©2011 Fulbright & Jaworski L.L.P.

Wednesday, June 1, 201112:00 p.m. – 1:00 p.m. CDT | Web Seminar

Accountable Care Organizations:Risk Sharing and Licensure

Implications under State Law

Speakers

Jerry A. Bell, Jr.PartnerAustinjbell@fulbright.com+1 512 536 4596

Andrew J. DemetriouPartnerLos Angelesademetriou@fulbright.com+1 213 892 9338

Denise Webb GlassPartnerDallasdglass@fulbright.com+1 214 855 8063

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Continuing Education InformationWe have applied for one hour of California, Texas and Virginia CLE and New York non-transitional CLE credit. Newly admitted New York attorneys may not receive non-transitional CLE credit. For attendees outside of these states, we will supply a certificate of attendance which can be used to apply for CLE credit in the applicable bar or other accrediting agencies.

Fulbright will supply a certificate of attendance to all participants that:1. Participate in the web seminar by phone and via the

web2. Complete our online evaluation, which we will send

to you later today3

Administrative Information

Today’s program will be conducted in a listen-only mode. To ask an online question at any time throughout the program, simply click on the question mark icon located on the tool bar in the bottom right side of your screen. We will try to answer your question during the session if time permits.Everything we say today is opinion. We are not dispensing legal advice, and listening does not establish an attorney-client relationship. This discussion is off the record. Anything we say cannot be quoted without our prior express written permission.

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Fundamental Structure

ACO must be an entity recognized under state lawACO must be able to “receive and distribute shared savings” to participating providers of services and suppliesACO must be accountable for losses in “two-sided” modelACO need not be a Medicare provider, thus shared savings payments are not treated as payments by Medicare for services

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ACO Option 1—One-Sided Model

Designed for ACOs who are not immediately ready to accept risk Provides an entry point for organizations with less experience managing care and accepting financial risk, such as physician-driven organizations or smaller ACOs, to gain experience with population management in the FFS setting before transitioning to more riskUnder Option 1, shared savings would be reconciled annually for the first 2 years of the 3-year agreement using a one-sided shared savings approach, with ACOs not being responsible for any portion of the losses above the expenditure target ACOs that enter the Shared Savings Program under Option 1 would be automatically transitioned to the two-sided model in the third year of their agreement and be required to share any losses that may be generated as well as savings

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ACO Option 2—Two-Sided Model

ACOs accept downside risk for losses once minimum loss rate is exceededOnce exceeded, risk shared from first dollarMinimum loss rate is flat 2% of ACO’s benchmarkLosses subject to maximum shared loss capShared loss cap increases each year: 5% in yr 1; 7.5% in yr 2; 10% in yr 3

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Shared Savings Program Comparison

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Design Element One-Sided Model (performance years 1 &2)

Two-Sided Model

Minimum Loss Rate None Flat 2 percent regardless of size

Maximum Sharing Cap Payment capped at 7.5 percent of ACO'sbenchmark

Payments capped at 10 percent of ACO'sbenchmark

Shared Savings Savings shared once MSR is exceeded;unless exempted, share in savings net of a 2percent threshold; up to 52.5 percent of netsavings up to cap.

Savings shared once MSR is exceeded; up to65 percent of gross savings up to cap.

Shared Losses None First dollar shared losses once the minimumloss rate is exceeded. Cap on the amount oflosses to be shared phased in over threeyears starting at 5 percent in year 1; 7.5percent in year 2; and 10 percent in year 3.Losses in excess of the annual cap would notbe shared. Actual amount of shared losseswould be based on final sharing rate thatreflects ACO quality performance and anyadditional incentives for including FQHCsand/or RHCs using the followingmethodology (1 minus final sharing rate).

CMS Recovery of Losses

25% withholding will be applied to an ACO’s earned performance paymentTo address losses which might exceed 25% or for losses incurred in the 1st year, ACOs must establish mechanisms for repaying losses to Medicare. Possible methods include:● Reinsurance● Placing funds in escrow● Obtaining surety bonds● Establishing a line of credit that Medicare program can draw upon● Contractual arrangements with ACO participants permitting CMS to

reduce future Medicare payments by a specified amountMust demonstrate repayment adequacy prior to entrance in program and annually thereafter● Amounts must be sufficient to ensure repayment of losses equal to at

least 1% of per capita expenditures for its assigned beneficiaries from most recent year

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State Law Requirements

Medicare program retains the insurance risk and responsibility for payment of claims for services rendered to Medicare beneficiariesCMS acknowledges that some states may regulate risk-bearing entities such as ACOs participating in the Shared Savings ProgramCMS seeking comments on whether its proposals would trigger application of state insurance laws

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State Regulatory Concerns with ACOs

Are there financial incentives to impose limits on treatment?Do patients have access to timely, quality health services?If an ACO’s contract with CMS terminates, what happens to patients in care?Who bears the risk of loss?

