[Federal Register Volume 81, Number 22 (Wednesday, February 3, 2016)]
[Proposed Rules]
[Pages 5824-5872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01748]



[[Page 5823]]

Vol. 81

Wednesday,

No. 22

February 3, 2016

Part II





 Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Part 425





Medicare Program; Medicare Shared Savings Program; Accountable Care 
Organizations--Revised Benchmark Rebasing Methodology, Facilitating 
Transition to Performance-Based Risk, and Administrative Finality of 
Financial Calculations; Proposed Rule

Federal Register / Vol. 81 , No. 22 / Wednesday, February 3, 2016 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 425

[CMS-1644-P]
RIN 0938-AS67


Medicare Program; Medicare Shared Savings Program; Accountable 
Care Organizations--Revised Benchmark Rebasing Methodology, 
Facilitating Transition to Performance-Based Risk, and Administrative 
Finality of Financial Calculations

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: Under the Medicare Shared Savings Program (Shared Savings 
Program), providers of services and suppliers that participate in an 
Accountable Care Organization (ACO) continue to receive traditional 
Medicare fee-for-service (FFS) payments under Parts A and B, but the 
ACO may be eligible to receive a shared savings payment if it meets 
specified quality and savings requirements. This proposed rule 
addresses changes to the Shared Savings Program that would modify the 
program's benchmark rebasing methodology to encourage ACOs' continued 
investment in care coordination and quality improvement, and identifies 
publicly available data to support modeling and analysis of these 
proposed changes. In addition, it would streamline the methodology used 
to adjust an ACO's historical benchmark for changes in its ACO 
participant composition, offer an alternative participation option to 
encourage ACOs to enter performance-based risk arrangements earlier in 
their participation under the program, and establish policies for 
reopening of payment determinations to make corrections after financial 
calculations have been performed and ACO shared savings and shared 
losses for a performance year have been determined.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 28, 2016.

ADDRESSES: In commenting, please refer to file code CMS-1644-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address only: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-1644-P, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1644-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments only to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Elizabeth November, (410) 786-8084. 
Email address: <a href="/cdn-cgi/l/email-protection#c6a7a5a986a5abb5e8aeaeb5e8a1a9b0"><span class="__cf_email__" data-cfemail="1776747857747a64397f7f6439707861">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Acronyms

ACO Accountable Care Organization
BY Benchmark Year
CBSA Core Based Statistical Area
CMS Centers for Medicare & Medicaid Services
CSA Combined Statistical Area
CY Calendar Year
DSH Disproportionate Share Hospital
ESRD End Stage Renal Disease
FFS Fee-for-service
GAO Government Accountability Office
HCC Hierarchical Condition Category
IME Indirect Medical Education
MA Medicare Advantage
MACRA Medicare Access and CHIP Reauthorization Act of 2015
MedPAC Medicare Payment Advisory Commission
MLR Minimum Loss Rate
MSA Metropolitan Statistical Area
MSR Minimum Savings Rate
NPI National Provider Identifier
OACT Office of the Actuary
PGP Physician Group Practice
PUF Public Use File
PY Performance Year
RIA Regulatory Impact Analysis
TIN Taxpayer Identification Number

I. Executive Summary and Background

A. Executive Summary

1. Purpose
    Section 1899 of the Social Security Act (the Act) established the 
Medicare Shared Savings Program, which promotes accountability for a 
patient population, fosters coordination of items and services under 
Medicare Parts A and B, and encourages investment in infrastructure and 
redesigned care processes for high quality and efficient health care 
service delivery. This

[[Page 5825]]

proposed rule would make changes to the regulations for the Shared 
Savings Program that were promulgated in November 2011 and June 2015, 
and codified at 42 CFR part 425. The goal is to address concerns raised 
by stakeholders regarding the financial benchmarking methodology, and 
establish additional options for ACOs to enter performance-based risk 
arrangements. This proposed rule also seeks to address policies for 
reopening of payment determinations to make corrections after financial 
calculations have been performed and ACO shared savings and shared 
losses for a performance year have been determined. Unless otherwise 
noted, these changes would be effective 60 days after publication of 
the final rule. Applicability or implementation dates may vary, 
depending on the nature of the policy. Table 1 lists the anticipated 
applicability date of key changes in this proposed rule. By indicating 
that a provision is applicable to a performance year (PY) or agreement 
period, activities related to implementation of the policy may precede 
the start of the performance year or agreement period.

 Table 1--Applicability Dates of Select Provisions of the Proposed Rule
------------------------------------------------------------------------
                                 Section title/
      Preamble section             description       Applicability date
------------------------------------------------------------------------
II.A.2, II.A.3..............  Integrating regional  Second or subsequent
                               factors in            agreement period
                               resetting ACO         beginning January
                               benchmarks.           1, 2017 and all
                                                     subsequent years.
II.A.2.e.3..................  Use of assignable     PY 2017 and
                               beneficiaries in      subsequent
                               calculations based    performance years.
                               on National FFS
                               expenditures.
II.B........................  Modification to the   PY 2017 and
                               methodology for       subsequent
                               adjusting             performance years.
                               benchmarks for
                               changes in ACO
                               participant
                               composition.
II.C........................  An additional         Second agreement
                               participation         period beginning
                               option that would     January 1, 2017 and
                               allow eligible        all subsequent
                               Track 1 ACOs to       years.
                               defer by 1 year
                               their entrance into
                               a performance-based
                               risk model (Track 2
                               or 3) for their
                               second agreement
                               period.
II.D........................  Definitions of        60 days from
                               circumstances for     publication of the
                               reopening             final rule.
                               determinations of
                               ACO shared savings
                               or shared losses to
                               correct financial
                               reconciliation
                               calculations.
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2. Summary of the Major Provisions
    This proposed rule is designed to improve program function and 
transparency. To achieve these goals, we propose to make the following 
modifications to the current program:
    <bullet> Modifying the methodology for rebasing and updating ACO 
historical benchmarks when an ACO renews its participation agreement 
for a second or subsequent agreement period to incorporate regional 
expenditures, thereby making the ACO's cost target more independent of 
its historical expenditures and more reflective of FFS spending in its 
region.
    <bullet> Modifying the methodology for risk adjustment to account 
for the health status of the ACO's assigned population in relation to 
FFS beneficiaries in the ACO's regional service area, and to apply this 
approach in determining the regional adjustment that is applied to the 
ACO's rebased historical benchmark.
    <bullet> Revising the methodology for adjusting ACO benchmarks to 
account for changes in ACO participant (TIN) composition.
    <bullet> Adding a participation agreement renewal option to 
encourage ACOs to enter performance-based risk arrangements earlier in 
their participation in the Shared Savings Program.
    <bullet> Defining circumstances under which we would reopen payment 
determinations to make corrections after the financial calculations 
have been performed and ACO shared savings and shared losses for a 
performance year have been determined.
3. Summary of Costs and Benefits
    As a result of this proposed rule, the median estimate of the 
financial impact of the Shared Savings Program for CYs 2017 through 
2019 would be net federal savings of $120 million greater than what 
would have been saved if no changes were made. Although this is the 
best estimate of the financial impact of the Shared Savings Program 
during CYs 2017 through 2019, a relatively wide range of possible 
outcomes exists. While approximately two-thirds of the stochastic 
trials resulted in an increase in net program savings, the 10th and 
90th percentiles of the estimated distribution show a net increase in 
costs of $230 million to net savings of $490 million, respectively.
    Overall, our analysis projects that improvements in the accuracy of 
benchmark calculations, including through the introduction of a 
regional adjustment to the ACO's rebased historical benchmark, are 
expected to result in increased overall participation in the program. 
The proposed changes are also expected to improve the incentive for 
ACOs to invest in effective care management efforts, increase the 
attractiveness of participation under performance-based risk in Track 2 
or 3 for certain ACOs with lower beneficiary expenditures, and result 
in overall greater gains in savings on FFS benefit claims costs than 
the associated increase in expected shared savings payments to ACOs. We 
intend to monitor emerging results for ACO effects on claims costs, 
changing participation (including risk for cost due to selective 
changes in participation), and unforeseen biased benchmark adjustments 
due to diagnosis coding intensity shifts. Such monitoring will inform 
future rulemaking, such as if the Secretary determines that a lower 
weight should be used in calculating the regional adjustment amount for 
ACOs' third and subsequent agreement periods.

B. Background

    On March 23, 2010, the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) was enacted, followed by enactment of the Health Care 
and Education Reconciliation Act of 2010 (Pub. L. 111-152) on March 30, 
2010, which amended certain provisions of Public Law 111-148. 
Collectively known as the Affordable Care Act, these public laws 
include a number of provisions designed to improve the quality of 
Medicare services, support innovation and the establishment of new 
payment models, better align Medicare payments with provider costs, 
strengthen Medicare program integrity, and put Medicare on a firmer 
financial footing.
    Section 3022 of the Affordable Care Act amended Title XVIII of the 
Act (42 U.S.C. 1395 et seq.) by adding section 1899 to the Act to 
establish a Shared Savings Program. This program is a key component of 
the Medicare delivery system reform initiatives included in

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the Affordable Care Act and is a new approach to the delivery of health 
care. The purpose of the Shared Savings Program is to promote 
accountability for a population of 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, and promote higher value care. ACOs that 
successfully meet quality and savings requirements share a percentage 
of the achieved savings with Medicare. Consistent with the purpose of 
the Shared Savings Program, in establishing the program, we focused on 
developing policies aimed at achieving the three-part aim consisting 
of: (1) Better care for individuals; (2) better health for populations; 
and (3) lower growth in expenditures.
    We published the final rule entitled ``Medicare Program; Medicare 
Shared Savings Program: Accountable Care Organizations'' (November 2011 
final rule), which appeared in the November 2, 2011 Federal Register 
(76 FR 67802). We viewed this final rule as a starting point for the 
program, and because of the scope and scale of the program and our 
limited experience with shared savings initiatives under FFS Medicare, 
we built a great deal of flexibility into the program rules. We 
anticipated that subsequent rulemaking for the Shared Savings Program 
would be informed by lessons learned from our experience with the 
program as well as from testing through the Pioneer ACO Model and other 
initiatives conducted by the Center for Medicare and Medicaid 
Innovation (Innovation Center) under section 1115A of the Act.
    As of January 1, 2016, over 400 ACOs were participating in the 
Shared Savings Program. This includes 147 ACOs with 2012 and 2013 
agreement start dates that entered into a new 3-year agreement 
effective January 1, 2016, to continue their participation in the 
program. We continue to see strong interest in the program, for 
instance, as indicated by the 100 ACOs that entered the program for a 
first agreement period beginning January 1, 2016. See Fact Sheet: CMS 
Welcomes New Medicare Shared Savings Program (Shared Savings Program) 
Participants, (January 11, 2016) available online at https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-01-11-2.html. We are gratified by stakeholder interest in 
this program. In the November 2011 final rule (76 FR 67805), we stated 
that we intended to assess the policies for the Shared Savings Program 
and models being tested by the Innovation Center to determine how well 
they were working and if there were any modifications that would 
enhance them.
    As evidenced by the high degree of interest in participation in the 
Shared Savings Program, we believe that the policies adopted in the 
November 2011 final rule are generally well-accepted. However, we 
identified several policy areas that should be revisited in light of 
the additional experience we gained during the first two years of 
program implementation. Therefore, we published a subsequent final rule 
entitled ``Medicare Program; Medicare Shared Savings Program: 
Accountable Care Organizations'' (June 2015 final rule), which appeared 
in the June 9, 2015 Federal Register (80 FR 32692). In that rule, we 
adopted policies designed to codify existing guidance, reduce 
administrative burden, and improve program function and transparency in 
a number of areas, such as eligibility for program participation and 
data sharing. Additionally, we modified policies related to the 
financial model, in response to stakeholder feedback, to encourage 
greater and continued ACO participation, for example, by offering ACOs 
the opportunity to continue participating under the one-sided model for 
a second agreement period, modifying the existing two-sided 
performance-based risk track (Track 2), and offering an alternative 
two-sided performance-based risk track (Track 3). Track 3 includes 
prospective beneficiary assignment and a higher sharing rate for shared 
savings as well as the potential for greater liability for shared 
losses. We finalized new policies for resetting an ACO's financial 
benchmark in a second or subsequent agreement period, by integrating 
the ACO's previous financial performance and equal weighting the 
historical benchmark years, to encourage ACOs to seek to continue their 
participation in the program and to address stakeholder concerns about 
the current benchmark rebasing methodology. We also stated our 
intention to address other modifications to program rules in future 
rulemaking in the near term including modifying the methodology for 
resetting benchmarks by incorporating regional trends and costs.

II. Provisions of the Proposed Regulations

    The purpose of this proposed rule is to propose revisions to some 
key policies of the Shared Savings Program adopted in the November 2011 
final rule (76 FR 67802) and modified by the June 2015 final rule (80 
FR 32692) including: (1) Proposing regulatory changes to the 
benchmarking methodology that will apply when resetting and updating 
the benchmark for an ACO's second or subsequent agreement period; (2) 
proposing a change to the methodology for adjusting an ACO's historical 
benchmark for changes to the ACO's certified ACO Participant List; (3) 
proposing a regulatory change to facilitate ACOs' transition to 
performance-based risk models; and (4) proposing a policy on 
administrative finality to address the circumstances under which 
payment determinations would be reopened to correct financial 
reconciliation calculations. We seek stakeholders' input regarding 
these proposed policies, which we believe are important to the 
continued success of the Shared Savings Program.

A. Integrating Regional Factors When Resetting ACOs' Benchmarks

1. Background on Establishing, Updating, and Resetting the Benchmark
    Section 1899(d)(1)(B)(ii) of the Act addresses how ACO benchmarks 
are to be established and updated. This provision specifies that the 
Secretary shall estimate a benchmark for each agreement period for each 
ACO using the most recent available 3 years of per beneficiary 
expenditures for Parts A and B services for Medicare FFS beneficiaries 
assigned to the ACO. Such benchmark shall be adjusted for beneficiary 
characteristics and such other factors as the Secretary determines 
appropriate and updated by the projected absolute amount of growth in 
national per capita expenditures for Parts A and B services under the 
original Medicare FFS program, as estimated by the Secretary. Such 
benchmark shall be reset at the start of each agreement period. In 
addition to the statutory benchmarking methodology established in 
section 1899(d) of the Act, section 1899(i)(3) of the Act grants the 
Secretary the authority to use other payment models, including payment 
models that would use alternative benchmarking methodologies, if the 
Secretary determines that doing so would improve the quality and 
efficiency of items and services furnished under this title and the 
alternative methodology would result in program expenditures equal to 
or lower than those that would result under the statutory payment 
model.
    In the November 2011 final rule, establishing the Shared Savings 
Program, we adopted policies for establishing, updating and resetting 
ACO benchmarks at Sec.  425.602. Under this methodology, we use 
national FFS spending and trends as part of establishing, updating and 
resetting ACO-specific benchmarks. Specifically,

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we currently calculate a benchmark for each ACO using a risk-adjusted 
average of per capita Parts A and B expenditures for original Medicare 
FFS beneficiaries who would have been assigned to the ACO in each of 
the 3 calendar years prior to the start of the agreement period. We 
trend forward each of the first 2 benchmark years' per capita risk 
adjusted expenditures to third benchmark year (BY3) dollars based on 
the national average growth rate in Parts A and B per capita FFS 
expenditures verified by the CMS Office of the Actuary (OACT). In 
establishing the benchmark for an ACO's first agreement period, the 
first benchmark year is weighted 10 percent, the second benchmark year 
is weighted 30 percent, and the third benchmark year is weighted 60 
percent. This weighting creates a benchmark that more accurately 
reflects the latest expenditures and health status of the ACO's 
assigned beneficiary population. For each performance year, we adjust 
for changes in beneficiary characteristics and update the benchmark by 
the OACT-verified projected absolute amount of growth in national per 
capita expenditures for Parts A and B services under the original FFS 
program. In trending forward the historical benchmark, adjusting for 
changes in beneficiary characteristics, and annually updating the 
benchmark by growth in national per capita Medicare FFS expenditures, 
we make calculations for populations of beneficiaries in each of the 
following Medicare enrollment types: ESRD, disabled, aged/dual 
eligible, and aged/non-dual eligible. Further, to minimize variation 
from catastrophically large claims, we truncate an assigned 
beneficiary's total annual Parts A and B FFS per capita expenditures at 
a threshold of the 99th percentile of national Medicare FFS 
expenditures for the applicable Medicare enrollment type (ESRD, 
disabled, aged/dual eligible, or aged/non-dual eligible).
    Under section 1899(d)(1)(B)(ii) of the Act and Sec.  425.602(c) of 
the Shared Savings Program regulations, an ACO's benchmark must be 
reset at the start of each new agreement period. In the June 2015 final 
rule, we established a policy for resetting ACO benchmarks that 
accounts for factors relevant to ACOs that have participated in the 
program for at least one agreement period. This policy is intended to 
help ensure that the Shared Savings Program remains attractive to ACOs 
and continues to encourage ACOs to participate in additional agreement 
periods and to continue to improve their performance, particularly 
those ACOs that have achieved shared savings. Specifically, we revised 
Sec.  425.602(c) to specify that in resetting the historical benchmark 
for ACOs in their second or subsequent agreement period we: (1) Weight 
each benchmark year equally; and (2) make an adjustment to reflect the 
average per capita amount of savings earned by the ACO in its prior 
agreement period, reflecting the ACO's financial and quality 
performance, during that prior agreement period. The additional per 
capita amount is applied as an adjustment to the ACO's rebased 
historical benchmark for a number of assigned beneficiaries (expressed 
as person years) not to exceed the average number of assigned 
beneficiaries (expressed as person years) under the ACO's prior 
agreement period. If an ACO was not determined to have generated net 
savings in its prior agreement period, we do not make any adjustment to 
the ACO's rebased historical benchmark. We use performance data from 
each of the ACO's performance years under its prior agreement period in 
resetting the ACO's benchmark for its second or subsequent agreement 
period.
    We adjust the ACO's historical benchmark for changes during the 
performance period in the health status and demographic factors of the 
ACO's assigned beneficiaries (Sec.  425.604(a), Sec.  425.606(a), Sec.  
425.610(a)), as described in section II.A.3. of this proposed rule. 
Consistent with section 1899(d)(1)(B)(ii) of the Act, we update the 
ACO's benchmark annually, based on the projected absolute amount of 
growth in national per capita expenditures for Parts A and B services 
under the original FFS program, as described further in section 
II.A.2.d. of this proposed rule. Additionally, as described further in 
section II.B. of this proposed rule, we also adjust ACO historical 
benchmarks annually based on changes to the ACO's certified ACO 
Participant List.
2. Alternative Approaches To Reset the ACO's Benchmark
a. Overview
    In the December 2014 proposed rule, we sought comment on three 
approaches to account for regional FFS expenditures in ACO benchmarks: 
(1) Use of regional FFS expenditures, instead of national FFS 
expenditures, to trend forward the most recent 3 years of per 
beneficiary expenditures for Parts A and B services in order to 
establish the historical benchmark for each ACO and to update the 
benchmark during the agreement period; (2) adjusting the ACO's 
benchmark from its prior agreement period to reflect trends in FFS 
costs in the ACO's region, effectively holding a portion of the ACO's 
reset benchmark constant relative to its region; and (3) transitioning 
ACOs from benchmarks based on their historical costs toward benchmarks 
based only on regional FFS costs. Under this approach, an ACO's 
benchmark would gradually become more independent of the ACO's 
historical expenditures and gradually more reflective of FFS trends in 
its region. We also sought comment on a number of technical issues 
specific to these alternatives, including: How to define an ACO's 
region, and specifically, the ACO's regional reference population; how 
to account for changes in ACO participants from year-to-year and across 
agreement periods; and considerations related to risk adjusting 
benchmarks based on regional factors. We also discussed and sought 
comment on how broadly or narrowly to apply these alternative 
benchmarking approaches to the program's financial tracks, and the 
timing for implementing any changes.
    Many commenters indicated their support for revising the program's 
benchmarking methodology to reflect regional cost variation. (See June 
2015 final rule (80 FR 32791 through 32796) for a discussion of 
comments received on and considerations for use of regional factors in 
establishing, updating and resetting benchmarks.) Of the options to 
incorporate regional FFS costs in ACO benchmarks, the approach that 
would transition ACOs to regionally based benchmarks over time seemed 
to garner the greatest support from commenters. Commenters suggested 
CMS consider a variety of additional methodologies for revising the 
program's benchmarks, sometimes offering opposing alternatives. For 
example, some commenters supported blended approaches, whereby 
benchmarks would reflect a combination of the ACO's historical costs 
and regional, national or a combination of regional/national costs. 
MedPAC offered a vision for both the near and long term evolution of 
the program's benchmarking methodology. (See letter from Glenn M. 
Hackbarth, J.D., Chairman, Medicare Payment Advisory Commission to Ms. 
Marilyn Tavenner, Administrator, Centers for Medicare and Medicaid 
Services, regarding File code CMS-1461-P (February 2, 2015) (available 
through www.regulations.gov, comment tracking number 1jz-8gz6-jbt1).) 
In the short term, we would keep the existing

[[Page 5828]]

rebasing methodology, but would not rebase an ACO that met a two-part 
test,\1\ which would leave benchmarks for lower-spending ACOs 
unchanged. In the longer term, CMS would move ACOs from a benchmark 
based on the ACO's historical cost experience to a common (equitable), 
local FFS-based benchmark, where FFS spending is defined to include 
spending on beneficiaries assigned to ACOs as well as on other 
beneficiaries in traditional FFS. MedPAC indicated this longer term 
approach should initially be implemented under the two-sided payment 
models, phased in over the course of the ACO's second agreement period, 
but that all ACOs should be transitioned to regional FFS benchmarks by 
year 2021. On the topic of the pace for transitioning ACOs to regional 
benchmarks, commenters' suggestions ranged from rapid transition 
(within the first agreement period) to a slower pace (for example, over 
the course of 2, 3, 4 or even 5 agreement periods). Several commenters 
suggested a different pace of transition depending on the ACO's 
historical costs relative to its market, or the level of experience of 
the ACO, or an approach under which an ACO could determine its own pace 
of transitioning to a regional benchmark. One commenter recommended 
that the changes become effective for all ACOs beginning with the first 
full performance year after the final rule is published.
---------------------------------------------------------------------------

    \1\ MedPAC explained the two-part test: ``First, per-capita 
spending for the ACO (after that spending is adjusted for health 
care risk and input prices) must be below the national average per-
capita FFS spending. Second, per-capita spending for the ACO (risk 
adjusted) must be below the average FFS spending (risk adjusted) in 
the ACO's market.''
---------------------------------------------------------------------------

    Many commenters pointed to the importance of the details of the 
chosen methodology, for example, the definition of the ACO's region. 
Some commenters indicated there were insufficient details in the 
December 2014 proposed rule on the alternative benchmarking approaches 
or cited their lack of data to analyze the alternatives discussed in 
order to make an informed and effective recommendation about the 
options. These commenters indicated the need for CMS to perform 
additional modeling and analytic work on the alternatives discussed in 
the December 2014 proposed rule, and to share the results of this 
analysis and put forward detailed proposals on revisions to the 
benchmarking methodology through additional notice and comment 
rulemaking. More generally, other commenters requested that CMS provide 
detailed documentation regarding program calculations and greater 
access to the underlying data.
    In response, we acknowledged the importance of quickly moving to a 
benchmark rebasing approach that accounts for regional FFS costs and 
trends in addition to the ACO's historical costs and trends. In the 
June 2015 final rule, we committed to engaging in additional rulemaking 
to propose modifications to the Shared Savings Program's methodology 
for resetting ACO benchmarks. We signaled our anticipated policy 
direction by outlining an approach to rebasing that would account for 
regional expenditures and identified additional issues we would need to 
address in implementing this approach. We discussed a rebasing approach 
based on a blend of: (1) A regionally trended component, reflecting ACO 
historical costs for the 3 years preceding its first agreement period 
that starts in 2017 or a subsequent year, adjusted by a regional trend 
factor based on changes in regional expenditures for each Medicare 
enrollment type (ESRD, disabled, aged/dual eligible, aged/non-dual 
eligible) for the most recent year prior to the start of the ACO's new 
agreement period, and adjusted for changes in the health status and 
demographic factors of the ACO's assigned beneficiary population in 
each benchmark year relative to its region; and (2) a rebased component 
calculated using the current rebasing methodology (based on historical 
costs from the 3 most recent years prior to the start of the ACO's new 
agreement period), including equally weighting the benchmark years but 
excluding the addition of a portion of savings generated over the same 
3 most recent years.
    In the June 2015 final rule (80 FR 32796), we specified that the 
forthcoming proposed rule would provide a detailed discussion of key 
methodological issues, including: Weight of the two benchmark 
components, risk adjustment, defining an ACO's region, and accounting 
for changes in ACO participant composition. We indicated that in 
developing the proposed rule we would take into account broader 
considerations for the program, including: Whether to change the 
methodology for updating the benchmark; whether to make adjustments to 
account for ACOs whose costs are relatively high or low in relation to 
FFS trends in their region or the nation; and how to safeguard against 
ACOs that may increase their spending to lock in higher benchmarks for 
future agreement periods.
    In the June 2015 final rule we explained that the revised rebasing 
approach would require tradeoffs among several criteria:
    <bullet> Strong incentives for ACOs to improve efficiency and to 
continue participation in the program over the long term.
    <bullet> Benchmarks which are sufficiently high to encourage ACOs 
to continue to meet the three-part aim, while also safeguarding the 
Medicare Trust Funds against the possibility that ACOs' reset 
benchmarks become overly inflated to the point where ACOs need to do 
little to maintain or change their care practices to generate savings.
    <bullet> Generating benchmarks that reflect ACOs' actual costs in 
order to avoid potential selective participation by (and excessive 
shared payments to) ACOs with high benchmarks.
    In further considering modifications to the benchmarking 
methodology for this proposed rule, we added the following set of 
guiding principles:
    <bullet> Transparency: Developed based on identifiable sources of 
data, and where possible publicly available data and data sets, in 
order to allow stakeholders to understand and model impacts.
    <bullet> Predictability: Enable ACOs to anticipate their updated 
benchmark targets and their likely performance under the program.
    <bullet> Simplicity: Methodology can be explained in relatively 
simple terms and in sufficient detail to be readily understood by ACOs 
and stakeholders.
    <bullet> Accuracy: Methodology generates benchmarks that are an 
accurate reflection of the ACOs' expenditures and relevant regional 
expenditures, and can be accurately implemented and calculated, 
validated and disseminated in a timely manner.
    <bullet> Maintain program momentum and market stability by 
providing sufficient notice of methodological changes and phase-in of 
these changes.
b. Proposals for Regional Definition
(1) Background
    The June 2015 final rule indicated that in defining an ACO's region 
we would consider using Metropolitan Statistical Areas (MSAs) and non-
MSA portions of a state, Combined Statistical Areas (CSAs), or another 
definition of regionally-based statistical areas, or the ACO's county-
level service area.
    For purposes of this proposed rule, we consider an ACO's region to 
be synonymous with its service area from which it derives its assigned 
beneficiaries. Further, as discussed in this section of the proposed 
rule, issues related to the definition of an ACO's regional service 
area include: (1) The selection of the geographic unit of

[[Page 5829]]

measure to define this area; (2) identification of the population of 
beneficiaries to include in this area; and (3) calculation of the FFS 
expenditures for this area. A fundamental concept underlying our 
consideration of these issues is that the definition of an ACO's 
regional service area bear a relationship to the area of residence of 
the ACO's assigned beneficiaries. In some cases, an ACO's assigned 
beneficiary population may span multiple geographic boundaries, for 
example in cases where an ACO provides services to beneficiaries 
residing in multiple counties within a single state and/or multiple 
states.
(2) Proposals for Defining the ACO's Regional Service Area
    We considered the geographic unit of measure to use in defining an 
ACO's regional service area for the purpose of determining the 
corresponding regional FFS expenditures to be used in calculations 
based on regional spending in the modified approach to establishing, 
adjusting and updating the ACO's rebased historical benchmark, 
discussed in this proposed rule. These regional FFS expenditures will 
be used in determining a regional adjustment to an ACO's rebased 
historical benchmark and in calculating growth rates of regional 
spending used in establishing and updating the ACO's rebased historical 
benchmark, which are described later in this proposed rule. We 
considered the stability of the definition of the geographic unit of 
measure, specifically: Whether it is a legal or statistical area 
defined according to uniform national criteria by the U.S. government 
(for example, by the U.S. Bureau of the Census); whether the area has 
boundaries that do not change frequently; and CMS' use of the area in 
other Medicare operations. Core Based Statistical Areas (CBSAs), MSAs, 
and CSAs are delineated by OMB and are the result of the application of 
published standards to Census Bureau data. Other options for defining 
regional service areas, for example, Hospital Referral Regions as 
defined by the Dartmouth Institute, may have certain advantages in 
terms of linking markets together by utilization patterns as opposed 
to, for example, commuting patterns used by the Census Bureau to define 
CSAs. However, such definitions are not governmentally maintained, may 
change over time, and are not otherwise directly utilized for FFS 
Medicare payment. Of the options considered, definitions of counties, 
states and territories are the most stable.
    We also considered whether the geographic unit is used in other CMS 
operations. MSAs and rest of state areas are used by CMS for the 
hospital wage index. Geographic practice cost indices (GPCIs) used to 
adjust payments for physicians' services are based on 89 Medicare 
localities, which are either state-wide or combination MSA and rest-of-
state areas. There is precedent in the Medicare program for using 
county-level data to set cost targets for value based purchasing 
initiatives. CMS used counties to define the service areas of Physician 
Group Practice (PGP) demonstration sites (a predecessor of CMS' ACO 
initiatives) and used Parts A and B spending by county as part of 
setting benchmarks for these organizations. CMS also uses county-level 
FFS expenditure data, in combination with other adjustments, to 
establish the benchmarks used for setting local Medicare Advantage (MA) 
rates. However, under the MA program, special payment areas apply to 
ESRD enrollees. ESRD payments are determined using State capitation 
rates for enrollees in dialysis and transplant status (See Medicare 
Managed Care Manual, Chapter 8--Payments To Medicare Advantage 
Organizations, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/mc86c08.pdf). Currently, CMS 
produces quarterly and annual reports for Shared Savings Program ACOs 
that include aggregate data on distribution of assigned beneficiary 
residence by county.
    We believe county-level data offer a number of advantages over the 
other options (CBSA, MSA, CSA, State/territory). Counties tend to be 
stable regional units compared to some alternatives, as the definition 
of county borders tends not to change. Further, the agency has 
experience with identifying populations of beneficiaries by county of 
residence and calculating county-level rates based on their costs. In 
terms of determining regional costs, smaller areas (such as counties) 
better capture regional variation in Medicare expenditures, and allow 
for more customized regional definitions for each ACO, but risk being 
dominated by expenditures from a single ACO or group of ACOs, which 
could potentially reduce ACO benchmarks in clustered markets. We can 
guard against the potential bias from this effect by using a 
sufficiently large county-based population, as discussed in section 
II.A.2.b.3. of this proposed rule.
    Therefore, we considered developing county FFS rates based on Parts 
A and B spending by county. We considered the fact that some commenters 
responding to the December 2014 proposed rule urged CMS to more closely 
align the Shared Savings Program with MA when adopting a benchmarking 
approach that accounts for regional costs. For instance, MedPAC's 
longer term vision for the program's benchmarking methodology included 
achieving equity among ACOs in a geographic market and rewarding 
efficiency across payment models, including FFS Medicare, the Shared 
Savings Program, and MA. Use of county-level FFS data in calculating 
expenditures for an ACO's regional service area would permit ACOs to be 
viewed as being on the spectrum between traditional FFS Medicare and 
MA, a concept some commenters and stakeholders have urged CMS to 
articulate. Use of county FFS expenditure data, which are publicly 
available, would allow for increased transparency in ACO benchmark 
calculations and would ease ACOs' and stakeholders' access to data for 
use in modeling and predictive analyses. We would make adjustments to 
county FFS expenditure data to assure parity between the calculation of 
these expenditures and calculations of ACO benchmark and performance 
year expenditures as currently specified under the Shared Savings 
Program regulations by excluding indirect medical education (IME) 
payments, disproportionate share hospital (DSH) payments and 
uncompensated care payments, and by including beneficiary-identifiable 
payments under a demonstration, pilot or time limited program as 
discussed in section II.A.2.e. of this proposed rule.
    Additionally, consistent with the approach used in MA, we believe 
the use of state-wide values for the ESRD population is appropriate 
given the small numbers of ESRD beneficiaries residing in many U.S. 
counties. Use of values for ESRD beneficiaries at the county level, 
based on very small numbers, would likely lead to greater instability 
of county-level expenditures for the ESRD population than for the other 
larger populations (disabled, aged/dual eligible and aged/non-dual 
eligible beneficiaries) considered in the program. This concern is 
particularly acute for ACOs operating in rural areas that tend to be 
more sparsely populated. We believe use of statewide values, for all 
ESRD beneficiaries residing in any county within the state, will be 
more statistically stable.
    We propose to determine an ACO's regional service area by the 
counties of residence of the ACO's assigned beneficiary population. 
Furthermore, we propose to define regional costs as county FFS 
expenditures as determined according to the discussion later in this

[[Page 5830]]

section of the proposed rule and adjusted to assure parity with the 
calculation of ACO benchmark and performance year expenditures as 
specified under the Shared Savings Program regulations (as discussed in 
greater detail in section II.A.2.e. of this proposed rule). These 
calculations will be undertaken separately according to the following 
populations of beneficiaries (identified by Medicare enrollment type): 
ESRD, disabled, aged/dual-eligible, aged/non-dual eligible. Further, we 
propose to determine expenditures for ESRD beneficiaries statewide, and 
apply these amounts consistently to each county within a state. We seek 
comment on these proposals and on the alternatives for defining the 
ACO's regional service area, specifically use of CBSA, MSA, CSA or 
State/territory designations. These proposals are reflected in our 
proposed addition of a new definition of ``ACO's regional service 
area'' to Sec.  425.20 and in a proposed new regulation at Sec.  
425.603 describing the calculations that would be used in resetting an 
ACO's historical benchmark for a second or subsequent agreement period.
(3) Proposals for Establishing the Beneficiary Population Used To 
Determine Expenditures for an ACO's Regional Service Area
    The population that is the basis for calculating regional FFS costs 
must be sufficiently large to produce statistically stable mean 
expenditure estimates (avoiding biases that result from small numbers), 
and must be representative of the demographic mix, health status and 
cost trends of the beneficiary population within the ACO's regional 
service area. Therefore, we considered whether the calculation of 
regional FFS costs for an ACO's regional service area should include or 
exclude the costs for the ACO's assigned beneficiary population. While 
including these ACO-assigned beneficiaries results in a larger 
reference population for calculating regional costs, some stakeholders 
have expressed concern that doing so will capture the impact of the 
ACO's efforts to coordinate care and reduce expenditures for the FFS 
population it treats and result in relatively lower regional 
expenditures being used for setting its benchmark.
    The following points informed our consideration of this issue:
    <bullet> Most individual ACO assigned beneficiary populations only 
make up a small fraction of the FFS beneficiaries in an ACO's regional 
service area. For example, we found that the rate at which an ACO's 
assigned population comprised its regional FFS population \2\ ranged 
from 0.5 percent (minimum) to 57 percent (maximum), with a median of 12 
percent.
---------------------------------------------------------------------------

