, CMS has considered all FFS beneficiaries in this rebasing calculation; however, the overall FFS population includes beneficiaries who are not eligible for assignment to an ACO. The Final Rule updates the national FFS calculations to incorporate assignable Medicare beneficiaries rather than all FFS beneficiaries. An “assignable beneficiary” is defined under the Final Rule as a Medicare FFS beneficiary who receives a primary care service during a specified 12-month assignment window from a primary care physician or from a physician in one of the primary specialty designations. The change to the assignable beneficiary population is intended to assure parity in regional FFS calculations. Going forward, the calculations will exclude beneficiaries who would not meet requirements for being assigned, including non-utilizers of primary care services. This revision will apply at the start of the 2017 performance year to all ACOs that entered into agreements in 2014 or later.

b. Benchmarks: Second Agreement and Beyond

Other significant adjustments to the benchmark methodology signal acknowledgment from CMS that healthcare cost trends vary across the nation. The Final Rule incorporates regional factors into benchmark calculations for ACOs that renew their participation in the MSSP. These updates apply only to ACOs that enter into a second or subsequent MSSP agreement on or after January 1, 2017. Therefore, for ACOs that renewed their participation contracts in 2016, the revised methodology will not apply until 2019.

The Final Rule also removes the existing adjustment that explicitly accounts for savings generated under the ACO’s prior agreement period. CMS appears to be recognizing that ACOs will not always be able to improve on their past performance, a factor which should make it more attractive for ACOs to stay in the MSSP.

In addition, CMS will consider an ACO’s ability to deliver high quality care at a lower cost relative to other local providers. Measures of ACO efficiency will, with each agreement period, increasingly reflect regional spending trends rather than an ACO’s past performance. Historical data and regional trend factors will be combined to determine an ACO’s shared savings or shared losses. The weight given to the regional adjustment when establishing an ACO’s rebased historical benchmark will, at first, be reduced to as low as 25 percent for certain higher-spending ACOs but, eventually, a weight of 70 percent will be applied in calculating the regional adjustment for all ACOs. This phased approach is intended to give ACOs time to adapt to the revised methodology. To help with planning, CMS will release annual data files with county-level expenditure and risk score data.

The annual updates will get a regional makeover, too. Each annual update to the rebased historical benchmark will account for changes in regional FFS spending, using county-level data. This is a shift from the current model, which bases annual updates on the amount of projected growth in national FFS spending. Annual updates will also account for changes in the ACO’s certified ACO Participant List.

Risk-Sharing: Add One Year of Training Wheels

The Final Rule adds flexibility to the risk-sharing options under the MSSP. ACOs choose one of three “tracks” that assign varying degrees of risk. Track One, a one-sided shared savings model (i.e., upside-only), provides for shared savings without the potential liability of shared losses. Track Two and Track Three are two-sided shared savings/shared losses models under which an ACO may receive a greater percentage share of the savings — but also risks the potential liability of shared losses. Currently, most ACOs operate on the one-sided track.

The Final Rule provides for a “smoother and quicker transition” to more advanced risk-sharing options.6 It allows Track One ACOs to defer exposure to downside risk for one extra year by adding a fourth year to their Track One agreement before transitioning to a new agreement period on either Track Two or Track Three. This participation option will be available in the 2017 application cycle.

Achieved Shared Savings? Not So Fast…

The third major update from the Final Rule is the statement from CMS on the finality of shared savings or shared losses calculations, which is intended to reduce financial uncertainty for ACOs. CMS may reopen a payment determination for “good cause” up to four years after the ACO is notified of the initial determination of shared savings or shared losses. In cases of fraud or similar fault, CMS reserves the right to reopen a payment determination at any time. Although CMS declined to provide specific “good cause” criteria, the agency indicated that it will address issues related to the materiality of an error through subregulatory guidance. It hinted, though, that it is considering guidance from the Government Accountability Office (GAO) relevant to financial audits of federal entities. Based on this guidance, CMS currently believes that three percent of the total amount of net shared savings and shared losses for all ACOs for the applicable performance year “could generally be a reasonable threshold for ‘material effect.'”


It is a busy time in the ACO world. Just a few days after CMS issued the Final Rule, the Health and Human Services Office of Inspector General (OIG) released its Work Plan Mid-Year Update for fiscal year 2016.The OIG will review the MSSP to ensure that CMS has appropriately assigned beneficiaries to ACOs and to determine whether shared savings payments for assigned beneficiaries comply with federal requirements. In addition, it will review payments to ensure that there is no duplication of payments for beneficiaries assigned to ACOs by other savings programs or initiatives. The OIG will also analyze the performance of MSSP ACOs with the goal of identifying promising practices for, and key challenges to, performing well on various measures and achieving savings.

81 Fed. Reg. 37950 (June 10, 2016).

P.L. 111-148, as amended by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152.

See Affordable Care Act § 3022. Regulations for the MSSP are located at 42 CFR Part 425.

42 CFR Part 425.602.

An ACO provider or supplier means an individual or entity that is a Medicare-enrolled provider or supplier that bills for services under an ACO participant tax ID number. Beneficiaries are “assigned” to an ACO based on the receipt of at least one primary care service from a physician within the ACO. Generally, primary care physicians are those with one of four specialty designations: internal medicine, general practice, family practice, and geriatric medicine. See

CMS Press Release,

Fiscal Year 2016 HHS OIG Mid-Year Work Plan,