HEALTHTREK ACCOUNTABLE CARE ORGANIZATIONS: OPERATIONAL RISK AND FINANCIAL RESPONSIBILITY HEALTH CARE PRACTICE

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1 ACCOUNTABLE CARE ORGANIZATIONS: OPERATIONAL RISK AND FINANCIAL RESPONSIBILITY By Sadra L. Berkowitz, RN, JD UNCERTAINTY CALLING OUT FOR INSURANCE SOLUTIONS As the Patiet Protectio ad Affordable Care Act (PPACA) of 2010 is implemeted, the likelihood of chages i paymet models that reward provider performace ad ehace coordiatio of care cotiues to be high. 1 The Ceters for Medicare ad Medicaid Services (CMS) have made it abudatly clear that their focus is o cotrollig aggregate costs for all beeficiaries (i.e., ot just the paymet rate) ad service volume decreases (readmissios, returs to ERs, prevetable hospitalizatios ad overuse of specialists). CMS refers to shared savigs reforms as havig a three-part aim of: 1. Better care for idividuals 2. Better health for populatios 3. Slower growth i expeditures HEALTH CARE PRACTICE HEALTHTREK March Accoutable Care Orgaizatios are viewed by may as the solutio to these three better/better/slower challeges: better care, better populatio health ad slower growth i medical costs. System Trasformatio, aka Provider Aligmet, is CMS uspoke but perhaps most importat goal. It is the coditio precedet to achievig goals umber 2 ad umber 3. WHAT S AN ACCOUNTABLE CARE ORGANIZATION? A Accoutable Care Orgaizatio (ACO) is a formal legal structure through which health care providers across the cotiuum of care (prevetive, primary, specialty, emergecy, acute ad postacute) become cliically ad fiacially accoutable for a populatio of patiets. These patiets become aliged with a ACO as oe payer

2 (here, pursuat to the Medicare Shared Savigs Program [MSSP] admiistered by the Ceters for Medicare ad Medicaid Services [CMS]). 2 Smoothig out the risks of ucertaity is the domai of risk trasfer ormally through isurace or cotractual laguage. The goverig body of a ACO may ot have isurace requiremets at the top of its list, but every risk maager servig a ACO, every board member ad every other stakeholder associated with a ACO certaily should. The MSSP ACO model is a way for a group of health care providers to potetially ad gradually trasform ito ACOs that assume more of the risk. The CMS Iovatio Ceter s Pioeer ACO Model is desiged to test the effectiveess of a particular paymet model full risk capitatio. Full risk capitatio meas that the ACO must accept a guarateed paymet per participat that is ot adjusted based o services provided. The Iovatio Ceter believes that Pioeer Model ACOs will be more effective i producig gais i CMS three-part aim if they fully commit to a busiess model based o fiacial ad performace accoutability. Pioeer Model ACOs are required to eter similar cotracts with other payers (commercial isurers, employer health plas, ad Medicaid) ad more tha 50% of the ACO s reveues will be derived from such arragemets by the ed of the secod year i busiess (the Performace Period ). 3 The Urba Istitute reported i November 2011 that at least eight private health plas have etered ito ACO cotracts with providers usig a shared risk paymet model, ad at least 27 more have etered ito shared savigs cotracts. 4 May commetators ad legal reviewers have raised fudametal questios regardig the orgaizatioal, operatioal, fiacial ad legal perils iheret i ACO formatio ad maagemet. Although there have bee ACO demostratio projects focused o measurig potetial cost savigs, the issue of potetial liabilities for ACOs still requires meaigful ad creative examiatio. Smoothig out the risks of ucertaity is the domai of risk trasfer ormally through isurace or cotractual laguage. The goverig body of a ACO may ot have isurace requiremets at the top of its list, but every risk maager servig a ACO, every board member ad every other stakeholder associated with a ACO certaily should. THE ACO AND FORESEEABLE RISKS Sectio 3022 of the Patiet Protectio ad Affordable Care Act (PPACA) 5, which creates the Medicare Shared Savigs Program, requires that a MSSP ACO must: Accept resposibility for the quality, cost ad overall care