    \2\ The product of the ACO's proportion of total assigned 
beneficiaries in a county (in relation to all other counties where 
its beneficiaries reside), and the percent of the ACO's assigned 
population comprising the county's FFS population.
---------------------------------------------------------------------------

    <bullet> In cases where an ACO's assigned population makes up a 
large portion of the population of its region, removal of the ACO's 
assigned beneficiaries from the regional FFS population would limit the 
comparison population and may bias results.
    <bullet> Removing an ACO's assigned population would add both 
complexity and volatility to calculations particularly in circumstances 
where it results in small numbers of beneficiaries remaining in the 
regional FFS population.
    <bullet> Including beneficiaries who are not eligible to be 
assigned to an ACO in the regional FFS population could bias 
calculations of regional expenditures. For example, including Medicare 
FFS beneficiaries who have not utilized services (``non-utilizers'') in 
these calculations would result in relatively lower per capita 
expenditures for the regional FFS population.
    Based on this analysis, we concluded that attempting to identify 
regional FFS expenditures for only non-ACO beneficiaries (or 
customizing the calculation of regional FFS expenditures for each ACO 
by excluding its own beneficiaries) would add significant complexity 
and create potential bias. Furthermore, excluding the ACO's assigned 
beneficiaries from the population used to determine regional FFS 
expenditures may also produce biased results where an ACO tends to 
serve beneficiaries of a particular Medicare enrollment type, 
demographic or socio-economic status (for example, ACOs serving largely 
dual-eligible populations) and when an ACO tends to dominate (serve a 
large proportion of FFS beneficiaries) in a region. In order to address 
the latter situation, we considered expanding the scope of an ACO's 
region (for example, by including adjoining counties) to allow the 
ACO's regional service area to include a greater mix of beneficiaries 
who are not assigned to the ACO. However, we believe that this approach 
may be challenging to apply consistently and accurately given the 
potential for variation of populations across and within regional 
areas, and a potentially cumbersome policy to maintain as ACOs continue 
to develop across the country. In addition, this type of policy would 
require that we establish a threshold to determine whether an ACO is 
sufficiently dominant in its region to warrant an expansion of its 
regional service area. We are concerned that application of such a 
threshold may encourage ACO decision making based on the ACO's 
relationship to the threshold (for instance decisions related to an 
ACO's structure or operations, particularly with respect to its 
composition of ACO participants and the beneficiaries it serves), 
either to remain below or exceed the threshold to yield a more 
favorable benchmark.
    Several elements of Shared Savings Program financial calculations 
are based on expenditures for all Medicare FFS beneficiaries as opposed 
to the expenditures only for the ACO's assigned beneficiary population, 
as discussed further in section II.A.2.e. of this proposed rule. For 
example, we use all FFS beneficiaries in calculating the following: The 
growth rates used to trend forward expenditures during the benchmark 
period; the projected absolute amount of growth in national per capita 
expenditures for Parts A and B services used to update the benchmark; 
the completion factors applied to benchmark and performance year 
expenditures; and the truncation thresholds set at the 99th percentile 
of national Medicare FFS expenditures. To maintain consistency across 
program calculations, we considered using all FFS beneficiaries in 
determining expenditures for the ACO's regional service area. However, 
we believe that continuing to include expenditures for all FFS 
beneficiaries would introduce bias into the calculations of the ACO's 
regional service area expenditures. For one, the overall FFS population 
will include beneficiaries who are not eligible for assignment to ACOs. 
In current calculations, we believe this bias is mitigated to some 
extent by the large size of the national Medicare FFS population. 
Regional FFS expenditures, calculated based on relatively smaller 
populations, may be more susceptible to the influence of this bias. For 
example, in counties where the health status of the overall beneficiary 
population leads more beneficiaries to be non-utilizers of services a 
bias in the direction of relatively lower regional expenditures may be 
more pronounced. On the other hand, a bias in the direction of 
relatively higher regional expenditures may be more pronounced in 
counties where there are established patterns of accessing primary care 
services through specialists who are not the basis for assignment. (We 
note that recent changes in the assignment algorithm have narrowed the 
use of services

[[Page 5831]]

furnished by specialty physicians in the assignment methodology (see 80 
FR 32749 through 32754).) Ultimately, such differences could factor 
more prominently in certain counties that are used to compute an ACO's 
regional service area expenditures. Secondly, we believe that these 
biases may also be more pronounced when calculating the amount of per 
capita regional FFS expenditures in a particular year as opposed to a 
factor reflecting change in growth in expenditures across periods in 
time.
    To address this concern, we considered limiting the beneficiary 
population included for purposes of calculating expenditures for an 
ACO's regional service area to Medicare FFS beneficiaries who could be 
considered for assignment to ACOs. As described in greater detail in 
section II.A.2.e. of this proposed rule, we identify the pool of 
beneficiaries who are eligible to be assigned to an ACO as those 
beneficiaries that have received at least one primary care service from 
a physician in the ACO who is a primary care physician or who has as 
primary specialty designation included in Sec.  425.402(c) that is 
utilized in the assignment methodology. We will then use this 
population of eligible beneficiaries to determine the beneficiaries who 
will be assigned to an ACO based on the two-step assignment process 
under Sec.  425.402(b). We considered applying a similar logic to 
identifying the population of FFS beneficiaries that should be 
considered in determining expenditures for an ACO's regional service 
area. That is: If a beneficiary gets at least one primary care service 
from any Medicare-enrolled physician who is a primary care physician or 
who has one of the primary specialty designations that are used for 
purposes of assignment under the Shared Savings Program, the 
beneficiary would be included in the calculation of expenditures for 
the ACO's regional service area. We refer to this population as 
``assignable beneficiaries.''
    We also considered how to weight the ACO's regional costs in cases 
where an ACO's assigned population spans multiple counties. ACOs often 
serve beneficiaries in multiple counties within a state or across 
several states, with some ACOs being an aggregation of providers 
located in different parts of the country. We currently provide ACOs 
with a quarterly report showing the distribution of the ACO's assigned 
beneficiary residence by county where the ACO's service area is defined 
as counties with at least 1 percent of assigned beneficiaries. Based on 
assignment data from Quarter 1 2015 for all active ACOs in the Shared 
Savings Program, ACOs served beneficiaries residing in between 2 and 32 
counties, with a median of 8 counties served. Given the geographic 
spread of some ACOs' assigned populations, we believe it will be 
important to weight an ACO's regional expenditures relative to the 
proportion of its assigned beneficiaries in each county. Absent this 
weighting, we could overstate or understate the influence of the 
expenditures for a county where relatively few or many of an ACO's 
assigned beneficiaries reside.
    Taking these considerations into account, we propose using all 
assignable beneficiaries, including ACO-assigned beneficiaries, in 
determining expenditures for the ACO's regional service area in order 
to ensure sufficiently stable regional mean expenditures. We propose to 
define the ACO's regional service area to include any county where one 
or more assigned beneficiaries reside. We also propose to include the 
expenditures for all assignable FFS beneficiaries residing in those 
counties in calculating county FFS expenditures by enrollment type that 
will be used in the ACO's regional cost calculations (discussed in 
detail in sections II.A.2.c. and II.A.2.d. of this proposed rule). 
Further, we propose to weight county-level FFS expenditures by the 
ACO's proportion of assigned beneficiaries in the county, determined by 
the number of the ACO's assigned beneficiaries residing in the county 
in relation to the ACO's total number of assigned beneficiaries. These 
proposals are reflected in the proposed addition of new definitions for 
``assignable beneficiary'' and ``ACO's regional service area'' to Sec.  
425.20, and in the proposed new regulation at Sec.  425.603.
    We believe this proposed approach will result in the most accurate 
and predictable regional expenditure factor for each ACO. However, we 
would monitor for cases where an ACO tends to serve a large proportion 
of FFS beneficiaries in its region, and consider the effect of these 
circumstances on ACO benchmarks. If warranted, we would explore 
developing adjustments to the definition of an ACO's regional service 
area to account for this circumstance in future rulemaking. We also 
seek comment on alternatives to proposed use of assignable 
beneficiaries in establishing the expenditures for an ACO's regional 
service area, including use of all Medicare FFS beneficiaries in 
determining these expenditures.
(4) Proposals for Determining County FFS Expenditures
    We considered how to calculate county FFS expenditures for use in 
factors based on regional FFS expenditures described in this proposed 
rule. Consistent with proposals described in other sections of this 
proposed rule, we are proposing the following approach to calculating 
county FFS expenditures:
    <bullet> Determine county FFS expenditures based on the 
expenditures of the assignable population of beneficiaries in each 
county, where assignable beneficiaries are identified for the 12-month 
period corresponding to the applicable calendar year (see sections 
II.A.2.b.3. and II.A.2.e. of this proposed rule). We will make separate 
expenditure calculations according to the following populations of 
beneficiaries (identified by Medicare enrollment type): ESRD, disabled, 
aged/dual-eligible, aged/non-dual eligible.
    <bullet> Calculate assignable beneficiary expenditures using the 
payment amounts included in Part A and B FFS claims with dates of 
service in the 12-month calendar year for the relevant benchmark or 
performance year, allowing for a 3-month claims run out and applying a 
completion factor (see section II.A.2.e.2. of this proposed rule). The 
completion factor will be calculated based on national FFS assignable 
beneficiary expenditures (see section II.A.2.e. of this proposed rule).
    ++ These calculations will exclude IME, DSH, and uncompensated care 
payments (see section II.A.2.e.2. of this proposed rule).
    ++ These calculations will take into consideration individually 
beneficiary identifiable payments made under a demonstration, pilot or 
time limited program (see section II.A.2.e.2. of this proposed rule).
    <bullet> Truncate a beneficiary's total annual Parts A and B FFS 
per capita expenditures at the 99th percentile of national Medicare FFS 
assignable beneficiary expenditures as determined for the relevant 
year, in order to minimize variation from catastrophically large claims 
(see section II.A.2.e. of this proposed rule). We would determine 
truncation thresholds separately for each of the four Medicare 
enrollment types (ESRD, disabled, aged/dual eligible, aged/non-dual 
eligible).
    <bullet> Adjust county FFS expenditures for severity and case mix 
of assignable beneficiaries in the county using prospective CMS--
Hierarchical Condition Category (HCC) risk scores (see section 
II.A.2.e.2. of this proposed rule). We would determine average risk 
scores separately for each of the four Medicare enrollment types (ESRD, 
disabled, aged/dual eligible, aged/non-dual eligible).

[[Page 5832]]

    Consistent with the discussion in section II.A.2.b.2. of this 
proposed rule, we propose to compute state-level per capita 
expenditures and average risk scores for the ESRD population in each 
state and to apply those state-level values to all counties in a state. 
We believe this approach addresses issues associated with small numbers 
of ESRD beneficiaries in certain counties that can lead to statistical 
instability in expenditures for this complex population.
    We anticipate making county level data used in Shared Savings 
Program calculations publicly available annually. For example, a 
publicly available data file would indicate for each county: Average 
per capita FFS assignable beneficiary expenditures and average risk 
scores for all assignable beneficiaries by Medicare enrollment type 
(ESRD, disabled, aged/dual eligible, aged/non-dual eligible). In 
addition, as described in the regulatory impact analysis section of 
this proposed rule, we are making publicly available a data file with 
county-level expenditure and risk score data to support modeling of the 
proposed changes to the benchmark rebasing methodology.
    We propose to include this approach for determining county FFS 
expenditures in a new regulation at Sec.  425.603. We seek comment on 
these proposals as well as any additional factors we would need to 
consider in calculating risk adjusted county FFS expenditures.
c. Proposals for Applying Regional Expenditures to the ACO's Rebased 
Benchmark
(1) Background
    The discussion of benchmark alternatives in the recent rulemaking 
underscores the array of options for incorporating regional 
expenditures in ACO benchmarks (see the December 2014 proposed rule at 
79 FR 72839 through 72843; see the June 2015 final rule at 80 FR 32791 
through 32796). While we agree with commenters on the benefits of 
incorporating regional expenditures in rebased benchmarks, we are 
interested in moving to an alternative rebasing approach that builds on 
the program's existing benchmarking methodology established under the 
authority of section 1899(d)(1)(B)(ii) of the Act and codified in the 
Shared Savings Program regulations at Sec.  425.602. Over 400 ACOs have 
voluntarily entered the Shared Savings Program under the financial 
models (Track 1 and Track 2) established in the November 2011 final 
rule and as modified by the June 2015 final rule (adding a choice of 
Track 3 for agreement periods beginning January 1, 2016). Further, 147 
ACOs with 2012 and 2013 agreement start dates elected to continue their 
participation in the program for a second 3-year agreement effective 
January 1, 2016 to which the current methodology for resetting the 
ACO's benchmark applies (including the rebasing modifications finalized 
with the June 2015 final rule). The value proposition of the program's 
financial models, which is largely determined by the methodology used 
to establish ACO benchmarks, is an important consideration for 
organizations deciding whether to engage (or continue to engage) in 
this new approach to the delivery of health care. Therefore, in 
considering how to incorporate regional expenditures into the 
benchmarking methodology, we believe that building from the existing 
benchmarking methodology will help maintain the stability of the 
program and ultimately result in revised policies that are more easily 
understood by ACOs and program stakeholders, and more readily 
implemented by CMS.
    Principally, we considered using the Secretary's discretion under 
section 1899(d)(1)(B)(ii) of the Act to adjust the historical benchmark 
by ``such other factors as the Secretary determines appropriate'' in 
order to incorporate regional FFS expenditures into the rebased 
historical benchmark. In this proposed rule we discuss two approaches 
to calculating an adjustment to an ACO's rebased historical benchmark 
to account for regional FFS expenditures for the ACO's regional service 
area, and describe how the adjustment would be applied to the rebased 
historical benchmark.
    We believe the plain language of section 1899(d)(1)(B)(ii) of the 
Act demonstrates Congress' intent that the benchmark established for a 
Shared Savings Program ACO would reflect the ACO's historical 
expenditures in the 3 most recent years prior to the start of the ACO's 
agreement period. Congress also recognized that this historical 
benchmark should be adjusted ``for beneficiary characteristics and such 
other factors as the Secretary determines appropriate.'' Therefore, to 
the extent an ACO's rebased benchmark continues to be based on the 
ACO's historical expenditures in the 3 years preceding the start of the 
new agreement period, we believe adjusting those historical 
expenditures to account for regional FFS expenditures for the ACO's 
regional service area falls within the Secretary's discretion to make 
adjustments to the historical benchmark for ``other factors'' under 
section 1899(d)(1)(B)(ii) of the Act.
    Currently, CMS makes several adjustments to an ACO's historical 
benchmark under the Secretary's discretion under section 
1899(d)(1)(B)(ii) of the Act, including to: (1) Adjust benchmark year 
expenditures to exclude IME and DSH payments (Sec.  425.602(a)(1)(i)); 
(2) adjust the historical benchmark for the addition and removal of ACO 
participants (Sec.  425.602(a)(8)); (3) adjust the rebased historical 
benchmark to account for the average per capita amount of savings 
generated during the ACO's previous agreement period (Sec.  
425.602(c)(2)(ii)); and (4) adjust the historical benchmark for changes 
in demographics and health status of the ACO's performance year 
assigned beneficiary population (Sec. Sec.  425.604(a)(1) through (3), 
425.606(a)(1) through (3), 425.610(a)(1) through (3)). For the reasons 
discussed in the June 2015 final rule, we believe it is appropriate to 
further adjust ACO historical benchmarks to reflect regional FFS 
expenditures (see 80 FR 32791 through 32796). Further, in relation to 
use of regional FFS expenditures in developing the ACO's rebased 
benchmark, for the reasons discussed in section II.A.2.c.2. of this 
proposed rule we believe it appropriate to forgo making an additional 
adjustment to account for savings generated by the ACO in its prior 
agreement period (see 80 FR 32796).
    Table 2 summarizes the proposals discussed in this section of the 
proposed rule, including the percentage (weight) to be used in 
calculating the amount of the adjustment for regional FFS expenditures 
to be applied to the ACO's rebased historical benchmark, using regional 
(instead of national) trend factors in establishing an ACO's rebased 
historical benchmark, using regional (instead of national) FFS 
expenditures to update the ACO's benchmark for each performance year, 
and the timing of the applicability of the proposed new rebasing 
methodology.
(2) Proposals for Adjusting the Reset ACO Historical Benchmark To 
Reflect Regional FFS Expenditures
    Our proposal for adjusting an ACO's rebased historical benchmark to 
reflect regional FFS expenditures for the ACO's regional service area 
expands on the approaches initially outlined in the June 2015 final 
rule (see 80 FR 32795 through 32796). The discussion elsewhere in this 
proposed rule describes two options for calculating the regional FFS 
adjustment, as well as the calculation of the ACO's rebased historical 
benchmark. The first option would be to

[[Page 5833]]

calculate the adjustment based on a regionally-trended version of the 
ACO's prior historical benchmark. The second option describes an 
alternative approach, based on a regional average determined using 
county FFS expenditures.
    Under both options, we would calculate the ACO's rebased historical 
benchmark using the current rebasing methodology established in the 
June 2015 final rule under which an ACO's rebased benchmark is 
calculated based on the 3 years prior to the start of its current 
agreement period. Consistent with the current policy we would equally 
weight the 3 benchmark years. However, in trending forward benchmark 
year (BY) 1 and BY2 expenditures to BY3 dollars, we would use regional 
growth rates (instead of national growth rates) for Parts A and B FFS 
expenditures, as discussed in section II.A.2.d. of this proposed rule.
    Furthermore, in calculating the ACO's rebased historical benchmark, 
we would not apply the current adjustment to account for savings 
generated by the ACO under its prior agreement period. We have observed 
that for ACOs generating savings, an alternative rebasing methodology 
that accounts for regional FFS expenditures would generally leave a 
similar or slightly greater share of measured savings in an ACO's 
rebased benchmark for its ensuing agreement period. By contrast, for 
ACOs generating losses, an alternative rebasing methodology that 
accounts for regional FFS expenditures would tend to carry forward a 
significant portion of measured losses into their rebased benchmarks 
and push benchmarks lower than the current rebasing policy. Therefore, 
in transitioning to a benchmark rebasing methodology that incorporates 
an adjustment for regional FFS expenditures, we believe it is important 
to forgo the current adjustment to account for shared savings generated 
by the ACO under its prior agreement period. (For further information, 
see section IV.E. of this proposed rule.)
    We considered two options for calculating regional expenditures as 
an input into an adjustment that we would apply to the ACO's rebased 
historical benchmark. First, we considered calculating a regionally-
trended amount developed using the ACO's historical benchmark from an 
earlier agreement period adjusted by a regional trend factor based on 
changes in regional expenditures for each Medicare enrollment type 
(ESRD, disabled, aged/dual eligible, aged/non-dual eligible) for the 
most recent year prior to the start of the ACO's current agreement 
period and for changes in health status and demographic factors of the 
assigned patient population. The calculation of the regionally-trended 
amount would generally involve the following steps:
    <bullet> Use the ACO's historical benchmark from a prior agreement 
period, adjusted to account for ACO Participant List changes. We would 
use an expenditure ratio to adjust the benchmark for changes in ACO 
participant (TIN) composition, as described in section II.B. of this 
proposed rule.
    <bullet> Risk adjust to reflect changes in the health status of the 
ACO's assigned beneficiaries from that prior agreement period to the 
most recent year prior to the start of the new agreement period.
    <bullet> Trend the historical benchmark to the most recent year 
prior to the start of the new agreement period based on risk adjusted 
county FFS expenditures for the ACO's regional service area. As 
discussed in section II.A.2.b. of this proposed rule, we would 
determine regional FFS expenditures for an ACO's regional service area, 
using an approach that weights county expenditures according to the 
proportion of the ACO's assigned beneficiaries residing in each county.
    <bullet> Use weighting to reflect changes in the proportion of each 
of the four Medicare enrollment types from the prior agreement period 
to the most recent year prior to the start of the new agreement period. 
Specifically, we would weight the regionally-trended expenditures by 
the proportions of the ACO's assigned beneficiaries in each Medicare 
enrollment type for benchmark year 3 of the ACO's new agreement period.
    In the June 2015 final rule (80 FR 32796), we also indicated that 
we were considering an alternative approach based on regional average 
spending to transition ACOs to benchmarks based on regional FFS costs. 
Under this approach, we would calculate a regional FFS adjustment to 
the ACO's rebased historical benchmark using regional average 
expenditures. Calculation of regional average expenditures would 
generally involve the following key steps:
    <bullet> Calculate risk adjusted regional per capita FFS 
expenditures using county level Parts A and B expenditures for the 
ACO's regional service area for each Medicare enrollment type (ESRD, 
disabled, aged/dual eligible, aged/non-dual eligible); weighted based 
on the proportion of ACO assigned beneficiaries residing in each county 
for the most recent benchmark year. We describe the risk adjustment 
approach that would be used in these calculations to adjust for 
differences in health status between an ACO and its regional service 
area in section II.A.3. of this proposed rule.
    <bullet> Weight the resulting regional expenditures by the 
proportion of assigned beneficiaries for the most recent benchmark year 
for each Medicare enrollment type (ESRD, disabled, aged/dual eligible, 
aged/non-dual eligible).
    In comparing the features of the two options, the regionally-
trended amount and regional average expenditures, we believe using 
regional average expenditures offers a preferred approach. While we 
believe both options would avoid penalizing ACOs that improve their 
spending relative to that of their region, the approach of using 
regional average expenditures would not depend on older historical data 
in calculations as would be required under the alternative involving 
calculation of a regionally-trended amount. In general, from an 
operational standpoint, using a regional average as part of calculating 
regional FFS expenditures for an ACO's regional service area is 
anticipated to be easier for ACOs and stakeholders to understand as 
well as for CMS to implement in comparison to the alternative 
considered, and would more closely align with the MA rate-setting 
methodology.
    We also considered how the adjustment based on regional FFS 
expenditures should be applied to the ACO's rebased historical 
benchmark. Our preferred approach is to use the following steps to 
adjust the ACO's rebased historical benchmark:
    <bullet> Calculations of the ACO's rebased historical benchmark and 
regional average expenditures, as described previously in this section 
of the proposed rule, would result in average per capita values of 
expenditures for each Medicare enrollment type (ESRD, disabled, aged/
dual eligible, aged/non-dual eligible).
    <bullet> For each Medicare enrollment type (ESRD, disabled, aged/
dual eligible, aged/non-dual eligible) we would determine the 
difference between the per capita regional average amount and the 
average per capita amount of the ACO's rebased historical benchmark. 
These values may be positive or negative. For example, for a particular 
Medicare enrollment type, if the value of the ACO's rebased historical 
benchmark is greater than the regional average amount, the difference 
between these values will be expressed as a negative number.
    <bullet> Multiply the resulting difference, for each Medicare 
enrollment type by a percentage determined for the relevant

[[Page 5834]]

agreement period. The value of this percentage is described in detail 
later in this section of the proposed rule. The products (one for each 
Medicare enrollment type) resulting from this step are the amounts of 
the regional adjustments that will be applied to the ACO's historical 
benchmark.
    <bullet> Add the adjustment to the ACO's rebased historical 
benchmark, adding the adjustment amount for the Medicare enrollment 
type to the truncated, trended and risk adjusted average per capita 
value of ACO's rebased historical benchmark for the same Medicare 
enrollment type.
    <bullet> Multiply the adjusted value of the ACO's rebased 
historical benchmark for each Medicare enrollment type by the 
proportion of the ACO's assigned beneficiary population for that 
Medicare enrollment type, based on the ACO's assigned beneficiary 
population for benchmark year 3 of the rebased historical benchmark.
    <bullet> Sum expenditures across the four Medicare enrollment types 
to determine the ACO's adjusted rebased historical benchmark.
    Therefore, we are proposing to calculate the ACO's rebased 
benchmark using historical expenditures for the beneficiaries assigned 
to the ACO in the 3 years prior to the start of its current agreement 
period, applying equal weights to the benchmark years, but not 
accounting for shared savings generated by the ACO in its prior 
agreement period. We propose to adjust the ACO's rebased historical 
benchmark to reflect risk adjusted regional average expenditures, based 
on county FFS expenditures determined for the ACO's regional service 
area. We propose to revise section Sec.  425.602 in order to limit the 
scope of the provision to establishing, adjusting, and updating the 
benchmark for an ACO's first agreement period. We propose to specify in 
a new regulation at Sec.  425.603 how the benchmark would be reset for 
a subsequent agreement period, including the proposed methodology for 
adjusting an ACO's rebased historical benchmark to reflect FFS 
expenditures in the ACO's regional service area in the ACO's second or 
subsequent agreement period starting on or after January 1, 2017. 
Further, we propose to make conforming and clarifying revisions to the 
provisions of Sec.  425.602, including to: Revise the title of the 
section; remove paragraph (c) from Sec.  425.602 and incorporate this 
paragraph in the new regulation at Sec.  425.603; and to add a 
paragraph that describes the adjustments made to the ACO's historical 
benchmark during an ACO's first agreement period to account for changes 
in severity and case mix for newly and continuously assigned 
beneficiaries as presently specified under Sec.  425.604, Sec.  
425.606, and Sec.  425.610. We also propose to make a clarifying change 
to Sec.  425.20, to specify that the acronym ``BY'' stands for 
benchmark year.
    We seek comment on our proposals and on the alternative approach of 
using a regionally-trended amount developed from the ACO's historical 
benchmark for a prior agreement period instead of regional average 
expenditures to adjust the ACO's rebased historical benchmark. We are 
particularly interested in comments on the design of the approaches for 
calculating the regional adjustment to the ACO's rebased historical 
benchmark described in this section of the proposed rule, as well as 
any concerns about implementing the proposed regional adjustment.
(3) Proposals for Transitioning to a Higher Weight in Calculating the 
Adjustment for Regional FFS Expenditures
    As discussed in the June 2015 final rule, we considered applying a 
weight of 70 percent on the regionally-trended component of the rebased 
benchmark. We explained our initial belief that this weight would serve 
the goal of providing strong incentives for ACOs to achieve savings and 
to continue to participate in the Shared Savings Program (see 80 FR 
32796). In developing the policies for this proposed rule, we 
considered both the potential positive and negative consequences of 
quickly transitioning to use of a greater weight in calculating the 
regional adjustment to ACOs' rebased historical benchmarks.
    We believe placing a greater weight on regional expenditures in 
adjusting an ACO's historical benchmark will encourage existing low 
spending ACOs in higher spending and/or higher growth regions to enter 
and continue their participation in the Shared Savings Program. 
Stakeholders have expressed concerns that the original rebasing 
methodology promulgated in the November 2011 final rule, in which an 
ACO's benchmark is rebased using the ACO's historical expenditures for 
the most recent 3 years corresponding to its prior agreement period, 
absent additional adjustment, penalizes an ACO for past achievement of 
savings by reducing its benchmark for the following agreement period 
(see 80 FR 32786). In the June 2015 final rule, we expressed our view 
that the benchmarking methodology should be revised to help ensure that 
an ACO that has previously achieved success in the program will be 
rebased under a methodology that encourages its continued participation 
in the program (see 80 FR 32788). Further, we have noted the importance 
of quickly moving to a benchmark rebasing approach that accounts for 
regional FFS expenditures and trends in addition to the ACO's 
historical expenditures and trends (see 80 FR 32795 through 32796).
    We are also concerned that existing low spending ACOs operating in 
regions with relatively higher spending and/or higher growth in 
expenditures may be positioned to generate savings under the proposed 
methodology because of the regional adjustment to their rebased 
historical expenditures rather than as a result of actual gains in 
efficiency, creating an opportunity for arbitrage. In particular, we 
are concerned about the potential for ACOs to alter their healthcare 
provider and beneficiary compositions or take other such actions in 
order to achieve more favorable performance relative to their region 
without actually changing their efficiency. We anticipate these effects 
to be more pronounced, the larger the percentage that is applied to the 
difference between the regional average expenditures for the ACO's 
regional service area and the ACO's rebased historical expenditures 
when calculating the regional adjustment. However, we believe there is 
uncertainty around the magnitude of these possible negative 
consequences of adjusting the ACO's rebased benchmark based on regional 
expenditures in the ACO's regional service area which have yet to be 
observed. We believe these concerns are likely to be outweighed by the 
benefits of encouraging more efficient care through a benchmark 
rebasing methodology that encourages continued participation by ACOs 
that are efficient relative to their regional service area by placing 
greater weight on regional expenditures when resetting the ACO's 
benchmark over subsequent agreement periods. The use of a higher 
percentage in calculating the regional adjustment would create strong 
incentives for higher spending ACOs to be more efficient relative to 
their regional service areas while also improving the quality of care 
provided to their beneficiaries. Furthermore, this approach will also 
ensure that ACOs' rebased benchmarks continue to reflect in part their 
historical spending.
    To balance these concerns, we considered a phased approach to 
transitioning to greater weights in calculating the adjustment amount, 
expressed as a percentage of the difference between regional average

[[Page 5835]]

expenditures for the ACO's regional service area and the ACO's rebased 
historical expenditures. We considered how quickly or slowly to phase-
in the maximum weight. Taking the suggestions of some stakeholders, 
including commenters on the December 2014 proposed rule, such as MedPAC 
(describing phase-in to a regional benchmark to be completed by 2021, 
if implemented in 2016) (see 80 FR 32792; see also letter from Glenn M. 
Hackbarth, J.D., Chairman, Medicare Payment Advisory Commission to Ms. 
Marilyn Tavenner, Administrator, Centers for Medicare and Medicaid 
Services, regarding File code CMS-1461-P (February 2, 2015) (available 
through www.regulations.gov, comment tracking number 1jz-8gz6-jbt1)), 
we considered increasing the weight used in calculating the adjustment 
over time, making an ACO's benchmark gradually more reflective of 
expenditures in its region and less reflective of the ACO's own 
historical expenditures. We considered a phase-in approach that 
includes the following features:
    <bullet> Maintain the current methodology for establishing the 
benchmark for an ACO's first agreement period in the Shared Savings 
Program based on the historical expenditures for beneficiaries assigned 
to the ACO with no adjustment for expenditures in the ACO's regional 
service area in order to provide continued stability to the program and 
the momentum for attracting new organizations. As over 400 ACOs have 
voluntarily entered the program under this methodology we believe the 
current methodology is an important part of facilitating entry into the 
program by organizations located throughout the nation that have 
differing degrees of experience with accountable care models and have 
varying provider compositions.
    <bullet> Increase the percentage used in calculating the regional 
adjustment amount, applied to the ACO's rebased historical benchmark 
(determined as specified in this proposed rule), over subsequent 
agreement periods. For ACOs entering their second agreement period, in 
calculating the regional adjustment we would take 35 percent of the 
difference between the ACO's regional service area expenditures and the 
ACO's rebased historical benchmark expenditures. For ACOs entering 
their third or subsequent agreement period, the percentage used in this 
calculation would be set at 70 percent unless the Secretary determines 
a lower weight should be applied, as specified through future 
rulemaking.
    In making a determination of whether a lower weight should be used 
in calculating the adjustment, the Secretary would assess what effects 
the regional adjustment (and other modifications to the program made 
under this rule) are having on the Shared Savings Program, considering 
factors such as but not limited to: The effects on net program costs; 
the extent of participation in the Shared Savings Program; and the 
efficiency and quality of care received by beneficiaries. As part of 
this determination, the Secretary may also take into account other 
factors, such as the effect of implementation of the Medicare Access 
and CHIP Reauthorization Act of 2015 (MACRA) on the Shared Savings 
Program by incentivizing physicians and certain other practitioners to 
participate more broadly in alternative payment models.
    Such a determination could potentially occur in advance of the 
first application of this higher percentage. For example, the 
determination could be made in advance of the agreement period 
beginning January 1, 2020, which is the start of the third agreement 
period for ACOs that entered the program in January 2014 and the first 
group of ACOs to which the revised rebasing methodology discussed in 
this proposed rule would apply. Any necessary modifications to program 
policies as a result of the Secretary's determination, such as reducing 
the long-term weight used in calculating the regional adjustment below 
70 percent or making other program changes (for example, refinements to 
the risk adjustment methodology as described in section II.A.2.e.3. of 
this proposed rule) would be proposed in future rulemaking, such as 
through the calendar year (CY) 2020 Physician Fee Schedule rule. 
Subsequently, we would periodically assess the effects of the regional 
adjustment over time and address any needed modifications to program 
policies in future rulemaking.
    <bullet> As discussed in section II.A.2.f. of this proposed rule, 
for ACOs that started in the program in 2012 and 2013 and started their 
second agreement period on January 1, 2016, we would apply this phased 
approach when rebasing for their third and fourth agreement periods.
    We believe this phased approach to moving to a higher percentage in 
calculating the adjustment for regional expenditures would give ACOs 
sufficient notice of the transition to benchmarks that reflect regional 
expenditures. Further, we believe this approach to phasing in the use 
of a greater percentage to calculate the regional adjustment provides a 
smoother transition for ACOs to benchmarks reflective of regional FFS 
expenditures, giving ACOs more time to prepare for this change and 
therefore ultimately maintaining the stability of ACOs, the Shared 
Savings Program and the markets where ACOs operate.
    Alternatively, we considered using a percentage set at 50 percent 
in calculating the regional adjustment amount for ACOs entering their 
third and subsequent agreement periods (under the phased approach 
previously described in this section of the proposed rule). We also 
considered taking a more gradual approach to transitioning to the use 
of a higher percentage in calculating the adjustment. For instance, in 
the ACO's second agreement period the percentage used in calculating 
the regional adjustment would be set at 35 percent; in the ACO's third 
agreement period the percentage would be set at 50 percent; and in the 
ACO's fourth and subsequent agreement periods, the percentage would be 
set at 70 percent unless the Secretary determines a lower weight should 
be applied, as specified through future rulemaking. However, we prefer 
an approach which more quickly transitions to the use of a higher 
percentage in calculating the adjustment, as previously described, over 
the course of two rebasing periods (for example, the ACO's second and 
third agreement periods). We believe this faster transition to use of a 
higher percentage in calculating the adjustment would more quickly 
create incentives to drive the most meaningful change for ACOs under 
the Shared Savings Program, including ensuring the program more 
immediately encourages continued participation by ACOs that are 
efficient relative to their regional service area.
    We also considered an approach that would be similar to the 
approach to phasing in regional costs described previously, except that 
we would begin to incorporate some information on an ACO's regional 
costs during an ACO's initial agreement period, for agreement periods 
beginning on or after January 1, 2017. In particular, rather than using 
national trends in FFS expenditures to trend benchmark year 
expenditures when establishing the benchmark and to update the 
benchmark annually during the agreement period, we considered using 
regional FFS expenditures for both of these purposes for an ACO's first 
agreement period, similar to the approach we are proposing to use for 
subsequent agreement periods. We describe and seek comment on related 
considerations in sections II.A.2.d.2. and II.A.2.d.3. of this proposed 
rule. Under this alternative, the modified first agreement period 
benchmarking methodology would apply prospectively

