5824 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

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. 

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: aco@cms.hhs.gov. 

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 

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

Preamble section Section title/description Applicability date 

II.A.2, II.A.3 .......................... Integrating regional factors in resetting ACO benchmarks.Second or subsequent agreement period beginning 

January 1, 2017 and all subsequent years. 

II.A.2.e.3 ............................... Use of assignable beneficiaries in calculations based 

on National FFS expenditures.

PY 2017 and subsequent performance years. 

II.B ........................................ Modification to the methodology for adjusting benchmarks for changes in ACO participant composition.PY 2017 and subsequent performance years. 

II.C ........................................ An additional 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) 

for their second agreement period.

Second agreement period beginning January 1, 2017 

and all subsequent years. 

II.D ........................................ Definitions of circumstances for reopening determinations of ACO shared savings or shared losses to correct financial reconciliation calculations.60 days from publication of the final rule. 

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: 

• 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. 

• 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. 

• Revising the methodology for 

adjusting ACO benchmarks to account 

for changes in ACO participant (TIN) 

composition. 

• Adding a participation agreement 

renewal option to encourage ACOs to 

enter performance-based risk 

arrangements earlier in their 

participation in the Shared Savings 

Program. 

• 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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5826 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

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/MediaRelease

Database/Fact-sheets/2016-Fact-sheetsitems/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 § 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 § 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 § 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 (§ 425.604(a), 

§ 425.606(a), § 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 

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1MedPAC explained the two-part test: ‘‘First, percapita 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.’’ 

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. 

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: 

• Strong incentives for ACOs to 

improve efficiency and to continue 

participation in the program over the 

long term. 

• 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. 

• 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: 

• 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. 

• Predictability: Enable ACOs to 

anticipate their updated benchmark 

targets and their likely performance 

under the program. 

• Simplicity: Methodology can be 

explained in relatively simple terms and 

in sufficient detail to be readily 

understood by ACOs and stakeholders. 

• 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. 

• 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 

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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 countylevel 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 countylevel 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 countylevel 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 beneficiaryidentifiable 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 

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2The 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. 

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 

§ 425.20 and in a proposed new 

regulation at § 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: 

• 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. 

• 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. 

• 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. 

• 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 

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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 

§ 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 § 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 § 425.20, and in the 

proposed new regulation at § 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: 

• 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. 

• 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). 

• 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/nondual eligible). 

• 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/nondual eligible). 

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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 

§ 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 § 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 

(§ 425.602(a)(1)(i)); (2) adjust the 

historical benchmark for the addition 

and removal of ACO participants 

(§ 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 (§ 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 

(§§ 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 

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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: 

• 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. 

• 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. 

• 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. 

• 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: 

• 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/nondual 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. 

• 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/nondual 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: 

• 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/nondual eligible). 

• 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. 

• Multiply the resulting difference, 

for each Medicare enrollment type by a 

percentage determined for the relevant 

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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. 

• 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. 

• 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. 

• 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 § 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 § 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 § 425.602, including 

to: Revise the title of the section; remove 

paragraph (c) from § 425.602 and 

incorporate this paragraph in the new 

regulation at § 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 § 425.604, § 425.606, and 

§ 425.610. We also propose to make a 

clarifying change to § 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 

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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: 

• 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. 

• 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. 

• 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 

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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 

§ 425.603: 

• 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. 

• 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 

§ 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: 

• More consistent with the statutory 

methodology for updating an ACO’s 

benchmark (see 76 FR 19610 and 76 FR 

67924). 

• 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). 

• 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). 

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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: 

• 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). 

• 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 § 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/nondual 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 locationspecific 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 

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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: 

• 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/nondual eligible); 

• 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. 

• 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: 

• Regional trend factors would more 

accurately reflect the cost experience in 

an ACO’s regional service area 

compared to use of national trend 

factors. 

• 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. 

• 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/nondual 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 § 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 § 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 

§ 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 

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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 locationspecific 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): 

• 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. 

• 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/nondual 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: 

• 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). 

• 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. 

• 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. 

• 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. 

• 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/nondual 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 

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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. 

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To summarize, we are proposing to 

include a provision in the proposed new 

regulation at § 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 

§ 425.602, and for determining 

performance year expenditures under 

§ 425.604 for Track 1 ACOs and under 

§ 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 § 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 § 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 

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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 countyspecific 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 § 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 

§§ 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: 

• 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. 

• Truncate a beneficiary’s total 

annual Parts A and B FFS per capita 

expenditures at the 99th percentile of 

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national Medicare FFS expenditures as 

determined for the relevant benchmark 

or performance year in order to 

minimize variation from 

catastrophically large claims. 

