A Physician's Guide to Forming and Operating an Accountable Care Organization

December 2012

By: Sarah E. Swank*

Maryland Medicine

In March 2010, President Obama signed the Affordable Care Act (ACA) establishing the accountable care organization program (ACO) to achieve a three-part aim: lower costs, improved care and better health. Last year, several federal agencies came together to create a legal framework and remove legal barriers to make way for the concept of accountable care. The Center for Medicare and Medicaid Services (CMS) recently announced 29 new ACOs, signaling a movement away from the current fragmented fee-for-service world to a new world with payments based on high quality and cost efficiency.

What Is an ACO?

ACOs are legal entities that apply and are approved to participate in a voluntary three-year program with CMS. Originally specific to the Medicare program, the term ACO has come to mean accountable or integrated care. For example, several payors now use the term commercial ACOs to describe an integrated risk sharing approach to managed care contracting reminiscent of capitation, but with more emphasis on quality data.

Who Can Form an ACO?

Only "ACO Participants" can form an ACO:

  • Professionals in a group practice
  • Network of individual practices
  • Partnership or joint venture between hospitals and professionals
  • Hospital employing professionals
  • Critical access hospitals
  • Federal Qualified Health Centers
  • Rural Health Centers

An ACO must include at least one ACO Participant. Other providers, health plans and investors may partner with ACO Participants to form ACOs, but they cannot independently form one. Other than primary care physicians, ACO Participants may participate in multiple ACOs. CMS encourages ACOs of all shapes and sizes to apply to the program.

How to Form an ACO

Legal Entity and Tax Identification Number

An ACO must be a legal entity under state law with a tax Identification number, such as:

  • Corporations
  • Partnerships
  • Limited liability companies
  • Foundations

The ACO may use an existing entity if it meets the requirement for independent governance. Two or more independent entities must form a new legal entity.


Governing bodies must have the following characteristics:

  • Oversight
  • Transparency
  • Fiduciary duty
  • Conflict of interest policy
  • Composition and control

Unlike in other healthcare transactions, ACO Participants must have at least 75 percent control of the governing body of an ACO to ensure that the ACO will remain provider-driven and the governing body must include a Medicare beneficiary who does not have a conflict of interest or whose family members do not have a conflict of interest.


An ACO must include specific leadership positions:

  • Manager. The manager must be an accountable executive who reports to and can be removed by the governing body. The manager must demonstrate the ability to influence or direct clinical practice to improve efficiency processes and outcomes.
  • Medical Director. The medical director must be a board-certified, senior-level physician, licensed in at least one state in which ACO operates. The medical director can be part-time.
  • Compliance Officer. The compliance officer must report to the governing body and be responsible for overseeing the compliance plan required by the ACO regulations.

ACO applicants may request CMS approval of alternative management and governance structure by describing how the alternative structure will be capable of accomplishing the goals of the ACO.


An ACO must be able to start operation on or before the assigned January 1 start date including all contracts:

  • Between the ACO and all ACO Participants
  • With other providers, suppliers and vendors
  • If approved, between the ACO and CMS

The contracts between the ACO Participants and the ACO must be finalized and executed prior to submission of an application.

Paying for Information and Infrastructure ACO Costs

One of the greatest concerns regarding ACOs is formation and operating costs. These costs include both financial investments such as electronic health records (EHRs), staff training and other infrastructure costs, and human investments, such as development of clinical protocols and evidence-based medicine. The current fraud and abuse laws create obstacles to financial incentive programs under the ACA, especially between hospitals and physicians. The Centers for Medicare and Medicaid and Office of the Inspector General provided ACO-specific waivers making way for sharing savings and losses among providers.

Operating an ACO

Patient Centeredness

CMS seeks to move the healthcare industry towards this patient-centered care approach. ACOs must include Medicare beneficiaries in the governance structure, monitor and report patient satisfaction data and focus on care coordination.

Know Your Beneficiaries and Primary Care Providers

Primary care providers drive assignment of Medicare beneficiaries for purposes of quality and shared savings payments. To remain qualified under the program, an ACO must include at least 5,000 Medicare beneficiaries. Beneficiaries can seek care from providers outside the ACO, so assignment is based on CMS retrospective reports.

Getting Paid

Under the ACO model, providers are paid their normal fee-for-service rates, but are eligible to receive a part of the shared savings based on performance against benchmarks and on the quality measures. During the application process, ACOs can select whether or not to be at risk and share losses under their agreement with CMS. CMS pays ACOs shared savings, if any, earned at the end of each of the performance years.

Quality Reporting and Monitoring

ACOs must maintain physician-led quality assurance programs and meet 33 quality performance standards. Currently, the performance measures are in four domains:

  • Patient/caregiver experience
  • Care coordination/patient safety
  • Preventive health
  • At-risk populations

ACOs are responsible for completely and accurately report data on all program measures, although the measures move from pay-for-reporting to pay-for-performance. ACOs face possible sanctions or even termination for failure to comply with the quality reporting requirements.

The Role of Electronic Health Records (EHR)

Currently, EHRs are not required under the ACO regulations. CMS strongly encourages the use of EHRs, but for now, the meaningful use of certified EHRs by physicians in an ACO is a doubly counted quality measure. CMS may reconsider EHR technology requirements once providers gain more experience with it.

Other Legal Concerns

In forming an ACO, physicians must consider antitrust issues depending on their market share, as well as Internal Revenue Service issues if contracting with not-for-profit hospitals. The Health Insurance Portability and Accountability Act concerns arise while sharing data among the separate entities that make up the ACO.

Coming Together

The ACO program is one way to help bring hospitals, physicians and providers together to provide improved quality outcome and cut costs. ACOs seek to reward providers who put patients first and make high quality health care more affordable.

* Sarah E. Swank is a former Ober|Kaler Health Law Group attorney.

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