Successful Physician Participation in ACOs - Part I

June 30, 2011

Affordable Care Organizations are the future of the health care industry, but it's necessary for physicians to be active participants for them to work.

In an attempt to reign in and harness the rising cost of health care, Accountable Care Organizations (ACOs) were introduced in March 2010 in Sec. 1899 of the Shared Savings Program of the Patient Protection and Affordable Care Act. The law, which mirrors the work of Dr. Elliot Fisher of Dartmouth Medical School, provides definitions, specifics and parameters for the creation of ACOs.

The current health care model in the United States consists mostly of sole practicing physicians and/or physicians who practice as part of physician groups. Physicians have been their own bosses and have had control of the patient population they serve and payment for medical services has been volume based rather than value based. ACOs attempt to change the model by striving to create a system in which the health care of the patient base is shared by groups of health care providers, rather than individual physicians. ACOs focus on improving the quality of health care while lowering costs, fostering accountability and sharing the cost savings among its members.

A key hurdle for successful physician integration will be in educating and convincing physicians that the ACO model — where physicians work together and are rewarded for obtaining the best outcomes for the patient population — is better. Including physicians in the development and implementation of protocols will be the key to success.

This article, the first in a two-part series, will discuss and present some key strategies for success.

Part I Key Points:

  • Active physician participation critical to success
  • Strategic business plan
  • ACO structure
  • Participation and time commitment
  • Upfront investment

Active participation

Active physician participation will be critical to the ACO’s success and all providers should be represented in the planning process. Active participation will include determining the optimal size and types of providers, groups and entities to include in the ACO, defining the roles of the various providers and players, as well as developing and implementing protocols and best practices. Since one requirement for the formation of an ACO is that is must be made up of primary care physicians, primary care physicians should be well represented in the process and not allow the planning process to be dictated by the hospital, large physician organizations or other members of the organization.

Strategic business plan

As with any new venture, having a strategic business plan in place from the onset will serve as a roadmap and assist in attracting capital. A strategic plan would include the cost of forming, maintaining and expecting a monetary return. The strategic business plan should include both positive and negative scenarios.

ACO structure

The formation of an ACO requires that it be composed of primary care physicians to which beneficiary attribution can be made. Having met this requirement, an ACO may consist of physicians and other professionals in group practice, organizations that are partnerships, joint ventures between physicians and hospitals, hospitals that employ physicians and critical access hospitals. The Center for Medicare & Medicaid Services (CMS) is currently soliciting comments on the types of providers and suppliers who could be ACO participants.

ACOs may be organized as any type of entity recognized under state law. Options include a corporation, partnership, limited liability company or foundation that is capable of receiving and distributing shared savings; repaying shared losses; establishing, reporting and ensuring ACO participation and provider/supplier compliance with program requirements, including quality performance standards; and performing any of the other ACO functions. The ACO legal entity must be in good standing, be duly qualified to transact business in each state in which it conducts business, have its own Tax Identification Number (TIN) and does not need to be enrolled in Medicare.

The choice of entity is important for tax liability and income recognition purposes. An ACO formed as a C-corp would be subject to double taxation and the possibility of tax upon dissolution if intellectual property or other intangible assets are developed during its existence. On the other hand, a partnership would find it difficult to retain earnings due to distribution of earnings to the partners. Some state laws may require that the newly formed ACO obtain a third-party administrator, insurance or HMO license and/or otherwise be regulated as a risk-bearing organization. Consulting with professionals with the expertise in this area is advisable.

Participation and time commitment

Participation in the program requires a three-year commitment by the ACO with a starting date of January 1 following approval of the application. A 60 day advanced written notice is required by the ACO of its intention to terminate its agreement and participation. Participation as an ACO requires that the organization have sufficient primary care ACO professionals to include at a minimum 5,000 Medicare fee-for-service beneficiaries. The 5,000 beneficiaries are a requirement for the “critical mass” necessary for benchmarking the shared savings exceeding Minimum Savings Rate (MSR).

CMS provides ACOs the selection of one of two choice financial risk models: the initially one-sided or entirely two-sided financial risk model. Under the initially one-sided model, the ACO would share in any upside savings generated in the first two years, but would also share in any savings (or losses) generated in the third year. Under the entirely two-sided financial risk model, the ACO would share in any savings (losses) during the entire three-year agreement.

Upfront investment

The formation and yearly costs of operating an ACO can be large. CMS estimates the average cost to be $1.7 million, while the American Hospital Association estimates the cost to be $11.6 million for a single hospital system. Some of the costs included in the upfront estimates are investments in information technology (including electronic health records systems); setting up systems to refine, coordinate and collect patient care data for ultimate reporting to CMS; and setting up a sophisticated financial management systems to divvy up single bundled payments.

The substantial amount of start-up and operational capital required to fund an ACO will require capital infusions from its owners. Although some owners may not have readily available liquid assets to enter, their participation may be required by law, which may state that primary care physicians must comprise a large percentage of the ACO base. Structuring compensation agreements with providers may provide a means of ownership for the provider and source of capital for the ACO.

Conclusion

Accountable Care Organizations represent the new frontier in the delivery of health care. If successful, they will change the current health care model in the United States. Educating and convincing physicians that the ACO model will be better will be dependent on many factors and successful ACO members will share in savings generated through reduced costs.

The following will be discussed in Part II:

  • How the ACO will incentivize providers
  • How the ACO will work with payers
  • How the ACO will collect information
  • Tracking and dividing profits
  • Electronic health record management

Ronald D. Finkelstein, CPA/ABV is Principal in charge of Morrison, Brown, Argiz & Farra, LLC’s Healthcare Practice. Lydia M. Glatz, CPA is a manager and healthcare accountant with MBAF. Either Ronald or Lydia can be reached at 954-760-9000.

Morrison, Brown, Argiz & Farra LLC is also a proud member of the

National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.