Response to Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and

time specified in the DATESsection of

this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document. V. Regulatory Impact Analysis

A. Introduction

We have examined the impacts of this proposed rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96–354), section 1102(b) of the Act, section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104–4), Executive Order 13132 on Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory

approaches that maximize net benefits (including potential economic,

environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of

quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule

has been designated an ‘‘economically’’

significant rule, under section 3(f)(1) of Executive Order 12866. Accordingly, the rule has been reviewed by the Office of Management and Budget.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2011, that

threshold is approximately $136 million. This proposed rule does not include any mandate that would result in spending by State, local or tribal governments, in the aggregate, or by the private sector in the amount of $136 million in any one year. We

acknowledge that there will be costs borne by the private sector, as discussed in this regulatory impact section, in order to participate in this program; however, participation is voluntary and is not mandated.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, pre-empts State law, or otherwise has Federalism implications. We do not believe that there is anything in this proposed rule that either explicitly or implicitly pre-empts any State law, and furthermore we do not believe that this proposed rule will have a substantial direct effect on State or local governments, preempt States law, or otherwise have a Federalism implication.

B. Statement of Need

This proposed rule is necessary to implement section 3022 of the Affordable Care Act which amended

Title XVIII of the Act (42 U.S.C. 1395 et

seq.) by adding a new section 1899 of

the Act to establish a Shared Savings Program that promotes accountability for a patient population, coordinates items and services under parts A and B, and encourages investment in

infrastructure and redesigned care processes for high quality and efficient service delivery. Section 1889(a)(1) of the Act requires the Secretary to establish this program not later than January 1, 2012. Also, section 1889(a)(1)(A) of the Act states that

under this program, ‘‘groups of

providers of services and suppliers meeting criteria specified by the Secretary may work together to manage and coordinate care for Medicare fee- for-service beneficiaries through an accountable care organization (referred

to as an ‘ACO’);’’ and section

1889(a)(1)(B) of the Act provides that

‘‘ACOs that meet quality performance

standards established by the Secretary are eligible to receive payments for

shared savings * * *.’’

The Shared Savings Program is a new approach to the delivery of health care aimed at reducing fragmentation, improving population health, and lowering overall health care costs.

The Shared Savings Program should provide an entry point for all willing organizations who wish to move in a direction of providing value-driven healthcare. Consequently, in accordance with the authority granted to the Secretary under sections 1899(d) and 1899(i) of the Act, we looked at creating both a shared savings model (one-sided) and a shared savings/losses model (two- sided). The sharing parameters under the two options are balanced so as to provide greater reward for organizations accepting risk while maintaining sufficient incentive to encourage providers to participate in the one-sided model, providing an entry point to risk- oriented models.

As detailed in Table 10, we estimate a total aggregate median impact of $510 million in net Federal savings for CYs 2012 through 2014 from the

implementation of the Shared Savings Program. (An estimate produced by the Office of the Actuary on April 22, 2010 showed no net impact only because the statute by itself lacked enough detail to allow for scoring.) The 10th and 90th percentiles of the estimate distribution, for the same time period, show net savings of $960 million and $170 million. These estimated impacts represent the effect on Federal transfers. The estimated aggregate cost for start-up investment and first year operating expenditures for ACOs in the Shared Savings Program range from

$131,643,825 to $263,287,650, assuming 75 to 150 ACOs participating in the Shared Savings Program. Furthermore, the Shared Savings Program would benefit beneficiaries since the program requires ACOs to be accountable for Medicare beneficiaries, improve the coordination of FFS items and services, encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery that demonstrate a dedication and focus toward patient-centered care.

Accordingly, we have prepared a RIA that to the best of our ability presents the costs and benefits of this proposed rule. We solicit comment on the assumptions and analysis presented throughout this regulatory impact section.

As discussed in the preamble of this proposed rule, the Shared Savings Program establishes a program whereby groups of suppliers and providers can work together through ACOs that would assume responsibility for managing and coordinating the care of groups of traditional FFS Medicare patients. Participating ACOs will have the opportunity to earn shared savings payments by reducing Medicare expenditure growth for their assigned beneficiaries below specified target thresholds or benchmarks while simultaneously meeting quality performance measures. An ACO could initially opt for one of two program tracks. The first option (one-sided model) offers eligibility for shared savings payments in years 1 and 2 without the risk of being responsible for repaying any losses if actual

expenditures exceed the benchmark, followed by a third year offering a higher percentage of shared savings but also risk for excess expenditures above the benchmark. The second option (two- sided model) provides an opportunity for receiving a higher percentage of shared savings for all 3 years, but with potential liability in each of the 3 years for annual expenditures that exceed the benchmark.