of its aliged Medicare beeficiaries Eter ito miimum of a three-year agreemet Have a formal legal structure to receive ad distribute shared savigs paymets to participats (emphasis added) Iclude a sufficiet umber of primary care professioals for the umber of assiged beeficiaries (MSSP miimum is 5,000; Pioeer Model miimum is 15,000) Have a leadership ad maagemet structure that icludes cliical ad admiistrative systems (emphasis added) Defie processes to promote evidece-based medicie ad patiet egagemet Report o quality ad cost measures (as predetermied by CMS) Coordiate care Demostrate to CMS that the ACO delivers patiet-cetered care Be paid o a Fee For Service basis for services uder Medicare A ad B If the ACO meets the quality performace criteria of CMS, it may receive a shared savigs paymet (ad may also have fiacial resposibility for shared losses). The paymet would be a calculatio based o the percetage of differece betwee 1) estimated average per capita Medicare expeditures i a year ad 2) the per capita bechmark established by CMS for that same timeframe. The visio expressed for the ACO model i the Act ad the ACO fial regulatios clearly cotemplates a substatial capital ivestmet i operatioal ecessities, such as sophisticated IT ad electroic health record (EHR) systems. It evisios a closely coordiated patiet 2 Willis North America 03/12

3 treatmet ad maagemet process, toward the larger goal of reducig total health care expeditures for a defied populatio i this case, Medicare beeficiaries. It is likely that the ACO will be a multidiscipliary collaboratio betwee umerous istitutioal ad idividual providers alog the cotiuum of care. The demads for efficiecy ad ehaced care coordiatio have the potetial to icrease both the frequecy ad severity of loss exposure for the ACO. Such losses could iclude, for example, a massive EHR security breach, vicarious liability exposure for all participats i the ACO cotiuum or executive liability for poor executio of the ACO busiess pla. The exposure for the ACO is compouded by the cotiued ucertaity surroudig the applicatio of ati-trust law, 6 ati-kickback law, physicia self-referral law, ad false claims law. 7 The utested waters associated with iterpretatio of the Iterim Fial Rules regardig waivers of Stark, Kickback ad Civil Moetary Pealties at both the federal ad state level, as well as the challege of decipherig ew fraud ad abuse waiver regulatios ad other policy statemets that have bee recetly issued by federal regulatory agecies, causes additioal ucertaity. Fiacial Risks State/federal budget deficits Capital access Isurace risk (adverse selectio) Accoutig irregularities ACO shared losses What Keeps ACOs Up At Night? Strategic Risks Heads i beds Physicia decisios ca achieve savigs w/o hospital ivolvemet IT systems compatibility ad meaigful use All-payer rate settig if market-based solutios like ACOs fail Provider Stop Loss Hazard Risks Med mal direct/vicarious liability Wrogful ecoomic credetialig Ati-trust Fiacial icetives distort medical ecessity decisios Privacy/Network security breach Icosistet safe harbors from kickback/fraud Physicia self referral/false claim Cyber Liability Coverage Regulatory Actio Coverage ACO RM Evirometal Risk Scas M&A Due Diligece Operatioal Risks Misguided M&A especially doctors Ieffective populatio maagemet strategies Performace risk (ca utilizatio be decreased?) Electroic Health Record Implemetatio Allocatio of medical home paymets for primary/chroic care maagemet w/o alieatig specialists Credetialig o-physicia PCPs Figer-poitig Quatify & Coect Operatioal Risk w/ Risk Trasfer The utested sustaiability of the ACO model o a log-term basis, combied with the large capital ivestmet ecessary to operate effectively, 8 requires ACO executives to employ a well-coceived risk maagemet ad isurace strategy. I the ACO Four Quadrats of Risk show above, the busiess ad risk maagemet challeges cofrotig ACOs vary from Strategic (doig the right thigs) to Operatioal (doig the thigs right) to Fiacial (impact o fiacial statemet) to Hazard (ma-made ad atural disasters). Risks i the Hazard quadrat are isurable, but risks i the other quadrats are geerally ot mitigated yes, but ot ormally trasferred. (Sample solutios relevat to each quadrat s risks are boxed beeath the quadrat.) Particularly i the early years whe skepticism about ACO viability may likely impede capital access, ACOs should demostrate fiacial resposibility by trasferrig risks for a reasoable ad appropriate premium whe they ca ad whe it makes sese i accomplishig their missio. Simply put, ACO capital is too scarce to deploy i lieu of reasoably priced risk trasfer; i.e., isurace. 3 Willis North America 03/12