[[Page 5836]]

to new ACOs entering the program for their first agreement period on or 
after January 1, 2017. Such an approach has the advantage that it would 
generate benchmarks that would better measure the factors driving costs 
for any particular ACO based on the dynamics specific to its regional 
service area. This approach would also reduce the differences between 
the benchmarking methodology used in an ACO's first agreement period 
and the methodology used in subsequent agreement periods, potentially 
easing the transition between agreement periods. This approach has the 
potential disadvantage that it would represent a departure from the 
methodology used for earlier cohorts of ACOs.
    Therefore, we are proposing a phased approach to moving to a higher 
weight in calculating the regional adjustment, ultimately reaching 70 
percent, subject to assessment by the Secretary as discussed 
previously. We propose to incorporate the following proposed policies 
regarding the weight to be applied in determining the regional 
adjustment in a new regulation at Sec.  425.603:
    <bullet> Calculate the regional adjustment in the ACO's second 
agreement period by applying a weight of 35 percent to the difference 
between regional average expenditures for the ACO's regional service 
area and the ACO's rebased historical benchmark expenditures.
    <bullet> In the ACO's third and subsequent agreement periods, the 
percentage used in this calculation would be set at 70 percent unless 
the Secretary determines a lower weight should be applied as specified 
through future rulemaking.
    We seek comment on our proposed approach to phase in the weight 
used in calculating the regional adjustment. We are particularly 
interested in understanding commenters' thoughts and suggestions about 
the percentage that should be used in calculating the adjustment for 
regional FFS expenditures. We also seek comment on the alternatives we 
considered including: (1) Limiting the weight used in the calculation 
of the adjustment to 50 percent (instead of 70 percent) in the ACO's 
third and subsequent agreement period; (2) a more gradual transition to 
use of a higher percentage in calculating the adjustment (such as 35 
percent in the second agreement period, 50 percent in the third 
agreement period, and 70 percent in the fourth and subsequent agreement 
period); and (3) a phase-in approach that uses regional (instead of 
national) FFS expenditures to trend benchmark year expenditures when 
establishing and updating the benchmark during an ACO's first agreement 
period (for agreement periods beginning on or after January 1, 2017). 
We also seek comment on alternative approaches to address our concerns 
about selective program participation and arbitrage opportunities that 
would facilitate our use of a higher percentage in calculating the 
amount of the adjustment.
d. Proposals for Parity Between Establishing and Updating the Rebased 
Historical Benchmark
(1) Background
    In the initial rulemaking to establish the Shared Savings Program, 
we identified the need to trend forward the expenditures in each of the 
3 years making up the historical benchmark. As explained in earlier 
rulemaking, because the statute requires the use of the most recent 3 
years of per-beneficiary expenditures for Parts A and B services for 
FFS beneficiaries assigned to the ACO to estimate the benchmark for 
each ACO, the per capita expenditures for each year must be trended 
forward to current year dollars before they are averaged using the 
applicable weights to obtain the benchmark (see 76 FR 19609). In the 
November 2011 final rule, we finalized an approach under Sec.  
425.602(a)(5) for trending forward benchmark expenditures based on 
national FFS Medicare growth rates for each of the following 
populations of beneficiaries: ESRD, disabled, aged/dual eligible, aged/
non-dual eligible (76 FR 67924 through 67925). We also explained that 
making separate calculations for specific groups of beneficiaries--
specifically the aged/dual eligible, aged/non-dual eligible, disabled, 
and ESRD populations--accounts for variation in costs of these groups 
of beneficiaries, resulting in more accurate calculations (76 FR 
67924). We considered using national, State or local growth factors to 
trend forward historical benchmark expenditures (76 FR 19609 through 
19610, 76 FR 67924 through 67925). However, we concluded that using the 
national growth rate for Parts A and B FFS expenditures as a trend 
factor for establishing the historical benchmark offered a number of 
advantages over the alternatives considered, including the following:
    <bullet> More consistent with the statutory methodology for 
updating an ACO's benchmark (see 76 FR 19610 and 76 FR 67924).
    <bullet> Applies a single growth factor to all ACOs, regardless of 
their size or geographic area; allowing us to move toward establishing 
a national standard to calculate and measure ACO financial performance 
(see 76 FR 19610 and 76 FR 67925).
    <bullet> Appropriately balanced concerns that benchmark trending 
should encourage participation among providers that are already 
efficient or operating in low cost regions without unduly rewarding 
ACOs in high-cost areas (see 76 FR 67925).
    We discussed this last point in detail, considering the likely 
incentives for developing organizations to participate in the program 
that would result from a policy of using national growth rates to trend 
forward benchmark expenditures. We explained that the anticipated net 
effect of using the same trending factor for all ACOs would be to 
provide a relatively higher expenditure benchmark for low growth/low 
spending ACOs and a relatively lower benchmark for high growth/high 
spending ACOs. ACOs in high cost, high growth areas would therefore 
have an incentive to reduce their rate of growth more to bring their 
costs more in line with the national average; while ACOs in low cost, 
low growth areas would have an incentive to continue to maintain or 
improve their overall lower spending levels (see 76 FR 67925). We also 
explained that use of the national growth rate could also 
disproportionately encourage the development of ACOs in areas with 
historical growth rates below the national average (see 76 FR 19610). 
These ACOs would benefit from having a relatively higher benchmark, 
which would increase the chances for shared savings. On the other hand, 
ACOs in areas with historically higher growth rates above the national 
average would have a relatively lower benchmark, and might be 
discouraged from participating in the program (see 76 FR 19610).
    In contrast, as we explained in the initial rulemaking to establish 
the Shared Savings Program, trending expenditures based on State or 
local area growth rates in Medicare Parts A and B expenditures may more 
accurately reflect the experience in an ACO's area and mitigate 
differential incentives for participation based on location (see 76 FR 
19610). We considered, but did not finalize, an option to trend the 
benchmark by the lower of the national projected growth rate or the 
State or the local growth rate (see 76 FR 19610 and 76 FR 67925). This 
option balanced providing a more accurate reflection of local 
experience with not rewarding historical growth higher than the 
national average. We believed this method would instill stronger saving 
incentives for ACOs in both high growth and low growth areas (see 76 FR 
19610).

[[Page 5837]]

    Section 1899(d)(1)(B)(ii) of the Act states that the benchmark 
shall be updated by the projected absolute amount of growth in national 
per capita expenditures for Parts A and B services under the original 
Medicare FFS program, as estimated by the Secretary. Further, the 
Secretary's authority under section 1899(i)(3) of the Act, for 
implementing other payment models, allows for alternatives to using 
national expenditures for updating the benchmark, as long as the 
Secretary determines the approach improves the quality and efficiency 
of items and services furnished under Medicare and does not to result 
in additional program expenditures.
    In the initial rulemaking, we considered using the flat dollar 
amount equivalent to the absolute amount of growth in the national FFS 
expenditures to update the benchmark during an agreement period as 
specified under section 1899(d)(1)(B)(ii) of the Act. We also 
considered using our authority under section 1899(i)(3) of the Act to 
update the benchmark by the lower of the national projected absolute 
amount of growth in national per capita expenditures and the local/
state projected absolute amount of growth in per capita expenditures 
(see 76 FR 19610 through 19611).
    We explained our belief that use of a national update factor was 
the most appropriate option in light of the following considerations:

    <bullet> Congress demonstrated an interest in mitigating some of 
the regional differences in Medicare spending among ACOs by requiring 
the use of the flat dollar amount equivalent to the absolute amount of 
growth in national FFS expenditures to update the benchmark during the 
agreement period (76 FR 19610).
    <bullet> ACOs in both high spending, high growth and low spending, 
low growth areas would have appropriate incentives to participate in 
the program (76 FR 19611).

In particular, we explained that using a flat dollar increase, which 
would be the same for all ACOs, provides a relatively higher 
expenditure benchmark for low growth, low spending ACOs and a 
relatively lower benchmark for high growth, high spending ACOs. 
Therefore, ACOs in high spending, high growth areas must reduce their 
rate of growth more (compared to ACOs in low spending, low growth 
areas) to bring their costs more in line with the national average (see 
76 FR 19610). We also indicated that these circumstances could 
contribute to selective program participation by ACOs favored by the 
national flat-dollar update, and ultimately result in Medicare costs 
from shared savings payments that result from higher benchmarks rather 
than an ACO's care coordination activities (see 76 FR 19610 through 
19611 and 19635).
    In contrast, updating the benchmark by the lower of the national 
projected absolute amount of growth in national per capita expenditures 
and the local/state projected absolute amount of growth in per capita 
expenditures could instill strong saving incentives for ACOs in low-
growth areas, as well as for ACOs in high-growth areas. Incorporating 
more localized growth factors reflects the expenditure and growth 
patterns within the geographic area served by ACO participants, 
potentially providing a more accurate estimate of the updated benchmark 
based on the area from which the ACO derives its patient population (76 
FR 19610).
    Ultimately, we finalized our policy under Sec.  425.602(b) to 
update the historical benchmark annually for each year of the agreement 
period based on the flat dollar equivalent of the projected absolute 
amount of growth in national per capita expenditures for Parts A and B 
services under the original Medicare FFS program. Further, consistent 
with the final policies for calculating the historical benchmark (among 
other aspects of the Shared Savings Program's financial models) the 
calculations for updating the benchmark are made for each of the 
following populations of beneficiaries: ESRD, disabled, aged/dual 
eligible, aged/non-dual eligible (76 FR 67926 through 67927).
    In the December 2014 proposed rule, we sought comment on a 
benchmark rebasing alternative that would use regional FFS 
expenditures, instead of national FFS expenditures, to develop the 
historical benchmark trend factors and to update the benchmark during 
the agreement period (79 FR 72839). We sought comment on using this 
approach in combination with other alternatives for incorporating 
regional expenditures into ACO benchmarks, including transitioning ACOs 
from benchmarks based on their historical expenditures toward 
benchmarks based on regional FFS expenditures over the course of 
several agreement periods (79 FR 72841 through 72843). Some commenters 
were supportive of using a combination of approaches to incorporate 
regional expenditures into benchmarks. On the issue of which FFS 
expenditures should be the basis for trending the historical benchmark 
and updating the benchmark, some commenters expressed support for 
maintaining the current approach of using only national FFS 
expenditures, while others suggested using only regional FFS 
expenditures, or a combination of factors based on regional and 
national FFS expenditures (see 80 FR 32794).
    More specifically, some commenters encouraged CMS to reflect 
location-specific changes in Medicare payment rates in the benchmarks 
by using regional factors (based on regional FFS costs) in establishing 
and updating ACO-specific benchmarks. Other commenters supporting this 
approach explained that regional expenditures more accurately reflect 
the health status of populations (for risk adjustment), differences 
between rural and urban areas or market/regional differences more 
generally, and differences in beneficiaries' socioeconomic status. A 
commenter who supported use of regional costs in updating benchmarks 
indicated this would better address the effects of churn in the ACO's 
assigned population, which the commenter explained leads the ACO's 
population to become less reflective of its historical population and 
more reflective of its regional population. On the other hand, some 
commenters encouraged CMS to continue using factors based on national 
FFS costs to trend and update benchmarks. For example, a commenter 
expressed concern that using regional FFS expenditures instead of 
national FFS expenditures in establishing and updating the benchmark 
may further disadvantage existing low-cost ACOs. Others supported 
allowing ACOs a choice of either regional and national trends, applying 
the higher of regional or national trends, or applying regional trends 
to ACOs in existing high-cost regions and national trends to ACOs in 
existing low-cost regions. Several commenters offered conflicting views 
on whether moving to use of regional FFS costs in establishing 
historical and updated benchmarks would advantage or disadvantage 
existing low cost providers (80 FR 32792).
    In the June 2015 final rule (80 FR 32796), we indicated that we 
needed to consider further what additional adjustments should be made 
to the benchmarking methodology when moving to a rebasing approach that 
accounts for regional FFS trends. These considerations included whether 
to incorporate regional FFS expenditures in updating an ACO's 
historical benchmark each performance year or to maintain the current 
policy under which we update an ACO's benchmark based on the projected 
absolute amount of growth in national per capita expenditures for Parts 
A and B services under the original FFS program. For instance, the 
update factor could be

[[Page 5838]]

based on either regional expenditures or a blend of regional/national 
FFS expenditures. We also indicated the need to continue to adjust the 
ACO's historical benchmark for changes in health status and demographic 
factors of the ACO's assigned beneficiaries during the performance 
period (as described in section II.A.3 of this proposed rule).
(2) Proposals for Regional Growth Rate as a Benchmark Trending Factor
    In considering how to compute an ACO's rebased historical 
benchmark, we considered replacing the national trend factor that is 
currently used in trending an ACO's BY1 and BY2 expenditures forward to 
BY3 with a regional trend factor based on regional FFS expenditures 
corresponding to the ACO's regional service area. To align with the 
proposed calculation of the regional FFS expenditures for an ACO's 
regional service area, we considered the following approach for 
calculating regional FFS trend factors:
    <bullet> For each benchmark year, calculate risk adjusted county 
FFS expenditures for the ACO's regional service area, as described 
under sections II.A.2.b and II.A.2.e.2 of this proposed rule. As 
described in section II.A.2.b.4 of this proposed rule, county FFS 
expenditures would be determined using total county-level FFS Parts A 
and B expenditures for assignable beneficiaries, excluding IME, DSH, 
and uncompensated care payments, but including beneficiary identifiable 
payments made under a demonstration, pilot or time limited program; 
regional expenditures would be calculated for each Medicare enrollment 
type (ESRD, disabled, aged/dual eligible, aged/non-dual eligible);
    <bullet> For each benchmark year, compute a weighted average of 
risk adjusted county-level FFS expenditures with weights based on the 
ACO's regional service area, that is the proportion of an ACO's 
assigned beneficiaries residing in each county within the ACO's 
regional service area. Calculations would be done by Medicare 
enrollment type (ESRD, disabled, aged/dual eligible, aged/non-dual 
eligible) based on the ACO's benchmark year assigned population.
    <bullet> Compute the average growth rates from BY1 to BY3, and from 
BY2 to BY3, using the weighted average risk-adjusted county level FFS 
expenditures for the respective benchmark years, for each Medicare 
enrollment type.
    We would apply these regional trend factors to the ACO's historical 
benchmark expenditures, which are also adjusted based on the CMS-HCC 
model, to account for the severity and case mix of the ACO's assigned 
beneficiaries in each benchmark year.
    Using regional trend factors, instead of national trend factors to 
trend forward expenditures in the benchmark period, would further 
incorporate regional FFS spending and population dynamics specific to 
the ACO's regional service area in the ACO's rebased benchmark. We 
believe there are number of relevant considerations for moving to use 
of regional trend factors, including the following:
    <bullet> Regional trend factors would more accurately reflect the 
cost experience in an ACO's regional service area compared to use of 
national trend factors.
    <bullet> Regional trend factors would reflect the health status of 
the FFS population that makes up the ACO's regional service area, the 
region's geographic composition (such as rural versus urban areas), and 
socio-economic differences that may be regionally related.
    <bullet> Regional trend factors could better capture location-
specific changes in Medicare payments (for example, the area wage 
index) compared to use of national trend factors.
    We also considered how use of regional trend factors in resetting 
ACO benchmarks could affect participation by relatively high- and low-
growth ACOs operating in regions with high and low growth in Medicare 
FFS expenditures. We anticipate using regional trend factors would 
result in relatively higher benchmarks for ACOs that are low growth in 
relation to their region compared to benchmarks for ACOs that are high 
growth relative to their region. Therefore, use of regional FFS trends 
could disproportionately encourage the development of and continued 
participation by ACOs with rates of growth below that of their region. 
These ACOs would benefit from having a relatively higher benchmark, 
which would increase their chances for shared savings. On the other 
hand, ACOs with historically higher rates of growth above the regional 
average would have a relatively lower benchmark and may be discouraged 
from participating if they are not confident of their ability to bring 
their costs in line with costs in their region.
    In using regional growth rates specific to an ACO's regional 
service area and composition (by Medicare enrollment type) we expect to 
see significant variation in the growth rates between health care 
markets in different regions of the country and even between ACOs 
operating in the same markets. This approach would be a departure from 
the current methodology that applies a single set of national growth 
factors calculated for each benchmark year by Medicare enrollment type 
(ESRD, disabled, aged/dual eligible, aged/non-dual eligible). However, 
ACOs familiar with the composition of their assigned population and 
cost trends in their regional service area may find they can more 
readily anticipate what these trend factors may be. Additionally, 
stakeholders may find it helpful to observe differences in county FFS 
expenditures using the data files made publicly available in 
conjunction with this proposed rule, as described in detail in the 
regulatory impact analysis section.
    Accordingly, we are proposing to replace the national trend factors 
used for trending an ACO's BY1 and BY2 expenditures to BY3 in 
calculating an ACO's rebased historical benchmark with regional trend 
factors derived from a weighted average of risk adjusted FFS 
expenditures in the counties where the ACO's assigned beneficiaries 
reside. Further, we propose to calculate and apply these trend factors 
for each of the following populations of beneficiaries: ESRD, disabled, 
aged/dual eligible, aged/non-dual eligible. We propose to incorporate 
this proposal in a new regulation at Sec.  425.603. We seek comment on 
this proposed change.
    We also considered whether it would be sufficient to incorporate 
regional FFS expenditures into rebased benchmarks by applying regional 
trend factors (instead of national trend factors) in establishing the 
rebased benchmark under the existing rebasing methodology. Therefore, 
we specifically seek comment on the use of regional trend factors for 
trending forward an ACO's BY1 and BY2 expenditures to BY3 in 
establishing and resetting historical benchmarks under the current 
approach to resetting ACO benchmarks in Sec.  425.602(c) as an 
alternative to adopting the proposed approach to adjusting rebased 
benchmarks to reflect FFS expenditures in the ACO's regional service 
area, as discussed in section II.A.2.c of this proposed rule. Further, 
we considered and seek comment on an alternative under which we would 
apply regional trend factors for trending forward BY1 and BY2 
expenditures to BY3 in establishing the benchmark for an ACO's first 
agreement period under Sec.  425.602(a), allowing this policy to be 
applied consistently program-wide beginning with an ACO's first 
agreement period.
(3) Proposals for Updating the Reset Benchmark During the Agreement 
Period
    Section 1899(d)(1)(B)(ii) of the Act states the benchmark shall be 
updated

[[Page 5839]]

by the projected absolute amount of growth in national per capita 
expenditures for Parts A and B services under the original Medicare FFS 
program, as estimated by the Secretary. Accordingly, we currently 
update the historical benchmark annually for each year of the agreement 
period based on the flat dollar equivalent of the projected absolute 
amount of growth in national per capita expenditures for Parts A and B 
services under the original Medicare FFS program.
    We considered using an update factor based on the regional FFS 
expenditures for the ACO's regional service area to update an ACO's 
rebased historical benchmark during the ACO's second or subsequent 
agreement period. This approach would align with our proposal to use 
regional FFS expenditures in developing the trend factors for the 
rebased historical benchmark (to trend BY1 and BY2 expenditures to BY3) 
and our proposal to adjust the ACO's rebased historical benchmark to 
reflect regional FFS expenditures. Updating the benchmark based on 
regional FFS expenditures annually, during the course of the agreement 
period, would result in a benchmark used to determine shared savings 
and losses for a performance year that reflects trends in regional FFS 
growth for the ACO's regional service area for the corresponding year. 
As with use of regional trend factors instead of national trend factors 
(discussed in section II.A.2.d.2. of this proposed rule), we believe 
calculating the update factor using regional FFS expenditures would 
better capture the cost experience in the ACO's region, the health 
status and socio-economic dynamics of the regional population, and 
location-specific Medicare payments, when compared to using national 
FFS expenditures. Adopting this approach would require our use of 
authority under section 1899(i)(3) of the Act as it is a departure from 
the methodology for annually updating the benchmark specified under 
section 1899(d)(1)(B)(ii) of the Act.
    We considered using the following approach to calculate the 
regional update amount for each Medicare enrollment type (ESRD, 
disabled, aged/dual eligible, aged/non-dual eligible):
    <bullet> For each calendar year corresponding to a performance 
year, calculate risk adjusted county FFS expenditures for the ACO's 
regional service area, as described under sections II.A.2.b. and 
II.A.2.e.2. of this proposed rule. As described in section II.A.2.b.4. 
of this proposed rule, county FFS expenditures would be determined 
using total county-level FFS Parts A and B expenditures for assignable 
beneficiaries, excluding IME, DSH, and uncompensated care payments, but 
including beneficiary identifiable payments made under a demonstration, 
pilot or time limited program, truncated and risk adjusted for each 
Medicare enrollment type (ESRD, disabled, aged/dual eligible, aged/non-
dual eligible). The ACO's regional service area would be defined based 
on the ACO's assigned beneficiary population used to perform financial 
reconciliation for the relevant performance year.
    <bullet> Compute a weighted average of risk adjusted county-level 
FFS expenditures with weights based on the proportion of an ACO's 
assigned beneficiaries residing in each county of the ACO's regional 
service area. Calculations would be done by Medicare enrollment type 
(ESRD, disabled, aged/dual eligible, aged/non-dual eligible) based on 
the ACO's assigned population used to perform financial reconciliation 
for the relevant performance year. This would result in an update 
factor for each Medicare enrollment type (ESRD, disabled, aged/dual 
eligible, aged/non-dual eligible).
    We considered whether to calculate a flat dollar equivalent of the 
projected absolute amount of growth in regional per capita expenditures 
for Parts A and B FFS services, or whether to calculate the percentage 
change in growth in regional FFS expenditures for the ACO's regional 
service area. We discussed issues related to use of a growth rate or a 
flat dollar amount in the initial rulemaking to establish the Shared 
Savings Program, including our view that a growth rate would more 
accurately reflect each ACO's historical experience, but could also 
perpetuate current regional differences in medical expenditures (see 76 
FR 19609 through 19610 and 76 FR 67924). For the reasons discussed in 
the earlier rulemaking, we believe that using growth rates to determine 
the annual update would more effectively capture changes in the ACO's 
regional service area expenditures and changes in the health status of 
the ACO's population in comparison to the health status of the 
population of the ACO's regional service area over time. Using a growth 
rate to update ACOs' benchmarks would also result in proportionately 
larger updates for higher spending ACOs in the region and lower updates 
for lower spending ACOs in the region and would strike a balance with 
the flat-dollar average regional expenditures used to adjust the ACOs 
historical benchmark.
    We also considered how to apply the update to the ACO's rebased 
historical benchmark adjusted for expenditures in the ACO's regional 
service area. To maintain the overall structure of the program's 
current methodology, and to align with the other proposed revisions to 
the methodology used to calculate an ACO's rebased historical benchmark 
described in this proposed rule, the update would be applied after all 
adjustments are made to the ACO's rebased benchmark. For example, for 
an ACO in its second or subsequent agreement period, the sequence for 
adjustments and the application of the update would be as follows:
    <bullet> Calculate the ACO's rebased historical benchmark using 
historical expenditures for the beneficiaries assigned to the ACO in 
the 3 years prior to the start of its current agreement period, using 
trend factors based on regional FFS expenditures to trend the ACO's BY1 
and BY2 expenditures to BY3, and applying equal weights to the 
benchmark years (as described in sections II.A.2.c. and II.A.2.d.2. of 
this proposed rule).
    <bullet> Adjust the ACO's rebased historical benchmark to reflect 
risk adjusted regional average expenditures based on county FFS 
expenditures determined for the ACO's regional service area, as 
described in section II.A.2.c. of this proposed rule.
    <bullet> As needed, adjust the ACO's rebased historical benchmark 
to account for changes in ACO participants for the performance year, as 
described in section II.B. of this proposed rule.
    <bullet> Adjust the ACO's rebased historical benchmark according to 
the health status and demographic factors of the ACO's performance year 
assigned beneficiary population. We would continue to apply the current 
newly and continuously assigned risk adjustment methodology, described 
in detail in section II.A.3. of this proposed rule.
    <bullet> Update the adjusted rebased historical benchmark using the 
growth rates in risk adjusted FFS expenditures for the ACO's regional 
service area for each Medicare enrollment type (ESRD, disabled, aged/
dual eligible, aged/non-dual eligible).
    The use of an update factor based on regional FFS spending offers 
different incentives compared to an update factor reflecting only 
growth in national FFS spending. For instance, accounting for national 
FFS spending in an ACO's benchmark update, similar to the current 
methodology for updating ACO benchmarks, would continue to incorporate 
a national standard in the calculation and measurement of ACO financial 
performance. This approach would provide a relatively higher 
expenditure benchmark for low spending ACOs in low growth areas and

[[Page 5840]]

a relatively lower benchmark for high spending ACOs in high growth 
areas. In contrast, accounting for changes in regional FFS spending 
between the benchmark and the performance year by updating the 
benchmark according to changes in regional FFS expenditures, would 
ensure that the benchmark continues to reflect recent trends in FFS 
spending growth in the ACO's region throughout the duration of the 
ACO's agreement period.
    However, we anticipate there being significant variation in annual 
benchmark updates for individual ACOs, reflecting the cost experience 
in each ACO's individualized regional service area along with changes 
in the health status of the population of patients served by the ACO as 
well as changes in the types of Medicare entitlement status in the 
ACO's assigned beneficiary population. The update factors are used to 
account for change in FFS growth. The degree of year-to-year change in 
expenditures will likely vary in both existing low- and high-growth 
regions and could also vary significantly from expectations. In 
particular, we note our early experience in the program, where the 2012 
national FFS growth factors (as used for interim reconciliation for the 
2012 starters) showed an overall decrease in expenditures totaling -0.5 
percent, and decreases in expenditures for three of four Medicare 
eligibility types (ESRD, aged/dual eligible, aged/non-dual eligible). 
Only disabled beneficiaries experienced a growth in expenditures in 
this timeframe. The resulting negative updates (and corresponding 
decreases in benchmark values) were surprising to many stakeholders who 
presumed that the updates would result in benchmark increases.
    As discussed previously in this section, it would be necessary to 
use the discretionary authority in section 1899(i)(3) of the Act to 
adopt a policy under which we would calculate the benchmark update 
using regional FFS expenditures. Section 1899(i)(3) of the Act 
authorizes the Secretary to use other payment models in place of the 
payment model outlined in section 1899(d) of the Act as long as the 
Secretary determines these other payment models will improve the 
quality and efficiency of items and services furnished to Medicare 
beneficiaries, without additional program expenditures. We believe that 
updating an ACO's rebased historical benchmark based on regional FFS 
spending, rather than national FFS spending (as is done currently) 
would have positive effects for the Shared Savings Program and Medicare 
beneficiaries. As described in the regulatory impact analysis of this 
proposed rule, the proposed changes to the payment model used in the 
Shared Savings Program, including updating the ACO's rebased historical 
benchmark based on regional FFS spending, are anticipated to increase 
overall participation in the program, improve incentives for ACOs to 
invest in effective care management efforts, and increase the accuracy 
of benchmarks in capturing the experience in an ACO's regional service 
area compared to the use of national FFS expenditures. Therefore, we 
believe these changes would result in improved quality of care 
furnished to Medicare beneficiaries, and greater efficiency of items 
and services furnished to these beneficiaries, as more ACOs enter and 
remain in the Shared Savings Program and continue to work to meet the 
program's three-part aim of better care for individuals, better health 
for populations and lower growth in expenditures.
    We note that section 1899(i)(3)(B) of the Act provides that the 
requirement that the other payment model not result in additional 
program expenditures ``shall apply . . . in a similar manner as 
[subparagraph (b) of paragraph (2) of section 1899(i)] applies to the 
payment model under [section 1899(i)(2)].'' Section 1899(i)(2) of the 
Act provides discretion for the Secretary to use a partial capitation 
model rather than the payment model described in section 1899(d) of the 
Act. Section 1899(i)(2)(B) of the Act provides that--

[p]ayments to an ACO for items and services under this title for 
beneficiaries for a year under the partial capitation model shall be 
established in a manner that does not result in spending more for 
such ACO for such beneficiaries than would otherwise be expended for 
such ACO for such beneficiaries for such year if the model were not 
implemented, as estimated by the Secretary.

We have not previously addressed this provision in rulemaking. We 
believe we could use a number of approaches to address this statutory 
requirement, for example: Through an initial estimation that the model 
does not result in additional expenditures and that spans multiple 
years of implementation; by a periodic assessment that the model does 
not result in additional program expenditures; or by structuring the 
model in a way such that CMS could not spend more for an ACO for such 
beneficiaries than would otherwise be expended for such ACO for such 
beneficiaries for such year if the model were not implemented. However, 
because section 1899(i)(3)(B) of the Act states only that the 
requirement that the payment model not result in additional program 
expenditures must be applied in ``a similar manner'' to the requirement 
under section 1899(i)(2)(B) of the Act, we believe we have some 
discretion to tailor this requirement to the payment framework that is 
being adopted under the other payment model.
    Section 1899(i)(3)(B) of the Act also specifies that the other 
payment model must not result in additional program expenditures. 
Section IV.E. of this proposed rule discusses our analysis of this 
requirement, and our initial assessment of the costs associated with a 
payment model that includes changes to the manner in which we update 
the benchmark during an ACO's agreement period. We compared all current 
policies and proposed policies to policies that could be implemented 
under section 1899(d)(1)(B)(ii) of the Act, and assessed that for the 
period spanning 2017 through 2019 there would be net federal savings. 
Therefore, we believe that the proposed alternative payment model under 
section 1899(i)(3) of the Act, which includes using regional FFS 
expenditures to update an ACO's rebased historical benchmark and using 
FFS expenditures of assignable beneficiaries to calculate the national 
benchmark update for ACOs in their first agreement period and for ACOs 
that started a second agreement period on January 1, 2016, as discussed 
in section II.A.2.d.3. of this proposed rule, as well as current 
policies established using the authority of section 1899(i)(3) of the 
Act, meets the requirements under section 1899(i)(3)(B) of the Act. We 
anticipate that the costs of this alternative payment model will be 
periodically reassessed as part of the impact analysis for subsequent 
rulemaking regarding the payment models used under the Shared Savings 
Program. However, in the event we do not undertake additional 
rulemaking, we intend to periodically reassess whether a payment model 
established under authority of section 1899(i)(3) of the Act continues 
to improve the quality and efficiency of items and services furnished 
to Medicare beneficiaries, without resulting in additional program 
expenditures. If we determine the payment model no longer satisfies the 
requirements of section 1899(i)(3) of the Act, for example if the 
alternative payment model results in net program costs, we would 
undertake additional notice and comment rulemaking to make adjustments 
to our payment methodology to assure continued compliance with the 
statutory requirements.

[[Page 5841]]

    To summarize, we are proposing to include a provision in the 
proposed new regulation at Sec.  425.603 to specify that for ACOs in 
their second or subsequent agreement period whose rebased historical 
benchmark incorporates an adjustment to reflect regional expenditures, 
the annual update to the benchmark will be calculated as a growth rate 
that reflects risk adjusted growth in regional per beneficiary FFS 
spending for the ACO's regional service area. Further, we propose to 
calculate and apply separate update factors based on risk adjusted 
regional FFS expenditures for each of the following populations of 
beneficiaries: ESRD, disabled, aged/dual eligible, and aged/non-dual 
eligible. We seek comment on this proposal. We also seek comment on the 
alternatives considered, including calculating the update factor as the 
flat dollar equivalent of the projected absolute amount of growth in 
regional per capita expenditures for Parts A and B FFS services for the 
ACO's regional service area.
    We want to clarify that the current methodology for calculating the 
annual update will continue to apply in updating an ACO's historical 
benchmark during its first agreement period, as well as in updating the 
rebased historical benchmark for the second agreement period for ACOs 
that started in the program in 2012 or 2013, and entered their second 
agreement period on January 1, 2016. That is, for these ACOs, we would 
continue to update the historical benchmark annually for each year of 
the agreement period based on the flat dollar equivalent of the 
projected absolute amount of growth in national per capita expenditures 
for Parts A and B services under the original Medicare FFS program. We 
believe the continued application of an update based on national FFS 
spending is consistent with the methodology used to establish the 
benchmarks for these ACOs, particularly the use of trend factors based 
on national FFS spending to trend an ACO's BY1 and BY2 expenditures to 
BY3. However, as discussed earlier in this section of this proposed 
rule, we are seeking comment on the use of trend factors based on 
regional FFS expenditures, instead of national FFS expenditures, in 
establishing the benchmark for an ACO's first agreement period (see 
section II.A.2.d.2. of this proposed rule). Likewise, we considered and 
seek comment on using regional FFS expenditures, instead of national 
FFS expenditures, to update an ACO's historical benchmark beginning 
with its first agreement period.
e. Proposals for Parity Between Calculation of ACO, Regional and 
National FFS Expenditures
(1) Background
    In the November 2011 final rule, we established a methodology for 
determining ACO benchmark and performance year expenditures for 
Medicare FFS beneficiaries assigned to the ACO. Under that methodology, 
we take into account payments made from the Medicare Trust Funds for 
Parts A and B services for assigned Medicare FFS beneficiaries, 
including individually beneficiary identifiable payments made under a 
demonstration, pilot or time limited program, when computing average 
per capita Medicare expenditures under the ACO. We exclude IME payments 
and DSH and uncompensated care payments from both benchmark and 
performance year expenditures. This adjustment to benchmark 
expenditures falls under the Secretary's discretion established by 
section 1899(d)(1)(B)(ii) of the Act to adjust the benchmark for 
beneficiary characteristics and such other factors as the Secretary 
determines appropriate. However, section 1899(d)(1)(B)(i) of the Act 
only provides authority to adjust expenditures in the performance 
period for beneficiary characteristics and does not provide authority 
to adjust for ``other factors.'' Therefore, to remove IME and DSH 
payments from performance year expenditures, we used our authority 
under section 1899(i)(3) of the Act, which authorizes use of other 
payment models, in order to make this adjustment (see 76 FR 67920 
through 67922). We allow for a 3-month run out of claims data and apply 
a claims completion factor (percentage), to more accurately determine 
an ACO's benchmark and performance year expenditures (76 FR 67837 
through 67838). To minimize variation from catastrophically large 
claims we truncate an assigned beneficiary's total annual Parts A and B 
FFS per capita expenditures at the 99th percentile of national Medicare 
FFS expenditures as determined for each benchmark year and performance 
year (76 FR 67914 through 67916).
    We perform many of these calculations separately for each of the 
following populations of beneficiaries: ESRD, disabled, aged/dual 
eligible, and aged/non-dual eligible. For example, we calculate 
benchmark and performance year expenditures, determine truncation 
thresholds, and risk adjust ACO expenditures separately for each of 
these four Medicare enrollment types. As part of this methodology, we 
account for circumstances where a beneficiary is enrolled in a Medicare 
enrollment type for only a fraction of a year, through a process that 
results in a calculation of ``person years'' for a given year. We 
calculate the number of months that each beneficiary is enrolled in 
Medicare in each Medicare enrollment type, and divide by 12. When we 
sum the fraction of the year enrolled in Medicare for all the 
beneficiaries in each Medicare enrollment type, the result is total 
person years for the beneficiaries assigned to the ACO.
    We apply these policies consistently across the program, as 
specified in the provisions for establishing, updating and resetting 
the benchmark under Sec.  425.602, and for determining performance year 
expenditures under Sec.  425.604 for Track 1 ACOs and under Sec.  
425.606 for Track 2 ACOs. Further, in developing Track 3, we determined 
that it would be appropriate to calculate expenditures consistently 
program-wide (see 80 FR 32776 through 32777). Accordingly, the 
provisions in Sec.  425.602 governing establishing, updating, and 
resetting the benchmark also apply to ACOs under Track 3, and we 
adopted the same approach for determining performance year expenditures 
as is used in Track 1 and Track 2 in Sec.  425.610 for Track 3 ACOs.
(2) Proposals for Calculation of Regional FFS Expenditures
    As part of our proposal to adjust the historical benchmark to 
reflect regional FFS expenditures, we believe it is important to 
calculate FFS expenditures for an ACO's region in a manner consistent 
with the methodology used to calculate an ACO's benchmark and 
performance year expenditures. Consistent application of program 
methodology in calculating FFS expenditures will result in more 
predictable and stable calculations across the program over time, for 
example as ACOs transition from a benchmarking methodology that 
incorporates factors based on national FFS expenditures to one that 
incorporates factors based on regional FFS expenditures. In addition, 
use of an alternative approach to calculating regional FFS expenditures 
could introduce bias because different types of payments could be 
included in or excluded from these expenditures, as compared to 
historical benchmark expenditures and performance year expenditures.
    To increase predictability and stability, and avoid this bias, we 
believe we should follow the same approach in calculating regional FFS 
expenditures as is used in calculating benchmark and performance year 
expenditures, for