There is substantial uncertainty as to the number of ACOs that will

participate in the program, their characteristics, provider and supplier response to the financial incentives offered by the program, and the ultimate effectiveness of the changes in care delivery that may result as ACOs work to improve the quality and efficiency of patient care. These program design and other uncertainties complicate efforts to assess the financial impacts of the Shared Savings Program and result in a wide range of potential outcomes regarding the net impact on Medicare expenditures.

To best reflect these uncertainties, we designed a stochastic model that incorporates assumed probability distributions for each of the key variables that will affect the overall financial impact of the Shared Savings Program. Using a Monte Carlo

simulation approach, the model randomly draws a set of specific values for each variable, reflecting the expected covariance among variables, and calculates the program’s financial impact based on the specific set of assumptions. We repeated the process for a total of 5,000 random trials, tabulating the resulting individual cost or savings estimates to produce a distribution of potential outcomes that reflects the assumed probability distributions of the incorporated variables, as shown in Table 10. In this way, we can evaluate the full range of potential outcomes based on all combinations of the many factors that will affect the financial impact, and with an indication of the likelihood of these outcomes. It is important to note that these indications do not represent formal statistical probabilities in the usual sense, since basis for the

underlying assumptions for each of the factors in the model are based on reasonable judgments, using independent expert opinion when available.

The median result from the distribution of simulated outcomes

represents the ‘‘best estimate’’ of the

financial effect of the Shared Savings Program, recognizing the uncertainty inherent in a new program with uncertain responses. The full

distribution illustrates the uncertainty surrounding the mean or median financial impact from the simulation.

As detailed in Table 11, the median estimate involves a combination of: (1) Reduced actual Medicare expenditures due to more efficient care; (2) shared savings payments to ACOs; and (3)

payments to CMS for shared losses when actual expenditures exceed the benchmark, resulting in a projected total of $510 million in net savings over CYs 2012 through 2014. Approximately 97 percent of the stochastic trials resulted in a net savings to the Medicare program, while the other 3 percent produced a net cost. At the extremes, the greatest simulated savings was approximately $1,960 million, while the greatest simulated cost was $270 million.

A net savings (costs) occurs when the payment of earned and unearned shared-savings bonuses (less penalties collected) resulting from— (1)

Reductions in spending; (2) program design; and (3) random group claim fluctuation, in total are less than (greater than) assumed savings from reductions in expenditures.

As we finalize the Shared Savings Program provisions, and as the actual number of participating ACOs and their characteristics become known, the range of financial outcomes will narrow. Similarly, as data become available on the initial differences between actual expenditures and the target

expenditures reflected in ACO benchmarks, it will be possible to evaluate the financial effects with greater certainty. The estimate distribution shown provides an objective and reasonable indication of the likely range of financial outcomes, given the chosen variables and their assumed distributions at this time in the program’s development.

C. Anticipated Effects

1. Effects on the Medicare Program As a voluntary program involving an innovative and complex mix of financial incentives for quality of care and efficiency gains within FFS Medicare, the Shared Savings Program could result in a wide range of possible outcomes. While examples exist across the

healthcare marketplace for risk-sharing arrangements leading to efficiency gains, a one-sided model would presumably provide a weaker incentive to ACOs than other possible approaches. The optional two-sided risk model, and the requirement for all other ACOs to accept downside risk in their third program year, both provide stronger incentives than a shared savings only approach. For example, under the one- sided model, a provider’s worst-case outcome is the failure to earn shared- savings. A provider would operate under the significant possibility that there would be no impact on their Medicare reimbursement. The two-sided risk model, however, presents liability for excessive expenditures, significantly increasing a provider’s perceived likelihood that aggregate Medicare revenue will depend on the level of efficiency with which they operate. In addition, the two-sided model offers a lower minimum savings rate and a greater sharing percentage, both of which enhance the incentive for efficiency. However, participating ACOs may be more likely to choose the one- sided model for the first 2 years and thereby avoid the potential for financial loss if expenditures experience a significant upward fluctuation or if efficiency improvements are less effective than planned.

In the third year of their first agreement period, as noted previously, all ACOs that participate in the one- sided model during the first 2 years of the agreement period will be required to transition to the two-sided risk model. We believe certain participating ACOs may choose to terminate their agreement early after the first 2 years. For example, ACOs in Track 1 that failed to meet the expenditure growth targets in the first 2 years (but were protected from penalties by being in the one-sided model), would likely reconsider their continuing participation. Certain other ACOs, such as those in higher-cost areas of the country, could also terminate their agreement if they anticipate that the national growth formula, relative to their local baseline cost, puts them in jeopardy of experiencing losses in the third year. (Under section 2899(d) of the Act, we update ACO benchmarks by the estimated annual increase in the absolute amount of national average Medicare Part A and Part B

expenditures, expressed as a flat dollar amount for each year. As a result, the updates to ACO benchmarks in percentage terms will be higher in low- cost areas of the country and lower in high-cost areas.) This scenario could contribute to selective program

participation by ACOs favored by the national flat-dollar growth target.

