As change in health care moves forward—with or without the imperative of federal legislation—certain outcomes regarding the payment and delivery system seem inevitable:

• Access to care will likely be expanded, even if not made universal
• Evidence-based medicine focused on outcomes and quality will be a central organizing principle for delivery and payment
• Cost management will ultimately become a practical imperative defining a sustainable delivery system

Partisan politics notwithstanding, the proposed Senate and House health reform bills have some common themes, including more active provider involvement in furnishing care on a coordinated and cost effective basis. The bills reference accountable care organizations (ACOs) and other organizational structures as participants in a retooled health care delivery and payment system.

Although such constructs convey an image of novelty and complexity, the new ACOs will likely revolve around certain basic concepts, consisting of an organizational structure involving health care providers and focusing on effective care management and delivery to a defined group of covered lives.

ACOs Would Manage and Coordinate Care of Medicare Beneficiaries

Under the federally proposed payment reform timeline, ACOs will be empowered in the near future. Section 3022 of the Senate's Patient Protection and Affordable Care Act calls for the creation of ACOs by January 1, 2012, and the use of value-based purchasing demonstration projects by October 1, 2012.

Among other things, participating ACOs would be required to manage and coordinate the care of at least 5,000 Medicare fee-for-service beneficiaries and would be eligible to participate in shared savings achieved. Regardless of legislatively prescribed deadlines and programmatic nuances, which may shift in political sands, anecdotal evidence suggests that private third-party payors are already embracing the ACO concept in new managed care arrangements by prodding hospitals and physicians to proceed forward accordingly.

Focus Will Be on Essential Goals

Tomorrow's ACOs will differ from legacy organizations such as Geisinger, Mayo and similar integrated groups with decades of organizational experience and underlying culture. Instead, tomorrow's ACOs will likely amalgamate historically distinct providers into brand new organizations functioning in the accountable care environment, or, alternatively, be composed of existing enterprises that are retooled and redirected, while building on their core competencies in a revised setting.

Given payor, employer and consumer demands, these new organizations are likely to be materially different from the PHOs, IPAs and other loosely affiliated entities of the past, which were frequently motivated more by narrow self preservation than the need to confront new realities amidst a changing health care delivery system. Instead, the ACOs that will develop in the near future will most probably be enterprises driven by physicians focusing on essential goals and capabilities: providing quality services to patients, and earning a reasonable livelihood in the process.

ACO Structure Will Emphasize Physician Influence Over Care Delivery

The precise features of any particular ACO await definition. The marketplace will prompt creation of different structures and operating formats sharing several common characteristics. Tomorrow's ACOs will:

• Be composed of providers and provider-affiliated entities
• Engage in true coordination and care delivery for a defined group of individuals
• Use organizational structures providing for significant physician influence over the care delivery process
• Have a solid data infrastructure and sufficient IT "connectedness" to provide the necessary information for care assessment, coordination, and management
• Include supportive personnel resources such as discharge planners, care managers and other non-physician staff assisting in the coordination of care for a defined population
• Use formal governance and decision-making structures involving evidence-based medicine, quality management and performance oversight
• Be competent in accepting third party reimbursement on a capitated, global or similar episodic basis not based upon individual DRGs or conventional fee for service medicine, and able to distribute those funds to participating providers based upon services rendered and their relative performance on quality and other metrics

Participant Configurations Will Vary

Consistent with the objective of promoting delivery system innovation, the federal legislative proposals do not prescribe particular organizing principles for ACOs beyond those functional requirements referenced above. Thus, such organizations may be driven by physician organizations such as the established clinics (Mayo, Cleveland, etc.) listed above.

Alternatively, some ACOs will be driven by health system–sponsored integrated delivery systems (IDSs) that use their cadre of employed and contracted physicians as the ACO's nucleus. They may involve the IDS hospitals and physicians while including other providers "virtually" (at a minimum) through service contracts—but not necessarily involving them in active organizational governance, capitalization or otherwise.

In between these two extremes will likely be clinically integrated networks of providers consisting of physicians only, or, more probably, joint venture organizations involving physicians and hospitals.

In a rapidly evolving marketplace—and irrespective of legislative impetus or the lack thereof—the range of participatory options itself may involve any number of configurations of health care providers in different communities.

Variety of Pre-Existing Laws May Apply to ACO Functions

The congressional reform proposals both contemplate that ACOs function as an agent for positive change in the reformed payment and delivery system. The ACO concept as a vehicle to promote quality and contain costs has also emerged in the private health care marketplace.

But despite the consistent use of this terminology, there is little clear definition or legal framework actually governing the establishment and operation of ACOs. Ironically, a likely result is that ACOs will need to be created within an already established legal and regulatory framework based upon their functional characteristics and the intersection of pre-existing laws applied to newly developing ACO functions, activities and behaviors.

