CMS final rule aggressively moves ACOs into two-sided risk - Offers flexibilities in beneficiary assignment, telemedicine, and beneficiary incentives



The Centers for Medicare & Medicaid Services (CMS) on December 21, 2018, announced a Final Rule, subsequently published in the December 31 issue of the federal register, affecting accountable care organizations (ACOs)1 CMS has dubbed the Final Rule “Pathways to Success” and called it a “new direction” for the Medicare Shared Savings Program (MSSP).2 Generally, ACOs that begin or renew enrollment periods on or after July 1, 2019, will have no more than two years of participation before facing downside risk.

The Final Rule applies to ACOs with agreement periods that begin on or after July 1, 2019 (unless otherwise noted). This Client Alert summarizes the changes in the following key areas:

  • Requiring ACOs to take on more risk, more quickly
  • Moving to five-year agreement periods
  • Modifying the benchmarking methodology
  • Offering more flexibility with regard to beneficiary assignment
  • Expanding options for beneficiary incentives and telehealth services

This Client Alert also explains the basic elements of the Final Rule, to help inform the decisions of organizations considering participating or continuing to participate in a Medicare ACO program.

It should be noted, however, that not every element of the Final Rule is detailed in this briefing. For answers to specific questions, please consult the Final Rule itself or reach out to a member of our Health Care team.


The Affordable Care Act established the MSSP within the traditional fee-for-service Medicare program. The MSSP allows for the creation of ACOs, which are organized by Medicare providers who voluntarily come together to achieve two objectives: (1) to improve the quality of care provided to beneficiaries assigned to the ACO while also (2) reducing the costs of caring for those beneficiaries. Beneficiaries assigned to an ACO are free to receive their benefits from any Medicare provider, whether or not the provider participates in the ACO. Providers participating in the MSSP ACO receive reimbursement for their services under Medicare Parts A and B.

As described by CMS, “When an ACO succeeds in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the Medicare program.”

In general, ACOs manage the delivery of Medicare benefits provided by providers participating in the ACO in order to meet or exceed clinical quality and financial performance standards set by CMS. The annual costs of care are measured against a “benchmark” established under MSSP rules. Where the ACO achieves savings, as compared to the benchmark, a portion of those savings are paid to the ACO by CMS. The ACO then distributes to ACO participating providers a portion of the shared savings, based on the terms of a participation agreement entered into between the providers and the ACO.

Some ACOs are eligible for these “shared savings” without being at risk of sharing in any losses should spending exceed the benchmark. These ACOs are said to be in a “one-sided risk” arrangement. In contrast, a “two-sided” model is one in which the ACO has entered into an agreement with CMS that includes “downside" risk. In that case, should the ACO's costs of care be greater than the benchmark, the ACO and its participating providers may be obligated to make payments to CMS.

Prior to this Final Rule, most ACOs enrolled as either “Track 1” (a one-sided model), or as “Track 2” or “Track 3” (two-sided models). In January 2018, CMS also introduced a “Track 1+” model, which it describes as a “lower-risk, two-sided model”—and on which the redesign of the ACO program in this Final Rule is based.

The majority of ACOs are currently in Track 1 (i.e., without downside risk). According to a CMS news release about the Final Rule, “[s]ome Track 1 ACOs are increasing Medicare spending (and therefore generating losses) while having access to waivers of certain federal requirements in connection with their participation in the program.”

Much of the Final Rule appears to address that concern.

New “Basic” and “Enhanced” Tracks replace Tracks 1, 2 and 3

Under the Final Rule, new ACOs will no longer have the option to enroll in Tracks 1, 2, 3 or 1+. Rather, CMS offers “basic” and “enhanced” track ACO models (herein, “Basic” and “Enhanced” Tracks). The Basic Track involves a limited period of one-sided risk, followed by mandatory and increasing two-sided risk. Enhanced Track ACOs are described as similar to Track 3, with significant two-sided risk.

The Basic Track involves options for one-sided risk of up to 40 percent, and two-sided risk of up to 50 percent. ACOs must move from one-sided to two-sided risk over time, on what CMS calls a “glide path” through Basic Levels A through E. In Level E, the Basic Track qualifies the ACO as an Advanced Alternative Payment Model (APM) under the Quality Payment Program.

Five-year agreement period

Both the Basic and Enhanced Tracks have agreement periods of at least five years, in contrast to the current three-year agreements.

The annual application cycle starts on January 1, 2020, and the following years,. However, to accommodate ACOs that extended their participation agreements from December 31, 2018, to the end of June 2018, there will be a one-time agreement period with a start date of July 1, 2019. Such ACOs generally have an opportunity for additional time in the Basic Track, as they will begin the new program six months before any new ACO entrants.

To begin the application process for an ACO agreement period beginning July 1, 2019, ACOs must complete a “Notice of Intent to Apply” (NOIA) between January 2 and January 18, 2019.