[[Page 5842]]

instance by including total Parts A and B FFS claims for the assignable 
beneficiary population for each county that will be used as the basis 
for determining expenditures for the ACO's regional service area and 
using a 3-month claims run out with a completion factor. As explained 
in previous rulemakings for the Shared Savings Program, we apply a 3-
month claims run out and completion factor (expressed as a percentage) 
so that our calculation of ACO expenditures for a given calendar year 
reflects the full costs of care furnished to assigned beneficiaries 
during that year. The decision to use a 3-month claims run out and a 
completion factor was based on our experience with the submission and 
processing of Parts A and B claims for services and the inherent lag 
between when a service is performed and when a claim is submitted for 
payment (see 76 FR 67837 through 67838; see also 80 FR 32776 through 
32777). Currently we use a completion factor that takes into account 
our experience with the submission of FFS claims nationwide. For 
instance, since the start of the program (as part of determining ACO 
benchmarks and the expenditure calculations for the performance years 
ending December 31, 2013, and December 31, 2014) we have consistently 
used the same completion factor as a multiplier applied to total Parts 
A and B expenditures for an ACO's assigned beneficiaries. We anticipate 
continuing to use completion factors based on national FFS claims to 
determine FFS expenditures for an ACO's regional service area, as 
opposed to calculating county-level claims completion factors. We 
believe claims completion factors based on national FFS data will 
continue to accurately reflect the full cost of care furnished to ACO 
assigned beneficiaries, because these factors are calculated based on a 
broad population of Medicare FFS beneficiaries and therefore 
comprehensively reflect billing practices of Medicare providers and 
suppliers nationally. Applying completion factors based on national FFS 
claims to regional FFS expenditures also allows us to consistently 
apply a single set of completion factors across program calculations, 
further ensuring the comparability of these calculations across the 
program over time. We are concerned that an alternative approach to 
calculating completion factors, such as county level completion 
factors, would add additional complexity without providing additional 
accuracy. Further, applying region or county-specific completion 
factors in some calculations and nationally-based completion factors in 
other calculations, could result in lack of comparability of resulting 
expenditures.
    In the initial rulemaking establishing the Shared Savings Program, 
we finalized an approach to determining which payments are included in 
expenditures used in program calculations. Consistent with section 
1899(d)(1) of the Act, we take into account payments made from the 
Medicare Trust Funds for Parts A and B services for assigned Medicare 
FFS beneficiaries, including individual beneficiary identifiable 
payments made under a demonstration, pilot or time limited program when 
computing average per capita Medicare expenditures under the ACO (see 
76 FR 67919 through 67920). We also believe that the calculation of 
Parts A and B county FFS expenditures used as the basis for calculating 
the ACO's regional service area expenditures should include 
individually beneficiary identifiable payments made under a 
demonstration, pilot or time limited program. Unless these payments are 
included in the calculation of regional FFS expenditures, these 
expenditures will be understated compared to ACO benchmark and 
performance year expenditures. In the November 2011 final rule, we also 
finalized an approach whereby we exclude IME and DSH payments from 
program calculations, so as not to create an incentive for ACOs to 
avoid referrals to hospitals that receive IME and/or DSH payments in an 
effort to demonstrate savings (see 76 FR 67920 through 67922). 
Similarly, we believe IME payments and DSH and uncompensated care 
payments should be excluded from regional FFS expenditures. Absent this 
adjustment, regional expenditures will overstate payments to providers 
receiving IME payments and/or DSH and uncompensated care payments, as 
compared to benchmark and performance year expenditures.
    In prior rulemaking for the Shared Savings Program we established 
policies for truncating an assigned beneficiary's total annual Parts A 
and B FFS per capita expenditures at the 99th percentile of national 
Medicare FFS expenditures when calculating benchmark and performance 
year expenditures (see 76 FR 67915 through 67916; see also 80 FR 32776 
through 32777). This truncation minimizes variation from 
catastrophically large claims. To prevent overstatement of the regional 
FFS expenditures that will be used to adjust an ACO's rebased 
historical benchmark, we believe it is necessary to apply the same 
approach to truncating beneficiary expenditures when calculating county 
FFS expenditures that are used as the basis for determining 
expenditures for an ACO's regional service area.
    We also risk adjust benchmark expenditures in the Shared Savings 
Program, to take into account the severity of health status and case 
mix of assigned beneficiaries, as described in greater detail in 
section II.A.3.a. of this proposed rule. For example, we use the 
prospective CMS-HCC model for adjusting benchmark expenditures in 
establishing the ACO's historical benchmark (see 76 FR 67916 through 
67919, and Sec.  425.602(a)(3)). Similarly, we would risk adjust county 
FFS expenditures for severity and case mix of assignable beneficiaries 
using the prospective CMS-HCC model.
    In financial calculations under the Shared Savings Program, we make 
separate expenditure calculations for each of the following populations 
of beneficiaries: ESRD, disabled, aged/dual eligible, and aged/non-dual 
eligible (see Sec. Sec.  425.602, 425.604, 425.606, and 425.610). For 
instance, we use this approach in calculating and truncating benchmark 
and performance year expenditures, trending historical benchmark 
expenditures and updating the historical benchmark, and in risk 
adjusting expenditures. Consistent with this approach, we believe it is 
important to calculate expenditures for each county used to determine 
the expenditures for an ACO's regional service area separately for each 
of these populations of beneficiaries. As described previously in the 
background for this section of this proposed rule, we use beneficiary 
person years in calculating expenditures for each Medicare enrollment 
type. Consistent with this approach, we would also calculate 
beneficiary person years when determining county FFS expenditures for 
each Medicare enrollment type.
    Taking these considerations into account, we propose to take the 
following steps in calculating county FFS expenditures used to 
determine expenditures for an ACO's regional service area:

    <bullet> Calculate the payment amounts included in Parts A and B 
FFS claims using a 3-month claims run out with a completion factor. 
Exclude IME, DSH, and uncompensated care payments. Include individually 
beneficiary identifiable payments made under a demonstration, pilot or 
time-limited program.
    <bullet> Truncate a beneficiary's total annual Parts A and B FFS 
per capita expenditures at the 99th percentile of

[[Page 5843]]

national Medicare FFS expenditures as determined for the relevant 
benchmark or performance year in order to minimize variation from 
catastrophically large claims.
    <bullet> Adjust expenditures for severity and case mix using 
prospective CMS-HCC risk scores.
    <bullet> Make separate expenditure calculations for each of the 
following populations of beneficiaries, stated as beneficiary person 
years: ESRD, disabled, aged/dual eligible, and aged/non-dual eligible.

We propose to incorporate this proposed methodology for calculating 
county FFS expenditures in a new section of the Shared Savings Program 
regulations at Sec.  425.603. We seek comment on this proposed 
methodology and on any additional factors that should be considered in 
calculating the expenditures for an ACO's regional service area.
(3) Proposals for Modifying the Calculation of National FFS 
Expenditures, Completion Factors, and Truncation Thresholds Based on 
Assignable Beneficiaries
    Several elements of the existing Shared Savings Program financial 
calculations are based on expenditures for all Medicare FFS 
beneficiaries regardless of whether they are eligible to be assigned to 
an ACO, including: The growth rates used to trend forward expenditures 
during the benchmark period; the projected absolute amount of growth in 
national per capita expenditures for Parts A and B services used to 
update the benchmark; the completion factors applied to benchmark and 
performance year expenditures; and the truncation thresholds set at the 
99th percentile of national Medicare FFS expenditures. In calculating 
these factors based on national FFS expenditures, we take into account 
Parts A and B expenditures for all Medicare FFS beneficiaries, and 
exclude IME payments and DSH and uncompensated care payments to align 
with our methodology for calculating benchmark and performance year 
expenditures.
    Generally, beneficiaries eligible for assignment to Shared Savings 
Program ACOs are a subset of the larger population of Medicare FFS 
beneficiaries. In identifying the pool of beneficiaries who can be 
assigned to an ACO, as a ``pre-step'' to the two-step assignment 
process under Sec.  425.402, we determine if a beneficiary received at 
least one primary care service from a physician within the ACO whose 
services are used in assignment:
    <bullet> For performance year 2016 and subsequent performance 
years, the beneficiary must have received a primary care service, as 
defined under Sec.  425.20, with a date of service during the 12-month 
assignment window, as defined under Sec.  425.20.
    <bullet> The service must have been furnished by a primary care 
physician as defined under Sec.  425.20 or by a physician with one of 
the primary specialty designations included in Sec.  425.402(c). 
Therefore, beneficiaries who have not received any primary care 
service, or who have only received primary care services from 
physicians with a primary specialty code not specified in Sec.  
425.402(c) (see 80 FR 32753 through 32754, Table 5-Physician Specialty 
Codes Excluded From Assignment Step 2), or from non-physician 
practitioners are excluded from assignment to an ACO.
    This pre-step is designed to satisfy the statutory requirement 
under section 1899(c) of the Act that beneficiaries be assigned to an 
ACO based on their use of primary care services furnished by physicians 
(80 FR 32756; Sec.  425.402(a), Sec.  425.402(b)(1)). We use the 
beneficiary population resulting from the pre-step, referred to as 
``assignable beneficiaries,'' to determine the beneficiaries who will 
be assigned to an ACO based on the two-step assignment process under 
Sec.  425.402.
    Including beneficiaries ineligible for assignment in calculating 
factors that are based on the expenditures of the broader FFS 
population can bias those calculations. There may be differences in the 
health status and health care cost experience of Medicare beneficiaries 
excluded from the pre-step compared to those who are eligible for 
assignment, based on their health conditions and the providers from 
whom they receive care. Thus, including the expenditures for non-
assignable beneficiaries, such as non-utilizers of health care 
services, can result in lower overall per capita expenditures. These 
biases may have a more pronounced effect in calculations of regional 
FFS expenditures, which are based on relatively smaller populations of 
beneficiaries, as compared to calculations based on the national FFS 
population. As a result, we are concerned that using expenditures for 
all Medicare FFS beneficiaries, as opposed to a narrower population of 
FFS beneficiaries, in calculating certain program elements may 
introduce a degree of bias in these calculations, particularly for 
elements based on regional FFS expenditures (as discussed in section 
II.A.2.b. of this proposed rule).
    Therefore, we believe it is timely to reconsider the population 
that should be used in program calculations for both national and 
regional FFS populations. Our preferred approach would be to apply a 
similar logic as is used to identify the population of FFS 
beneficiaries eligible for assignment as part of the assignment pre-
step under Sec.  425.402(b)(1). We would limit the Medicare FFS 
population used in these program calculations to ``assignable'' 
Medicare beneficiaries who meet the following requirements: (1) 
Received at least one primary care service, as defined under Sec.  
425.20, with a date of service during the 12-month assignment window; 
and (2) this primary care service was provided by a primary care 
physician, as defined under Sec.  425.20, or by a physician with one of 
the primary specialty designations included in Sec.  425.402(c).
    One factor related to calculating expenditures for assignable 
beneficiaries is the assignment window used to identify this 
population, with options including: The 12-month period used to assign 
beneficiaries to Track 1 and 2 ACOs based on a calendar year, and an 
off-set 12-month period used to assign beneficiaries prospectively to 
an ACO in Track 3. (See definition of assignment window under Sec.  
425.20 and related discussion in the June 2015 final rule at 80 FR 
32699.) We believe it is important to calculate regional and national 
FFS expenditures consistently across the three tracks of the program, 
so as not to advantage or disadvantage an organization simply on this 
basis. This consistency would help to ensure a level playing field in 
markets where multiple ACOs are present, and would also simplify 
program operations. Accordingly, we are proposing to calculate county 
FFS expenditures and average risk scores, as well as factors based on 
national FFS expenditures, using the assignable beneficiary population 
identified using the assignment window for the 12-month calendar year 
corresponding to the benchmark or performance year. This is the same 
assignment window that is currently used to assign beneficiaries under 
Track 1 and Track 2. We plan to monitor for observable differences in 
the health status (for example, as identified by HCC risk scores) and 
expenditures of the assignable beneficiaries identified using the 12-
month calendar year assignment window, as compared to assignable 
beneficiaries identified using an assignment window that is the off-set 
12-month period prior to the benchmark or performance year (for example 
October through September preceding

[[Page 5844]]

the calendar year). In the event that we conclude that additional 
adjustments (for instance as part of risk adjusting county FFS 
expenditures) are necessary to account for the use of assignable 
beneficiaries identified using an assignment window that is different 
from the assignment window used to assign beneficiaries to the ACO, we 
would address this issue through future rulemaking.
    This proposed rule primarily focuses on modifying the methodology 
for resetting the ACO's historical benchmark for an ACO's second or 
subsequent agreement period beginning on or after January 1, 2017. As 
we have indicated elsewhere in this proposed rule (see section 
II.A.2.d.3. of this proposed rule), while we are proposing to modify 
the annual update to the ACO's rebased historical benchmark to reflect 
a regional update, we are not proposing to extend this modification to 
the benchmark update for ACOs in their first agreement period or for 
ACOs that started their second agreement period January 1, 2016. We 
will continue to apply an update based on national FFS expenditures to 
these ACOs. However, to the extent that we are proposing to change our 
methodology in order to use only assignable beneficiaries instead of 
all Medicare FFS beneficiaries in calculating the benchmark update 
based on national FFS expenditures, we believe we would need to use the 
authority under section 1899(i)(3) of the Act to adopt other payment 
models to implement this proposed change.
    Section 1899(d)(1)(B)(ii) of the Act states the benchmark shall be 
updated by the projected absolute amount of growth in national per 
capita expenditures for Parts A and B services under the original 
Medicare FFS program, as estimated by the Secretary. The plain language 
of section 1899(d)(1)(B)(ii) of the Act demonstrates Congress' intent 
that the benchmark update be calculated based on growth in expenditures 
for the national FFS population, as opposed to a subset of this 
population. Therefore, in order to allow us to use only assignable 
beneficiaries in determining the amount of growth in per capita 
expenditures for Parts A and B services for purposes of determining the 
benchmark update for ACOs in their first agreement period and those 
ACOs that started a second agreement period on January 1, 2016, it is 
necessary to rely upon our authority under section 1899(i)(3) of the 
Act. Section 1899(i)(3) of the Act authorizes the Secretary to use 
other payment models in place of the payment model outlined in section 
1899(d) of the Act as long as the Secretary determines these other 
payment models will improve the quality and efficiency of items and 
services furnished to Medicare beneficiaries, without additional 
program expenditures.
    For the reasons explained in section II.A.2.d.3 of this proposed 
rule, we believe using our authority under section 1899(i)(3) of the 
Act to adopt a payment model that includes calculating the benchmark 
update for ACOs in their first agreement period and for ACOs that 
started a second agreement period on January 1, 2016, using national 
FFS expenditures for assignable beneficiaries, rather than for all FFS 
beneficiaries, would improve the quality and efficiency of items and 
services furnished to Medicare beneficiaries. We believe this approach 
would increase the accuracy of benchmarks, by determining the national 
update using a population that more closely resembles the population 
that could be assigned to ACOs. Further, we believe using assignable 
beneficiaries across program calculations based on national and 
regional FFS expenditures will result in factors that are generally 
more comparable. As a result, these calculations will be more 
predictable and stable across the program over time, for example as 
ACOs transition from a benchmarking methodology that incorporates 
national FFS expenditures to one that incorporates factors based on 
regional FFS expenditures. Ultimately, we believe this policy could 
increase overall participation in the program, thereby resulting in 
more organizations working to meet the program's three-part aim of 
better care for individuals, better health for populations and lower 
growth in expenditures.
    As explained in section II.A.2.d.3. of this proposed rule, section 
1899(i)(3)(B) of the Act also specifies that the other payment model 
must not result in additional program expenditures. Section IV.E. of 
this proposed rule discusses our analysis of this requirement, and our 
initial assessment that for the period spanning 2017 through 2019 there 
would be net federal savings associated with a payment model under 
section 1899(i)(3) that includes the proposed changes to the manner in 
which we update the benchmark during an ACO's agreement period.
    Taking these considerations into account, we believe applying a 
payment methodology that includes calculating the benchmark update 
consistently based on assignable FFS beneficiaries, instead of all FFS 
beneficiaries, would meet the requirements under section 1899(i)(3) of 
the Act that the payment model would improve the quality and efficiency 
of items and services furnished to Medicare beneficiaries, without 
additional program expenditures. However, as discussed in section 
II.A.2.d.3. of this proposed rule, we intend to revisit this 
determination periodically. If we determine the payment model no longer 
satisfies the requirements of section 1899(i)(3) of the Act, for 
example if the model results in net program costs, we would undertake 
additional notice and comment rulemaking to make adjustments to the 
model to assure continued compliance with the statutory requirements. 
After considering these issues, we are proposing to use the authority 
under section 1899(i)(3) of the Act to revise the regulation at Sec.  
425.602(b)(1) to specify that the annual update to the benchmark will 
be based on the projected absolute amount of growth in national per 
capita expenditures for Parts A and B services under the original 
Medicare FFS program for assignable beneficiaries. We further propose 
to specify in this provision of the regulations that we will identify 
assignable beneficiaries for the purpose of calculating the update 
based on national FFS expenditures using the 12-month calendar year 
corresponding to the year for which the update is being calculated. We 
seek comment on these proposals.
    We also propose to make conforming changes to the regulations to 
specify that assignable Medicare FFS beneficiaries, identified based on 
the 12-month period corresponding to the calendar year for which the 
calculations are being made, will be used to perform the following 
calculations: (1) Truncation thresholds for limiting the impact of 
catastrophically large claims on ACO expenditures under Sec.  
425.602(a)(4), Sec.  425.604(a)(4), Sec.  425.606(a)(4), Sec.  
425.610(a)(4); and (2) growth rates used to trend forward expenditures 
during the benchmark period under Sec.  425.602(a)(5). We will provide 
additional information through subregulatory guidance regarding the 
process for using assignable beneficiaries to perform these 
calculations, as well as calculation of the claims completion factor 
applied under Sec.  425.602(a)(1), Sec.  425.604(a)(5), Sec.  
425.606(a)(5), Sec.  425.610(a)(5).
    In addition, we propose to specify in a new provision of the Shared 
Savings Program regulations at Sec.  425.603 that would govern the 
methodology for resetting, adjusting, and updating an ACO's benchmark 
for a second or subsequent agreement period that county FFS 
expenditures will be based on assignable Medicare FFS beneficiaries 
determined using the 12-

[[Page 5845]]

month period corresponding to the calendar year for which the 
calculations are being made.
    We propose that regulatory changes regarding use of assignable 
beneficiaries in calculations based on national FFS expenditures would 
apply for the 2017 performance year and all subsequent performance 
years. Under this proposal, these changes would apply to ACOs that are 
in the middle of an agreement period, specifically ACOs that started 
their first agreement period in 2015 or 2016 and ACOs that started 
their second agreement period on January 1, 2016. We would adjust the 
benchmarks for these ACOs at the start of the first performance year in 
which these proposed changes apply so that the benchmark for the ACO 
reflects the use of the same methodology that would apply in 
expenditure calculations for the corresponding performance year.
    We seek comment on these proposals. We also seek comment on whether 
expenditures for all Medicare FFS beneficiaries should be used to 
calculate these elements for ACOs in their first agreement period or a 
second agreement period that started on January 1, 2016, while 
expenditures for assignable Medicare FFS beneficiaries are used to 
calculate these elements for the ACO's second and subsequent agreement 
period in combination with the use of the assignable beneficiary 
population to determine expenditures for the ACO's regional service 
area.
f. Proposed Timing of Applicability of Revised Rebasing and Updating 
Methodology
    In the June 2015 final rule we indicated that the revised rebasing 
methodology would ``apply to ACOs beginning new agreement periods in 
2017 or later. ACOs beginning a new agreement period in 2016 would 
convert to the revised methodology at the start of their third 
agreement period in 2019'' (80 FR 32795). This description did not 
differentiate between ACOs that started their first agreement period 
under the Shared Savings Program on January 1, 2016, and ACOs that 
started in the program in 2012 and 2013 (2012 and 2013 starters) that 
entered their second agreement period on January 1, 2016.
    We considered the following approach, under which the revised 
rebasing methodology could be applied to new agreement periods 
beginning on or after January 1, 2017, in a manner that allows for a 
phase-in to a greater percentage in calculating the regional adjustment 
(as described in section II.A.2.c.3. of this proposed rule) for all 
ACOs:
    <bullet> All ACOs would have the benchmark for their first 
agreement period set and updated under the methodology under Sec.  
425.602(a) and (b).
    <bullet> The 2014, 2015, 2016 starters and subsequent cohorts 
entering their second agreement periods on or after January 1, 2017, 
would be rebased under the proposed new methodology for adjusting an 
ACO's rebased historical benchmark to reflect expenditures in the ACO's 
regional service area, and the ACO's rebased benchmark would be updated 
during the agreement period by growth in regional FFS expenditures. In 
calculating the regional adjustment to the rebased historical benchmark 
for an ACO's second agreement period, the percentage applied to the 
difference between the ACO's regional service area expenditures and 
ACO's rebased historical benchmark expenditures would be set at 35 
percent. In an ACO's third or subsequent agreement period this 
percentage would be set at 70 percent unless the Secretary determines a 
lower weight should be applied, as specified through future rulemaking.
    <bullet> With respect to the 2012 and 2013 starters, who have 
renewed their agreements for 2016, we would apply the current rebasing 
methodology, under which we equally weight the benchmark years and 
account for savings generated during the ACO's prior agreement period, 
in rebasing their historical benchmark for their second agreement 
period (beginning in 2016). We would apply the methodology currently 
specified under Sec.  425.602(b) for updating the benchmark annually 
for each year of their second agreement period. We would apply the 
proposed new rebasing policies, including the phase in of the 
percentage used in calculating the regional adjustment, to these ACOs 
for the first time in calculating their rebased historical benchmark 
for their third agreement period (beginning in 2019), as if the ACOs 
were entering their second agreement period. Accordingly, the 2012 and 
2013 starters would have the same transition to the use of a higher 
percentage in calculating the regional adjustment as all other ACOs.
    This approach to phasing in the application of the new methodology 
for adjusting an ACO's rebased historical benchmark to reflect regional 
FFS expenditures would give ACOs and other stakeholders greater 
opportunity to prepare for, understand the effects of and adjust to the 
application of benchmarks that incorporate regional expenditures.
    We are proposing to make these changes applicable to ACOs starting 
a second or subsequent agreement period on or after January 1, 2017. 
Therefore, they would initially apply in resetting benchmarks for the 
second agreement period for all ACOs other than 2012 and 2013 starters 
(who entered their second agreement period on January 1, 2016). Further 
we are proposing that 2012 and 2013 starters would have the same 
transition to regional adjustments to their rebased historical 
benchmarks as all other ACOs: In calculating the regional adjustment to 
the ACO's rebased historical benchmark for its third agreement period 
(in 2019), the percentage applied to the difference between the ACO's 
regional service area expenditures and ACO's rebased historical 
benchmark expenditures would be set at 35 percent; in its fourth or 
subsequent agreement period this percentage would be set at 70 percent 
unless the Secretary determines a lower weight should be applied, as 
specified through future rulemaking. We request comment on this 
proposed approach to phasing in the application of the revised rebasing 
and updating methodology.

[[Page 5846]]



                                        Table 2--Characteristics of Current and Proposed Benchmarking Approaches
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Adjustment to
                                                                     Adjustment to                                         historical
                                                                    the historical     Adjustment to                     benchmark for
                                                    Historical       benchmark for    the historical    Adjustment to    health status      Update to
                                                  benchmark trend    regional FFS      benchmark for    the historical        and           historical
    Source of  methodology     Agreement period   factors  (Trend    expenditures       savings in      benchmark for     demographic     benchmark for
                                                 BY1, BY2 to BY3)     (percentage    prior  agreement  ACO Participant    factors  of     growth in FFS
                                                                      applied  in         period?        List changes     performance        spending
                                                                      calculating                                        year assigned
                                                                      adjustment)                                        beneficiaries
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Methodology..........  First...........  National........  N/A.............  N/A.............  Calculated       Newly assigned   National.
                                                                                                        using            beneficiaries
                                                                                                        benchmark year   adjusted using
                                                                                                        assignment       CMS-HCC model;
                                                                                                        based on the     continuously
                                                                                                        ACO's            assigned
                                                                                                        certified ACO    beneficiaries
                                                                                                        Participant      adjusted using
                                                                                                        List for the     demographic
                                                                                                        performance      factors alone
                                                                                                        year.            unless CMS-HCC
                                                                                                                         risk scores
                                                                                                                         result in a
                                                                                                                         lower risk
                                                                                                                         score.
                               Second and        National........  N/A.............  Yes.............  Same as          Same as          National.
                                subsequent.                                                             methodology      methodology
                                                                                                        for first        for first
                                                                                                        agreement        agreement
                                                                                                        period.          period.
Proposed Rebasing Methodology  Second (third     Regional........  Yes (35 percent)  No..............  ACO's rebased    No change......  Regional.
                                for 2012/2013                                                           benchmark
                                starters).                                                              adjusted by
                                                                                                        expenditure
                                                                                                        ratio *.
                               Third and         Regional........  Yes (70 percent   No..............  Same as          No change......  Regional.
                                subsequent                          unless the                          proposed
                                (fourth and                         Secretary                           methodology
                                subsequent for                      determines a                        for second
                                2012/2013                           lower weight                        agreement
                                starters).                          should be                           period.
                                                                    applied, as
                                                                    specified
                                                                    through future
                                                                    rulemaking).
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Proposed adjustment to the historical benchmark for ACO Participant List changes using an expenditure ratio would be a program-wide change applicable
  to all ACOs including ACOs in their first agreement period. As part of the proposed rebasing methodology, the regional adjustment to the ACO's rebased
  historical benchmark would be recalculated based on the new ACO Participant List.

3. Risk Adjustment and Coding Intensity Adjustment
a. Overview
    In earlier rulemaking for the Shared Savings Program, we identified 
several risk adjustment considerations related to use of regional 
expenditures in resetting ACO benchmarks. In the June 2015 final rule, 
we specified that the subsequent proposed rule on benchmark rebasing 
would address the following issues related to risk adjustment: (i) How 
to refine the program's risk adjustment methodology to account for 
differences in the mix of beneficiaries assigned to the ACO and in the 
ACO's region; and (ii) how we might guard against excessive payments as 
ACOs improve documentation and coding of beneficiary conditions, such 
as by adjusting ACOs' risk scores for coding intensity or imposing 
limits on the extent to which an ACO's risk score can rise relative to 
its region (80 FR 32796). In the December 2014 proposed rule, we 
acknowledged considerations around the need for normalization of the 
ACO's assigned beneficiary risk scores among other considerations for 
additional risk adjustment in developing a rebasing methodology to 
account for regional expenditures (79 FR 72842).
    The Shared Savings Program benchmarking methodology uses the CMS-
HCC prospective risk score methodology used by the MA program to adjust 
expenditures for changes in health status of the population assigned to 
the ACO. Currently we use CMS-HCC risk scores for an ACO's assigned 
beneficiary population in risk adjusting the ACO's historical benchmark 
at the start of its first agreement period, adjusted historical 
benchmark (based on annual participant list changes during the 
agreement period) and in rebasing the ACO's benchmark for its second or 
subsequent agreement period (Sec.  425.602(a)(3)). Each performance 
year, we adjust the historical benchmark for changes during the 
performance period in the health status and demographic factors of 
assigned beneficiaries (Sec.  425.604(a), Sec.  425.606(a), Sec.  
425.610(a)). We use CMS-HCC prospective risk scores to adjust the 
benchmark to take into account changes in severity and case mix for 
newly-assigned beneficiaries and demographic factors to adjust for 
changes for beneficiaries continuously assigned to the ACO. However, if 
the continuously assigned population shows a decline in its CMS-HCC 
prospective risk scores, we adjust the benchmark to reflect the lower 
risk score for this population. The risk adjustment methodology applied 
in determining the updated benchmark each performance year limits the 
impact of changes in health status, including limiting the impact of 
ACO coding initiatives undertaken during the agreement period.
    We anticipate that using CMS-HCC risk scores for an ACO's assigned 
beneficiary population in resetting the ACO's benchmark has the 
potential to benefit ACOs that have systematically engaged in coding 
initiatives during their prior agreement period. This effect would have 
been limited in the corresponding performance years due to the 
application of our current approach to risk adjusting during the 
agreement period according to the ACO's newly and continuously assigned 
beneficiary populations. Although initial financial performance results 
(for the performance years ending December 31, 2013 and 2014) do not 
show strong evidence that concerns about systematic coding practices by 
ACOs have materialized, complete data are not yet available to analyze 
the effect of coding initiatives in the initial rebasing of ACO 
benchmarks, as initial program entrants (ACOs with 2012 and 2013 
agreement

[[Page 5847]]

start dates) only began their second agreement periods on January 1, 
2016.
    We received various suggestions for risk adjustment approaches, 
including through comments submitted in response to Shared Savings 
Program proposed rules (see 76 FR 67917 through 67919; 80 FR 32793). 
For instance, some commenters responding to the December 2014 proposed 
rule raised the need to revise the program's risk adjustment 
methodology when moving to an alternative benchmarking methodology that 
incorporates regional costs. Commenters suggested, for instance: Using 
a regional HCC growth rate or accounting for regional variation in 
updating the HCC formulas; using a concurrent risk adjustment 
methodology, and doing so in combination with a demographically 
adjusted regional FFS cost baseline; creating a risk adjustment factor 
by comparing the HCC coding between the ACO's assigned beneficiaries 
and the regional comparison population; following the MA methodology 
for risk adjustment; and readjusting the risk determination of a 
population after removing beneficiaries determined ineligible for 
assignment. Some commenters suggested that CMS not be overly 
restrictive in applying regional normalization and coding intensity 
adjustments. Others suggested CMS specifically account for other 
factors in regional adjustments such as changes in access to care for 
low-cost populations, and the socio-economic risk profile of 
beneficiaries. One commenter requested that risk adjustment be based on 
the ACO's historical performance and not the market's historical 
performance.
    In addition, although the December 2014 proposed rule did not 
explicitly request comment on the program's existing risk adjustment 
methodology, many commenters took the opportunity to criticize this 
aspect of the calculation of ACO benchmarks. Almost all commenters 
addressing the program's existing risk adjustment methodology suggested 
that it inadequately captures the risk and cost associated with 
assigned beneficiaries. Of the alternatives to the current risk 
adjustment methodology presented by commenters, many urged CMS to 
incorporate the full change in HCC risk scores across each performance 
year (upward and downward adjustment). Some suggested use of 
regionally-based risk factors. Others suggested that CMS' concerns 
about upcoding could be addressed through vigilant monitoring or 
placing a cap on upward risk adjustment growth (for example, relative 
to a national or regional growth rate). Some urged CMS to continue 
researching alternative risk adjustment models and consider additional 
changes to increase the accuracy of the risk adjustment methodology 
(see 80 FR 32793).
b. Proposals for Risk Adjusting in Determining the Regional Adjustment 
to the ACO's Rebased Historical Benchmark and Seeking Comment on 
Approaches for Risk Adjusting Rebased Benchmarks
    To balance CMS' concerns regarding ACO coding practices with the 
recommendations of commenters, we considered an approach whereby we 
would perform risk adjustment to account for the health status of the 
ACO's assigned population in relation to FFS beneficiaries in the ACO's 
regional service area when determining the regional adjustment to the 
ACO's rebased historical benchmark described in section II.A.2.c. of 
this proposed rule. Additionally, we considered rigorously monitoring 
for the impact of coding initiatives on ACO benchmarks and modifying 
the risk adjustment methodology used in resetting ACO benchmarks as 
warranted through future rulemaking.
    We propose to adjust for differences in health status between an 
ACO and its regional service area in a given year, in determining the 
regional adjustment to the ACO's rebased historical benchmark. For 
example, we would compute for each Medicare enrollment type a measure 
of risk-adjusted regional expenditures that would account for 
differences in HCC risk scores of the ACO's assigned beneficiaries and 
the average HCC risk scores in the ACO's regional service area. We 
believe this approach would account for differences in health status 
between the ACO's assigned population and the broader FFS population in 
the ACO's regional service area. It would also capture differences in 
coding intensity efforts applied to the ACO's assigned population and 
the FFS population in the ACO's regional service area. We propose to 
include this risk adjustment approach in the revised benchmark rebasing 
methodology under a new provision of the Shared Savings Program 
regulations at Sec.  425.603.
    While we anticipate the proposed approach would serve as a partial 
coding intensity adjustment, it may not fully adjust for differential 
coding intensity by the ACO relative to its region. In other words, 
this would not adjust for intensive coding practices of the ACO that 
are above and beyond the coding practices occurring generally in the 
ACO's region. For this reason, we plan to rigorously monitor for the 
impact of coding initiatives on ACO benchmarks and, if warranted, would 
undertake further rulemaking to modify the risk adjustment methodology 
to further limit ACOs from generating higher benchmarks simply through 
systematic coding practices. The combined approach of adjusting for an 
ACO's risk relative to its region while engaging in further rigorous 
monitoring is also in alignment with certain comments received in 
response to the December 2014 proposed rule, including comments 
recommending that CMS compare an ACO's HCC coding with that of a 
regional comparison population and avoid being overly restrictive in 
applying coding intensity adjustments (see 80 FR 32793).
    We believe the combined approach of proposing to adjust for an 
ACO's risk relative to that of its region in determining the regional 
adjustment to the ACO's rebased historical benchmark, while engaging in 
further rigorous monitoring, is reasonable given the lack of strong 
evidence to date that ACOs are engaging in more intensive coding 
practices and given a number of factors that we believe would mitigate 
the potential impact of coding intensity on ACO financial calculations, 
including the following:
    <bullet> The program's current policy for performance year 
reconciliation under which the ACO's benchmark is risk adjusted using 
HCC scores for the newly assigned population, but any upward adjustment 
for the continuously assigned population is limited to demographics, 
appears to mitigate the impact of ACO coding initiatives.
    <bullet> CMS is fully transitioning in 2016 to a new HCC model that 
markedly reduces the model's sensitivity to subjectively coded severity 
levels for key chronic conditions.
    <bullet> ACOs are less susceptible to coding practices, for 
instance, compared to MA plans, for several reasons including the 
following: (1) ACOs can be comprised of entities with little influence 
over the coding practices at other facilities or settings (a point made 
by commenters responding to the December 2014 proposed rule (see 80 FR 
32793)); and (2) unlike MA plans, ACOs cannot submit supplemental 
diagnosis codes.
    <bullet> Routine changes in the assignment of beneficiaries to the 
ACO would tend to reduce the potential disparity in coding intensity 
between the ACO and its region. As a result of normal changes in 
beneficiary assignment from year to year, beneficiaries whose risk 
scores were subject to ACO coding initiatives in one year may no longer 
be assigned to the ACO in the next year. These changes in the ACO's 
assigned

[[Page 5848]]

population may serve to mitigate the effect of coding initiatives by 
preventing the ACO from being able to systematically apply coding 
intensity efforts across a static population year after year. In 
addition, under the proposals described in section II.A.2. of this 
proposed rule, regional FFS expenditures would reflect the coding 
intensity efforts (or lack thereof) within the ACO's regional service 
area, including the ACO's own coding intensity initiatives.
    <bullet> Many ACOs tend to be clustered in similar regions, meaning 
coding intensity efforts in such regions would also be felt by the 
region's wider population as a whole, further reducing the potential 
impact of coding intensity for ACOs relative to their region. 
Similarly, ACOs serve a wider population than just their assigned 
beneficiaries which leads to spillover of any coding shifts to the 
wider region; when many ACOs are clumped together geographically these 
spillover effects can be further amplified.
    However, we considered several alternatives that might be employed 
in the future to limit the impacts of intensive coding while still 
accounting for changes in health status within an ACO's assigned 
beneficiary population.
    One alternative we considered would be to apply the methodology 
currently used to adjust the ACO's benchmark annually to account for 
the health status and demographic factors of the ACO's performance year 
assigned beneficiaries (according to newly and continuously assigned 
populations) when rebasing the ACO's historical benchmark. Under this 
approach, newly assigned beneficiaries would always receive full HCC 
risk adjustment, whereas continuously assigned beneficiaries would 
receive either HCC or demographic risk adjustment, depending on whether 
average HCC risk scores were rising or falling. We believe this 
approach would more significantly limit ACOs from generating higher 
benchmarks simply through systematic coding practices, compared to the 
current risk adjustment methodology that accounts for the CMS-HCC 
scores of all assigned beneficiaries in rebasing, or the approaches 
proposed in this section. An advantage of this alternative is that it 
is already part of the current benchmarking methodology and is familiar 
to ACOs and stakeholders, and would be relatively easy for CMS to 
implement.
    We have also considered ultimately moving to a coding intensity 
adjustment similar to the methodology used in the MA program which 
relies on an analysis of populations of beneficiaries who remained in 
MA for two consecutive reference years, and whose diagnoses all came 
from MA, referred to as stayers. For a full description of the MA 
approach see ``Advance Notice of Methodological Changes for Calendar 
Year (CY) 2010 for Medicare Advantage (MA) Capitation Rates and Part C 
and Part D Payment Policies,'' February 20, 2009, available online at 
https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/downloads/Advance2010.pdf. Under this approach we would develop a 
coding intensity adjustment by looking at risk score changes over time 
for beneficiaries assigned to the ACO for at least two consecutive 
prospective risk adjustment data years (similar to the population 
referred to as stayers under the MA methodology) relative to the 
greater FFS population. One advantage of this approach is that CMS has 
several years of experience with the methodology used under the MA 
program. Further, this approach would measure the degree of coding 
intensity and adjust accordingly. However, before implementing an 
approach similar to the one used in the MA program, we would need to 
conduct additional analyses, using Shared Savings Program data spanning 
several program years, including future years.
    We seek comment on the proposals to risk adjust to account for the 
health status of the ACO's assigned population in relation to FFS 
beneficiaries in the ACO's regional service area as part of the 
methodology for adjusting the ACO's rebased historical benchmark to 
reflect regional FFS expenditures, and to specify this approach under a 
new provision of the Shared Savings Program regulations at Sec.  
425.603. If this approach is finalized, we would rigorously monitor for 
the impact of coding initiatives on ACO benchmarks and make necessary 
refinements to the program's risk adjustment methodology through future 
rulemaking if program results show adverse impacts due to increased 
coding intensity. We also seek comment on alternatives considered that 
might be employed in the future to limit the impacts of intensive 
coding while still accounting for changes in health status within an 
ACO's assigned beneficiary population, including: (1) Apply the 
methodology currently used to adjust the ACO's benchmark annually to 
account for the health status and demographic factors of the ACO's 
performance year assigned beneficiaries (according to newly and 
continuously assigned populations) when rebasing the ACO's historical 
benchmark; or (2) develop a coding intensity adjustment by looking at 
risk score changes over time for beneficiaries assigned to the ACO for 
at least two consecutive prospective risk adjustment data years 
(similar to the population referred to as stayers under the MA 
methodology) relative to the greater FFS population.
    We note that these proposed changes would not apply in calculating 
the benchmarks for ACOs in their first agreement period, or in 
establishing and updating the rebased historical benchmark for the 
second agreement period for ACOs that started in the program in 2012 
and 2013 and started a new agreement period on January 1, 2016. Rather, 
we will continue to use CMS-HCC risk scores for the ACO's assigned 
beneficiary population in risk adjusting the ACO's historical benchmark 
at the start of the agreement period.
    Further, for all ACOs, we will continue to use the current 
methodology to adjust the ACO's benchmark annually to account for the 
health status and demographic factors of the ACO's performance year 
assigned beneficiaries (according to the newly and continuously 
assigned populations).