• Adjust expenditures for severity 

and case mix using prospective CMS– 

HCC risk scores. 

• 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 § 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 § 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: 

• For performance year 2016 and 

subsequent performance years, the 

beneficiary must have received a 

primary care service, as defined under 

§ 425.20, with a date of service during 

the 12-month assignment window, as 

defined under § 425.20. 

• The service must have been 

furnished by a primary care physician 

as defined under § 425.20 or by a 

physician with one of the primary 

specialty designations included in 

§ 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 § 425.402(c) (see 80 FR 

32753 through 32754, Table 5-Physician 

Specialty Codes Excluded From 

Assignment Step 2), or from nonphysician 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; § 425.402(a), 

§ 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 

§ 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 

§ 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 § 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 § 425.20, or 

by a physician with one of the primary 

specialty designations included in 

§ 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 § 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 

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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 threepart 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 § 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 

§ 425.602(a)(4), § 425.604(a)(4), 

§ 425.606(a)(4), § 425.610(a)(4); and (2) 

growth rates used to trend forward 

expenditures during the benchmark 

period under § 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 § 425.602(a)(1), § 425.604(a)(5), 

§ 425.606(a)(5), § 425.610(a)(5). 

In addition, we propose to specify in 

a new provision of the Shared Savings 

Program regulations at § 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- 

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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: 

• All ACOs would have the 

benchmark for their first agreement 

period set and updated under the 

methodology under § 425.602(a) and (b). 

• 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. 

• 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 § 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. 

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TABLE 2—CHARACTERISTICS OF CURRENT AND PROPOSED BENCHMARKING APPROACHES

Source of 

methodology Agreement period 

Historical 

benchmark 

trend factors 

(Trend BY1, 

BY2 to BY3) 

Adjustment to 

the historical 

benchmark for 

regional FFS 

expenditures 

(percentage applied 

in calculating 

adjustment) 

Adjustment to 

the historical 

benchmark for 

savings in 

prior 

agreement 

period? 

Adjustment to the 

historical 

benchmark for 

ACO Participant 

List changes 

Adjustment to 

historical 

benchmark for 

health status and 

demographic factors 

of performance 

year assigned 

beneficiaries 

Update to 

historical 

benchmark for 

growth in FFS 

spending 

Current Methodology First ........................ National ......... N/A ......................... N/A .................. Calculated using 

benchmark year 

assignment 

based on the 

ACO’s certified 

ACO Participant 

List for the performance year.

Newly assigned beneficiaries adjusted 

using CMS–HCC 

model; continuously 

assigned beneficiaries adjusted 

using demographic 

factors alone unless CMS–HCC risk 

scores result in a 

lower risk score.

National. 

Second and subsequent.National ......... N/A ......................... Yes .................. Same as methodology for first 

agreement period.

Same as methodology for first 

agreement period.

National. 

Proposed Rebasing 

Methodology.

Second (third for 

2012/2013 starters).

Regional ........ Yes (35 percent) .... No ................... ACO’s rebased 

benchmark adjusted by expenditure ratio *.

No change ................. Regional. 

Third and subsequent (fourth and 

subsequent for 

2012/2013 starters).

Regional ........ Yes (70 percent unless the Secretary determines 

a lower weight 

should be applied, as specified 

through future 

rulemaking).

No ................... Same as proposed 

methodology for 

second agreement period.

No change ................. Regional. 

* 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 

(§ 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 (§ 425.604(a), § 425.606(a), 

§ 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 newlyassigned 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 

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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 § 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: 

• 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. 

• 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. 

• 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. 

• 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 

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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. 

• 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 § 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 § 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-ServicePayment/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 

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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 

§ 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 § 425.118(a). 

Further, § 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 

§ 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 § 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 

(§§ 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 

§ 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 (§ 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-andAssignment-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 

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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: 

• 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. 

• 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. 

• 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): 

• 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. 

• Calculate a joiner component: 

Determine average per capita reference 

year expenditures for joiners. 

• 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. 

• 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. 

• 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 

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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 § 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 § 425.603. We also 

propose to add definitions for ‘‘stayers’’, 

‘‘joiners’’ and ‘‘leavers’’ to § 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 

§ 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 performancebased risk arrangements. We also 

indicated in the June 2015 final rule (80 

FR 32695) that we intended to consider 

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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 

§ 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 § 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 performancebased 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 performancebased 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 § 425.224. If the ACO’s 

renewal request is approved, the ACO 

would be able to defer entering the new 

agreement period under a performancebased 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 

§ 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 § 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 § 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 § 425.602(b) for 

performance year 4 of the initial 

participation agreement. However, we 

would defer resetting the benchmark as 

specified at proposed § 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 

§ 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 

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participation in the Shared Savings 

Program, the ACO would be required to 

transition to the selected performancebased 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 § 425.221 would apply. For 

example, if the ACO voluntarily 

terminates its agreement under 

§ 425.221(a), effective December 31 of 

its fourth performance year, and 

completes all required close-out 

procedures, then as specified by 

§ 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 

§ 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 § 425.222. 