Limiting one-sided risk

An ACO may only remain in a one-sided risk arrangement for a limited period of time. Most ACOs enrolling for the January 1, 2020, period will have up to two years of one-sided risk. The permitted period of one-sided risk depends on whether the ACO is determined to be “experienced with performance-based risk Medicare ACO initiatives.”

Defining ACOs “experienced with performance-based risk”

In general, an ACO is “experienced with performance-based risk” (herein, “experienced”) if it previously participated in a two-sided risk model (including Tracks 2 and 3, Pioneer, Next Generation, Track 1+ and certain levels of the CEC Model ACO).

If an ACO is made of a blend of participants, some of which come from ACOs experienced with two-sided risk, and some of which do not, CMS will make a determination based on how many of the participants are experienced. Specifically, if 40 percent or more of the ACO participants are from experienced ACOs, the ACO is “experienced.” The Final Rule also details several exceptions to this policy, not discussed in this Client Alert.

Whether an ACO is “experienced” is a separate determination from whether an ACO is a “new” or “returning” ACO. A returning ACO, as clarified by this Final Rule, is one in which more than 50 percent of its ACO participants have recent prior participation in the same ACO, whether or not the ACO is experienced with two-sided risk.

Whether an ACO is “experienced with performance-based risk” is one of two key factors in how much time the ACO may spend in the Basic Track.

Basic Track and Enhanced Track

As noted above, the Final Rule describes two major types of ACO tracks: Basic and Enhanced. The Basic Track includes five levels (A through E), of which only Levels A and B are limited to one-sided risk. Basic Track Levels C, D and E, along with the Enhanced Track, carry two-sided risk. At the end of each performance year, ACOs are automatically moved to the next Basic Track level.

Levels of risk

In Basic Track Levels A and B, the maximum shared savings level is generally 40 percent. In Basic Track Levels C, D and E, the maximum shared savings is 50 percent, subject to certain caps and quality requirements. In the Enhanced Track (which is modeled on prior Track 3), the maximum shared savings is generally 75 percent. Regarding shared losses, Basic Track Levels C, D and E involve shared losses of up to 30 percent, but are subject to slightly differing caps at each level. The Enhanced Track generally involves shared losses of 40 to 75 percent, also subject to certain restrictions.

Time in the Basic or Enhanced Track

In general, CMS is moving ACOs into two-sided risk sooner. How much sooner is based on their status as “experienced” and/or “high-revenue.”

All ACOs defined as “inexperienced with performance-based risk” may enter in the Basic Track at any level, or in the Enhanced Track. All ACOs defined as “experienced with performance-based risk” must begin their participation in a two-sided risk model.

Whether an experienced ACO must begin in the Basic Track Level E or the Enhanced Track depends on whether the ACO is high-revenue or low-revenue. Generally, a high-revenue ACO that is experienced must enter the Enhanced Track. A low-revenue ACO that is experienced may begin in the Basic Track Level E, as may an ACO experienced from the Track 1+ model.

An ACO may stay on the Basic Track longer if it is a low-revenue ACO. Assuming the ACO is inexperienced in the first agreement period, a low-revenue ACO may participate in the Basic Track for two agreement periods, with the second period at Level E (i.e., up to 50 percent two-sided risk). An inexperienced high-revenue ACO would be limited to one agreement period in the Basic Track, with the second agreement period in the Enhanced Track.

Defining high- and low-revenue ACOs

High-revenue ACOs are, essentially, those that cover more than 35 percent of their population’s care, which will likely include many ACOs that include large hospitals. Specifically, high-revenue ACOs are those “whose total Medicare Parts A and B FFS [fee for service] revenue for the most recent calendar year…is at least 35 percent of the total Medicare Parts A and B FFS expenditures for the ACO’s assigned beneficiaries…” Low-revenue ACOs are those whose revenue is a lesser proportion of the Medicare expenditures for the beneficiaries.

A CMS news release stated that the low-revenue ACO definition is “especially” intended to include those qualifying ACOs “that include clinics or smaller institutional providers, including rural ACOs.” The preamble also explains that low-revenue ACOs are permitted a longer period with a lower level of downside risk because, for example, “small, physician-only and rural ACOs may have limited experience submitting quality measures or managing patient care under two-sided risk arrangements, which could deter their participation in higher-risk options.”

CMS monitors the revenue of experienced low-revenue ACOs. If it determines that an ACO should be defined as high-revenue, it will allow the ACO to complete the performance year in the Basic Track, but CMS will then need to either alter its ACO participant list to remedy the ACO’s status, or discontinue  the ACO’s participation in the Basic Track.

ACO Vizio


As noted above, an ACO’s “benchmark” is the target amount of expenditures used as the basis for calculating shared savings or losses. The target per capita amount is based on a blend of regional and national averages of Medicare beneficiary spending, as well as the historical performance of the ACO participants.

Benchmarking a is complex topic and, therefore, this Client Alert only summarizes certain key changes that will affect ACOs.