B. Adjusting Benchmarks for Changes in ACO Participant (TIN) 
Composition

1. Overview
    In the initial rulemaking establishing the Shared Savings Program, 
we acknowledged that the addition or removal of ACO participants or ACO 
providers/suppliers (identified by TINs and NPIs, respectively) during 
the term of an ACO's participation agreement could affect a number of 
different aspects of the ACO's participation in the Shared Savings 
Program. In the November 2011 final rule, we included the regulation at 
Sec.  425.214(a)(3), which specified that the ACO's benchmark, risk 
scores, and preliminary prospective assignment may be adjusted to 
reflect changes in ACO participants or ACO providers/suppliers at CMS' 
discretion. Following the issuance of the November 2011 final rule, we 
issued subregulatory guidance further describing how the agency would 
use this discretion to make adjustments to reflect changes in ACO 
participants. See ``Changes in ACO participants and ACO providers/
suppliers during the Agreement Period'' available online at http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Updating-ACO-Participant-List.html (last modified 
November 16, 2015). This guidance explains:

    After acceptance into the program and upon execution of the 
participation agreement with CMS, the ACO must certify

[[Page 5849]]

the completeness and accuracy of its list of ACO participants. We 
set the ACO's historical benchmark at the start of the agreement 
period based on the assigned population in each of the three 
benchmark years by using the ACO Participant List certified by the 
ACO. The ACO must submit a new certified ACO Participant List at the 
start of each new performance year.
    CMS will adjust the ACO's historical benchmark at the start of a 
performance year if the ACO Participant List that the ACO certified 
at the start of that performance year differs from the one it 
certified at the start of the prior performance year. We will use 
the updated certified ACO Participant List to assign beneficiaries 
to the ACO in the benchmark period (the 3 years prior to the start 
of the ACO's agreement period) in order to determine the ACO's 
adjusted historical benchmark. As a result of changes to the ACO's 
certified ACO Participant List, we may adjust the historical 
benchmark upward or downward. We'll use the new certified list of 
ACO participants and the adjusted benchmark for the new performance 
year's assignment, quality measurement and sampling, reports for the 
new performance year, and financial reconciliation. We will provide 
ACOs with the adjusted Historical Benchmark Report.

    In the June 2015 final rule we amended the Shared Savings Program 
regulations to incorporate portions of the subregulatory guidance (80 
FR 32707 through 32712) at Sec.  425.118(b)(3)(i). This provision 
specifies that CMS annually adjusts an ACO's assignment, historical 
benchmark, the quality reporting sample, and the obligation of the ACO 
to report on behalf of eligible professionals that bill under the TIN 
of an ACO participant for certain CMS quality initiatives to reflect 
the addition or deletion of entities from the list of ACO participants 
that is submitted to CMS before the start of a performance year in 
accordance with Sec.  425.118(a). Further, Sec.  425.118(b)(3)(ii) 
specifies that absent unusual circumstances, CMS does not make 
adjustments during the performance year to the ACO's assignment, 
historical benchmark, performance year financial calculations, the 
quality reporting sample, or the obligation of the ACO to report on 
behalf of eligible professionals that bill under the TIN of an ACO 
participant for certain CMS quality initiatives to reflect the addition 
or deletion of entities from the ACO Participant List that become 
effective during the performance year. CMS has sole discretion to 
determine whether unusual circumstances exist that would warrant such 
adjustments. Because we added a new provision at Sec.  425.118 that 
addresses the adjustments that CMS will make to reflect changes in an 
ACO's list of ACO participants, we removed the reference to CMS' 
discretion to adjust the benchmark under Sec.  425.214(a)(3). The June 
2015 final rule also codified the subregulatory policies allowing for 
consideration of claims billed under merged and acquired Medicare-
enrolled TINs for purposes of beneficiary assignment and establishing 
the ACO's benchmark (Sec. Sec.  425.204(g), 425.118(a)(2)).
    During the program's initial performance years, we experienced a 
high volume of change requests from ACOs, both adding and removing ACO 
participants. With each new performance year an ACO has the opportunity 
to request the addition of new ACO participants and to make other 
changes to its ACO Participant List resulting in a new certified ACO 
Participant List as required under Sec.  425.118(a). Prospective 
additions must be vetted through CMS' screening process which reviews 
the TINs for program integrity concerns, Medicare enrollment 
requirements, and participation in other Medicare shared savings 
initiatives. ACOs may delete ACO participants from their ACO 
Participant List at any time during the performance year and are 
required to notify CMS within 30 days after the termination of an ACO 
participant agreement (Sec.  425.118(b)(2)).
    When we adjust historical benchmarks during the agreement period to 
account for changes in beneficiary assignment arising from ACO 
Participant List changes, the benchmark period (the 3 years prior to 
the start of the ACO's agreement period) remains the same. For 
instance, if an ACO with an agreement start date of January 1, 2013, 
added ACO participants for its second performance year (2014), then the 
adjustments made to the historical benchmark to reflect the ACO's 
certified ACO Participant List for performance year two would have been 
based on the same 3 benchmark years (2010, 2011, and 2012) originally 
used to calculate the historical benchmark for the ACO based on the ACO 
Participant List it certified when it entered the program at the start 
of its first performance year. As a result of this methodology, if an 
ACO certifies revisions to its ACO Participant List for its second and 
third performance years, it is necessary for us to adjust the 
historical benchmark to reflect the changes made to the ACO Participant 
List for the second performance year, and to make further adjustments 
to reflect the changes made for the third performance year.
    Changes in the ACO participant TINs that compose ACOs are also 
relevant to determining beneficiary assignment across all ACOs 
participating in the program. A beneficiary is assigned to an ACO if 
the beneficiary received the plurality of his or her primary care 
services (measured in allowed charges) from ACO professionals billing 
under the TINs of ACO participants in the ACO rather than outside the 
ACO (such as from ACO professionals billing under the TINs of ACO 
participants in other ACOs or from individual providers or provider 
organizations that are not participating in an ACO). We perform the 
assignment process for ACOs simultaneously, regardless of whether they 
have had an ACO Participant List change. To determine where a 
beneficiary got the plurality of his or her primary care services, we 
compare the total allowed charges for each beneficiary for primary care 
services provided by the ACO (in total for all ACO participants) to the 
allowed charges for primary care services provided by ACO participants 
in other ACOs and by non-ACO providers and suppliers. See ``Medicare 
Shared Savings Program: Shared Savings and Losses and Assignment 
Methodology Specifications'' available online at http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Financial-and-Assignment-Specifications.html (see version 4 dated 
December 2015 applicable beginning Performance Year 2016, and version 3 
dated December 2014 applicable for Performance Years prior to 2016). In 
the case where a beneficiary is receiving primary care services from 
ACO participants in multiple ACOs or from both ACO participants and 
non-ACO providers and suppliers, the composition of each ACO is 
important in determining whether the beneficiary is assigned to an ACO 
at all, and in determining to which ACO (among several) the beneficiary 
may be assigned.
    In summary, in making adjustments to the historical benchmarks for 
ACOs within an agreement period to account for ACO Participant List 
changes, the historical benchmark period remains constant, but 
beneficiary assignment reflects the influence of ACO Participant List 
changes. Under this methodology, the historical benchmarks for ACOs 
with ACO Participant List changes from one performance year to the next 
continue to reflect the ACOs' historical costs in relation to the 
current composition of the ACO. Changes to an ACO's list of ACO 
participants will result in changes to the ACO's assigned beneficiary 
population which can affect the proportion of an ACO's assigned 
population in each Medicare enrollment type (ESRD, disabled, aged/dual

[[Page 5850]]

eligible, aged/non-dual eligible), assigned beneficiary expenditures, 
and risk adjustment. Further, the historical benchmark will be adjusted 
to remove the historical claims experience of any ACO participant TINs 
that have been deleted from the ACO Participant List, unless the TIN 
has merged with or been acquired by another ACO participant TIN as 
reported to CMS by the ACO.
    In accordance with these policies, we adjusted the historical 
benchmarks for 162 of 220 ACOs (74 percent) with 2012 and 2013 start 
dates for the 2014 performance year to reflect changes in ACO 
participants. For the 2015 performance year, we adjusted benchmarks for 
245 of 313 ACOs (78 percent) with 2012, 2013 or 2014 start dates to 
reflect changes in ACO participants. Among the ACOs that made TIN 
changes effective for performance year 2015, the mean percentage change 
in historical benchmark value was -0.3 percent and the magnitude of the 
change for most ACOs was between -2 percent and +2 percent.
    While the current methodology ensures that a benchmark that has 
been adjusted based on changes in the ACO's participant composition 
accurately reflects benchmark year assignment using the most recent 
certified ACO Participant List, a primary drawback is that this 
methodology is operationally burdensome. To adjust benchmarks to 
account for ACO Participant List changes made by ACOs for each new 
performance year we must repeat the assignment process for all 3 
benchmark years for each starter cohort. For example, in order to 
adjust benchmarks for 2012, 2013, and 2014 starters making ACO 
Participant List changes for the 2015 performance year we had to 
perform the assignment process for 5 different benchmark years: 2009, 
2010, 2011, 2012, and 2013. The operational burden associated with the 
current methodology will increase further as Track 3 ACOs enter the 
program. Track 3 ACOs have an offset assignment window based on the 
most recent 12-month period preceding the relevant calendar year for 
which data are available (for example, the period spanning October-
September prior to the start of the benchmark year) whereas the 
assignment window for Track 1 and 2 ACOs is based on the 12-month 
calendar year that corresponds to the benchmark year. Therefore, with 
the first ACOs starting their participation under Track 3 on January 1, 
2016, we now have to perform two assignment runs for each benchmark 
year.
2. Proposed Revisions
    In light of the operational burden of adjusting benchmarks to 
reflect changes in ACO participants under the current policy, and the 
considerations associated with our proposal to adopt a benchmark 
rebasing methodology that requires additional calculations, we 
considered alternative approaches to streamline calculations of 
adjusted historical benchmarks. Under these alternatives, we would 
start with the historical benchmark based on the ACO's certified ACO 
Participant List for the most recent prior performance year and make 
adjustments to the benchmark using expenditures from a single reference 
year--for example, the third benchmark year (BY3) of the current 
agreement period--for which beneficiary assignment has been performed 
using both the ACO Participant List for the most recent prior 
performance year and the new ACO Participant List for the current 
performance year. This approach would allow us to adjust the benchmark 
to reflect changes in the ACO participants while reducing the number of 
benchmark years for which assignment would need to be redetermined 
based on the new ACO Participant List. Under this approach, where we 
would adjust the benchmark determined based on the ACO's list of ACO 
participants for the most recent prior performance year, there would be 
a cumulative effect of the adjustment in the case where an ACO 
certifies changes to its ACO Participant List effective for the second 
and third performance years of the agreement period. However, the 
number of cumulative adjustments would be limited and, further, we 
believe that applying adjustments to the benchmark determined based on 
the certified ACO Participant List for the most recent prior 
performance year in all cases enhances the simplicity of the approach.
    Calculations for the adjustment would be made in relation to three 
populations of beneficiaries assigned to the ACO in the reference year:
    <bullet> Stayers: Beneficiaries assigned to an ACO using both the 
ACO Participant List for the most recent prior performance year and the 
new ACO Participant List.
    <bullet> Joiners: Beneficiaries who are assigned to the ACO using 
the new ACO Participant List but not the ACO Participant List for the 
most recent prior performance year.
    <bullet> Leavers: Beneficiaries who are assigned to the ACO using 
the ACO Participant List for the most recent prior performance year but 
not the new ACO Participant List.
    Calculation of the adjusted historical benchmark would include the 
following steps for each Medicare enrollment type (ESRD, disabled, 
aged/dual eligible, aged/non-dual eligible):
    <bullet> Calculate a stayer component: Multiply an ACO's historical 
benchmark by a ratio of average per capita reference year expenditures 
for stayers to average per capita reference year expenditures for 
stayers and leavers combined. This ratio may adjust the benchmark 
upward or downward depending on the relative expenditures and person 
years of the stayers and leavers.
    <bullet> Calculate a joiner component: Determine average per capita 
reference year expenditures for joiners.
    <bullet> Combine the stayer and joiner components: Obtain the 
overall adjusted benchmark for each enrollment type by taking a 
weighted average of the stayer and joiner components where each 
component's weight is its relative share of the total number of 
assigned beneficiaries, identified as stayers or joiners 
(respectively), based on the new Participant List.
    <bullet> Once the preceding three steps have been completed for 
each Medicare enrollment type: Calculate a single weighted average per 
capita adjusted historical benchmark. We will sum the product of the 
benchmark expenditures for each Medicare enrollment type and the ACO's 
proportion of assigned beneficiaries for the corresponding Medicare 
enrollment type. We will determine the proportion of assigned 
beneficiaries by Medicare enrollment type during the reference year 
based on the assigned beneficiary population determined using the new 
ACO Participant List.
    <bullet> In conjunction with the proposals to adjust an ACO's 
rebased historical benchmark to account for regional expenditures, we 
would also redetermine the regional adjustment to account for changes 
to the ACO's certified ACO Participant List. In addition to the steps 
described previously, we would redetermine the ACO's regional service 
area during the reference year based on the residence of the ACO's 
assigned beneficiaries for the reference year determined using the new 
ACO Participant List. We would also use this assigned population to 
determine the ACO's proportion of beneficiaries by Medicare enrollment 
type (ESRD, disabled, aged/dual eligible, aged/non-dual eligible) to be 
used in calculating the regional adjustment. We would redetermine the 
regional adjustment, using the approach described previously under 
section II.A.2.c. of this proposed rule. In calculating the regional 
adjustment, we

[[Page 5851]]

would adjust for differences between the health status during the 
reference year of the ACO's assigned beneficiaries determined using the 
new ACO Participant List and the population of assignable beneficiaries 
in the ACO's regional service area.
    We believe that this approach offers the right balance between 
approximating the accuracy of the current methodology for adjusting 
historical benchmarks (which requires performing beneficiary assignment 
for all 3 of an ACO's historical benchmark years with the new ACO 
Participant List) and operational ease. Initial modeling suggests that 
benchmarks calculated using this alternative methodology are highly 
correlated with those calculated using the current methodology.
    We also examined a second alternative under which we would 
calculate the average per capita expenditures for leavers in the 
reference year and use this value, along with the relative person years 
for leavers and stayers, to impute average per capita reference year 
expenditures for stayers from the historical benchmark. The imputed 
expenditures for stayers would then be combined with average per capita 
reference year expenditures for joiners to obtain the overall adjusted 
benchmark. This second alternative, in addition to being more complex 
to compute and explain, does not consistently improve the accuracy of 
the calculations compared to the first alternative. For example, 
initial modeling indicates this approach can produce a phenomenon 
whereby ACOs with large numbers of high cost leavers (in relation to 
their stayer and joiner populations) actually retained relatively high 
benchmarks under this adjustment, which was an unanticipated result. 
Further, we have concerns about the reliability and predictability of 
imputed data, on which this approach depends.
    We believe that several clarifications to the application of the 
preferred first alternative methodology are important. First, in the 
case where an ACO's new ACO Participant List yields zero assigned 
beneficiaries who are identified as stayers, we would apply the current 
methodology for adjusting the historical benchmark for ACO Participant 
List changes. That is, in such cases, we would calculate the ACO's 
average per capita historical benchmark based on assignment for each of 
the 3 benchmark years prior to the start of the ACO's agreement period 
using the new ACO Participant List. Second, the ACO Participant List 
for the performance year would be used to identify the counties of 
residence for the ACO's assigned beneficiaries in order to determine 
the ACO's regional service area for the purpose of calculating the 
regional benchmark update, as discussed in section II.A.2.d. of this 
proposed rule.
    We considered whether to apply the preferred alternative 
methodology for adjusting the historical benchmark for ACO Participant 
List changes for all ACOs beginning with an ACO's first agreement 
period, or only for ACOs in a second or subsequent agreement period as 
part of the revised rebasing methodology. We believe that applying a 
single policy for adjusting historical benchmarks for changes in ACO 
participants to all ACOs participating in the program would provide 
operational consistency and stability to the program and its 
participants.
    Therefore, we propose to replace the current approach for 
calculating adjusted historical benchmarks for ACOs that make ACO 
Participant List changes with an approach that adjusts an ACO's 
historical benchmark using a ratio that is based on expenditures for 
the ACO's beneficiaries assigned using both the ACO Participant List 
for the new performance year and the ACO Participant List for the most 
recent prior performance year (stayers) and expenditures for the ACO's 
beneficiaries assigned using only the ACO Participant List for the 
ACO's most recent prior performance year (stayers and leavers) for the 
same reference year. We propose to define the reference year as 
benchmark year 3 of the ACO's current agreement period. This figure 
would then be combined with reference year expenditures for 
beneficiaries assigned using only the ACO Participant List for the new 
performance year (joiners) to obtain the overall adjusted benchmark. 
Calculations of the adjustment would be made, and applied to the 
historical benchmark, for each of the following populations of 
beneficiaries, according to Medicare enrollment type: ESRD, disabled, 
aged/dual eligible, and aged/non-dual eligible. We propose to apply 
this adjustment to the ACO's historical benchmark determined based the 
ACO's certified ACO Participant List for the most recent prior 
performance year. We propose to apply this new approach program wide as 
we believe it will address operational inefficiencies in the 
calculation of adjusted historical benchmarks under the current 
approach while still providing an accurate adjustment to reflect 
changes in ACO participants. We also propose that in the event an ACO's 
new ACO Participant List results in zero stayers, we would continue to 
apply the current methodology for adjusting the ACO's historical 
benchmark for ACO Participant List changes. We propose to incorporate 
this adjustment to the historical benchmark for ACOs in their first 
agreement period and those ACOs that started a second agreement period 
on January 1, 2016, by adding a paragraph to Sec.  425.602. In 
addition, we propose to specify that the adjustment would apply to the 
ACO's rebased historical benchmark in a new provision of the Shared 
Savings Program regulations at Sec.  425.603. We also propose to add 
definitions for ``stayers'', ``joiners'' and ``leavers'' to Sec.  
425.20.
    We seek comment on this proposed approach to adjusting ACO 
historical benchmarks for changes in ACO participants and any 
modifications to our proposed approach that may be needed. We welcome 
comments on alternatives to applying the adjustment to the ACO's 
historical benchmark determined based on the ACO's certified ACO 
Participant List for the most recent prior performance year, such as 
applying the proposed adjustment to the historical benchmark 
established for the first performance year of the ACO's agreement 
period. Further, we seek commenters' suggestions on the anticipated 
interactions between the proposed approach to adjusting ACO historical 
benchmarks using an expenditure ratio and the rebasing alternatives 
discussed previously in this proposed rule.

C. Facilitating Transition to Performance-Based Risk

1. Overview
    As discussed in the December 2014 proposed rule (79 FR 72815 
through 72816), we believe that in order for the Shared Savings Program 
to be effective and sustainable over the long term, we need to further 
strengthen our efforts to transition the Shared Savings Program to a 
two-sided performance-based risk program in which ACOs share in both 
savings and losses. Although we are encouraged by stakeholder interest 
in the Shared Savings Program, ACOs have been cautious in choosing to 
enter performance-based risk arrangements. Only a small number of ACOs 
have agreed to participate under the program's performance-based risk 
track (Track 2) established in the November 2011 final rule. Therefore, 
in the June 2015 final rule, we established a new performance-based 
risk track at Sec.  425.610, referred to as Track 3, and made other 
program revisions (see 80 FR 32694 and 32695 for a summary) to 
encourage ACOs to accept performance-based risk arrangements. We also 
indicated in the June 2015 final rule (80 FR 32695) that we intended to 
consider

[[Page 5852]]

other modifications to program rules in future rulemaking in the near 
term to improve ACO willingness to take on performance-based risk. 
Accordingly, in addition to the proposals to integrate regional factors 
when resetting ACO benchmarks which are discussed in section II.A. of 
this proposed rule, we continued to consider whether other revisions 
might also be appropriate to provide ACOs with additional flexibilities 
to support them as they transition to performance-based risk.
    Currently, for its initial agreement period, an ACO applies to 
participate in a particular financial model or track of the program as 
specified under Sec.  425.600(a). If the ACO's application is accepted, 
the ACO must remain under that financial model for the duration of its 
3-year agreement. ACOs entering the program under the one-sided shared 
savings model (Track 1) that meet eligibility criteria may continue 
their participation under this model for a second 3-year agreement 
period as specified under Sec.  425.600(b).
    Stakeholders and ACOs have suggested a variety of options to 
address their concerns about some of the current agreement period 
related policies. For example, as discussed in the June 2015 final rule 
(80 FR 32763), some commenters responding to the December 2014 proposed 
rule supported allowing ACOs initially participating under Track 1 to 
extend their first agreement period by 1, 2 or 3 years, under certain 
circumstances, to gain additional experience before starting their 
second agreement period under a performance-based risk track. Under 
such an option in which ACOs are allowed to choose voluntarily to have 
a longer agreement period under Track 1, stakeholders requested that we 
also maintain an ACO's original historical benchmark as it gains 
additional experience before moving to performance-based risk. These 
stakeholders explained that this approach would facilitate ACOs' 
transition to two-sided performance-based risk arrangements. We did not 
adopt these suggestions for the reasons discussed in the June 2015 
final rule (80 FR 32763). However, based on our experience with the 
first group of ACOs eligible for renewal for 2016 in which nearly all 
such ACOs applied to remain in Track 1 for an additional agreement 
period, we have further considered these issues.
2. Proposed Revisions
    We further considered these stakeholder suggestions and whether it 
would be appropriate to offer an additional option to encourage ACOs to 
move more quickly from the one-sided shared savings model to a 
performance-based risk model when renewing their agreements. To respond 
to stakeholder concerns and to provide additional support for ACOs that 
are willing to accept performance-based risk arrangements, we are 
proposing to add a participation option that would allow eligible Track 
1 ACOs to defer by 1 year their entrance into a performance-based risk 
model (Track 2 or 3) by extending their first agreement period under 
Track 1 for a fourth performance year. ACOs that would be eligible to 
elect this proposed new participation option would be those ACOs 
eligible to renew for a second agreement period under Track 1 but 
instead are willing to move to a performance-based risk track 2 years 
earlier, after continuing under Track 1 for 1 additional year. This 
option would assist ACOs in transitioning to a two-sided risk track 
when they need only one additional year in Track 1 rather than a full 
3-year agreement period in order to prepare to accept performance-based 
risk. The additional year could allow such ACOs to further develop 
necessary infrastructure to meet the program's goals, such as further 
developing their care management services, adopting additional 
mechanisms for measuring and improving quality performance, finalizing 
implementation and testing of electronic medical records, and 
performing data analytics. This option would be available to Track 1 
ACOs whose first agreement period is scheduled to end on or after 
December 31, 2016. Under this proposal, ACOs that elect this new 
participation option would continue under their first agreement period 
for a fourth year, deferring benchmark rebasing as well as deferring 
entrance to a two-sided risk track if they are approved for renewal.
    More specifically, we are proposing to provide an additional option 
for ACOs participating under Track 1 to apply to renew for a second 
agreement period under a two-sided track (Track 2 or Track 3) under the 
renewal process specified at Sec.  425.224. If the ACO's renewal 
request is approved, the ACO would be able to defer entering the new 
agreement period under a performance-based risk track for 1 year. 
Further, as a result of this deferral, we would also defer rebasing the 
ACO's benchmark for 1 year. At the end of this fourth performance year 
under Track 1, the ACO would transition to the selected performance-
based risk track for a 3-year agreement period. Accordingly, we are 
proposing to amend the participation agreement requirements at Sec.  
425.200 to provide that an ACO that defers entering its new agreement 
period will be able to continue participating under its first agreement 
for an additional year (for an agreement period that would total 4 
years).
    An ACO electing this option would still be required to undergo the 
renewal process specified at Sec.  425.224 prior to the end of its 
initial agreement (PY 3) and meet all other renewal requirements 
including the requirement that the ACO demonstrate that it is capable 
of repaying shared losses as required to enter a performance-based risk 
track. Because the ACO would be committing under the renewal 
application to transition to a performance-based risk track following 
completion of PY 4 under Track 1, the ACO would be required to 
demonstrate as part of its renewal application that it has established 
an adequate repayment mechanism as specified at Sec.  425.204(f) to 
assure CMS of its ability to repay losses for which it may be liable 
during the new agreement period. We propose to make this option 
available to Track 1 ACOs whose first agreement period is scheduled to 
end on or after December 31, 2016. Therefore, if finalized, this option 
would be available to ACOs with 2014 start dates seeking to renew their 
participation agreement in order to enter their second agreement period 
beginning in 2017. Under this proposal, we would update the ACO's 
benchmark as specified at Sec.  425.602(b) for performance year 4 of 
the initial participation agreement. However, we would defer resetting 
the benchmark as specified at proposed Sec.  425.603 until the 
beginning of the ACO's second agreement period (that is, the ACO's 
first agreement period under the selected performance-based risk 
track). The benchmark would be reset under the policies in place for 
that time period including any regional adjustment, as described in 
this proposed rule, if finalized. Also, we propose that the quality 
performance standard that would apply for performance year 4 of the 
initial participation agreement would be the same as for the ACO's 
performance year 3, consistent with Sec.  425.502(a)(2). Specifically, 
we propose that during the fourth performance year of the ACO's first 
agreement period, the ACO must continue to report all measures and the 
ACO will be assessed on performance based on the quality performance 
standard in place for the third performance year of the ACO's first 
agreement period.
    In addition, under this proposal, if a Track 1 ACO finishing its 
initial agreement period chooses to elect this option during the 
renewal of its

[[Page 5853]]

participation in the Shared Savings Program, the ACO would be required 
to transition to the selected performance-based risk track at the end 
of the fourth performance year under Track 1. The term of the second 
agreement period would be 3 performance years.
    If such an ACO subsequently decides during the fourth performance 
year that it no longer wants to transition to the performance-based 
risk track it selected in its application for a second agreement 
period, then the currently established close-out procedures and payment 
consequences of early termination under Sec.  425.221 would apply. For 
example, if the ACO voluntarily terminates its agreement under Sec.  
425.221(a), effective December 31 of its fourth performance year, and 
completes all required close-out procedures, then as specified by Sec.  
425.221(b), the ACO would be eligible to share in any shared savings 
for its fourth performance year.
    However, we believe it would be appropriate under this proposed 
participation option to provide some incentive for ACOs to honor their 
commitment to participate early in a performance-based risk track. 
Therefore, we are proposing that if an ACO that has been approved for 
an extension of its initial agreement period terminates its 
participation agreement prior to the start of the first performance 
year of the second agreement period, then the ACO would be considered 
to have terminated its participation agreement for the second agreement 
period under Sec.  425.220. Such an ACO would not be eligible to 
participate in the Shared Savings Program again until after the date on 
which the term of that second agreement period would have expired if 
the ACO had not terminated its participation, consistent with Sec.  
425.222.
    We would further note that if an ACO that goes on to participate 
under a two-sided track under this proposed option voluntarily 
terminates its agreement during its second agreement period, then the 
currently established close-out procedures and payment consequences of 
early termination under Sec.  425.221 would apply. If an ACO terminates 
its agreement under its selected performance-based risk track and 
subsequently decides to reapply to participate in the Shared Savings 
Program, then the requirements under Sec.  425.222 for re-application 
after termination would apply. For example, consistent with our current 
policy, such an organization would be required to apply to participate 
under a two-sided model and would have to wait the duration of its 
remaining agreement period before reapplying.
    In developing this proposal to support our policy goal of providing 
additional flexibility to ACOs that are considering transitioning to 
two-sided risk, we considered an alternative approach that might 
achieve the same goal. Specifically, we considered an alternative 
option that would permit the ACO to transition to a two-sided risk 
track during a subsequent 3-year agreement period under Track 1, 
instead of extending the first agreement period for an additional year. 
Under this alternative approach, we would allow the ACO to remain in 
Track 1 for the first performance year of the second 3-year agreement 
period. The ACO would then be required to transition to Track 2 or 3 
for the final 2 performance years of the agreement period. An ACO 
choosing this option would be required to satisfy all the requirements 
for a performance-based risk track at the time of renewal, including 
the requirement that the ACO demonstrate that it is capable of repaying 
shared losses as required to enter a performance-based risk track. 
Under this approach, we would rebase the ACO's benchmark as provided 
under proposed Sec.  425.603, effective for the first year of the 
second 3-year agreement period. Further, we would calculate shared 
savings for the first year of the second 3-year agreement period under 
the one-sided model as specified at Sec.  425.604. During the second 
and third performance years of the second agreement period we would 
calculate shared savings and shared losses, as applicable, under either 
Track 2 (as determined at Sec.  425.606) or Track 3 (as determined at 
Sec.  425.610). We did not elect to propose this alternative option 
because we believe there could be a stronger incentive for some ACOs to 
transition to two-sided performance-based risk if we were to defer 
resetting the ACO's benchmark until the beginning of the ACO's second 
agreement period. Additionally, the alternative approach could raise 
concerns about risk selection since an ACO could participate for the 
first performance year of the second agreement period under this 
alternative, learn midway through the second performance year that its 
expenditures for the first performance year were below the negative 
MSR, and withdraw from the program before being subjected to 
reconciliation under performance-based risk.
    We welcome comments on this proposal and the alternative approach, 
as well as on other possible alternatives to provide flexibility and 
encourage ACOs to enter into and honor their participation agreements 
under performance-based risk tracks, and any related issues.

