CMS Introduces Plan for Partially Capitated ACOs

May 19, 2011

May 19, 2011 — The Centers for Medicare and Medicaid Services (CMS) this week unveiled a plan to pay some accountable care organizations (ACOs) in part on a monthly, capitated basis, similar to how traditional health maintenance organizations (HMOs) have compensated providers.

The partially capitated ACOs would consist of hospitals and medical practices that are already adept at coordinating patient care and cutting costs through quality improvement. CMS wants to recruit such providers to form up to 30 "Pioneer" ACOs that would begin operating this year, well ahead of the January 1, 2012, kick-off for ordinary ACOs.

Created by the new healthcare reform law called the Affordable Care Act (ACA), ACOs will participate in a 3-year "shared-savings" program under Medicare. If they can bring annual healthcare expenditures below what Medicare normally would spend on a group of beneficiaries, the Pioneer ACOs can receive a cut of the savings, provided they also meet certain quality-of-care standards. The bonus comes on top of their usual fee-for-service revenue.

As outlined in proposed CMS regulations, an ACO's share of the savings is up to 50% or 60%, with the higher percentage for organizations that take on more risk of losing money, which happens when they exceed their expenditure target. The exact percentage an ACO receives depends on how well it scores on quality measures.

Even as it is receiving feedback — and criticism — of its proposed ACO regulations, CMS announced on Tuesday that it would launch the Pioneer ACO Model this fall for old pros at managed care. Such ACOs potentially could earn — or lose — more than nonpioneers. Their share of savings or losses could reach 60% in the first phase of the contract and 70% in the second.

In the third phase, successful Pioneer ACOs would shift to a combination of fee-for-service reimbursement — discounted by 50% — and capitation payments while retaining the opportunity to receive as much as 70% of any savings. CMS calls this a transition to population-based payment, which is shorthand for capitation.

In a scenario sketched out in a CMS request-for-application document, a Pioneer ACO in this third phase comes $200 under a $1000 monthly budget for a Medicare beneficiary (some of the expenses are incurred with non-ACO providers). The ACO itself receives $675 that month — $300 in fee-for-service revenue and another $375 in capitation. In a complicated formula, its actual earnings are the $600 that the ACO would have received under normal fee-for-service Medicare plus $126 — its share of the $200 savings as modified by its quality score — for a total of $726.

Because the ACO already has $675 in its pocket, CMS would cut it a check for $51 to reach $726. Of the grand total, almost 52% comes in the form of capitation. The ACO's final compensation is 21% higher than it would have been under normal fee-for-service Medicare.

CMS is encouraging would-be Pioneer ACOs to propose alternative payment models of their own.

"Congruent With Our Policy"

CMS is rolling out Pioneer ACOs under the aegis of the Center for Medicare and Medicaid Innovation, created by the ACA to test payment models that would improve care, reduce costs, and "transition primary care practices away from fee-for-service based reimbursement and toward comprehensive payment or salary based payment." The new healthcare reform law explicitly gives CMS the option to use partial capitation to pay ACOs.

Organized medicine has vigorously lobbied Congress and the White House to reform Medicare reimbursement and, in particular, the sustainable growth rate formula that CMS uses to set fee-for-service rates. That formula calls for a 29.5% Medicare pay cut on January 1, 2012, unless Congress acts to avert it.

Testifying before a subcommittee of the House Energy and Commerce Committee earlier this month, leaders of organized medicine advocated eliminating fee-for-service reimbursement in Medicare or reducing its role. Roland Goertz, MD, president of the American Academy of Family Physicians, for example, proposed paying new "medical homes" with a blend of fee-for-service, a per member care-management fee, and quality bonuses.

Dr. Roland Goertz

In an interview with Medscape Medical News, Dr. Goertz said the plan for partially capitated Pioneer ACOs is "congruent with our policy for blended payment with some retention of fee-for-service." He acknowledged that the term "capitation" picked up negative connotations during the managed care era, when contract negotiations with HMOs often focused more on the lowest possible monthly rate for a bundle of services than on quality improvement.

"I think a population-based payment could be used for in a different way, for care coordination and quality," he said. "It could cover a host of things that don't have a billing code."

Dr. Goertz said he was not surprised by the plan for partially capitated ACOs laid out earlier this week. What did surprise him, he said, was the timing of the CMS announcement, which came in less than 2 weeks after leaders of organized medicine testified before Congress about the need for payment reform.

"I'm glad we're seeing CMS be more responsive," he said.

To some, the announcement about Pioneer ACOs also appeared to be a hasty response to a May 11 letter from the American Medical Group Association to CMS stating that most of its members consider ACOs unattractive — as proposed — because of their regulatory complexity and financial rewards that are "too difficult to achieve."

Dr. Donald Berwick

In a press briefing on Tuesday, CMS Administrator Donald Berwick, MD, said that the plan for Pioneer ACOs and related initiatives has been in the works for some time, although he appreciates the feedback that CMS has received to the proposed ACO regulations. CMS will be accepting public comments on them through June 6. The draft regulations explain several ways to submit comments.

"We're going to meld all that into a better final rule," said Dr. Berwick.

Cash-Strapped ACOs Could Get Shared Savings in Advance

In addition to outlining Pioneer ACOs, CMS said Tuesday that it will solicit comments through June 17 on whether some ACOs in the shared-savings program should receive an advance on the bonus they expect to earn. This advance payment could address the worry that some providers cannot afford the computer technology and personnel needed to coordinate their services across a spectrum of healthcare settings. The advance payment would help them make these investments. Organized medicine has raised the issue of capital particularly in terms of ACOs formed by physicians who lack a deep-pocketed hospital for a partner.

CMS said the advance payment could take the form of per member, per month capitation. Comments on advance payments for ACOs can be sent to

The agency also announced Tuesday that the Center for Medicare and Medicaid Innovation will hold a series of 4 events for hospitals and physicians beginning in June this year to explain how ACOs function and how providers can improve the quality of care and health outcomes while reducing costs.

More information on Pioneer ACOs, advance payments in the shared-savings program, and the ACO educational sessions is available on the CMS Web site.


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