We would further note that if an ACO 

that goes on to participate under a twosided 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 § 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 

§ 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 § 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 § 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 § 425.606) or Track 

3 (as determined at § 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 performancebased 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 performancebased 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 twosided 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 

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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 

§ 425.800(a)(4). However, under 

§ 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-ProcessGuidance.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 § 425.804 or 

§ 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 § 405.980 

and § 405.986 regarding reopening of 

initial determinations of claims under 

the original Medicare program, 

§ 405.1885 regarding reopening of 

intermediary determinations of program 

reimbursement under the original 

Medicare program, and § 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 

§ 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 twosided 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 

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for ACOs and CMS, including multiple 

financial reconciliation re-runs and offcycle 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 

§ 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, § 405.980(b)(3); 74 FR 

65296, 65313 (December 9, 2009)). 

Further, under the Shared Savings 

Program regulations at § 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 § 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 § 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 

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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 

§ 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 §§ 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 

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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 taxpayerprovided 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/vol1lcomplete.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 

§ 425.606(h)(3) (Track 2) and 

§ 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 

§ 425.606(h)(3) or § 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 

§ 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 

§§ 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 § 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 § 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 

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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 § 425.800. 

However, we propose to amend 

§ 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 

§ 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 

(§ 425.800(a)(4)), and the limit on total 

amount of shared savings that may be 

earned under Track 1 and Track 2 

(§ 425.800(a)(5)). In the June 2015 final 

rule, we amended the Shared Savings 

Program regulations by adding a new 

provision at § 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 § 425.800 to include 

references to determinations under 

§ 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 § 425.800 to add determinations 

under § 425.610 (Track 3) to the list of 

determinations under § 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 

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3Traditional 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/Early

Preview2017GrowthRates.pdf. 

4Similarly, 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 

Continued 

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 assignmentweighted 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 potentiallyassignable 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. 

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-servicearea 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 ‘‘ACOheavy regions’’ that manage to broadly 

increase efficiency at the overall 

regional market level.4 However, on the 

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assigned population. Such scenarios are more likely 

when competing models are specifically targeted for 

beneficiaries not assigned to an ACO. 

5Early 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. 

6Medicare 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 

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. 

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. 

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: 

• Approximately 100, 100, and 200 

ACOs will consider renewing in 2017, 

2018, and 2019, respectively. 

• 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 MACRA6 that 

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physician fee schedule revenue to eligible professionals participating in certain qualifying 

ACOs. 

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. 

• 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. 

• 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). 

• 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. 

• 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. 

• ACOs achieve a mean quality score 

of 80 percent (based on analysis of 

Shared Savings Program ACO quality 

scores in 2013 and 2014). 

• 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. 

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5862 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

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 

($Million).

ACOs Renew 2017 ..........................

ACOs Renew 2018 ..........................

¥60 

........................

¥60 

¥60 

¥70 

¥60 

¥190 

¥120 

ACOs Renew 2019 .......................... ........................ ........................ ¥60 ¥60 

All ACO Total ............................ ¥60 ¥120 ¥190 ¥370 

Impact on Net Shared Savings Pay 

($Million).

ACOs Renew 2017 .......................... 40 30 30 100 

ACOs Renew 2018 .......................... ........................ 40 30 70 

ACOs Renew 2019 .......................... ........................ ........................ 80 80 

All ACO Total ............................ 40 70 140 250 

Overall Impact on Net Federal Costs 

($Million).

ACOs Renew 2017 .......................... ¥20 ¥30 ¥40 ¥90 

ACOs Renew 2018 .......................... ........................ ¥20 ¥30 ¥50 

ACOs Renew 2019 .......................... ........................ ........................ 20 20 

All ACO Total ............................ ¥20 ¥50 ¥50 ¥120 

Low (10th %-ile) ................. 20 50 160 230 

High (90th %-ile) ................ ¥70 ¥160 ¥260 ¥490 

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 riskadjusted 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 

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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 valuebased 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, 

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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 marketwide 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/smallbusiness-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 

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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 performancebased 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 

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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 

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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] 

Category Primary estimate Minimum estimate Maximum estimate 

Source citation 

(RIA, preamble, 

etc.) 