To this end, a number of key legal variables will affect ACO development including the following.

Antitrust Laws

Established antitrust principles governing the permitted size and market concentration of provider organizations, as well as limiting joint action involving otherwise separate and competing providers, has significant application to ACO operations. Insofar as otherwise separate providers simply collaborate in negotiating contracts with private or governmental third-party payors without achieving the requisite degree of either financial or clinical integration, antitrust prohibitions against unreasonable restraints of trade involving joint action, price fixing and related activities may be implicated.

Importantly, in recent years an emerging area of health care antitrust law has focused on the acceptable development of "clinically integrated" organizational structures which can survive antitrust scrutiny. These bodies include the clinically integrated physician hospital organization known as Tri State Health Partners, which was approved by the Federal Trade Commission in April 2009, as well as more established entities that have engaged in clinical integration for several years. The common theme with all such clinically integrated enterprises is the combination of providers, some fully integrated in a single medical practice or as hospital employees, but others more loosely connected through contractual relationships, across a common theme of quality management, evidence-based medicine and accountable practice.

To more effectively coordinate care, ACOs functioning as clinically integrated networks may choose to include a number of otherwise separate individual and organizational providers (e.g., physicians, hospitals, diagnostic imaging centers, ambulatory surgical centers, etc.) through a separate legal entity that actively oversees the quality-related activities.

Unlike traditional managed care practices which have focused on care rationing to conserve costs, a clinically integrated network emphasizes cost management through quality enhancement and evidence based medicine. Clinical integration may be achieved by an ACO through the combination of provider selection/participation criteria in addition to active oversight and management of service delivery on quality grounds. The ACO which meets clinical integration criteria will engage in data collection and analysis, practice protocol development, and oversight and management of provider care practices using agreed upon clinical practice protocols to enhance the efficiency of service delivery.

As a clinically integrated network, the ACO's care coordination and related activities should permit the collective negotiation of third party payor contracts on behalf of participating providers. It is a fortunate legal circumstance that the same antitrust principles governing clinical integration have significant overlap with the ACO concept and will almost certainly define the appropriate characteristics of ACOs as operated in both the Medicare and private sector marketplace.

Antifraud Laws

A host of federal laws that govern the Medicare Program related to fraud and abuse prevention and enforcement has potential application to ACO operations and incentive structures. These include the federal physician anti-self-referral or "Stark" Law, which prohibits physicians from making referrals to organizations providing "designated health services" with which they have a financial relationship, unless an applicable exception under the law applies.

Fraud and abuse law also includes the Stark Law's close cousin, the federal Anti-Kickback Statute, which imposes criminal and civil penalties on the offer or payment of any "remuneration" in exchange for referring or arranging to refer business reimbursed under a federal health care program.

Additionally, the financial incentive structures that will probably be implemented within ACOs as part of an intended value proposition may potentially trigger the Medicare Civil Monetary Penalty statute, which prohibits hospitals from making payments to physicians to reduce or limit services provided to Medicare beneficiaries.

This body of law will be implicated because of a basic tension between organizational goals and needs; that is, although the core philosophical underpinnings of ACOs emphasize quality care and effective care management, the organizations still require initial and ongoing capitalization along with associated reimbursement and compensation structures in an effort to influence and effect provider behaviors. Stated otherwise, ACOs may use compensation arrangements to focus provider attention on quality issues and to provide positive (and sometimes negative) financial incentives relative to adherence to quality and other performance metrics—thereby attempting to reverse decades of volume-based financial incentives that are now deeply rooted in the American health care system.

ACOs that pursue these important operational and financial incentive objectives will most certainly need to take these fraud and abuse laws into account. Although the pending health reform legislation permits the secretary of DHHS to waive these provisions in certain circumstances, any such waiver process will require significant time—even though the facts on the ground will probably demand more rapid ACO deployment. Moreover, any such waivers of otherwise applicable fraud and abuse laws may be limited to "qualified" participating ACOs under the statutory pilot project and not encompass a broader range of developing ACO enterprises.

Although the federal government has provided certain limited guidance regarding application of quality and pay for performance type incentive structures likely to be found in ACOs, to date that guidance has been limited. See, e.g., OIG Advisory Opinion 08-16 (discussing the establishment and operation of a pay for performance incentive program).

Exempt Organization Requirements

Given that many of the nation's hospitals and health systems are tax-exempt organizations under IRC §501(c)(3), the increased role of quality in the nation's payment delivery system, coupled with a potential reconfiguration of governance and influence structures within health care overall, will create significant challenges and potential uncertainty for the current leadership structures within tax-exempt enterprises.