While shared FFS savings, even with optional liability for a portion of excess expenditures, offers less incentive to reduce costs or improve efficiency than, say, full capitation, it still represents a new incentive for efficiency. Shared- savings (and potential liabilities) will have varying degrees of influence on hospitals, primary physicians, specialty physicians, and other providers. The expectation is for different ACOs to comprise a varying mix of these providers and suppliers. And while certain care improvements might be achieved relatively quickly (for example, prevention of hospital readmissions and emergency-room visits for certain populations with chronic conditions), many potential ACOs might need more than 3 years to achieve comprehensive efficiency gains. Challenges include identification of assigned beneficiaries, managing care furnished by providers and suppliers outside the ACO, lack of similar contracts with other payers, achieving buy-in from ACO providers and suppliers, and the extent to which possible future shared savings or losses will affect the perceived value of immediate FFS revenue for providers and suppliers participating in the ACO. a. Assumptions and Uncertainties

We sought input from a wide range of external experts, including credentialed actuaries, consultants, and academic researchers, to identify the pertinent variables that could determine the efficacy of the program, and to identify the reasonable ranges for each variable. The assumptions identified and stochastically modeled include the following:

• Number of participating ACO

provider groups.

• Size mix of participating ACOs.

• Type of ACO that would consider

accepting risk under the two-sided risk option.

• Participating ACOs’ current level of

integration and preparedness for improving the quality and efficiency of care delivery.

• Baseline per-capita costs for

prospective ACOs, relative to national average.

• Number and profile of providers

and suppliers unavailable to participate in the Shared Savings Program due to participation in ACO models tested by the Innovation Center.

• Range of savings for participating

ACOs within the first three years of the program.

• Local variation in expected claims

cost growth relative to the national average.

• Quality reporting scores and

resulting attained sharing (or loss) percentages.

Overall we assumed 1.5 to 4 million Medicare beneficiaries would align with a participating ACO during the first three years of the program. We assumed ACOs to be more likely to participate from markets exhibiting baseline per- capita FFS expenditures above the national average. In addition, we assumed the level of savings generated by an ACO to positively correlate to the achieved quality performance score and resulting sharing percentage.

Of particular relevance is the high degree of variability observed for local per-capita cost growth rates relative to

the national average ‘‘flat dollar’’ growth

(used to update ACO benchmarks). The benchmark or expenditure target effectively serves as the only measure of efficiency for participating ACOs. Factors such as lower-than-average baseline per-capita expenditure and variation in local growth rates relative to the national average can trigger Shared Savings Program shared savings payments even in the absence of any efficiency gains. Similarly, some ACOs could find that in the determination of shared savings by factors such as prevailing per-capita expenditure growth in their service area that is higher than the national average overshadows their hard-fought efficiency gains.

b. Detailed Stochastic Modeling Results Table 11 shows the distribution of the estimated net financial impact for the 5,000 stochastically generated trials. (The amounts shown are in millions, with negative net impacts representing Medicare savings). The net impact is defined as the total cost of shared savings less—(1) any amount of savings generated by reductions in actual expenditures; and (2) any losses collected for ACOs that accepted risk and have actual expenditures exceeding their benchmark.

The median estimate of the Shared Savings Program financial impact for calendar years 2012 through 2014 is a net savings of $510 million. This

amount represents the ‘‘best estimate’’ of

the 3-year financial impact of the Shared Savings Program initiative. It is important to note, however, the relatively wide range of possible outcomes. Overall, 97 percent of the stochastic trials resulted in net program savings, and the other 3 percent

represented cost increases. The 10th and 90th percentiles of the estimated

distribution show net savings of $960 million and $170 million, respectively, suggesting a 10 percent likelihood that the actual impact would fall outside respective percentile amounts. In the extreme scenarios, the results were as large as $2 billion in savings or $270 million in costs.

Our Office of the Actuary (OACT) prepared the stochastic model and resulting financial estimates. OACT believes that the median result of $510

million in savings is a reasonable ‘‘point

estimate’’ of the impact of the Shared

Savings Program provision in current

law, as it would be implemented through this proposed rule. However, OACT emphasizes the possibility of outcomes that differ substantially from the median estimate, as illustrated by the estimate distribution. With the adoption of final program provisions and with additional data on the actual number and characteristics of

participating ACOs, we can estimate the financial impact with greater precision.

The projections assume the

assignment of roughly 1.5 to 4 million beneficiaries to participating ACOs over the first 3 years. To the extent that the

Shared Savings Program will result in net savings or costs to Part B of Medicare, revenues from Part B beneficiary premiums would also be correspondingly lower or higher. In addition, because MA payment rates depend on the level of spending within traditional FFS Medicare, Shared Savings Program savings or costs would result in corresponding adjustments to MA payment rates. Neither of these secondary impacts has been included in the analysis shown.

Table 12 shows the median estimated