4 DISCOVERING AN ACO S RISK SOPHISTICATION QUESTIONS FOR ITS LEADERSHIP CEO: Have you formed a separate legal etity for this ACO? Is there oe orgaizatio with the cotrollig iterest? CEO: Were ay liability/employee beefits issues ucovered by your physicia acquisitio due diligece aside from medical malpractice tail liability cocers ad isurace placemet resposibility goig forward? Are ay of your acquired physicias i states that ba the Corporate Practice of Medicie (CPOM)? Do the PCs i CPOM states meet the defiitio of subsidiary i your isurace policies? Should the physicia employees of the PCs that the ACO ows or maages sue their sposorig lay etities for mismaagemet, what policy would respod? CEO: Has legal advice bee obtaied regardig the applicatio of fraud ad abuse waivers uder federal regulatios ad guidace? CEO: Who have you desigated as your ACO s isurace professioal ad risk maager ad do you have a icidet/claim reportig process i place? We pose these questios to direct focus to a ACO s fiacig philosophy for isurable risks, together with its strategy for maagig uisurable risks. Because the liability isurace marketplace reflects the same hesitacy toward ACO operatios that we hear from ACO sposors themselves, coverage optios are relatively udeveloped. I light of the differig ACO uderwritig views out there (from it s a PHO with oly a vicarious med mal exposure to o it s a direct medical malpractice risk ) we are sesitive that available policies must fit together. To this ed, Willis offers observatios o improvig the boilerplate isurace policy laguage available, with the goal of icreasig the probability that the ACO s policies fit together, the ACO is protected ad isurable losses get paid. CFO: Medicare ACOs may propose shared savigs methodologies that ivolve a risk corridor, that is, a credit or debit off the capitated charge How do you kow whe it s time to shift to a risk bearig cotract? How soo do you see the shift happeig? I moths? I years? CFO: Have ay ACO participats experieced a breach of protected health iformatio? If so, was the breach reported to HHS i compliace with their guidelies ad did the govermet impose fiacial pealties? Pre-claim otice ad moitorig, required i all 50 states, averages $73 per member record breached. 9 Did cyber/etwork liability isurace cover the pre-claim expeses of the breach? CFO: Where are you gettig your capital for the sigificat ifrastructure you must build? What is the amout of your capital ivestmet or lie of credit dedicated to the ACO? Private equity ivestors are approachig CEOs ad CFOs. Do you have a strategy or respose formulated? I the ACO Four Quadrats of Risk, the busiess ad risk maagemet challeges cofrotig ACOs vary from Strategic (doig the right thigs) to Operatioal (doig the thigs right) to Fiacial (impact o fiacial statemet) to Hazard (ma-made ad atural disasters). Risks i the Hazard quadrat are isurable, but risks i the other quadrats are geerally ot mitigated yes, but ot ormally trasferred. 4 Willis North America 03/12