Transfers From the Federal Government to ACOs 

Annualized monetized: Discount rate: 7%.¥ 39.3 million ....................... 73.5 million ............................ ¥159.1 million ...................... Table 3. 

Annualized monetized: Discount rate: 3%.¥39.7 million ........................ 75.3 million ............................ ¥161.5 million.

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/: 

• 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. 

• 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/StatutesRegulations-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/nondual 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 riskadjusted 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 

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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 

■ 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). 

■ 2. Amend § 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: 

§ 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 § 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 

§ 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 

§ 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 § 425.118 is taken into 

account. 

* * * * * 

■ 3. Amend § 425.200 as follows: 

■ A. In paragraph (b)(2) by removing the 

phrase ‘‘all subsequent years’’ and 

adding in its place the phrase ‘‘through 

2016’’. 

■ B. By adding paragraph (b)(3). 

■ C. By adding paragraph (e). 

The additions read as follows: 

§ 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 § 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 § 425.224. 

(iii) Has selected a two-sided model 

(as described under § 425.606 or 

§ 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 § 425.220; and 

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(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 

§ 425.222. 

■ 4. Amend § 425.314 as follows: 

■ A. By removing paragraph (a)(4). 

■ B. By adding paragraph (e). 

The additions reads as follows: 

§ 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 § 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 § 425.604(f), § 425.606(h), or 

§ 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. 

■ 5. Amend § 425.602 as follows: 

■ A. Revise the section heading. 

■ B. Redesignate paragraph (a)(4) as 

paragraph (a)(4)(i). 

■ 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’’. 

■ D. Add paragraph (a)(4)(ii). 

■ E. Revise paragraph (a)(5) 

■ F. Add paragraphs (a)(8)(i) and (ii). 

■ G. Add paragraph (a)(9). 

■ H. Revise paragraphs (b)(1) and (2). 

■ I. Remove paragraph (c). 

The revisions and additions read as 

follows: 

§ 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-forservice 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 

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factors as described under 

§§ 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-forservice 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-forservice 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-forservice 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-forservice 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. 

■ 6. Add § 425.603 to read as follows: 

§ 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 § 425.602(a) and (b) 

with the following modifications: 

(1) Rather than weighting each year of 

the benchmark using the percentages 

provided at § 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 § 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 

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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 § 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 

§§ 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 feefor-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 feefor-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-forservice 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 

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5872 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

the following to calculate an ACO’s 

regional expenditures using riskadjusted 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-forservice 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 feefor-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. 

■ 7. Amend § 425.604 as follows: 

■ 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.’’ 

■ 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’’. 

■ C. Redesignate paragraph (a)(4) as 

paragraph (a)(4)(i). 

■ 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’’. 

■ E. Add paragraph (a)(4)(ii). 

The addition reads as follows: 

§ 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-forservice expenditures for assignable 

beneficiaries identified for the 12-month 

calendar year corresponding to the 

performance year. 

* * * * * 

■ 8. Amend § 425.606 as follows: 

■ 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. ‘‘ 

■ 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. ‘‘ 

■ C. Redesignate paragraph (a)(4) as 

paragraph (a)(4)(i). 

■ 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’’. 

■ E. Add paragraph (a)(4)(ii). 

The addition reads as follows: 

§ 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-forservice expenditures for assignable 

beneficiaries identified for the 12-month 

calendar year corresponding to the 

performance year. 

* * * * * 

■ 9. Amend § 425.610 as follows: 

■ 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.’’ 

■ 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.’’ 

■ C. Redesignating paragraph (a)(4) as 

paragraph (a)(4)(i). 

■ 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’’. 

■ E. Add paragraph (a)(4)(ii). 

The addition reads as follows: 

§ 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-forservice expenditures for assignable 

beneficiaries identified for the 12-month 

calendar year corresponding to the 

performance year. 

* * * * * 

§ 425.800 [Amended] 

■ 10. Amend § 425.800 as follows: 

■ A. In paragraph (a)(4) by— 

■ i. Removing the phrase ‘‘The 

determination of whether’’ and adding 

in its place the phrase ‘‘The initial 

determination or revised initial 

determination of whether’’. 

■ ii. Removing the phrase ‘‘including 

the determination’’ and adding in its 

place the phrase ‘‘including the initial 

determination or revised initial 

determination’’. 

■ iii. Removing the cross-reference 

‘‘§ 425.602, § 425.604, and § 425.606’’ 

and adding in its place the crossreference ‘‘§§ 425.602, 425.604, 425.606, 

and 425.610’’. 

■ B. In paragraph (a)(5) by removing the 

cross-reference ‘‘§ 425.604 and 425.606’’ 

and adding in its place ‘‘§§ 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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