D. Administrative Finality: Reopening Determinations of ACO Savings or 
Losses To Correct Financial Reconciliation Calculations, and a 
Conforming Change

1. Overview
    ACOs enter into agreements with CMS to participate in the Shared 
Savings Program, under which ACOs that meet quality performance 
requirements and reduce the Medicare Parts A and B expenditures for 
their assigned beneficiaries below their benchmark by a specified 
margin are eligible to share a percentage of savings with the Medicare 
program. Further, ACOs participating under a two-sided track, whose 
Medicare Parts A and B expenditures for their assigned beneficiaries 
exceed their benchmarks by a specified margin, are liable for sharing 
losses with CMS. After each performance year (PY), CMS calculates 
whether an ACO has generated shared savings by comparing its actual 
expenditures for its assigned beneficiaries in the PY with its updated 
benchmark. Savings are generated if actual Medicare Parts A and B 
expenditures for assigned beneficiaries are less than the updated 
benchmark expenditures and shared with the ACO if they exceed the ACO's 
minimum savings rate, and the ACO meets the minimum quality performance 
standards and otherwise maintains its eligibility to participate in the 
Shared Savings Program. For an ACO in a two-sided track, losses are 
generated if actual Medicare Parts A and B expenditures for assigned 
beneficiaries are greater than the updated benchmark expenditures and 
the ACO is liable for shared losses if the losses exceed the ACO's 
minimum loss rate.
    To date, we have announced 2 years of financial performance results 
for ACOs participating in the Shared Savings Program, in Fall 2014 for 
220 ACOs with 2012 and 2013 start dates for PY 1 (concluding December 
31, 2013), and in August 2015 for 333 ACOs with 2012, 2013 and 2014 
start dates for PY 2014. Several months after the release of PY 1 
financial reconciliation results and shared savings payments to 
eligible ACOs, we discovered that there was an issue with one of the 
source input data fields used in the final financial reconciliation 
calculations that we ultimately determined resulted in an estimated 5 
percent overstatement of PY 1 shared savings payments to ACOs and an 
understatement of shared losses. The issue did not result in 
understated PY

[[Page 5854]]

1 shared savings payments or overstated PY 1 shared loss recoupments 
for any ACO.
    When we calculate total Medicare Parts A and B FFS expenditures for 
assigned beneficiaries for purposes of establishing ACO benchmarks and 
determining performance year results, we make an adjustment to remove 
IME payments and DSH payments, including uncompensated care payments. 
We identified an issue in the source data for Quarter 4 of CY 2013 that 
caused some cancellation claims for uncompensated care to be 
incorrectly signed (plus sign instead of a minus sign) in the national 
claim data repository used to calculate ACO benchmarks and performance 
year results. The outcome of the sign error was that the amounts 
deducted from total CY 2013 expenditure calculations were doubled for 
claims that were canceled and resubmitted, which ultimately led to ACO 
total expenditures for PY 1 being understated in the final 
reconciliation for PY 1 (that is, for the performance year ending 
December 31, 2013). As a result, the PY 1 shared savings payments were 
overstated for some ACOs and shared losses were understated for some 
other ACOs. The impact on individual ACOs varied depending on the 
extent to which services provided to the ACO's assigned beneficiaries 
were furnished by providers that receive DSH payments.
    The financial reconciliation calculation/methodology and the amount 
of shared savings an ACO might earn, including all underlying financial 
calculations, are not appealable. That is, the determination of whether 
an ACO is eligible for shared savings under section 1899(d), and the 
amount of such shared savings, as well as the underlying financial 
calculations are precluded from administrative and judicial review 
under section 1899(g)(4) of the Act and Sec.  425.800(a)(4). However, 
under Sec.  425.314(a)(4), if as a result of any inspection, 
evaluation, or audit, it is determined that the amount of shared 
savings due to the ACO or the amount of shared losses owed by the ACO 
has been calculated in error, CMS reserves the right to reopen the 
initial determination and issue a revised initial determination. (See 
also the CMS Web site at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Downloads/Reconsideration-Review-Process-Guidance.pdf).
    Thus far, we have not further specified, either through regulations 
or program guidance, the actions that we would take under circumstances 
when we identify an error in a prior payment determination, such as the 
error that occurred in the calculation of PY 1 shared savings and 
shared losses. We have considered what actions we believe would be 
appropriate for addressing issues with the financial reconciliation 
calculations underlying the initial determination of ACO shared savings 
and shared losses in situations such as the data source error that 
occurred for PY 1, or a final agency determination under Sec.  425.804 
or Sec.  425.806, if an error were discovered after a request for 
reconsideration of the initial determination. In considering this 
issue, we reviewed existing, analogous provisions within the Medicare 
program (such as Sec.  405.980 and Sec.  405.986 regarding reopening of 
initial determinations of claims under the original Medicare program, 
Sec.  405.1885 regarding reopening of intermediary determinations of 
program reimbursement under the original Medicare program, and Sec.  
423.346 regarding reopening of payment determinations under Medicare 
Part D).
    We are concerned that adopting wholesale one of these existing 
reopening processes, including all of the associated timeframes, may 
not be appropriate for the Shared Savings Program. For example, many 
ACOs have indicated that they intend to quickly reinvest some of any 
future shared savings they might receive to provide additional staff 
training, hire additional staff and make other infrastructure 
improvements to further improve the quality of care for Medicare 
beneficiaries and reduce unnecessary costs. We believe such investments 
may be critical so that ACOs can innovate further to achieve even 
greater cost savings. Shared savings payments also can support an ACO's 
ongoing operational costs, which we previously estimated to be an 
average of $0.86 million for an ACO participating in the Shared Savings 
Program (80 FR 32827). For example, shared savings payments support 
infrastructure (such as IT solutions) and process development, 
staffing, population management, care coordination, quality reporting 
and improvement, and patient education (80 FR 32767). We believe that 
ACOs may be reluctant to make the necessary investments to enable them 
to further improve the quality of care for Medicare beneficiaries and 
achieve greater cost savings if they might be required to unexpectedly 
pay back some or all of their shared savings payments. Further, ACOs 
could be reluctant to participate in two-sided performance-based risk 
tracks, if after receiving a payment determination they might 
subsequently be required to pay additional amounts for shared losses.
    We are concerned that the current uncertainty regarding the 
timeframes and other circumstances in which we would reopen a payment 
determination to correct financial calculations under the Shared 
Savings Program could introduce financial uncertainty which could 
seriously limit an ACO's ability to invest in additional improvements 
to increase quality and efficiency of care. This uncertainty could also 
limit an ACO's ability to get a clean opinion from its financial 
auditors, which could, for example, harm the ACO's ability to obtain 
necessary capital for additional program improvements. This could be 
especially challenging for ACOs seeking to enter or continue under a 
two-sided performance-based risk track since under the requirements at 
Sec.  425.204(f)(2), such an ACO must, as part of its application for a 
two-sided performance-based risk track, demonstrate its ability to 
repay shared losses to the Medicare program, which it may do by placing 
funds in escrow, obtaining a surety bond, establishing a line of credit 
(as evidenced by a letter of credit that the Medicare program can draw 
upon), or establishing a combination of such repayment mechanisms, that 
will ensure its ability to repay the Medicare program. These 
arrangements can often require that an ACO and/or its financial 
supporters make an assessment of the ACO's level of financial risk for 
possible repayments. Uncertainty over past financial results could 
significantly affect an ACO's ability to obtain and maintain these 
arrangements with financial institutions, and thus discourage ACOs from 
participating in the Shared Savings Program under two-sided 
performance-based risk tracks. We are particularly concerned that this 
could discourage ACOs from moving more quickly from the one-sided 
shared savings track to a performance-based risk track when renewing 
their agreements.
    We considered an approach under which we would always reopen a 
determination of ACO shared savings or shared losses to correct any 
issue that might arise with respect to a financial calculation. Under 
this approach, we would correct for any and all issues (for example, a 
source data error or computational error), even for relatively minor 
errors having little impact on ACO financial results, that are 
identified within four years after the release of final financial 
reconciliation results. We are concerned that this approach of 
correcting even very minor errors might result in significant 
operational burdens

[[Page 5855]]

for ACOs and CMS, including multiple financial reconciliation re-runs 
and off-cycle payment/recoupment activities that could have the 
potential for significant and unintended operational consequences, and 
could jeopardize the certainty of performance results for both ACOs and 
CMS. As noted earlier in this section, this approach, which includes a 
relatively broad scope and extended timeframe for reopening, could 
introduce financial uncertainty that could limit an ACO's ability to 
invest in additional improvements to increase quality and efficiency of 
care. This uncertainty could also limit an ACO's ability to get a clean 
opinion from its financial auditors and/or to obtain funds from lenders 
or investors.
    We also considered whether to adopt a policy under which we would 
never correct for errors after performing the financial calculations 
and making initial determinations of ACO shared savings and shared 
losses. By establishing such definitive administrative finality 
following notification of any applicable performance-based payments or 
loss recoupments, both ACOs and CMS would be better able to anticipate 
that such performance-based payments or loss recoupments would not be 
subject to subsequent revision. Financial calculations and shared 
savings payments or shared loss recoupments would not be subject to 
future reopening, and ACOs would be able to plan future transactions, 
issue financial reports, and plan for contingencies in reliance on the 
fact that those payment determinations were closed. However, we believe 
it would be appropriate to reopen financial calculations in certain 
circumstances, such as in the case of fraud or similar fault as defined 
at Sec.  405.902, or for errors with a significant impact on the 
computation of ACOs' shared savings/shared losses. Therefore, we 
believe it would be appropriate to allow for corrections, under certain 
circumstances and within a defined timeframe, after financial 
calculations have been performed and the determination of ACO shared 
savings and shared losses has been made. In the following section we 
further discuss the rationale and the details of our proposed finality 
policy for financial calculations and shared savings payments or shared 
loss recoupments.
2. Proposed Revisions
a. Circumstances for Reopening Initial Determinations and Final Agency 
Determinations of ACO Shared Savings or Shared Losses To Correct 
Financial Reconciliation Calculations
    It is longstanding policy in the Medicare program that a 
determination may be reopened at any time if it was procured by fraud 
or ``similar fault,'' (see, for example, Sec.  405.980(b)(3); 74 FR 
65296, 65313 (December 9, 2009)). Further, under the Shared Savings 
Program regulations at Sec.  425.314(a)(4), if as a result of any 
inspection, evaluation, or audit, it is determined that the amount of 
shared savings due to the ACO or the amount of shared losses owed by 
the ACO has been calculated in error, CMS reserves the right to reopen 
the initial determination and issue a revised initial determination. We 
believe it would be appropriate to define the circumstances under which 
we would reopen a payment determination to make corrections after the 
financial calculations have been performed and ACO shared savings and 
shared losses determined, absent evidence of fraud or similar fault. In 
developing the proposals in this section, we considered the following 
issues: (1) The type of issue/error that we would correct; (2) the 
timeframes for reopening a payment determination; and (3) whether we 
should establish a materiality threshold as an indicator of a material 
effect on shared savings and shared losses that would warrant a 
correction, and if so, at what level.
    First, we are proposing that CMS would have discretion to reopen a 
payment determination at any time in the case of fraud or ``similar 
fault,'' as defined in Sec.  405.902. Second, we are proposing that in 
certain circumstances we would reopen a payment determination for good 
cause. For consistency and to decrease program complexity, we believe 
it would be reasonable and appropriate to base the definition of good 
cause for purposes of the Shared Savings Program on the definition of 
good cause used elsewhere in the Medicare FFS program. We propose to 
follow the same approach to reopening for good cause as applies to the 
reopening of Parts A and B claims determinations under Sec.  405.986. 
Specifically, we propose that CMS will have the discretion to reopen a 
payment determination, within 4 years after the date of notification to 
the ACO of the initial determination of shared savings or shared losses 
for the relevant performance year, if there is good cause. We propose 
that good cause may be established if there is new and material 
evidence that was not available or known at the time of the payment 
determination, and which may result in a different conclusion, or if 
the evidence that was considered in making the payment determination 
clearly shows on its face that an obvious error was made at the time of 
the payment determination.
    New and material evidence or an obvious error could come to CMS' 
attention through a variety of means, such as identification by CMS 
through CMS program integrity reviews or audits, identification through 
audits conducted by independent federal oversight entities such as the 
Office of the Inspector General (OIG) or the Government Accountability 
Office (GAO). CMS program integrity reviews and audits would include 
reviews and audits conducted by CMS' contractors. We believe it would 
be appropriate to establish a 4-year time period (that is, 4 years from 
initial notification of the payment determination) for reopenings for 
good cause to provide sufficient time to initiate, complete, and 
evaluate errors through CMS program integrity reviews or audits by 
oversight entities like OIG or GAO. A timeline for reopenings for good 
cause that is too short could undermine the ability of CMS to address 
significant issues raised through such program integrity initiatives or 
audits. Therefore, we believe that it would be appropriate to establish 
a 4-year timeframe for reopening Shared Savings Program payment 
determinations for good cause. In developing the proposed time period 
for reopenings, we considered alternative approaches in which we would 
provide for either shorter or longer time periods for reopenings for 
good cause. We chose not to propose these alternative time periods for 
good cause. A shorter time period might provide more financial 
certainty for ACOs but could make it difficult for CMS to make 
corrections based on program integrity reviews or audits by OIG or GAO. 
Similarly, a longer time period might make it feasible for CMS to make 
additional corrections based on program integrity reviews or audits by 
OIG or GAO, but could provide less financial certainty for ACOs.
    We propose that good cause would not be established by changes in 
substantive law or interpretative policy. A change of legal 
interpretation or policy by CMS in a regulation, CMS ruling, or CMS 
general instruction, whether made in response to judicial precedent or 
otherwise, would not be a basis for reopening a payment determination 
under this section. Further, we propose CMS has sole

[[Page 5856]]

discretion to determine whether good cause exists for reopening a 
payment determination under this section. Under the proposal, the 
determination of whether an error was made, whether a correction would 
be appropriate based on these proposed criteria, and the timing and 
manner of any correction would be within the sole discretion of CMS. We 
do not intend to propose an exhaustive list of potential issues that 
would or would not constitute good cause, but do intend to provide 
additional subregulatory guidance on this issue if this policy is 
finalized as proposed. As one example, we do not believe it would be an 
error constituting good cause for reopening of a payment determination 
if an ACO identified a claims anomaly such as a participating provider 
who submitted claims to its Medicare contractor either earlier or later 
than it had typically submitted claims previously and which therefore 
might impact the ACO's total expenditures. Likewise, we do not believe 
that good cause would be established by a request to reopen a claims 
payment determination based upon a third party payer's error in making 
a payment determination when Medicare processed the claim in accordance 
with the information in its system of records or on the claim form. We 
would also note that good cause would not be established by a 
reconsideration, appeal, or other administrative or judicial review of 
any determinations precluded under Sec.  425.800.
    When determining whether to reopen for good cause, we would also 
consider whether the error is material and thus warrants a correction 
by reviewing the nature and particular circumstances of the error. 
Under this proposal, we would not reopen a payment determination to 
consider, or otherwise consider as part of a reopening, additional 
claims information submitted following the end of the 3-month claims 
run out and the use of the completion factor. We would continue to use 
claims submitted prior to the end of the 3-month claims run out with a 
completion factor to calculate an ACO's per capita expenditures for 
each performance year, consistent with Sec. Sec.  425.604(a)(5), 
425.606(a)(5) and 425.610(a)(5). Also, consistent with established 
policy, under this proposed policy, we would not reopen a determination 
if an ACO's ACO participants submitted additional claims or submitted 
corrected claims after the 3-month claims run out period following the 
end of the performance year. As discussed in the November 2011 final 
rule (76 FR 67837 through 67838), in establishing this policy we 
focused on balancing the need for timely payment determinations and the 
benefits of utilizing the most complete data in calculating both the 
quality metrics and the shared savings reconciliation. We continue to 
believe that a 3-month run out of claims data aids in ensuring success 
for ACOs by allowing prompt shared savings payments to eligible ACOs, 
enabling them to offset the initial startup and/or ongoing operational 
costs which would in turn allow the ACOs to remain financially viable 
and enable them to make additional investments to further improve 
quality of care and decrease costs, while any decrease in the accuracy 
as a result of the use of a 3-month run out versus a longer time period 
is mitigated by the application of a completion factor.
    Corrections for errors for good cause could in some circumstances 
introduce additional program complexities with unanticipated 
consequences. For example, changes to beneficiary assignment could 
affect the calculation of shared savings and losses for multiple ACOs. 
Therefore, in order to provide an opportunity for CMS to consider 
updated information and make other adjustments to payments 
determinations across all ACOs, and to minimize program disruptions for 
ACOs resulting from multiple reopenings, we will, to the extent 
feasible, make corrections in a unified reopening (as opposed to 
multiple reopenings) to correct errors for a given performance year. In 
addition, we will consider other ways to reduce operational burdens for 
both ACOs and CMS that could result from making payment adjustments. 
For example, during the 4-year time period from notification of the 
initial payment determination for reopenings due to good cause, if we 
determine that a correction needs to be made for a performance year's 
results, we would seek to potentially adjust shared savings payments to 
the ACO or shared loss recoupments from the ACO for a subsequent 
performance year. To illustrate, if an ACO that generated shared 
savings for the second performance year of its agreement period owed 
CMS money based on a correction made to the payment determination for 
the prior performance year, we might be able to deduct the amount owed 
prior to making the current year shared savings payments (subject to 
the general requirement, discussed elsewhere, for ACOs to repay monies 
owed to CMS within 90 days of notification of the obligation).
    In addition, we have evaluated how we might consider materiality 
when determining whether to reopen for good cause in the case of CMS 
technical errors. We do not intend to propose specific criteria for 
determining materiality but we would provide additional information for 
ACOs through subregulatory guidance, as appropriate. For example, in 
the case of technical errors by CMS such as CMS data source file errors 
and CMS computational errors, we would consider limiting reopenings of 
payment determinations under the Shared Savings Program to issues/
errors that have a material effect on the net amount of ACO shared 
savings and shared losses computed for the applicable performance year 
for all ACOs, and thus warrant a correction due to the magnitude of the 
error. Establishment of such a threshold for making financial 
corrections to address errors in the determination of shared savings 
payments or shared loss recoupments could reduce the likelihood of 
there being multiple financial reconciliation re-runs for errors that 
do not significantly affect the financial performance calculations. The 
general requirement under the Shared Savings Program is that ACOs are 
required to make payment in full to CMS of all amounts owed within 90 
days of their receipt of notification. Numerous off cycle adjustments 
to address technical errors that do not have a material effect on the 
total amount of ACO shared savings and shared losses computed for the 
applicable performance year could be disruptive and administratively 
burdensome for both ACOs and CMS, and could discourage ACOs from 
participating in the Shared Savings Program.
    Accordingly, in considering when to reopen an error for good cause, 
we intend to strike a careful balance between important Medicare 
program integrity concerns that payments be made timely and accurately 
under the Shared Savings Program with our desire to minimize 
unnecessary operational burdens for ACOs and CMS, and to support the 
ACOs' ability to invest in additional improvements to increase quality 
and efficiency of care. To achieve this careful balance in objectives, 
for reopenings to address CMS technical errors, we may consider whether 
the error satisfies a materiality threshold, such as 3 percent of the 
total amount of net shared savings and shared losses for all ACOs for 
the applicable performance year. We would expect to provide additional 
information about how we may consider the materiality of an error in 
subregulatory guidance, if we finalize

[[Page 5857]]

this policy as proposed. To illustrate, under such an approach, we 
could exercise our discretion to reopen the financial reconciliation 
for a performance year if we determined that a correction to address a 
CMS technical error would affect total net shared savings and shared 
losses (that is, the amount of shared savings after the amount of 
shared losses has been subtracted) for all ACOs for the affected 
performance year by 3 or more percent. We may consider a higher 
threshold, such as 5 percent, or a lower threshold, such as 1 or 2 
percent. However, based on a review of guidance from the GAO for 
financial audits of federal entities, we believe that 3 percent could 
be a reasonable threshold for ``material effect.'' The GAO guidance was 
developed to assist auditors in assessing material effect for planning 
the audit scope for federal entities to ensure that financial statement 
audits achieve their intended outcomes of providing enhanced 
accountability over taxpayer-provided resources. This guidance has been 
used for a number of years by GAO financial auditors for performing 
financial statement audits of federal entities. (See the GAO Web site 
at http://www.gao.gov/special.pubs/01765G/vol1_complete.pdf.) Although 
ACOs are not federal entities, we believe it would be reasonable to 
consider the GAO guidance in developing a material effect threshold 
across all ACOs. The Shared Savings Program is a relatively large 
federal program administered within HHS, including over 400 ACOs (as of 
January 1, 2016). Accordingly, we believe that the GAO guidance on 
federal entity audits, while not directly applicable, provides a 
relevant and appropriate resource in considering a materiality 
threshold for reopening certain payment determinations under the Shared 
Savings Program.
    We also initially considered applying a materiality threshold for 
each ACO rather than applying a materiality threshold to total net 
shared savings and shared losses for all ACOs. We recognize that in 
some situations an individual ACO might prefer to have a different 
materiality threshold, or might prefer that we always correct CMS 
technical errors that favor the individual ACO. However, we do not 
believe that applying a materiality threshold, such as 3 percent, to 
the financial results for each ACO, or applying a lower (or no) 
materiality threshold for reopenings for CMS technical errors, would 
achieve the desired level of administrative finality for the Shared 
Savings Program given that there currently are over 400 ACOs in the 
program, and correction for CMS technical errors would sometimes favor 
an individual ACO and sometimes not. We also do not believe it would be 
appropriate to establish a finality policy to only correct errors that 
favor the individual ACO. We believe it would be appropriate to limit 
reopenings to correct CMS technical errors that more widely affect the 
program rather than reopening determinations for specific issues for 
each of the hundreds of ACOs participating in the Shared Savings 
Program absent evidence of fraud or similar fault, or good cause 
established by evidence of other errors. Otherwise, as noted earlier in 
this section, a relatively broad scope and extended timeframe for 
reopening could introduce financial uncertainty that could limit ACOs' 
ability to invest in additional improvements to increase quality and 
efficiency of care.
    Finally, we note that the current requirements for ACO repayment of 
shared losses after notification of the initial determination of shared 
losses would not be affected by any proposals in this section. As 
described under Sec.  425.606(h)(3) (Track 2) and Sec.  425.610(h)(3) 
(Track 3), if an ACO has shared losses, the ACO must make payment in 
full to CMS within 90 days of receipt of notification. These current 
requirements would continue to apply for repayment by ACOs for shared 
losses. For example, an ACO would not be able to delay recoupment of 
any payments required under Sec.  425.606(h)(3) or Sec.  425.610(h)(3) 
by notifying CMS of a possible error that could merit reopening. 
Instead, if we determined that a correction should be made, we would 
subsequently adjust shared savings and shared losses for the applicable 
performance year based on the correction, and we would add any amount 
owed to the ACO, as determined through the reopening, prior to making 
any current year shared savings payments for which the ACO is eligible.
    Therefore, after considering these issues, we are proposing to 
revise Sec.  425.314 to remove (a)(4) and add a new paragraph (e) to 
specify the circumstances under which we would reopen a payment 
determination under Sec. Sec.  425.604(f), 425.606(h), 425.610(h), 
425.804, or 425.806. Specifically, we are proposing that, if CMS 
determines that the amount of shared savings due to the ACO or the 
amount of shared losses owed by the ACO has been calculated in error, 
CMS may reopen the earlier payment determination and issue a revised 
initial determination. We propose that a payment determination may be 
reopened: (1) At any time in the case of fraud or similar fault, as 
defined in Sec.  405.902; or (2) not later than 4 years after the date 
of notification to the ACO of the initial determination of shared 
savings or shared losses for the relevant performance year, for good 
cause. We propose that good cause may be established when there is new 
and material evidence of an error or errors, that was not available or 
known at the time of the payment determination and may result in a 
different conclusion, or the evidence that was considered in making the 
payment determination clearly shows on its face that an obvious error 
was made at the time of the payment determination. Good cause would not 
be established by a change of legal interpretation or policy by CMS in 
a regulation, CMS ruling or CMS general instruction, whether made in 
response to judicial precedent or otherwise. We have sole discretion to 
determine whether good cause exists for reopening a payment 
determination under this section. Also, good cause would not be 
established by a reconsideration, appeal, or other administrative or 
judicial review of any determinations precluded under Sec.  425.800.
    Under the proposal, the determination of whether an error was made, 
whether a correction would be appropriate based on these proposed 
criteria, and the timing and manner of any correction would be made 
would be within the sole discretion of CMS. If CMS determines that the 
reopening criteria are met, CMS would recompute the financial results 
for all ACOs affected by the error or errors. In light of this policy 
proposal, we would not reopen and revise the PY 1 payment 
determinations solely affected by the data source error described 
previously because we so far have not specified, either through 
regulations or program guidance, the criteria CMS would apply in 
determining whether to reopen a payment determination. However, we 
would reopen and revise these PY 1 payment determinations for other 
errors satisfying the proposed criteria for reopening for good cause or 
for fraud or similar fault.
    We believe this proposal would offer a flexible, balanced approach, 
providing additional certainty for ACOs as to whether they are eligible 
for shared savings payments, or required to repay a portion of losses 
under risk-based tracks, and the amount of any such shared savings or 
shared losses. ACOs would thus be better able to plan future financial 
transactions and investments to further improve the quality of 
beneficiary health care and reduce costs, issue financial reports, and 
plan for contingencies in reliance on the fact that those payments are 
closed after the

[[Page 5858]]

period for reopening has lapsed, in the absence of fraud or similar 
fault. We acknowledge that from year to year, corrections could 
sometimes advantage individual ACOs and sometimes disadvantage 
individual ACOs. We anticipate that, over time, this approach would not 
likely have a biased effect on ACOs or Medicare expenditures since the 
impact of reopenings over time would be equally likely to increase/
decrease net shared savings and losses.
    In addition, we note that nothing in this proposal would limit the 
scope of the preclusion of administrative and judicial review under 
Sec.  425.800. However, we propose to amend Sec.  425.800(a)(4), 
expressly to include a revised initial determination in the list of 
determinations that are precluded from administrative and judicial 
review. We invite comments on this proposal, including the proposed 
criteria for reopening, on alternative approaches for defining the time 
period for reopenings of payment determinations, on the criteria for 
establishing good cause, whether the time period for reopenings for 
good cause should be longer or shorter than 4 years, and on any other 
criteria that we should consider for the final rule to address issues 
related to financial reconciliation calculations and the determination 
of ACO shared savings and shared losses.
b. Conforming Change
    As discussed earlier in the overview for this section, the 
determination of whether an ACO is eligible for shared savings, and the 
amount of such shared savings, and the limit on the total amount of 
shared savings as well as the underlying financial calculations are 
excluded from administrative and judicial review under section 1899(g) 
of the Social Security Act. Accordingly, in the November 2011 final 
rule establishing the Shared Savings Program, we adopted the regulation 
at Sec.  425.800 to preclude administrative and judicial review of the 
determination of whether an ACO is eligible for shared savings and the 
amount of shared savings under Track 1 and Track 2 (Sec.  
425.800(a)(4)), and the limit on total amount of shared savings that 
may be earned under Track 1 and Track 2 (Sec.  425.800(a)(5)). In the 
June 2015 final rule, we amended the Shared Savings Program regulations 
by adding a new provision at Sec.  425.610 to establish a new 
performance-based risk option (Track 3) that includes prospective 
beneficiary assignment and a higher sharing rate. However, in the June 
2015 final rule we inadvertently did not also update the regulation at 
Sec.  425.800 to include references to determinations under Sec.  
425.610 (Track 3) in the list of determinations under this part for 
which there is no reconsideration, appeal, or other administrative or 
judicial review. Therefore, we are proposing a conforming change to 
amend Sec.  425.800 to add determinations under Sec.  425.610 (Track 3) 
to the list of determinations under Sec.  425.800 (a)(4) and (a)(5) for 
which there is no reconsideration, appeal, or other administrative or 
judicial review.

III. Collection of Information Requirements

    As stated in section 3022 of the Affordable Care Act, Chapter 35 of 
title 44, United States Code, shall not apply to the Shared Savings 
Program. Consequently, the information collection requirements 
contained in this proposed rule need not be reviewed by the Office of 
Management and Budget.

IV. Regulatory Impact Analysis

A. Statement of Need

    This proposed rule is necessary in order to make certain payment 
and policy changes to the Medicare Shared Savings Program established 
under section 1899 of the Act. The Shared Savings Program promotes 
accountability for a patient population, fosters the coordination of 
items and services under Parts A and B, and encourages investment in 
infrastructure and redesigned care processes for high quality and 
efficient service delivery. Proposed changes are focused on 
calculations for resetting the financial benchmark for an ACO's second 
or subsequent agreement period, thereby fulfilling a goal communicated 
in the Shared Savings Program June 2015 final rule (80 FR 32692) to 
propose a method for taking into account regional expenditures when 
resetting an ACO's financial benchmark for a second or subsequent 
agreement period.

B. Overall Impact

    We examined the impacts of this 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 Social Security Act, section 202 of 
the Unfunded Mandates Reform Act of 1995 (March 22, 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). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) Having an 
annual effect on the economy of $100 million or more in any 1 year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year). We estimate that this rulemaking is ``economically significant'' 
as measured by the $100 million threshold, and hence also a major rule 
under the Congressional Review Act. Accordingly, we have prepared a 
RIA, which to the best of our ability presents the costs and benefits 
of the rulemaking.
    In keeping with our standard practice, the main analysis presented 
in this RIA compares the expected outcomes if the full set of proposals 
in this rule were finalized to the expected outcomes under current 
regulations. We provide our analysis of the expected costs of the 
proposed payment model under section 1899(i)(3) of the Act to the costs 
that would be incurred under the statutory payment model under section 
1899(d) of the Act in section IV.E. of this proposed rule.

C. Anticipated Effects

1. Effects on the Medicare Program
    The Shared Savings Program is a voluntary program involving an 
innovative mix of financial incentives for demonstrating quality of 
care and efficiency gains within FFS Medicare. As a result, the changes 
to the Shared Savings Program proposed in this rule

[[Page 5859]]

could result in a range of possible outcomes. While evaluation of the 
program's overall impact to date is ongoing, the quality and financial 
results of the first 2 performance years are within the range 
originally projected for the program in the November 2011 final rule 
(see Table 8, 76 FR 67963). Also, at this point, we have seen no 
evidence of selective ACO participation that would systematically bias 
overall program performance as measured by ACO benchmarks.
    In the June 2015 final rule, we established a policy for rebasing 
an ACO's financial benchmark for a second or subsequent agreement 
period by weighting each benchmark year equally and taking into account 
savings generated by the ACO in the previous agreement period. We also 
discussed potential future modifications to the rebasing methodology 
that would account for regional FFS expenditures and remove the policy 
of adding savings generated by the ACO in the previous agreement 
period. After further analysis, in this proposed rule, we propose an 
alternative approach that would adjust the ACO's reset benchmark by a 
percentage of the difference between the ACO's regional service area 
average per capita expenditure amount and the ACO's rebased historical 
benchmark amount (described in section II.A.2.c. of this proposed 
rule). Under the proposed phased approach to using a higher percentage 
in calculating the adjustment for regional expenditures (described in 
section II.A.2.c.3. of this proposed rule): In the ACO's second 
agreement period the percentage used in calculating the regional 
adjustment would be set at 35 percent; in the ACO's third agreement 
period and subsequent agreement periods, the percentage would be set at 
70 percent unless the Secretary determines a lower weight should be 
applied, as specified through future rulemaking. This proposed approach 
would weaken the link between an ACO's performance in prior agreement 
periods and its benchmark in subsequent agreement periods. These 
changes are intended to strengthen the incentives for ACOs to invest in 
infrastructure and care redesign necessary to improve quality and 
efficiency and meet the goals of the Shared Savings Program.
    Further, a key modification to the benchmark rebasing methodology 
would be to refine certain calculations that currently rely on national 
FFS expenditures and corresponding trends so that they would instead be 
determined according to county FFS trends observed in each ACO's unique 
assignment-weighted regional service area. Annual average per capita 
costs would be tabulated for assignable FFS beneficiaries in each 
county. For each ACO a regional weighted average expenditure would be 
found by applying ACO assigned-beneficiary weights to the average 
expenditures tabulated for each county. Changes in an ACO's regional 
service area average per capita expenditures (and relative risk 
reflected in associated HCC risk scores) would define a regional trend 
specific to each ACO's region. This regional trend would be utilized in 
two specific areas of the existing benchmark methodology to replace 
the: (1) National expenditure trend in calculations establishing the 
ACO's rebased historical benchmark; and (2) existing national ``flat 
dollar'' growth amount for updating the rebased historical benchmark 
for each performance year.
    By replacing the national average FFS expenditure trend and ``flat 
dollar'' update with trends observed for county level FFS assignable 
beneficiaries in each ACO's unique assignment-weighted regional service 
area, benchmark calculations would be better structured to account for 
exogenous trend factors particular to each ACO's region and the pool of 
potentially-assignable beneficiaries therein (for example, higher trend 
due to a particularly acute flu season or an unusually large area wage 
index adjustment or change).
    Although the policy would have mixed effects--increasing or 
decreasing benchmarks for ACOs in various circumstances--an overall 
increase in program savings would likely result from taking into 
account service-area trends in benchmark calculations. In some cases 
lower benchmarks would be produced, preventing shared savings payments 
to certain ACOs for whom national average trends and updates would have 
provided higher updated benchmarks. For other ACOs, such a policy would 
be more sensitive to regional circumstances outside of the ACO's 
control causing higher trends for the ACO's service area. In such 
cases, a higher benchmark could improve program cost savings by 
reducing the likelihood the ACO would choose to drop out of the program 
because a shared loss would otherwise have been assessed because of 
exogenous factors unrelated to the ACO's changes in care delivery.
    In addition, applying the regional trend as a percentage (rather 
than ``flat dollar'') when updating the benchmark to a performance year 
basis is anticipated to further reduce program costs by improving the 
accuracy of updated benchmarks, particularly for ACOs that have 
historical benchmarks significantly below or above average. The 
November 2011 final rule discussed the risk that large nominal ``flat 
dollar'' growth updates could compound over an agreement period to 
excessively inflate benchmarks for ACOs with relatively low historical 
benchmark cost and could lead to predictable bias and resulting cost 
for selective participation in the program (76 FR 67964). Such risk has 
not materialized in program experience to date, largely due to the 
historically low national program trend used to update ACO benchmarks 
through the first 3 years of the program. However, the per capita trend 
for the Medicare FFS program is anticipated to be higher in future 
years associated with the period governed by this proposed rule in 
contrast to the relatively moderate growth in cost experienced over the 
first 3 years of the program's implementation.\3\ The proposed changes 
to the methodology for updating the benchmark would apply regional 
trends to update ACO benchmarks and therefore prevent the increased 
program cost the current update methodology risks by employing an 
average ``flat dollar'' update that compounds over the 3 years in an 
ACO's agreement period.
---------------------------------------------------------------------------

    \3\ Traditional fee-for-service Medicare Part A and B annual per 
capita cost trend is expected to reach approximately 5 percent in 
2019, as detailed in the 2017 Medicare Advantage Early Preview 
accessible at: https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/EarlyPreview2017GrowthRates.pdf.
---------------------------------------------------------------------------

    Program participation and ACO beneficiary assignment are not 
homogenously distributed geographically. ACOs tend to have service 
areas overlapping those of other ACOs in the same urban or suburban 
market(s). Therefore, to the extent that ACOs produce significant 
reductions in expenditures, a greater proportion of such savings would 
affect ACO-service-area trends than the average effect felt at the 
national program level, effectively reducing the average ACO's updated 
benchmark compared to what the use of a national trend alone would have 
produced. While such effect has the potential to reduce program costs 
by reducing net shared savings payments it could be seen as a 
disadvantage to participating organizations in ``ACO-heavy regions'' 
that manage to broadly increase efficiency at the overall regional 
market level.\4\ However, on the

[[Page 5860]]

whole, we anticipate this effect to be a reasonable trade-off that 
would not prevent an overall improvement in the incentive for ACOs to 
improve efficiency in care delivery in the context of periodic 
benchmark rebasing as a result of the policies proposed in this 
proposed rule.
---------------------------------------------------------------------------