Hospital boards already have significant responsibilities for quality and quality-related measures within their institutions. Nationally, however, there is also occurring a potential paradigm shift in the approach and role of physicians in both outpatient and ambulatory clinical practice activities and in inpatient service lines and services.

While historically physicians and hospitals have lived in different houses on the same street, under ACOs, the two houses will be pushed much closer together, with physicians becoming far more actively involved in care management processes within hospital organizations. ACO joint governing bodies will define expectations and payment levels to ACO participating providers—physicians and hospitals alike—based on their actual measured performance in delivering care.

These changes will create challenges for many hospital governing boards, which may require different skill sets and accountabilities in the new payment environment. In addition, reforms may further focus attention on the conflict of interest, fiduciary duty and other governance standards applicable to organization leaders.

State Licensure and Other Laws

Also on the short list of laws to be considered and navigated by ACOs in the near term are provisions governing form of entity, licensure, fee splitting, and insurance regulation. The form of legal entity for an ACO (e.g., as a for profit or nonprofit organization) will affect its tax status as well as its future ability to serve (or not) as a separate investment vehicle for its participants.

Licensure statutes and rules applicable to individual providers and provider organizations will necessitate consideration to determine how new management and accountability structures in an ACO environment affect the core roles and responsibilities historically imposed by licensing statutes.

Likewise, state law provisions prohibiting the sharing of provider fees (many of which mimic or mirror the federal Anti-Kickback and/or Stark laws in material respects) can also potentially be implicated when funds are aggregated and then re‑allocated among providers through incentive structures potentially used in an accountable care environment.

Lastly, state insurance laws governing assumption of risk and reserve requirements, the business of insurance, third-party administrator and related activities will also require review and analysis.

In overall terms, while tomorrow's health care delivery system may well be built on the principle of accountable care, the legal and regulatory infrastructure that now exists and upon which ACOs must be built dates from an earlier era and reflects different goals, expectations and values that are now embedded within current legal requirements.

Operational Prerequisites to ACO Development

Concurrent with legal structure and compliance attention, successful development of an ACO will generally require some or all of the following operational attributes and activities:

• Quality Focus. The ACO's focus must be on quality of care and evidence-based medicine, combined with a philosophy that by providing quality, costs will be managed.
• Provider Selection. Provider selection must be based upon basic quality standards and commitment to the ACO's philosophy and delivery model. There must also be a commitment to other key aspects of the program including participation in and adherence to data driven and evidence-based medicine, use of defined practice management and electronic health record infrastructure, and participation in care protocol development using measurable care standards.
• Infrastructure Development. An ACO will require a combination of information technology, human resources, and attention to quality-related measures and goals. Adequate capital will be required to develop infrastructure which collects and mines clinical and claims-related information into a useful database to support the practice of evidence-based medicine. Working groups of participating providers (e.g., medical directors, physicians and others) will also need to invest human and financial capital to focus on protocol development, benchmarking and performance assessment.
• Payor Contracting and Provider Reimbursement Strategy. If performed correctly, the creation and operation of the ACO should permit the organization to engage in joint contracting on behalf of its participating providers without violating the antitrust laws. The network's overall payor contracting strategy must be developed, in addition to development and implementation of internal provider compensation/disbursement models.
• Areas of Special Emphasis. Although ACOs will generally involve the interdependent delivery of coordinated care across a broad patient population, there may be specific areas in which more specialized ACOs can flourish. For example, Sec. 2706 of the Senate Bill provides for a "Pediatric Accountable Care Organization Demonstration Project" under the Medicaid Program commencing in January, 2012. If requested by a state and consistent with forthcoming DHHS performance guidelines, such a pediatric ACO may be eligible to receive a bonus payment based on savings achieved.
• Brand Identity and Recognition. While most ACOs will likely be locally owned and operated at the outset, the creation of a regional or national brand in district product lines may enhance value and become attractive to some stakeholders. Active attention to branding, identity management and protection of intellectual property will be important to providing value to the network's owners.
• Benefit to Participants. ACOs will involve many key participants including individual and organizational providers who will invest and participate in the network as service providers. Third party investors with expertise in managed care and related areas may also provide capital, infrastructure and know-how in support of its operations. If desired by participants and properly structured from inception, ACO participants may benefit both through services provided to a covered population and as investors in a viable business organization.

ACO Structure and Compliance Requirements Need Proactive Attention

For physicians, hospitals and other health care providers, ACO development may offer a variety of professional and business opportunities including enhanced access to patients in a rapidly changing environment—and market differentiation based on quality and the cost effective delivery of care in the public and private health care marketplace.

Pro‑active attention at the outset to ACO structure and compliance requirements will be required to yield positive return on investment on a going-forward basis for an ACO, its participants and the public served.