Historical benchmarking methodology

CMS will use “almost the same methodology” for benchmarking in the first agreement period as in subsequent periods, changing only the weights applied to the three benchmark years. In the first agreement period, the weights for each of the three benchmark years will be 10, 30 and 60 percent, respectively. Equal weights are used for resetting a benchmark entering a second or subsequent agreement period.

Risk adjustment methodology

Regarding risk adjustment for the historical benchmark, CMS will use CMS–HCC prospective risk scores to adjust the historical benchmark, using a new methodology that allows for risk score growth of up to three positive percent over the length of the agreement period, but without a negative three percent limit on risk score decreases.

Regional benchmarking

This Final Rule introduces a regional factor into the methodology sooner than under previous rules by incorporating average spending in the ACO’s region into the benchmark for the ACO’s first agreement period. Yet, it also limits the impact of regional average spending by reducing its weight in the formula compared to the previous methodology and by imposing a dollar amount cap. CMS will weight the regional factor more heavily if the ACO’s historical spending is lower than its regional average, but will also even out the difference in later agreement periods, such that the regional factor will carry equal weight regardless of whether the ACO’s average per capita spending is higher or lower than that of the region, starting with the ACO’s fourth agreement period under these rules.

Beneficiary assignment

Although Medicare beneficiaries are not restricted to using providers in an ACO, ACOs have an assigned population for purposes of calculating whether the applicable Medicare expenditures were above or below the benchmark. This calculation requires an ACO beneficiary assignment methodology.

Annual choice-of-assignment methodology

ACOs in the Basic Track may annually elect their preferred beneficiary-assignment methodology. This is in contrast to the current situation, in which ACOs are locked into a beneficiary assignment model for the duration of the three-year agreement period.

ACOs may choose between two existing types of beneficiary assignment: “prospective assignment” and “preliminary prospective beneficiary assignment methodology with retrospective reconciliation.” If an ACO changes its beneficiary assignment election, its benchmark will be re-calculated to match the beneficiary population.

ACOs choose from existing methodologies

“Preliminary prospective beneficiary assignment methodology with retrospective reconciliation is currently generally applicable to ACOs participating under Tracks 1 and 2. In substance, after prospective, preliminary assignment by a two-step methodology, final beneficiary assignment is determined after the performance year based on where beneficiaries chose to receive the plurality of their primary care services.

“Prospective assignment” is currently used in Track 3, in which beneficiaries are prospectively assigned to an ACO at the beginning of the performance year, using the same two-step methodology used in the preliminary prospective assignment. Under limited circumstances, a beneficiary may be excluded from the prospective assignment list, such as if the beneficiary enrolls in a Medicare Advantage plan, but otherwise, the prospective assignment is final.

Also, ever since performance year 2018, beneficiaries have been able to voluntarily align with an ACO by designating a “primary clinician.” Such beneficiaries will be added prospectively to the ACO’s list of assigned beneficiaries for the subsequent performance year.


The Final Rule allows certain ACOs to use telemedicine with beneficiaries in any region, even when the patient is at home. Specifically, beginning in 2020, ACOs with both two-sided risk and prospective beneficiary assignment will be reimbursed for services delivered via telemedicine. The restrictions that limit other Medicare reimbursement of telehealth services (which generally require that patients are located in a rural or underserved geographic area, and which exclude the beneficiary home as the originating site) will not apply. Because the preliminary prospective beneficiary assignment with retrospective reconciliation does not qualify for this benefit, ACOs in two-sided risk should consider telemedicine when electing the type of beneficiary assignment.

SNF three-day waiver

The Final Rule expands access to the skilled nursing facility (SNF) three-day waiver in multiple ways. (Under the waiver, a beneficiary is not required to have a three-day inpatient hospital stay before Medicare coverage of SNF services, if other requirements are met.) Effective July 1, 2019, ACOs in two-sided risk are potentially eligible for the waiver, regardless of the type of beneficiary assignment. Also beginning on that date, additional facilities are eligible, including critical access hospitals (CAHs) and other small, rural hospitals operating under a swing bed agreement.

Beneficiary incentives

ACOs in the new two-sided risk models (Enhanced Track and Basic Track Levels C E) can offer expanded beneficiary incentives through an approved program effective as early as July 1, 2019. These include up to $20 per beneficiary per qualifying primary care service, plus additional “in-kind” incentives that could include certain gift cards with a reasonable connection to the beneficiary’s medical care or clinical goals. Notably, such expenditures are not counted in calculating an ACO’s benchmark or per capita expenditures. Also, in-kind items (which must be non-Medicare-covered items and services) are available to all Medicare FFS beneficiaries, not just beneficiaries assigned to an ACO.

  1. 83 Fed. Reg. 67816 (Dec. 31, 2018). Available at
  2. CMS Newsroom. “Final Rule Creates Pathways to Success for the Medicare Shared Savings Program.” Dec. 21, 2018. Available at:


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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