    \4\ Similarly, certain regions may be targeted for care delivery 
reforms, for example certain Center for Medicare and Medicaid 
Innovation models. A downward bias on an ACO's benchmark could be 
felt to the extent that such activity reduces expenditures for 
beneficiaries in the ACO's region but not in a proportional way 
within the ACO's assigned population. Such scenarios are more likely 
when competing models are specifically targeted for beneficiaries 
not assigned to an ACO.
---------------------------------------------------------------------------

    Additionally, we anticipate significant program savings would 
result from the proposal to remove the current policy in which savings 
generated in the previous agreement period would be taken into account 
when resetting the benchmark in an ACO's second or subsequent agreement 
period. This proposed rule would modify the methodology used to rebase 
ACO benchmarks for agreement periods beginning in 2017 and subsequent 
years. In other words, the current rebasing methodology would apply to 
ACOs that entered a second or subsequent agreement period prior to 
2017.
    Changes to the existing benchmark calculations described previously 
would therefore benefit program cost savings by producing rebased 
benchmarks with improved accuracy (for example, reflecting regional 
trends rather than national average trends and `flat dollar' updates) 
and of somewhat lower per capita cost on average (due to no longer 
adding a portion of savings to the baseline and because of oversampling 
ACO populations in regional trend calculations). However, such savings 
would be partly offset by increasing shared savings payments to ACOs 
benefiting from our proposal to adjust the rebased historical benchmark 
with a portion of the difference between the ACO's regional service 
area average per capita expenditure amount and the ACO's rebased 
historical benchmark amount. Such trade-off reflects the intention of 
our proposal to strengthen the reward for attainment of efficiency in 
an absolute sense, complementing the existing program's focus on 
rewarding improvement relative to an ACO's recent baseline.
    Making a regional adjustment to the ACO's rebased historical 
benchmark would strengthen an ACO's incentives to generate and maintain 
efficient care delivery over the long run by weakening the link between 
an ACO's prior performance and its future benchmark. This adjustment is 
expected to marginally increase program participation in agreement 
periods where risk (Track 2 or 3) is mandatory for an ACO since a 
significant portion of ACOs will have knowledge that a favorable 
baseline expenditure comparison to their FFS region will mitigate their 
risk of being assessed a shared loss in a subsequent agreement period. 
It is also expected to reduce the frequency with which ACOs in Track 2 
or 3 drop out of the program during an agreement period because such 
ACOs will have somewhat greater certainty regarding the extent to which 
savings achieved in the prior agreement period would continue to be 
reflected in a rebased benchmark that incorporates a regional 
adjustment.
    However, more predictable relationships, that is, an ACO's 
knowledge of its costs relative to FFS expenditures in its region, also 
creates risk of added cost to the Shared Savings Program by way of--(1) 
increasing shared savings payments to ACOs exhibiting expenditures 
significantly below their region at baseline especially in cases where 
such differences are related to factors exogenous to efficiency in the 
delivery of care (where shared savings payments could be further 
inflated by increased selection of Track 3 over Track 2); (2) 
potentially losing participation from ACOs with expenditures high above 
their region at baseline--reducing the opportunity to impact 
beneficiary populations with the greatest potential for improvements in 
the cost and quality of care; \5\ and (3) from structural shifts by 
ACOs in ways that would reduce assignment of relatively high cost 
beneficiaries and increase assignment of relatively healthy populations 
or shift the geography of their service area to similarly effect a more 
favorable benchmark adjustment.
---------------------------------------------------------------------------

    \5\ Early program results indicate that ACOs with expenditures 
significantly above their risk-adjusted FFS regional average have 
produced greater than average reductions in expenditures than ACOs 
with low baseline expenditures relative to their region; however it 
is not yet evident that such early savings achieved for such 
relatively high cost populations are likely to grow to an extent 
that their expenditures would reach parity with their region. If the 
regional adjustment results in unattainable benchmarks for ACOs 
serving at-risk populations then the program would likely exhibit 
decreasing participation from providers serving populations where 
the greatest potential for savings through management would 
otherwise be present and therefore we would expect significantly 
lower savings for the program than currently anticipated.
---------------------------------------------------------------------------

    In addition to the uncertainty with respect to the relationship of 
the potential offsetting effects noted previously, there remains 
broader uncertainty as to the number of ACOs that will participate in 
the program (especially under performance-based risk in Track 2 or 
Track 3), provider and supplier response to financial incentives 
offered by the program, interactions with other value based models and 
programs from CMS and other payers, 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. Certain ACOs that have 
achieved shared savings in their first agreement period may find that 
they receive significantly lower benchmarks under the proposed 
revisions (especially in cases where regional expenditures are much 
lower than expenditures for the ACO's assigned beneficiary population). 
Other ACOs may seek to maximize sharing in savings by selecting Track 3 
if they have assigned beneficiaries with significantly lower 
expenditures at baseline relative to their region. These uncertainties 
continue to 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 of the changes in this proposed rule on 
Medicare expenditures.
    To best reflect these uncertainties, we continue to utilize 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. A summary of assumptions and 
assumption ranges utilized in the model includes the following:
    <bullet> Approximately 100, 100, and 200 ACOs will consider 
renewing in 2017, 2018, and 2019, respectively.
    <bullet> ACOs will choose not to renew if--
    ++ Under the current policy: The ACO's gross loss in the prior 
performance year was 5 percent or greater; or
    ++ Under the proposed policies: The ACO's gross loss would be 3 
percent or greater in the prior performance year after accounting for 
the expected effect of the revised rebasing methodology (for example, 
considering differences between the ACO's spending and that of its 
region) and adjusting for ACO participant changes which result in 
baseline cost reduction of 2 percent on average (see discussion 
elsewhere in this proposed rule).
    In either scenario, the thresholds are calibrated to approximate 
the level of baseline loss an ACO would correlate to an expected shared 
loss from its rebased benchmark. The magnitude of the loss is roughly 
equal to the revenue ACO participating physicians may have gained from 
the 5 percent incentive payment available under MACRA\6\ that

[[Page 5861]]

is potentially available to physicians and certain other practitioners 
in certain ACOs for participation in the program; the policies included 
in this proposed rule are assumed to result in a lower tolerance for 
renewal after a prior agreement period loss because the proposed 
regional adjustment to the rebased benchmark is expected to be more 
consistent from year to year whereas the current rebasing methodology 
would be expected to generate a higher benchmark reflecting to a 
greater degree the actual spending from the prior agreement period that 
led to the prior loss. However, ACOs that do renew under the policies 
included in this proposed rule would be more likely to remain in the 
program for the entire agreement period because the benchmark 
adjustment improves the likelihood that favorable changes to the 
methodology for rebasing the benchmark that led the ACO to renew its 
agreement would continue to be evidenced in future performance years.
---------------------------------------------------------------------------

    \6\ Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) 
established new incentives to encourage physicians and certain other 
practitioners to participate in alternative payment models; pending 
rulemaking, such incentive payments may equate to approximately 5 
percent of physician fee schedule revenue to eligible professionals 
participating in certain qualifying ACOs.
---------------------------------------------------------------------------

    <bullet> Renewing ACO will choose higher risk in Track 3 if--
    ++ Under the current policies: The ACO's gross savings in prior 
performance year are 4 percent or greater; or
    ++ Under the proposed policies: The ACO's prior performance year 
gross savings adjusted by regional expenditures would be 2 percent or 
greater.
    In either scenario, similar to the renewal assumption, policies 
included in the proposed rule offer greater certainty that adjusted 
prior performance will correlate to future performance and therefore 
the threshold for selecting Track 3 is lower than what is assumed for 
baseline scenario.
    <bullet> Marginal gross savings would increase by between 0.0 
percent to 1.0 percent for ACOs selecting higher performance-based risk 
in Track 3 and between 0.0 percent to 0.2 percent for all ACOs due to 
the adjusted rebasing methodology. These ranges were chosen to 
encompass a range of relative savings rates observed for performance-
based risk accepted by ACOs participating in the Pioneer ACO Model 
relative to Shared Savings Program ACOs, the vast majority of which 
have elected to participate under the one-sided shared savings model 
(Track 1).
    <bullet> ACOs experiencing a loss during the rebased agreement 
period are assumed to drop out prior to the second or third performance 
year if a shared loss from the prior performance year exceeds 2 
percent. While Pioneer ACO Model experience would predict a lower 
tolerance for remaining in the program after a loss, 2 percent was 
chosen to approximate the incentive payment under MACRA likely to be 
made available to physicians and certain other practitioners 
participating in ACOs in Track 2 and Track 3, which was not available 
to participants in Pioneer ACOs.
    <bullet> ACOs make adjustments to their ACO Participant Lists that 
reduce their cost relative to region by approximately 2 percent on 
average. This assumption is based on empirical analysis of 2015 ACO 
Participant List change requests and resulting impact on ACO baseline 
expenditures due to changes in assignment; the magnitude of bias is 
assumed to be greater for ACOs starting higher than their corresponding 
regional average expenditures and/or with a relatively small assigned 
beneficiary population and lower for ACOs starting below regional 
average expenditures and/or with a relatively large assigned 
beneficiary population.
    <bullet> ACOs achieve a mean quality score of 80 percent (based on 
analysis of Shared Savings Program ACO quality scores in 2013 and 
2014).
    <bullet> ACO savings have a diluted impact on regional expenditures 
and trends according to ACO assignment saturation of FFS beneficiary 
population in the market.
    Assumptions for ACO baseline costs, including variations in trends 
for ACOs and their relationship to their respective regions were 
determined by analyzing existing ACO and corresponding regional 
expenditures back to 2009, the first benchmark year used for the first 
wave of ACOs that entered the program in 2012. (Note associated data 
for the 2012 through 2014 time period is being released in conjunction 
with this proposed rule to assist commenters in modeling implications 
of the proposals.) The empirical time series data were randomly 
extrapolated to form baseline time series data through the end of the 
rebased agreement period by applying growth rates to ACOs and their 
regions by randomly sampling empirical growth rates for ACOs (and their 
respective regions) with similar characteristics in terms of size and 
relative cost to region.
    Using a Monte Carlo simulation approach, the model randomly draws a 
set of extrapolated ACO baseline trends and 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 1,000 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.
    Table 3 details our estimate of the 3-year net impact of the 
proposed policy changes on FFS net benefit claims costs, net shared 
savings payments to ACOs, and the resulting impact on net Federal cost. 
Projected impacts are detailed for the first 3 cohorts of ACOs that 
would be renewing agreements under the proposed changes, renewing 
respectively for agreement periods starting in 2017, 2018, and 2019. 
During these agreement periods, a 35 percent weight would be placed on 
the benchmark expenditure adjustment for regional FFS expenditures. In 
such agreement periods, total savings from the proposed changes to the 
methodology for calculating and trending expenditures during the 
benchmark period in order to establish and update the benchmark, as 
well as anticipated savings from marginally increased program 
participation and improved incentives for creating efficiency, are 
expected to be greater than the increase in cost of net shared savings 
payments due to selective participation in response to adjustments that 
are predictably significant (either favorable or unfavorable) upon 
examination of how expenditures for the ACO's historically assigned 
beneficiary population compare to the ACO's regional service area 
expenditure level at baseline. For this reason the net Federal impact 
is projected to be a savings (that is, a negative change in net Federal 
cost) for the first 3 years for each renewing cohort, and 
correspondingly a $120 million net Federal savings for the first 3 
calendar years of the projection window, 2017 through 2019. Such median 
impact on net Federal cost results from a projected increase in savings 
on net benefit claims costs of $370 million partially offset by a $250 
million increase in net shared savings payments to ACOs. The last two 
rows of Table 3 enumerate the range of potential net Federal cost 
impacts our modeling projected, specifically the 10th percentile of 
simulation outcomes (a $230 million net Federal increase in cost) and 
the 90th percentile ($490 million net Federal savings). Overall, 
approximately two-thirds of trials resulted in combined net Federal 
savings over 2017 to 2019.

[[Page 5862]]



 Table 3--Estimated 3-Year Impact of Proposed Changes (Including 35 Percent Weight Used in Determining Regional
  Adjustment Amount) on Net Benefit Costs, Net Payments to ACOs, and Overall Net Federal Costs CYs 2017 Through
                                                      2019
                               [Impacts are median results unless otherwise noted]
----------------------------------------------------------------------------------------------------------------
                                  Calendar year        2017            2018            2019        3-Year total
----------------------------------------------------------------------------------------------------------------
Impact on Net Claims Costs      ACOs Renew 2017.             -60             -60             -70            -190
 ($Million).                    ACOs Renew 2018.  ..............             -60             -60            -120
                                ACOs Renew 2019.  ..............  ..............             -60             -60
                                                 ---------------------------------------------------------------
                                   All ACO Total             -60            -120            -190            -370
                                                 ---------------------------------------------------------------
Impact on Net Shared Savings    ACOs Renew 2017.              40              30              30             100
 Pay ($Million).
                                ACOs Renew 2018.  ..............              40              30              70
                                ACOs Renew 2019.  ..............  ..............              80              80
                                                 ---------------------------------------------------------------
                                   All ACO Total              40              70             140             250
                                                 ---------------------------------------------------------------
Overall Impact on Net Federal   ACOs Renew 2017.             -20             -30             -40             -90
 Costs ($Million).
                                ACOs Renew 2018.  ..............             -20             -30             -50
                                ACOs Renew 2019.  ..............  ..............              20              20
                                                 ---------------------------------------------------------------
                                   All ACO Total             -20             -50             -50            -120
                                                 ---------------------------------------------------------------
                                     Low (10th %-             20              50             160             230
                                      ile).
                                     High (90th              -70            -160            -260            -490
                                      %-ile).
----------------------------------------------------------------------------------------------------------------

    The stochastic model and resulting financial estimates were 
prepared by the CMS Office of the Actuary (OACT). The median result of 
$120 million increase in savings in net Federal cost is a reasonable 
``point estimate'' of the impact of the proposed changes to the Shared 
Savings Program during the period between 2017 through 2019. However, 
we emphasize the possibility of outcomes differing substantially from 
the median estimate, as illustrated by the estimate distribution. 
Accordingly, this RIA presents the costs and benefits of this proposed 
rule to the best of our ability. To help further develop and 
potentially improve this analysis, we request comment on the aspects of 
the rule that may incentivize behavior that could affect participation 
in the program and potential shared savings payments. As further data 
emerges and is analyzed, we may improve the precision of future 
financial impact estimates.
    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, savings or costs arising from the 
Shared Savings Program would result in corresponding adjustments to MA 
payment rates. Neither of these secondary impacts has been included in 
the analysis shown.
a. Effects of the Proposed Rule in Subsequent Agreement Periods
    For an ACO's third agreement period (that is, second rebased 
agreement period, for example the 3-year period covering 2020 through 
2022 for ACOs renewing for a second agreement period in 2017) we are 
proposing that the weight on the adjustment to the benchmark for 
regional FFS expenditures be increased from the 35 percent applicable 
in the first renewed agreement period to 70 percent. Increasing the 
weight of the adjustment reduces the strength of the link between an 
ACO's effect on the cost of care for its assigned beneficiaries and the 
benchmark calculated for an ensuing agreement period. Weakening this 
link may increase the incentive for ACOs to make investments in care 
delivery reforms because resulting potential savings would be more 
likely to be rewarded over multiple agreement periods rather than being 
`baked' back into the benchmark at the next rebasing. On the other 
hand, efficiency gains would need to be significantly greater than 
those currently achieved by the ACOs participating in the program to 
result in budget neutrality by sufficiently offsetting increased shared 
savings payments to ACOs favored by a regional adjustment with 70 
percent weight. As discussed in the preamble, we are proposing to set 
the weight on the regional adjustment at 70 percent for the third and 
subsequent agreement periods unless the Secretary determines a lower 
weight should be applied, as specified through future rulemaking. This 
determination, which could be made in advance of the agreement period 
beginning January 1, 2020, may be based on an assessment of the effects 
of the regional adjustment (and other modifications to the program made 
under this rule) on the Shared Savings Program such as: The effects on 
net program costs; the extent of participation in the Shared Savings 
Program; and the efficiency and quality of care received by 
beneficiaries.
    ACOs demonstrate a wide range of differences in expenditures 
relative to risk adjusted expenditure levels for their region (for the 
sample of roughly 200 ACOs that started in the program in 2012 or 2013 
the percentage by which ACO per capita expenditures exceed or are 
exceeded by their respective risk-adjusted regional per capita 
expenditures varies with a standard deviation of approximately 10 
percent). Transitioning to a 70 percent weight to calculate the 
regional adjustment effectively down-weights the savings generated by 
the changes we are proposing to make to the existing benchmark 
calculation, since an ACO's benchmark would have increased dependence 
on the regional FFS expenditures and correspondingly a decreasing 
dependence on the historical expenditures for the ACO. At the same 
time, increasing the weight used to

[[Page 5863]]

calculate the regional adjustment could result in selective 
participation and increases in shared savings payments to ACOs that 
have low beneficiary expenditures at baseline. If that were to happen, 
the overall anticipated cost of net shared savings payments would rise 
and outweigh the anticipated potential gains from additional care 
management and associated improvements in net benefit costs spurred by 
the improved incentives for efficiency generated by partially delinking 
ACO benchmarks from their own historical costs.
    An element of the proposed regional adjustment which becomes 
apparent when reviewing the accompanying data files and the performance 
of ACOs in 2013 and 2014 (for those roughly 200 ACOs that started in 
2012 and 2013) is that ACOs that are above or below the regional 
service area expenditure amount used to adjust their rebased benchmark 
in 1 year tend to have a similar bias in the following year. Placing a 
100 percent weight on the regional service area expenditure amount 
illustrates this. Of the 50 ACOs that were the furthest below their 
estimated regional service area expenditure level in 2013, all were at 
least 10 percent below and their average expenditures were roughly 15 
percent below the expenditures for the region. In the subsequent year, 
2014, none of these ACOs exceeded its regional service area expenditure 
level, and the average expenditure difference only moved by about 2 
percentage points. Similar yet less glaring results occur in those ACOs 
above their regional service area expenditure level, with the 50 ACOs 
the furthest above their regional service area expenditure level having 
costs an average of approximately 10 percent above the regional service 
area expenditure level in 2013--an average difference for the group 
that only moved by about 2 percentage points the following year.
    Of the approximately 150 ACOs that were more than 0.5 percent below 
their regional service area expenditure level, only about 10 percent 
were above their regional service area expenditure level in the 
following year. Again, ACOs above their regional service area 
expenditure level follow a similar pattern, though less drastic. Of the 
ACOs above their regional service area expenditure level by more than 
0.5 percent, approximately 25 percent performed below their regional 
service area expenditure level in the following year. Notwithstanding 
the potential for behavioral changes, this illustrates that for a 
significant portion of existing ACOs, there is evidence of a bias when 
compared to their regional service area expenditure level and that bias 
is likely to be predictable over time. We have accounted for cost 
associated with program selection for ACOs favored by such bias and 
considered attrition in participation by ACOs disfavored by such bias. 
However for some ACOs of the latter condition, it may take multiple 
years to sufficiently redesign their care delivery processes in order 
to generate savings substantial enough to offset high expenditures 
relative to their region at baseline. We note that this analysis is 
based on data from the first two years of program operations, and 
longer term effects may emerge to mitigate bias for certain ACOs with 
high expenditures at baseline.
    Additionally, the passage of the Medicare Access and CHIP 
Reauthorization Act of 2015 (MACRA) established new incentives to 
encourage providers to participate in alternative payment models. 
Paying for value and incentivizing better care coordination and 
integration is a top priority for us, and we have been implementing 
policies that encourage a shift towards paying for value instead of 
volume. MACRA provides additional tools to encourage care integration 
and value-based payment. Although implementation of MACRA is ongoing 
and many details are still to be proposed and finalized through 
rulemaking, the incentives created by MACRA could result in increased 
market pressure on providers to participate in ACOs. This may lower the 
risk of selective participation and potentially lead to higher expected 
net Federal savings.
    Emerging data will be monitored in order to provide additional 
information for updating projections as part of the proposed use of a 
higher percentage (70 percent) in calculating the regional adjustment 
amount for ACOs entering a third or subsequent agreement period. For 
example, if ACOs respond by generating new efficiencies in care beyond 
those that are anticipated, and/or potential selective participation 
responses are lower than expected, then a 70 percent weight could 
potentially be associated with revised expectations regarding net costs 
or net savings. However, it is also possible that gains in efficiency 
will fail to materialize and/or selective participation and other 
behavioral responses will increase cost beyond the level that is 
currently anticipated, in such scenario we would consider further 
rulemaking as necessary to protect the Medicare Trust Funds (for 
example, in order to apply a lower percent weight in calculating the 
regional adjustment amount). To help further develop and potentially 
improve this analysis, we request comment on the aspects of the rule 
that may incentivize behavior that will affect participation in the 
program and potential shared savings. We specifically request data and 
methodology suggestions for modeling interactions between ACO payment 
parameters, anticipated responses to incorporating regional adjustments 
and trends into the benchmark.
b. Further Considerations
    The proposed rule would introduce regional expenditure trends and a 
regional adjustment to the rebased historical benchmark that would 
include prospective HCC risk adjustment to ensure trending and the 
regional adjustment appropriately account for differences in risk 
between an ACO's assigned beneficiary population and its regional 
service area assignable beneficiary population. Current program 
experience supports the hypothesis that the current approach of 
applying conditional reliance on demographic risk ratios for a 
continuously-assigned subset of beneficiaries for purposes of adjusting 
the historical benchmark to a performance year basis provides a 
reasonable balance between accounting for changes in risk of the 
population and limiting the risk that coding intensity shifts would 
artificially inflate ACO benchmarks. The proposal would retain this 
current policy for adjusting the historical benchmark to a performance 
year basis.
    However, for the proposed changes involving the use of regional 
expenditure trends (to trend forward the benchmark years and to update 
the ACO's rebased historical benchmark) and the adjustment to the 
rebased benchmark for expenditures in the ACO's regional service area, 
we are not proposing to interject an additional explicit policy for 
limiting coding intensity sensitivity at this time (beyond what is 
described in section II.A.3. of this proposed rule), but would rely on 
the difference between the average prospective HCC scores for the ACO's 
assigned beneficiary population and its regional service area 
assignable beneficiary population. Regional trend calculations for the 
rebased historical base years are expected to mitigate the risk of 
sensitivity to potential coding intensity efforts by ACO providers/
suppliers for several reasons. The benchmark years for the new 
agreement period correspond to performance years from a prior agreement 
period where incentives for coding intensity changes were already 
actively limited by the continuously assigned demographic alternative 
calculation. In addition,

[[Page 5864]]

coding intensity shifts that are uniform over a prior agreement period 
would not affect the trending of historical expenditures from the first 
2 years to the third year of such period because such historical 
adjustments are only sensitive to risk score changes between the first 
2 years and the third year of such baseline period. The CMS prospective 
HCC model has been updated for 2016 in ways that reduce its sensitivity 
to subjective coding levels for chronic conditions that are known to 
have historically accounted for differences in coding levels for MA 
beneficiaries relative to FFS Medicare. Lastly, ACOs tend to neighbor 
each other in markets where any ACO coding intensity shifts would then 
likely drive similar market-wide effects (including effects from market 
spillover affecting diagnosis codes submitted for patients receiving 
care from ACO providers/suppliers but who are not ultimately assigned 
to an ACO) that would tend to net out any coding shifts in the 
calculation of risk scores relative to the ACO's region. This final 
consideration also offers a degree of reassurance that the calculation 
of the adjustment reflecting the difference between an ACO's 
expenditures relative to its region would be less likely to be 
materially biased by ACO coding intensity shifts.
    If the new benchmark rebasing methodology proposed in this rule is 
adopted, we intend to carefully monitor emerging program data to assess 
whether the overall benchmark methodology as revised remains 
appropriately balanced between sensitivity to real changes in assigned 
population risk and protection from making shared savings payments due 
to potential coding intensity shifts. Of particular concern for close 
monitoring (and potential future rulemaking changes, if necessary) are 
the unique circumstances related to the use of a prospective 
beneficiary assignment methodology in Track 3 and the associated 
benchmark calculations for Track 3 ACOs. Prospective assignment creates 
an overlap between the claims considered for purposes of determining 
beneficiary assignment to the ACO and the period in which diagnosis 
submissions from claims are utilized for calculating a beneficiary's 
prospective HCC score for the year during which the beneficiary will be 
assigned to the ACO. A related area for monitoring is whether regional 
FFS expenditures tabulated at a county level for assignable 
beneficiaries determined using the assignment methodology used in Track 
1 and Track 2 would provide an unbiased comparison to a beneficiary 
population assigned under the prospective assignment methodology for 
Track 3. For these reasons, monitoring will consider the potential 
necessity to undertake rulemaking in order to make adjustments to 
regional calculations for Track 3 ACOs to avoid biasing the results.
2. Effects on Beneficiaries
    As explained in more detail previously, we believe the proposed 
changes would provide additional incentive for ACOs to improve care 
management efforts and maintain program participation. In addition, 
ACOs with low baseline expenditures relative to their region are more 
likely to transition to and sustain participation in a risk track 
(Tracks 2 or 3) in future agreement periods. Consequently, the changes 
in this rule will also benefit beneficiaries through broader 
improvements in accountability and care coordination (such as through 
the use of the waiver of the 3-day stay SNF rule by Track 3 ACOs) than 
would occur under current regulations.
    Additionally, we intend to continue to analyze emerging program 
data to monitor for any potential unintended effect that the 
introduction of a regional adjustment to the ACO's rebased historical 
benchmark could potentially have on the incentive for ACOs to serve 
vulnerable populations (and for ACOs to maintain existing partnerships 
with providers and suppliers serving such populations). Further 
refinements that could be addressed in future rulemaking if monitoring 
ultimately revealed such problems could include reducing the percentage 
applied to the adjustment to the benchmark for regional expenditures, 
introducing additional adjustments (for example, enhancements or 
complements to the prospective HCC risk model) to control for exogenous 
factors impacting an ACO's costs relative to its region, or otherwise 
modifying the benchmark calculation to improve the balance between 
rewarding attainment and improvement in the efficiency and quality of 
care delivery for the full spectrum of beneficiaries enrolled in FFS 
Medicare.
3. Effects on Providers and Suppliers
    The proposed shift from adding prior agreement period savings to an 
ACO's rebased baseline (as provided in the June 2015 final rule for 
ACOs renewing for a second agreement period starting in 2016) to an 
adjustment reflecting 35 percent of the difference between the ACO's 
regional service area average per capita expenditure amount and the 
ACO's rebased historical benchmark amount is anticipated to provide an 
additional incentive for ACOs to make investments to improve care 
coordination. At the same time, such change in methodology also shifts 
the benchmark policy focus from rewarding improvement in trend relative 
to an ACO's original baseline to an incentive that places more weight 
on attainment of efficiency--how an ACO compares in absolute 
expenditures to its region. Certain ACOs that joined the program from a 
high expenditure baseline relative to their region and that showed 
savings under the first agreement period benchmark methodology will 
likely expect lower benchmarks and greater likelihood of shared losses 
under a methodology that includes a 35 percent weight on the regional 
expenditure adjustment. Additionally, certain ACOs that joined the 
program with relatively low expenditures relative to their region may 
now expect significant shared savings payments even if they failed to 
generate shared savings in their first agreement period under the 
existing benchmark methodology.
4. Effect on Small Entities
    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. Most physician practices, hospitals, and 
other providers are small entities either by virtue of their nonprofit 
status or by qualifying as a small business under the Small Business 
Administration's size standards (revenues of less than $7.5 to $38.5 
million in any 1 year; NAIC Sector-62 series). States and individuals 
are not included in the definition of a small entity. For details, see 
the Small Business Administration's Web site at http://www.sba.gov/content/small-business-size-standards. For purposes of the RFA, 
approximately 95 percent of physicians are considered to be small 
entities. There are over 1 million physicians, other practitioners, and 
medical suppliers that receive Medicare payment under the Physician Fee 
Schedule.
    Although the Shared Savings Program is a voluntary program and 
payments for individual items and services will continue to be made on 
a FFS basis, we acknowledge that the program can affect many small 
entities and have developed our rules and regulations accordingly in 
order to minimize costs and administrative burden on such entities as 
well as to maximize their opportunity to participate. (For example: 
Networks

[[Page 5865]]

of individual practices of ACO professionals are eligible to form an 
ACO; the use of an MSR under Track 1, and, if elected by the ACO, under 
Tracks 2 and 3 that varies by the size of the ACO's population and is 
calculated based on confidence intervals so that smaller ACOs have 
relatively lower MSRs; and eligible ACOs may remain under the one-sided 
model for a second agreement period.)
    Small entities are both allowed and encouraged to participate in 
the Shared Savings Program, provided the ACO has a minimum of 5,000 
assigned beneficiaries, thereby potentially realizing the economic 
benefits of receiving shared savings resulting from the utilization of 
enhanced and efficient systems of care and care coordination. 
Therefore, a solo, small physician practice or other small entity may 
realize economic benefits as a function of participating in this 
program and the utilization of enhanced clinical systems integration, 
which otherwise may not have been possible. We believe the policies 
included in this proposed rule, such as proposals to facilitate the 
transition to performance-based risk (see section II.C. of this 
proposed rule) and to streamline the adjustment to the benchmark for 
changes in the ACO participant composition (see section II.B. of this 
proposed rule), may further encourage participation by small entities. 
For example, smaller entities (among others) that are risk averse but 
ready to transition to a performance-based risk track may elect the 
option (if finalized) that would defer by one year their entrance into 
a two-sided model. Once under a two-sided model, ACOs will have the 
opportunity for greater reward compared to participation under the one-
sided model although they will be at risk for shared losses. 
Additionally, the proposed approach to adjusting for changes in ACO 
participant composition could provide greater stability to the 
benchmark calculations over time, particularly for ACOs with relatively 
smaller numbers of assigned beneficiaries.
    As detailed in this RIA, total median shared savings payments net 
of shared losses are expected to increase by $250 million over the 2017 
to 2019 period as a result of changes that will increase benchmarks for 
certain ACOs participating in the Shared Savings Program and therefore 
increase the average small entity's shared savings revenue. However, 
the impact on any single small entity may depend on its relationship to 
costs calculated for the counties comprising its regional service area. 
We seek comment from individual providers, including small entities, 
regarding the changes proposed with special focus on the impact of the 
adjustment to the benchmark to reflect regional FFS expenditures, again 
noting for commenters that county level data are being made available 
in conjunction with this proposed rule to allow them to analyze such 
differences in cost for individual ACOs and their regions.
5. Effect on Small Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. Although the Shared 
Savings Program is a voluntary program, this proposed rule will have a 
significant impact on the operations of a substantial number of small 
rural hospitals. We have proposed changes to our regulations such that 
benchmark trend calculations and adjustments for ACOs that include 
rural hospitals as ACO participants will be made in order to reflect 
FFS costs and trends in the ACO's regional service area. Overall, we 
expect the average ACO to receive greater shared savings revenue under 
the proposed changes ($250 million greater net sharing anticipated over 
2017 through 2019). However, the impact on individual ACOs and their 
participating small rural hospitals may differ from the program 
average. We seek comment from small rural hospitals on the proposed 
changes with special focus on the impact of the adjustment to the 
benchmark to reflect regional FFS expenditures, again noting for 
commenters that county level data being made available in conjunction 
with this proposed rule to allow them to analyze such differences in 
cost for individual ACOs and their regions.
6. Unfunded Mandates
    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 2015, that 
is approximately $144 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 $144 million in any 1 year. Further, participation in this program 
is voluntary and is not mandated.

D. Alternatives Considered

    As indicated in the June 2015 final rule (see 80 FR 32795 through 
32796), and as discussed previously in section II.A.2.c. of this 
proposed rule, we also considered an alternative method for 
establishing benchmarks for subsequent agreement periods that would 
incorporate regional trends. Under such method we would apply the 
regional trend to inflate an ACO's historical benchmark from the prior 
(that is, first) agreement period to represent expenditures expected 
for the most recent base year preceding the ACO's subsequent agreement 
period. This approach would therefore be delinked from an ACO's 
performance over the prior agreement period (except to the extent an 
ACO's assigned population impacts its wider regional trend)--improving 
the incentive for ACOs to invest in efforts to improve efficiency. In 
contrast to the methodology for calculating a regional adjustment 
proposed in this rule, it would also retain sensitivity to baseline 
costs demonstrated by beneficiaries assigned to the ACO in the prior 
agreement period, potentially mitigating concerns regarding certain 
types of program selection and possibly providing a more incremental 
transition for ACOs familiar with the existing program benchmark 
methodology.
    Specifically it was estimated that blending an ACO's rebased 
benchmark with its prior (first) historical benchmark inflated by a 
regional trend would produce an overall budget neutral change in net 
program cost for the subsequent agreement period if the blending were 
accomplished via a 70 percent weight on an ACO's trended prior 
benchmark and a 30 percent weight on its rebased benchmark. While such 
blend would reasonably be expected to result in an improvement in 
program incentives for ACOs to generate new efficiencies in care 
delivery despite rebasing concerns, other considerations impacted the 
decision to ultimately propose the different approach detailed in this 
proposed rule.
    Primarily, program experience to date indicates that many ACOs make 
significant changes to their provider composition over the course of an 
agreement period. Attempting to lock-in a first historical benchmark 
that would be trended to form 70 percent of the historical benchmark 
for future agreement periods would invariably be complicated and in 
many cases biased by changes in provider composition made years after 
the ACO's first entry

[[Page 5866]]

into the program. Such operational complications and potential biases 
would invariably grow in magnitude for subsequent agreement periods, 
necessitating modifications to future rebasing, for example by reducing 
the weight on the regionally-trended component of the benchmark or 
requiring the regionally trended component always to be sourced from 
the rebased benchmark from the prior agreement period--changes that 
would likely dampen the incentive for ACOs to make significant 
investments in redesigning care in efficient ways. Furthermore, the 
rebasing methodology proposed in this proposed rule has the comparative 
advantage of linking the regional adjustment to an ACO's historical 
expenditures to its region's contemporary standardized cost as opposed 
to the level of cost (and associated efficiency) that happened to be 
exhibited in an ACO's prior historical benchmark period. Therefore, it 
was determined that the proposed approach generally offers a less 
complicated and more consistent and equitable mechanism for adjusting 
ACO rebased benchmarks to reflect regional expenditures over the long 
term.