5 IMPROVING ACO LIABILITY INSURANCE CONTRACT CERTAINTY ACO OPERATIONS/RISKS TYPICALLY COVERED BY HOW DOES POLICY ADDRESS Formal legal structure to receive ad distribute savigs ad later, medical cost risk/shareholder lawsuits Directors & Officers (D&O) Outside directors eed writte istructios from home boards Isured vs isured exclusio (oe isured caot sue aother e.g., isured specialists ca t sue ACO for ufair distributio of bous pool ) Sufficiet primary care physicias for # assiged beeficiaries/ direct medical services Direct & Vicarious Medical Malpractice; D&O E&O excludes direct care by isured Corporate practice of medicie costraits if applicable to ACO: Who is the First Named Isured? Do PCs meet subsidiary defiitios? Tail ratig basis (idividual tail purchases vs. rollig FTE tail so log as istitutioal employer policy is maitaied) Employmet Practices D&O/Employmet Practices Liability Wrogful ecoomic credetialig or discrimiatio (e.g., ca your PCP ad/or Medical Home team leader be a Nurse Practitioer?) Pressure to be accessible leads to practice orth of scope / patiet ifo breach i Network Security & Privacy Is the other isurace coditio triggered whe payer s member ifo is breached by ACO whose providers carry o cyber limits? Theft of, or Disappearace of, laptop cotaiig provider credetialig iformatio Network Security & Privacy, MCO E&O Pre-claim otice ad moitorig expese: Eve if laptop is ecrypted, otice ad moitorig costs are steep MCO E&O does ot exted to employee privacy breach Negotiatig cotracts with isurace compaies ad directly w/ local employers Regulatory scrutiy: subpoeas ad eforcemet actios Higher per capita cost for o-medicare patiets served by Medicare ACO suggests weakeed market competitio/ati-trust D&O, E&O Doig busiess without a licese exclusio? State regulatio of doig busiess of isurace applies if ACO is direct cotractig with employer MCO E&O Scope of regulatory coverage grat D&O, MCO E&O Scope of ati-trust coverage grats Shared losses excess of bechmark targets: capital access ad accumulatio Provider Excess of Loss (excess of stipulated threshold, this coverage trasfers medical costs risk assumed by a provider) Reisurace cotract terms: who drafts the laguage? CONCLUSION I coclusio, we agree that ACOs face key implemetatio challeges. 10 Some ACOs will ot succeed, ad their idemificatio agreemets may ed up worthless. Isurace, however, is a asset that ca survive busiess failure ad ecourages iformed risk-takig. Which pieces of paper idemity agreemets from a orgaizatio with o track record or well crafted isurace policies from a A rated carrier do cotractig payers ad other stakeholders wat to see the ACO provide as evidece of fiacial resposibility? 5 Willis North America 03/12

6 CONTACTS For further iformatio, please visit our website o willis.com or cotact ay of the followig: Frak Castro Health Care Practice Leader Los Ageles, CA frak.castro@willis.com Jacquelie Bezaire Los Ageles, CA jacquelie.bezaire@willis.com Ke Felto Hartford, CT keeth.felto@willis.com Deaa Alle Atlata, GA deaa.alle@willis.com Neil Morrell Chicago, IL eil.morrell@willis.com Brad Norrick Chicago, IL brad.orrick@willis.com Sady Berkowitz Rador, PA sady.berkowitz@willis.com Paul A. Greve, Jr. Fort Waye, IN paul.greve@willis.com Robert Syder Housto TX bob.syder@willis.com Kathy Kuigiel Sarasota FL kathy.kuigiek@wiilis.com The observatios, commets ad suggestios we have made i this report are advisory ad are ot iteded or should they be take as medical/legal advice. Please cotact your ow medical/legal adviser for a aalysis of your specific facts ad circumstaces. 1 Deloitte, Accoutable Care Orgaizatios: A ew model for sustaiable iovatio 2010, p.3. 2 Fial Rule for Medicare Shared Savigs Program ad ACOs 76 Federal Register 67802, 11/2/11. 3 CMS, Pioeer ACO Model Geeral Fact Sheet, 12/19/11 p6-7. Additioal iformatio about the Pioeer ACO Model is available o the Pioeer ACO Model website Bereso Robert ad Burto, Rachel, Accoutable Care Orgaizatios i Medicare ad the Private Sector: A Status Update, Urba Istitute, November 2011, p.3. 5 Sectio 1899 (b)(2) of U.S.C et seq. 6 Fial Statemet of Atitrust Eforcemet Policy Regardig ACOs 76 Federal Register 67026, 10/28/11. 7 Iterim Fial Rule Regardig Waivers of Stark, Kickback ad CMP 76 Federal Register 67992, 11/2/11. 8 Dowloaded 12/20/11 from K Cheug, October 26,2011: the ACO budget rages from CMS low of $1.7M per ACO to AHA s $5.3M-$12M, depedig o hospital size. 9 Zurich Executive Webiar November 9, 2011, Peter Foster citig Poemo Istitute 2011 statistics. 10 Deloitte, Accoutable Care Orgaizatios: A ew model for sustaiable iovatio 2010, p.5. 6 Willis North America 03/12