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Level of State Oversight Depends on ACO Payment Methodologies

Bundled payments may or may not be subject to current regulations depending on any risk assumed through pre-payment of services Partial capitation may require licensure and compliance with solvency requirementsGlobal capitation will require licensure and compliance with solvency and consumer protection requirementsFee-for-service with bonus incentives will generally not be subject to regulatory requirements

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Texas Regulation of Risk Arrangements

Under Texas law, an entity which arranges for or provides a health care plan to enrollees on a prepaid basis is an HMO and must have a certificate of authority (COA) A person is not required to obtain a COA if the person is:● a physician engaged in the delivery of medical care● a provider engaged in the delivery of health care services, other than

medical care, as part of an HMO delivery network, in which an HMO arranges for health care services directly or indirectly through contracts and subcontracts with providers and physicians

● a 5.01(a) that contracts to arrange for or provide health care services on a fee-for-service basis

But, a physician or provider that enters into a contractual arrangement with other providers to provide basic or limited health care services or a single health care service is required to obtain a COA

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Risk Arrangements under an HMO Delivery Network

Physicians (including P.A.s, 5.01(a)s, and other entities wholly owned by physicians) may take capitated risk for providing medical care (physician services only), directly or through subcontracts with other physicians Providers (including hospitals and persons wholly owned or controlled by one or more hospitals and physicians) may provide health care services reimbursed on a fee-for-service, risk sharing arrangement, or capitation basis under the following circumstances:● the provider is engaged in the delivery of health care services, other than medical

care, as part of an HMO delivery network;● the provider has contracted to provide or arranged to provide through

subcontracts with similarly licensed providers any health care service that the providers are licensed to provide, other than medical care; or

● the provider has contracted to provide or arranged to provide through subcontracts with other providers, a health care service, other than medical care, that the provider is not licensed to provide, if the contracted or subcontracted services constitute less than 15% of the total amount of services to be provided or arranged for by that provider [TIC §843.318]

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The Fate of SB 8--Texas Health Care Collaboratives

SB 8 would have created a new ch. 848 of the Texas Insurance Code to provide for a licensure process for health care collaborativesA health care collaborative defined as an entity that:● undertakes to arrange for medical and health care services for insurers,

health maintenance organizations, and other payors in exchange for payments in cash or in kind;

● accepts and distributes payments for medical and health care services;● consists of:

Physicians;Physicians and other health care providers;Physicians and insurers or health maintenance organizations; orphysicians, other health care providers, and insurers or health maintenance organizations; and

● that is certified by the commissioner to lawfully accept and distribute payments to physicians and other health care providers using the authorized reimbursement methodologies

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Texas SB 8 (cont’d)

Licensure would have been required for an entity, other than an HMO, that by itself or through a subcontract with another entity, undertakes to arrange for or provide medical care or health care services to enrollees in exchange for predetermined payments on a prospective basis; and accepts responsibility for performing HMO-like functionsOnce licensed, a health care collaborative would be permitted to contract for, accept, and distribute payments from governmental or private payors based on fee-for-service or alternative payment mechanisms, including: episode-based or condition-based bundled payments; capitation or global payments; or pay-for-performance or quality-based payments

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California Regulation of Risk Arrangements

Health plans ● Enroll members of the public and are responsible for the

payment of provider claims● At risk for the costs of care● Subject to licensure and regulation, including solvency and

tangible net equity rules

“Limited License” Holder● An entity that takes risk for a spectrum of providers but does

not enroll members of the public, rather it subcontracts to licensed health plans—may be physician led or hospital led

● Subject to truncated licensure procedures and solvency regulation

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California Regulation of Risk Arrangements

Risk Bearing Organizations● Organizations that take risk (e.g., through capitated

payments) for physician services, including outpatient care, but not at risk for institutional care

● Subject to solvency rules and reporting obligations, but not licensure

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Limited License Requirements

Must provide materials required for a licensed health plan—organizational information, financials, contractual arrangements, quality of care and review systems—except marketing materialsMust have a restricted deposit of $300,000 and a minimum tangible net equity of $1,000,000Subject to quarterly and annual filing obligations and annual audits by DMHCProcess for approval can take six months

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Risk Bearing Organizations

Must maintain positive working capital and tangible net equity as well as a ratio of cash to claims exceeding 75%Subject to quarterly and annual financial filings and annual audits by DMHCMust be a subcontractor to health plans or limited license holders

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Integrated ModelTexas 5.01(a), California Foundation

Foundation/5.01(a)

MEDICARE

PhysiciansSuppliers/

Other Providers

Hospital

Shared Savings/Losses

Medicare Provider Payments

Shared Savings/Funding of Losses?

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Joint Venture Model

ACO

Provider PoolHospital

Suppliers/Other

Providers

Physicians

MEDICARE

Medicare Provider Payments

Shared Savings/Losses

Savings Distributions/ Loss Funding

Owned and Governed by ACO Participants

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Hospital Employed Physician Model

Hospital

Employed Physicians

Suppliers/Other Providers

MEDICARE

Shared Savings/LossesMedicare Provider Payments

Shared Savings/Losses

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Questions?

Jerry A. Bell, Jr.PartnerAustinjbell@fulbright.com+1 512 536 4596

Andrew J. DemetriouPartnerLos Angelesademetriou@fulbright.com+1 213 892 9338

Denise Webb GlassPartnerDallasdglass@fulbright.com+1 214 855 8063

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Continuing Education Information

For those attorneys requesting New York State CLE credit for this presentation, please record the number given during the program. You will be asked to repeat this number on an online evaluation regarding the program, which Fulbright will email to you later today.

If you are viewing a recording of this web seminar, most state bar organizations will only allow you to claim self-study CLE credit. Please refer to your state's CLE rules. If you have any questions regarding CLE approval of this course in your applicable bar, please contact your bar administrator.

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