E. Compliance With Requirements of Section 1899(i)(3)(B) of the Act

    As previously discussed in this proposed rule, certain proposals 
rely upon the authority granted in section 1899(i)(3) of the Act to use 
other payment models that the Secretary determines will improve the 
quality and efficiency of items and services furnished to Medicare FFS 
beneficiaries. Section 1899(i)(3)(B) requires that such other payment 
model must not result in additional program expenditures. Collectively, 
current and proposed policies falling under authority of section 
1899(i)(3) of the Act include: performance-based risk, refining the 
calculation of national expenditures used to update the historical 
benchmark to use the assignable subpopulation of total FFS enrollment, 
updating benchmarks with regional trends as opposed to national average 
absolute growth in per capita spending, and adjusting performance year 
expenditures to remove IME, DSH, and uncompensated care payments.
    A comparison was constructed between the projected impact of the 
payment methodology that incorporates all proposed changes and a 
hypothetical baseline payment methodology that excludes the elements 
described previously that require section 1899(i)(3) of the Act 
authority--most importantly performance based risk in Tracks 2 and 3 
and updating benchmarks using regional trends. The hypothetical 
baseline was assumed to include adjustments allowable under section 
1899(d)(1)(B)(ii) of the Act including the provision from the June 2015 
final rule whereby an ACO's rebased benchmark might include an 
adjustment reflecting a portion of savings measured during the ACO's 
prior agreement period and the 35 percent weight used in calculating 
the regional adjustment to the ACO's rebased historical benchmark 
proposed in this rule. The stochastic model and associated assumptions 
described previously in this section were adapted to reflect the 
agreement period spanning 2017 through 2019 for roughly 100 ACOs 
expected to renew in 2017. Such analysis estimated approximately $130 
million greater average net program savings under the alternative 
payment model that includes all proposed changes than expected under 
the hypothetical baseline in total over the 2017 to 2019 agreement 
period cycle. Furthermore, approximately 78 percent of stochastic 
trials resulted in greater or equal net program savings. The proposals 
were projected to result in both greater savings on benefit costs and 
net payments to ACOs. Participation in performance-based risk under 
Track 2 and Track 3 is assumed to improve the incentive for ACOs to 
increase the efficiency of care for beneficiaries (similar to as 
assumed in the modeling of the impacts, described previously). Such 
added savings are partly offset by lower participation associated with 
the requirement to transition to performance-based risk. 
Correspondingly, net shared savings payments are also expected to be 
greater under the proposed alternative payment model under section 
1899(i)(3) of the Act than under the hypothetical baseline, mainly 
driven by the higher sharing rates and potentially lower minimum 
savings requirements in Track 2 and Track 3, but partly offset mainly 
by lower benchmarks resulting from the removal of the policy adopted in 
the June 2015 final rule of adding a portion of savings to the rebased 
benchmark, the use of more-accurate regional benchmark updates, and new 
shared loss revenue.
    Additionally, we also projected a lower net federal savings of 
approximately $15 million would result from using the hypothetical 
baseline described previously but forgoing the adjustment to account 
for a portion of savings generated during the ACO's prior agreement 
period. We believe the proposed removal of this adjustment for savings 
generated in the ACO's prior agreement period would enable us to place 
a greater weight on the amount of the regional adjustment in the 
future, while not over crediting or penalizing an ACO for its prior 
performance (discussed in section II.A.2.c. of this proposed rule). 
This alternative hypothetical baseline (that does not account for 
savings generated in the ACO's prior agreement period) more closely 
resembles the future hypothetical baseline that would be used in our 
analysis of the application of a higher weight in calculating the 
regional adjustment in subsequent agreement periods (if the policies 
described in this proposed rule are finalized).
    Relative savings projected for the ACOs starting a second agreement 
period in 2017 participation cycle are reasonably assumed to be 
proportional for ACOs starting a second agreement period in 2018 and 
2019 because the assumptions and parameters would be the same or 
similar. Accordingly, the requirement under section 1899(i)(3)(B) of 
the Act that an alternative payment model not result in additional 
program expenditures is therefore satisfied for the period 2017 through 
2019. As discussed in sections II.A.2.d.3. and II.A.2.e.3. of this 
proposed rule, we will reexamine this projection in the future to 
ensure that the requirement under section 1899(i)(3)(B) of the Act that 
an alternative payment model not result in additional program 
expenditures continues to be satisfied, taking into account, for 
example, increasing the weight placed on the regional adjustment to an 
ACO's rebased historical benchmark, which is proposed to increase to 70 
percent for an ACO's third and subsequent agreement period (unless the 
Secretary determines a lower weight should be applied, as specified 
through future rulemaking). In the event that we conclude that the 
payment model established under section 1899(i)(3) of the Act no longer 
meets this requirement, we would undertake additional notice and 
comment rulemaking to make adjustments to the payment model to assure 
continued compliance with the statutory requirements.

F. Accounting Statement and Table

    As required by OMB Circular A-4 under Executive Order 12866, in 
Table 4, we have prepared an accounting statement showing the change 
in--(1) net federal monetary transfers; (2) shared savings payments to 
ACOs net of shared loss payments from ACOs; and (3) the aggregate cost 
of ACO operations for ACO participants and ACO

[[Page 5867]]

providers/suppliers from 2017 to 2019 that are associated with the 
provisions of this proposed rule as compared to baseline.

                                 Table 4--Accounting Statement Estimate Impacts
                                                 [CYs 2017-2019]
----------------------------------------------------------------------------------------------------------------
                                                                                           Source citation (RIA,
            Category              Primary estimate   Minimum estimate   Maximum estimate      preamble, etc.)
----------------------------------------------------------------------------------------------------------------
                                  Transfers From the Federal Government to ACOs
----------------------------------------------------------------------------------------------------------------
Annualized monetized: Discount   - 39.3 million...  73.5 million.....  -159.1 million...  Table 3.
 rate: 7%.
Annualized monetized: Discount   -39.7 million....  75.3 million.....  -161.5 million...
 rate: 3%.
----------------------------------------------------------------------------------------------------------------
Notes: Negative values reflect reduction in federal net cost resulting from care management by ACOs. Estimates
  may be a combination of benefits and transfers. To the extent that the incentives created by Medicare payments
  change the amount of resources society uses in providing medical care, the more accurate categorization of
  effects would be as costs (positive values) or benefits/cost savings (negative values), rather than as
  transfers.

G. Publicly Available Data To Facilitate Modeling of Proposed Changes

    We believe several sources of data will facilitate ACOs and other 
stakeholders in modeling the proposed changes to the benchmark rebasing 
methodology that include calculations using factors of regional FFS 
spending. Concurrent with the issuance of this proposed rule, we are 
making the following new data files available for select calendar years 
through the Shared Savings Program Web site at www.cms.gov/sharedsavingsprogram/:
    <bullet> Files containing average county FFS expenditures, CMS-HCC 
prospective risk scores and person-years for assignable beneficiaries 
by Medicare enrollment type (ESRD, disabled, aged/dual eligible, aged/
non-dual eligible) for 2012, 2013, and 2014.
    <bullet> Files containing the total number of assigned 
beneficiaries for each ACO for each county where at least 1 percent of 
the ACO's assigned beneficiaries reside for 2012, 2013, and 2014.

These files can be accessed under the Statutes/Regulations/Guidance 
section of the Shared Savings Program's Web site, see https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Statutes-Regulations-Guidance.html.
    A listing of all publicly available Shared Savings Program ACO data 
and ACO performance data sources maintained by CMS is available through 
the Shared Savings Program Web site (see the guide titled ``Medicare 
Shared Savings Program Publicly available ACO data and ACO performance 
data sources maintained by CMS'' available online at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/index.html). The most comprehensive data sets that 
include specific data used in determining financial reconciliation for 
performance year 1 (ending December 31, 2013) and performance year 2014 
are the Shared Savings Program Accountable Care Organizations Public 
Use Files (PUFs). For each ACO (identified by ACO name) the PUFs 
contain: Financial and quality performance data (including quality 
score, final sharing rate, Minimum Savings Rate/Minimum Loss Rate, 
benchmark, and the same data provided through the program's Performance 
Year results dataset available through Data.CMS.gov regarding the 
calculation of savings/losses); data on demographic characteristics of 
the ACO's assigned beneficiary population; ACO-level data on 
expenditure and utilization metrics; and data on the ACO's provider/
supplier composition. Additionally, the performance year 2014 PUF 
includes variables not included in the PUF for the first performance 
year, including: State(s) where beneficiaries reside; average 
expenditures for populations of beneficiaries by enrollment type (ESRD, 
disabled, aged/dual eligible, aged/non-dual eligible) for benchmark 
years 1, 2, 3; average HCC risk scores in the performance year and 
benchmark years 1, 2, 3 for populations of beneficiaries by enrollment 
type (ESRD, disabled, aged/dual eligible, aged/non-dual eligible); 
average historical expenditure benchmark; and number of assigned 
beneficiaries by Medicare enrollment type (ESRD, disabled, aged/dual 
eligible, aged/non-dual eligible) in the performance year. (Note the 
existing 2013 PUF displays aggregate 18 or 21 month data for ACOs with 
start dates in April 2012 or July 2012 whereas the new data files to 
support modeling of this proposed rule include data on a calendar year 
basis, including data for 2013.)
    Combining data from existing PUFs and the new data files will allow 
one or more years of comparison between risk-adjusted per capita 
expenditures for an ACO's assigned beneficiaries and the corresponding 
risk-adjusted expenditures for the ACO's regional service area, however 
the specific year or years of available comparison depend on the ACO's 
start date. For example, it will be possible to use the new data files 
to estimate the BY2, BY3 and PY1 (respectively CYs 2012, 2013, and 
2014) risk standardized regional FFS costs by Medicare enrollment type 
for ACOs that started January 1, 2014 and then make a piecewise 
comparison to corresponding ACO assigned population standardized per 
capita costs by Medicare enrollment type for such years using the 
existing 2014 PUF data.
    While we believe the release of the new data files in conjunction 
with existing 2014 PUF data will provide a reasonable overall dataset 
for illustrating relationships that exist between a representative 
sample of ACOs in terms of their expenditures and trends relative to 
their risk-adjusted county-weighted FFS regional service area 
expenditures and trends, we note that precision in such comparison for 
any single ACO may be limited because the datasets are not exhaustive. 
For example, as noted previously, assignment data for an ACO are not 
shown for counties with less than 1 percent of the ACO's overall 
assigned beneficiary population in the given year, and ACO assignment 
is not broken out by Medicare enrollment type at the county level.
    We note that aside from these data files published and maintained 
by CMS, there are possibly other sources of data that would inform 
analyses of the proposed changes to the benchmarking methodology 
described in this proposed rule. For example, individual ACOs may have 
access to additional data, specific

[[Page 5868]]

to their organization and experience in the communities in which they 
operate, that may further enable them to model the potential impacts of 
the proposed changes on their organization.

H. Conclusion

    The analysis in this section, together with the remainder of this 
preamble, provides a regulatory impact analysis. As a result of this 
proposed rule, the median estimate of the financial impact of the 
Shared Savings Program for CYs 2017 through 2019 would be net federal 
savings of $120 million greater than what would have been saved if no 
changes were made. Although this is the best estimate of the financial 
impact of the Shared Savings Program during CYs 2017 through 2019, a 
relatively wide range of possible outcomes exists. While approximately 
two-thirds of the stochastic trials resulted in an increase in net 
program savings, the 10th and 90th percentiles of the estimated 
distribution show a net increase in costs of $230 million to net 
savings of $490 million, respectively.
    Overall, our analysis projects that improvements in the accuracy of 
benchmark calculations, including through the introduction of a 
regional adjustment to the ACO's rebased historical benchmark, are 
expected to result in increased overall participation in the program. 
The proposed changes are also expected to improve the incentive for 
ACOs to invest in effective care management efforts, increase the 
attractiveness of participation under performance-based risk in Track 2 
or 3 for certain ACOs with lower beneficiary expenditures, and result 
in overall greater gains in savings on FFS benefit claims costs than 
the associated increase in expected shared savings payments to ACOs. We 
intend to monitor emerging results for ACO effects on claims costs, 
changing participation (including risk for cost due to selective 
changes in participation), and unforeseen biased benchmark adjustments 
due to diagnosis coding intensity shifts. Such monitoring will inform 
future rulemaking such as if the Secretary determines that a lower 
weight should be used in calculating the regional adjustment amount for 
ACOs' third and subsequent agreement periods.
    In accordance with the provisions of Executive Order 12866, this 
rule was reviewed by the Office of Management and Budget.

V. 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 DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

List of Subjects in 42 CFR Part 425

    Administrative practice and procedure, Health facilities, Health 
professions, Medicare, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR part 425 as set forth 
below:

PART 425--MEDICARE SHARED SAVINGS PROGRAM

0
1. The authority citation, for part 425 is revised to read as follows:

    Authority: Secs. 1102, 1106, 1871, and 1899 of the Social 
Security Act (42 U.S.C. 1302, 1306, 1395hh, and 1395jjj).

0
2. Amend Sec.  425.20 by adding in alphabetical order definitions for 
``ACO's regional service area'', ``Assignable beneficiary'', ``BY'', 
``Joiners'', ``Leavers'', and ``Stayers'' to read as follows:


Sec.  425.20  Definitions.

* * * * *
    ACO's regional service area means all counties where one or more 
beneficiaries assigned to the ACO reside.
* * * * *
    Assignable beneficiary means a Medicare fee-for-service beneficiary 
who receives at least one primary care service with a date of service 
during a specified 12-month assignment window from a Medicare-enrolled 
physician who is a primary care physician or who has one of the 
specialty designations included in Sec.  425.402(c).
* * * * *
    BY stands for benchmark year.
* * * * *
    Joiners means beneficiaries who were not assigned to the ACO for 
the preceding performance year but become assigned to the ACO for the 
current performance year when the certified ACO participant list for 
the current performance year, as required under Sec.  425.118, is taken 
into account.
    Leavers means beneficiaries who were assigned to the ACO for the 
preceding performance year, but are no longer assigned to the ACO for 
the current performance year when the certified ACO participant list 
for the current performance year, as required under Sec.  425.118, is 
taken into account.
* * * * *
    Stayers means beneficiaries who were assigned to the ACO for the 
preceding performance year and remain assigned to the ACO for the 
current performance year when the certified ACO participant list for 
the current performance year, as required under Sec.  425.118 is taken 
into account.
* * * * *
0
3. Amend Sec.  425.200 as follows:
0
A. In paragraph (b)(2) by removing the phrase ``all subsequent years'' 
and adding in its place the phrase ``through 2016''.
0
B. By adding paragraph (b)(3).
0
C. By adding paragraph (e).
    The additions read as follows:


Sec.  425.200  Participation agreement with CMS.

* * * * *
    (b) * * *
    (3) For 2017 and all subsequent years--
    (i) The start date is January 1 of that year; and
    (ii) The term of the participation agreement is 3 years, except the 
term of an ACO's initial agreement period under Track 1 (as described 
under Sec.  425.604) may be extended, at the ACO's option, for an 
additional year for a total of 4 performance years if the conditions 
specified in paragraph (e) of this section are met.
* * * * *
    (e) Optional fourth year. (1) To qualify for a fourth performance 
year as described in paragraph (b)(3)(ii) of this section, the ACO must 
meet all of the following conditions:
    (i) Is currently participating in its first agreement period under 
Track 1.
    (ii) Has requested renewal of its participation agreement in 
accordance with Sec.  425.224.
    (iii) Has selected a two-sided model (as described under Sec.  
425.606 or Sec.  425.610 of this part) in its renewal request.
    (iv) Has requested an extension of its current agreement period and 
a 1-year deferral of the start of its second agreement period in a form 
and manner specified by CMS.
    (v) CMS approves the ACO's renewal, extension, and deferral 
requests.
    (2) An ACO that is approved for renewal, extension, and deferral 
that terminates its participation agreement before the start of the 
first performance year of the second agreement period is--
    (i) Considered to have terminated its participation agreement for 
the second agreement period under Sec.  425.220; and

[[Page 5869]]

    (ii) Not eligible to participate in the Shared Savings Program 
again until after the date on which the term of that second agreement 
period would have expired if the ACO had not terminated its 
participation, consistent with Sec.  425.222.
0
4. Amend Sec.  425.314 as follows:
0
A. By removing paragraph (a)(4).
0
B. By adding paragraph (e).
    The additions reads as follows:


Sec.  425.314  Audits and record retention.

* * * * *
    (e) Reopenings. (1) If CMS determines that the amount of shared 
savings due to the ACO or the amount of shared losses owed by the ACO 
has been calculated in error, CMS may reopen the initial determination 
or a final agency determination under subpart I of this part and issue 
a revised initial determination:
    (i) At any time in the case of fraud or similar fault as defined in 
Sec.  405.902; or
    (ii) Not later than 4 years after the date of the notification to 
the ACO of the initial determination of savings or losses for the 
relevant performance year under Sec.  425.604(f), Sec.  425.606(h), or 
Sec.  425.610(h), for good cause.
    (2) Good cause may be established when--
    (i) There is new and material evidence that was not available or 
known at the time of the payment determination and may result in a 
different conclusion; or
    (ii) The evidence that was considered in making the payment 
determination clearly shows on its face that an obvious error was made 
at the time of the payment determination.
    (3) A change of legal interpretation or policy by CMS in a 
regulation, CMS ruling or CMS general instruction, whether made in 
response to judicial precedent or otherwise, is not a basis for 
reopening a payment determination under this section.
    (4) CMS has sole discretion to determine whether good cause exists 
for reopening a payment determination under this section.
0
5. Amend Sec.  425.602 as follows:
0
A. Revise the section heading.
0
B. Redesignate paragraph (a)(4) as paragraph (a)(4)(i).
0
C. In newly redesignated paragraph (a)(4)(i) by removing the phrase 
``Truncates an assigned'' and adding in its place the phrase ``For 
performance years before 2017, truncates an assigned''.
0
D. Add paragraph (a)(4)(ii).
0
E. Revise paragraph (a)(5)
0
F. Add paragraphs (a)(8)(i) and (ii).
0
G. Add paragraph (a)(9).
0
H. Revise paragraphs (b)(1) and (2).
0
I. Remove paragraph (c).
    The revisions and additions read as follows:


Sec.  425.602  Establishing, adjusting, and updating the benchmark for 
an ACO's first agreement period.

    (a) * * *
    (4) * * *
    (ii) For the 2017 performance year and all subsequent performance 
years, truncates an assigned beneficiary's total annual Parts A and B 
fee-for-service per capita expenditures at the 99th percentile of 
national Medicare fee-for-service expenditures for assignable 
beneficiaries identified for the 12-month calendar year corresponding 
to each benchmark year in order to minimize variation from 
catastrophically large claims.
    (5)(i) For performance years before 2017--
    (A) Using CMS Office of the Actuary national Medicare expenditure 
data for each of the years making up the historical benchmark, 
determines national growth rates and trends expenditures for each 
benchmark year (BY1 and BY2) to the third benchmark year (BY3) dollars.
    (B) To trend forward the benchmark, CMS makes separate calculations 
for expenditure categories for each of the following populations of 
beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (ii) For the 2017 and all subsequent performance years--
    (A) Using CMS Office of the Actuary national Medicare expenditure 
data for each of the years making up the historical benchmark, 
determines national growth rates for assignable beneficiaries 
identified for the 12-month calendar year corresponding to each 
benchmark year, and trends expenditures for each benchmark year (BY1 
and BY2) to the third benchmark year (BY3) dollars.
    (B) To trend forward the benchmark, CMS makes separate calculations 
for expenditure categories for each of the following populations of 
beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
* * * * *
    (8) * * *
    (i) For performance years before 2017, the benchmark is adjusted to 
take into account the expenditures for beneficiaries who would have 
been assigned to the ACO in any of the 3 most recent years prior to the 
agreement period using the most recent certified ACO participant list 
for the relevant performance year.
    (ii) For the 2017 performance year and all subsequent performance 
years, the benchmark is adjusted to account for changes in the 
certified ACO participant list during the term of the agreement period.
    (A) To adjust the benchmark, CMS does the following:
    (1) Calculates a stayer component using an expenditure ratio of 
average per capita expenditures for stayers to stayers and leavers 
combined, using BY3 as a reference year. CMS makes separate expenditure 
calculations for each of the following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (2) Calculates a joiner component using average per capita 
expenditures for joiners, using BY3 as a reference year. CMS makes 
separate expenditure calculations for each of the following populations 
of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (3) Combines the stayer component described in paragraph 
(a)(8)(ii)(A)(1) of this section and the joiner component described in 
paragraph (a)(8)(ii)(A)(2) of this section.
    (4) Calculates a single weighted average per capita adjusted 
historical benchmark from separate expenditure calculations for each of 
the following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (B) In the event no stayers are identified to complete the 
calculation as described in paragraph (a)(8)(ii)(A) of this section, 
CMS calculates an adjusted historical benchmark for the ACO as 
described in paragraph (a)(8)(i) of this section.
    (9) The historical benchmark is further adjusted at the time of 
reconciliation for a performance year to account for changes in 
severity and case mix for newly and continuously assigned beneficiaries 
using prospective HCC risk scores and demographic

[[Page 5870]]

factors as described under Sec. Sec.  425.604(a)(1) through (3), 
425.606(a)(1) through (3), and 425.610(a)(1) through (3).
    (b) * * *
    (1) For performance years before 2017, CMS updates the historical 
benchmark annually for each year of the agreement period based on the 
flat dollar equivalent of the projected absolute amount of growth in 
national per capita expenditures for Parts A and B services under the 
original Medicare fee-for-service program.
    (i) CMS updates the fixed benchmark by the projected absolute 
amount of growth in national per capita expenditures for Parts A and B 
services under the original Medicare fee-for-service program using data 
from CMS' Office of the Actuary.
    (ii) To update the benchmark, CMS makes expenditure calculations 
for separate categories for each of the following populations of 
beneficiaries:
    (A) ESRD.
    (B) Disabled.
    (C) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (D) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (2) For the 2017 performance year and all subsequent performance 
years, CMS updates the historical benchmark annually for each year of 
the agreement period based on the flat dollar equivalent of the 
projected absolute amount of growth in national per capita expenditures 
for Parts A and B services under the original Medicare fee-for-service 
program for assignable beneficiaries identified for the 12-month 
calendar year corresponding to the year for which the update is 
calculated.
    (i) CMS updates the fixed benchmark by the projected absolute 
amount of growth in national per capita expenditures for Parts A and B 
services under the original Medicare fee-for-service program for 
assignable beneficiaries identified for the 12-month calendar year 
corresponding to the year for which the update is being calculated 
using data from CMS' Office of the Actuary.
    (ii) To update the benchmark, CMS makes expenditure calculations 
for separate categories for each of the following populations of 
beneficiaries:
    (A) ESRD.
    (B) Disabled.
    (C) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (D) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
0
6. Add Sec.  425.603 to read as follows:


Sec.  425.603  Resetting, adjusting, and updating the benchmark for a 
subsequent agreement period.

    (a) An ACO's benchmark is reset at the start of each subsequent 
agreement period.
    (b) For ACOs entering into a second agreement period in 2016, CMS 
establishes, adjusts, and updates the rebased historical benchmark in 
accordance with Sec.  425.602(a) and (b) with the following 
modifications:
    (1) Rather than weighting each year of the benchmark using the 
percentages provided at Sec.  425.602(a)(7), each benchmark year is 
weighted equally.
    (2) An additional adjustment is made to account for the average per 
capita amount of savings generated during the ACO's previous agreement 
period. The adjustment is limited to the average number of assigned 
beneficiaries (expressed as person years) under the ACO's first 
agreement period.
    (c) For ACOs entering into a second or subsequent agreement period 
in 2017 and subsequent years, CMS establishes the rebased historical 
benchmark by determining the per capita Parts A and B fee-for-service 
expenditures for beneficiaries who would have been assigned to the ACO 
in any of the 3 most recent years before the agreement period using the 
certified ACO participant list submitted before the start of the 
agreement period as required under Sec.  425.118. CMS does all of the 
following:
    (1) Calculates the payment amounts included in Parts A and B fee-
for-service claims using a 3-month claims run out with a completion 
factor. The calculation--
    (i) Excludes IME and DSH payments; and
    (ii) Considers individually beneficiary identifiable payments made 
under a demonstration, pilot or time limited program.
    (2) Makes separate expenditure calculations for each of the 
following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (3) Adjusts expenditures for changes in severity and case mix using 
prospective HCC risk scores.
    (4) Truncates an assigned beneficiary's total annual Parts A and B 
fee-for-service per capita expenditures at the 99th percentile of 
national Medicare fee-for-service expenditures for assignable 
beneficiaries identified for the 12-month calendar year corresponding 
to each benchmark year in order to minimize variation from 
catastrophically large claims.
    (5) Trends forward expenditures for each benchmark year (BY1 and 
BY2) to the third benchmark year (BY3) dollars using regional growth 
rates based on expenditures for the ACO's regional service area as 
determined under paragraphs (e) and (f) of this section, making 
separate expenditure calculations for each of the following populations 
of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (6) Restates BY1 and BY2 trended and risk-adjusted expenditures in 
BY3 proportions of the following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (7) Weights each benchmark year equally.
    (8) The benchmark is adjusted to account for changes in the 
certified ACO participant list during the term of the agreement period.
    (i) To adjust the benchmark, CMS does the following:
    (A) Calculates a stayer component using an expenditure ratio of 
average per capita expenditures for stayers to stayers and leavers 
combined, using BY3 as a reference year. CMS makes separate expenditure 
calculations for each of the following populations of beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (B) Calculates a joiner component using average per capita 
expenditures for joiners, using BY3 as a reference year. CMS makes 
separate expenditure calculations for each of the following populations 
of beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (C) Combines the stayer component described in paragraph 
(c)(8)(i)(A) of this section and the joiner component described in 
paragraph (c)(8)(i)(B) of this section.
    (D) Calculates a single weighted average per capita adjusted 
historical

[[Page 5871]]

benchmark from separate expenditure calculations for each of the 
following populations of beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (ii) In the event no stayers are identified to complete the 
calculation as described in paragraph (c)(8)(i) of this section, CMS 
calculates an adjusted historical benchmark for the ACO as described in 
Sec.  425.602(a)(8)(i).
    (iii) CMS redetermines the regional adjustment amount under 
paragraph (c)(9) of this section, according to the ACO's assigned 
beneficiaries for BY3 resulting from the most recent certified ACO 
participant list for the relevant performance year.
    (9) Adjusts the historical benchmark based on the ACO's regional 
service area expenditures, making separate calculations for the 
following populations of beneficiaries: ESRD, disabled, aged/dual 
eligible Medicare and Medicaid beneficiaries, and aged/non-dual 
eligible Medicare and Medicaid beneficiaries. CMS does all of the 
following:
    (i) Calculates an average per capita amount of expenditures for the 
ACO's regional service area as follows:
    (A) Determines the counties included in the ACO's regional service 
area based on the ACO's BY3 assigned beneficiary population.
    (B) Determines the ACO's regional expenditures as specified under 
paragraphs (e) and (f) of this section for BY3.
    (C) Adjusts for differences in severity and case mix between the 
ACO's assigned beneficiary population and the ACO's regional service 
area that includes assignable beneficiaries identified for the 12-month 
calendar year that corresponds to the relevant benchmark year.
    (ii) Calculates the adjustment as follows:
    (A) Determines the difference between the ACO's regional service 
area average per capita expenditure amount as specified under paragraph 
(c)(9)(i) of this section and the average per capita amount of the 
ACO's rebased historical benchmark determined under paragraphs (c)(1) 
through (8) of this section, for each of the following populations of 
beneficiaries:
    (1) ESRD.
    (2) Disabled.
    (3) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (4) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (B) Applies a percentage, determined as follows:
    (1) The first time an ACO's benchmark is rebased using the 
methodology described under paragraph (c) of this section, CMS 
calculates the regional adjustment using 35 percent of the difference 
between the ACO's regional service area average per capita expenditure 
amount and the ACO's rebased historical benchmark amount.
    (2) The second or subsequent time that an ACO's benchmark is 
rebased using the methodology described under this paragraph (c), CMS 
calculates the regional adjustment to the historical benchmark using 70 
percent of the difference between the ACO's regional service area 
average per capita regional expenditure amount and the ACO's rebased 
historical benchmark amount, unless the Secretary determines a lower 
weight should be applied.
    (10) The historical benchmark is further adjusted at the time of 
reconciliation for a performance year to account for changes in 
severity and case mix for newly and continuously assigned beneficiaries 
using prospective HCC risk scores and demographic factors as described 
under Sec. Sec.  425.604(a)(1) through (3), 425.606(a)(1) through (3), 
and 425.610(a)(1) through (3).
    (d) CMS updates the rebased historical benchmark under paragraph 
(c) of this section, annually for each year of the agreement period by 
the growth in the ACO's regional service area expenditures by doing all 
of the following:
    (1) Determining the counties included in the ACO's regional service 
area based on the ACO's assigned beneficiary population used to 
determine financial reconciliation for the relevant performance year.
    (2) Determining growth rates based on expenditures for counties in 
the ACO's regional service area calculated under paragraphs (e) and (f) 
of this section, for each performance year.
    (3) Updating the benchmark by making separate calculations for each 
of the following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (e) For ACOs entering into a second or subsequent agreement period 
in 2017 and subsequent years, CMS does all of the following to 
determine risk adjusted county fee-for-service expenditures for use in 
calculating the ACO's regional fee-for-service expenditures:
    (1)(i) Determines average county fee-for-service expenditures based 
on expenditures for the assignable population of beneficiaries in each 
county, where assignable beneficiaries are identified for the 12-month 
calendar year corresponding to the relevant benchmark or performance 
year.
    (ii) Makes separate expenditure calculations for each of the 
following populations of beneficiaries:
    (A) ESRD.
    (B) Disabled.
    (C) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (D) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (iii) The calculation for ESRD beneficiaries is based on the 
aggregation of expenditures statewide, and applied consistently to each 
county within a State.
    (2) Calculates assignable beneficiary expenditures using the 
payment amounts included in Part A and B fee-for-service claims with 
dates of service in the 12-month calendar year for the relevant 
benchmark or performance year, using a 3-month claims run out with a 
completion factor. The calculation--
    (i) Excludes IME and DSH payments; and
    (ii) Considers individually beneficiary identifiable payments made 
under a demonstration, pilot or time limited program.
    (3) Truncates a beneficiary's total annual Parts A and B fee-for-
service per capita expenditures at the 99th percentile of national 
Medicare fee-for-service expenditures for assignable beneficiaries 
identified for the 12-month calendar year that corresponds to the 
relevant benchmark or performance year, in order to minimize variation 
from catastrophically large claims.
    (4) Adjusts fee-for-service expenditures for severity and case mix 
of assignable beneficiaries in the county using prospective CMS-HCC 
risk scores.
    (i) The calculation is made according to the following populations 
of beneficiaries:
    (A) ESRD.
    (B) Disabled.
    (C) Aged/dual-eligible Medicare and Medicaid beneficiaries.
    (D) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (ii) The calculation for ESRD beneficiaries is based on the 
aggregation of expenditures and prospective CMS-HCC risk scores 
statewide, and applied consistently to each county within a State.
    (f) For ACOs entering into a second or subsequent agreement period 
in 2017 and subsequent years, CMS does all of

[[Page 5872]]

the following to calculate an ACO's regional expenditures using risk-
adjusted county fee-for-service expenditures determined according to 
paragraph (e) of this section:
    (1) Weights resulting county expenditures by the ACO's proportion 
of assigned beneficiaries for the relevant benchmark or performance 
year for each of the following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iii) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
    (2) Weights county-level fee-for-service expenditures by the ACO's 
proportion of assigned beneficiaries in the county, determined by the 
number of the ACO's assigned beneficiaries residing in the county in 
relation to the ACO's total number of assigned beneficiaries, to 
determine regional fee-for-service expenditures for each of the 
following populations of beneficiaries:
    (i) ESRD.
    (ii) Disabled.
    (iii) Aged/dual eligible Medicare and Medicaid beneficiaries.
    (iv) Aged/non-dual eligible Medicare and Medicaid beneficiaries.
0
7. Amend Sec.  425.604 as follows:
0
A. In paragraphs (a)(1) and (2), remove each time it appears the phrase 
``adjust for changes'' and add in its place the phrase ``adjust the 
benchmark for changes.''
0
B. In paragraph (a)(3) introductory text, remove the phrase ``In 
adjusting for health status'' and add in its place the phrase ``In 
adjusting the benchmark for health status''.
0
C. Redesignate paragraph (a)(4) as paragraph (a)(4)(i).
0
D. In newly redesignated paragraph (a)(4)(i) by remove the phrase ``To 
minimize variation'' and add in its place the phrase ``For performance 
years before 2017 to minimize variation''.
0
E. Add paragraph (a)(4)(ii).
    The addition reads as follows:


Sec.  425.604  Calculation of savings under the one-sided model.

    (a) * * *
    (4) * * *
    (ii) For the 2017 and all subsequent performance years to minimize 
variation from catastrophically large claims, CMS truncates an assigned 
beneficiary's total annual Parts A and B fee-for-service per capita 
expenditures at the 99th percentile of national Medicare fee-for-
service expenditures for assignable beneficiaries identified for the 
12-month calendar year corresponding to the performance year.
* * * * *
0
8. Amend Sec.  425.606 as follows:
0
A. In paragraphs (a)(1) and (2), remove each time it appears the phrase 
``adjust for changes'' and add in its place the phrase ``adjust the 
benchmark for changes. ``
0
B. In paragraph (a)(3) introductory text, remove the phrase ``In 
adjusting for health status'' and add in its place the phrase ``In 
adjusting the benchmark for health status. ``
0
C. Redesignate paragraph (a)(4) as paragraph (a)(4)(i).
0
D. In newly redesignated paragraph (a)(4)(i), remove the phrase ``To 
minimize variation'' and add in its place the phrase ``For performance 
years before 2017 to minimize variation''.
0
E. Add paragraph (a)(4)(ii).
    The addition reads as follows:


Sec.  425.606  Calculation of shared savings and losses under Track 2.

    (a) * * *
    (4) * * *
    (ii) For the 2017 performance years and all subsequent performance 
years to minimize variation from catastrophically large claims, CMS 
truncates an assigned beneficiary's total annual Parts A and B fee-for-
service per capita expenditures at the 99th percentile of national 
Medicare fee-for-service expenditures for assignable beneficiaries 
identified for the 12-month calendar year corresponding to the 
performance year.
* * * * *
0
9. Amend Sec.  425.610 as follows:
0
A. In paragraphs (a)(1) and (2), remove each time it appears the phrase 
``adjust for changes'' and add in its place the phrase ``adjust the 
benchmark for changes.''
0
B. In paragraph (a)(3) introductory text, remove the phrase ``In 
adjusting for health status'' and add in its place the phrase ``In 
adjusting the benchmark for health status.''
0
C. Redesignating paragraph (a)(4) as paragraph (a)(4)(i).
0
D. In newly redesignated paragraph (a)(4)(i), remove the phrase ``To 
minimize variation'' and add in its place the phrase ``For performance 
years before 2017 to minimize variation''.
0
E. Add paragraph (a)(4)(ii).
    The addition reads as follows:


Sec.  425.610  Calculation of shared savings and losses under Track 3.

    (a) * * *
    (4) * * *
    (ii) For the 2017 and all subsequent performance years to minimize 
variation from catastrophically large claims, CMS truncates an assigned 
beneficiary's total annual Parts A and B fee-for-service per capita 
expenditures at the 99th percentile of national Medicare fee-for-
service expenditures for assignable beneficiaries identified for the 
12-month calendar year corresponding to the performance year.
* * * * *


Sec.  425.800  [Amended]

0
10. Amend Sec.  425.800 as follows:
0
A. In paragraph (a)(4) by--
0
i. Removing the phrase ``The determination of whether'' and adding in 
its place the phrase ``The initial determination or revised initial 
determination of whether''.
0
ii. Removing the phrase ``including the determination'' and adding in 
its place the phrase ``including the initial determination or revised 
initial determination''.
0
iii. Removing the cross-reference ``Sec.  425.602, Sec.  425.604, and 
Sec.  425.606'' and adding in its place the cross-reference 
``Sec. Sec.  425.602, 425.604, 425.606, and 425.610''.
0
B. In paragraph (a)(5) by removing the cross-reference ``Sec.  425.604 
and 425.606'' and adding in its place ``Sec. Sec.  425.604, 425.606, 
and 425.610''.

    Dated: December 16, 2015.
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: December 21, 2015.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2016-01748 Filed 1-28-16; 4:15 pm]
BILLING CODE 4120-01-P


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