In 2011, CMS implemented the Accountable Care Organization (“ACO”) Shared Savings Program, which aims to promote increased savings for the Medicare program, improve health care quality, and create a more efficient and effective health care delivery system. While many deemed the ACO to be the future of health care models, the program’s initial performance has not met the industry’s high expectations.

At the onset of the program, ACO participants had the ability to choose between two tracks (called the “one-sided track” and the “two-sided track”). The two-sided track allowed for higher rewards (a return of 60% of savings), but penalized an ACO’s poor performance at the same percentage. The one-sided track provided lower returns, but exempted participants from penalties for three years before being automatically moved to the two-sided track. In exchange for the reduced risk, savings were reduced to 50% of the participant’s savings for the year. Due to the exemption from penalty, almost all program participants opted for the one-sided track. However, in the first year of the program, only about half of the 220 participating ACOs experienced Medicare savings, while the other half had costs exceeding Medicare’s spending benchmarks and were not eligible for shared savings.

Since the onset of the program, many ACO participants expressed that three years was an insufficient amount of time to establish the required infrastructure before being moved to the two-sided track. In addition, many argued the savings bonuses were too minimal in comparison to the high costs of implementing the necessary health care delivery system. According to a survey conducted by National Association of ACOs, two-thirds of participants were unwilling to take on additional risk and indicated they would be unlikely to continue with the program once they are required to accept penalties after the third year.

In response to these concerns and to incentivize continued participation in the ACO program, CMS recently proposed a rule that may encourage some participants to take on more financial risk for greater rewards and allow other participants to reduce their risk so they will remain in the ACO program.

Among key provisions, the rule proposes to protect ACOs in the one-sided track from penalties for up to six years instead of three, allowing ACOs more time to implement the necessary changes to the infrastructure of their current health care systems. However, if the ACO wishes to avoid penalties after its third year, it may need to meet several additional eligibility requirements and its savings rewards would drop from 50% to 40%.

To encourage participants to opt for the two-sided track, the minimum savings rate (“MSR”) and minimum loss rate (“MLR”) would be modified so as to be computed based on each individual ACO participant’s number of assigned beneficiaries rather than a set rate for all. The MLR and MSR are the percentages of the participant’s spending benchmark that a participant must exceed or save before being penalized or being eligible for shared savings. Therefore the proposed change may encourage smaller ACO participants to opt for the riskier track, since the MLR and MSR can be altered to better match a participant’s resources. For example if a smaller ACO participant has a higher MLR, it will have more leeway as to how much it can exceed its benchmark before being subjected to penalties.

In addition to the modifications to the two original tracks, CMS also proposes a “Track Three,” that will allow for a participant to receive 75% of savings in exchange for additional risk (responsibility for 75% of losses). However, savings would be capped at 20% of the ACO’s benchmark and losses would be capped at 15%. Unlike the original two-sided track, the MSR and MLR will be set at 2%, which may encourage more participants to opt for the new track.

The comment period set by CMS expired on February 6, 2015. Responses to this proposed rule will present an interesting development in the ACO Shared Savings Program and could significantly impact the success of the ACO model in 2015 and the years to follow.