What the Proposed ACO Regulations Say About Legal Structures and Governance The third advisory in our series on the newly proposed ACO regulations implementing Section 3022 of the PPACA

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This advisory focuses on the permissible legal structures and governance options available under the proposed regulations. Although many aspects of the regulations have been characterized as burdensome or overly intrusive, they give would-be participants great flexibility and latitude to structure and govern an accountable care organization.

To briefly recap, the Patient Protection and Affordable Care Act (PPACA) provides for the creation of an ACO comprised of physicians, hospitals, and other health care suppliers willing to enter into a three-year Shared Savings Program agreement with the Centers for Medicare & Medicaid Services and be accountable for the care of at least 5,000 Medicare beneficiaries. If certain quality performance standards are met, the ACO is eligible to receive shared savings bonus payments in addition to normal fee for services payments.

The proposed regulations include four structural requirements, each of which is discussed in detail in this advisory: (1) the form of entity must be recognized under state law; (2) the ACO must have a tax identification number; (3) the ACO must be comprised of eligible ACO participants; and (4) the ACO must have an established mechanism for shared governance.

Form of entity

The proposed rules merely advise that the ACO be "authorized to conduct its business under applicable state law” and "be capable of (1) receiving and distributing shared savings; (2) repaying shared losses; (3) establishing, reporting, and ensuring compliance with program requirements; and (4) performing the other ACO functions identified in the statute." These latter four capabilities are operational in nature, and will be addressed in a later advisory.

State law authorizes a number of forms of legal entities, from partnerships (both limited and general), to corporations (both nonprofit and for-profit), unincorporated associations, cooperatives, and limited liability companies. The proposed regulations do not limit the form of entity. For a variety of reasons, we anticipate that many ACOs will be formed by hospitals employing physicians (operating as nonprofit or for-profit corporations) and that most new ACOs formed by more than one owner will be formed as limited liability companies (LLCs). LLCs allow their owners, called members, to limit their liability to the amount of capital contributed. LLCs also allow for maximum flexibility in the allocation of tax profits/losses as well as distributions of cash. Often LLCs are less formally run, without the need for board meetings, corporate resolutions, minutes, and the like.

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