“Should we form an ACO?” questioned the primary care physician at a presentation by legal counsel at a business meeting of her medical group. “Do you mean an ACO or Medicare ACO?” replied the group’s general counsel. “What’s the difference?” quizzed the physician. “Well, quite a bit,” replied the lawyer.

The term ACO, short for accountable care organization, became the latest and greatest acronym to come out of federal health reform efforts from March 2010. ACO as a generic term means an organization of health care providers that agrees through some sort of clinical management to be accountable to its population of patients for improving their care within the health system and hopefully doing so by using fewer health care dollars. The policy concepts related to ACOs largely are based upon another clinical model known formally as the Triple Aim. That is generic ACO lingo.

ACO as a new Medicare term, however, has a wholly different meaning and a legal meaning at that. A Medicare ACO means an entity that has applied and has been approved to participate in the demonstration project labeled the Medicare Shared Savings Program. As a participating Medicare ACO, fee-for-service Medicare beneficiaries will be assigned to entities of providers around the country that organize themselves into an ACO. Beneficiaries serviced in the Medicare managed care program, that is, Medicare Advantage, will not be part of the project.

In early April 2011, the Centers for Medicare and Medicaid Services (CMS) published proposed regulations that outlined the type of entities that are eligible to serve as Medicare ACOs and what those entities must do to be eligible to receive a portion of the shared savings they realize in reducing health care expenditures for assigned fee-for-service beneficiaries. In addition to the CMS proposed regulations, the Office of Inspector General, the Federal Trade Commission, the Department of Justice, and the Internal Revenue Service issued statements regarding the application of existing federal law to Medicare ACOs and explained the need for possible waivers or exceptions for ACO activity. The initial dust up generated by proposed regulations and agency statements has subsided, but now consultants, lawyers, business managers, and clinical leaders for health care providers around the country are grappling with the concept of “do we apply?”

As an April 7, 2011 New England Journal of Medicine article reported, in an earlier but similar Medicare demonstration project, the participating organizations spent an average of $1.7 million to ramp up for the project and did not realize any reward for their effort in the first year of the project and only minimal return in later years. There was no information about how much of the costs of ramping up were related to complying with regulatory oversight versus investments in the organization’s infrastructure and patient care resources.

The proposed regulations clearly indicate that Medicare ACOs will be highly regulated, monitored, and audited. CMS will be motivated to demonstrate success in the program, and likely will triage applicants to make certain that only organizations with a chance of succeeding will make it through. Given the looming threat of fraud and abuse violations and antitrust risk, multiple federal agencies will be peering into the operations of every participating organization. That clearly presents added legal risk for any organization.

So what to do? Study, study, study. Study the proposed regulations and agency commentary. Study prior Medicare fee-for-service demonstration projects. Study whatever actual numbers exist that can help shed light on the cost-benefit of spending significant financial resources chasing a piece of shared savings in your organization’s Medicare fee-for-service line of business.

For an organization willing to accept significant federal oversight, being deemed a Medicare ACO would grant the organization superior bragging rights especially when negotiating with commercial payors outside of the federal health care programs. For organizations, however, just starting out with concepts such as clinical integration or shared savings, moving toward making ideals such as the Triple Aim operational, well, that should make both business and legal sense.

If an organization can demonstrate to payors, federal or otherwise, that not only can it care for a group of patients, effectively improve the overall health status of those patients, and save health care dollars to boot, that basically is a new product in the health care marketplace. Creating those efficiencies should be rewarded, and that can be done as an ACO, in a generic sense, or a Medicare ACO, in a highly regulated sense.