As summarized in our previous advisories, the Patient Protection and Affordable Care Act anticipates the creation of accountable care organizations comprised of physicians, hospitals, and other health care suppliers.

ACOs must be willing to enter into a three-year Shared Savings Program agreement with the Centers for Medicare and Medicaid Services and be accountable for the care of at least 5,000 Medicare beneficiaries. If quality performance standards are met, the ACO is eligible to receive shared savings bonus payments in addition to fee-for-service payments. The details are contained in the proposed ACO rule published by CMS on April 7, 2011.

This 10th advisory in our series on ACOs focuses on how CMS proposes to either financially reward or penalize ACO participants. During the first two years of the program, participating ACOs will have the choice to share savings with no downside risk (the “one-sided model”). By year three, however, all ACOs must both share savings and be at risk should the costs of care exceed the established thresholds (the “two-sided model”). ACOs in the two-sided model have the opportunity to achieve larger financial bonuses, but also run the risk of having to refund money to CMS.

CMS proposes to calculate performance by comparing the ACO’s future Medicare payments against a “benchmark” of what CMS would have paid for services to the same patient population absent the ACO’s efforts to achieve cost savings.

As explained in more detail below, the cost and risk sharing components of the proposed ACO model are complex and the amount of the potential reward seems relatively modest when one considers the level of investment required to establish the ACO infrastructure. Based on the industry’s reaction to the proposed rule, it appears that the ACO model is more likely to evolve through innovation by providers and commercial payors.