One of the stated policy objectives for the ACO rule is to encourage more ACOs to take higher levels of risk, but a little-noticed provision in the notice of proposed rule-making would severely restrict the ability of physician-only ACOs to enter into the higher risk ENHANCED track. This relates to the required “repayment mechanisms” that ensures that ACOs entering downside risk models will pay CMS back if they incur shared losses. A small policy decision here can make a large difference in the amount of cash ACO would need to sequester, and the investments they can make in care improvement.

The repayment mechanism amount required for two-sided risk contracts is significant and can range from $100,000 for an ACO with 5,000 assigned beneficiaries under the BASIC track, to $5,000,000 for an ACO with 50,000 assigned beneficiaries under the ENHANCED track. While the data show that physician-only ACOs can be most successful at reducing cost, few would be able to put away millions of dollars into escrow, while simultaneously investing in the additional technology and services needed to generate savings.

Fortunately, there is an approved repayment mechanism that is well-designed for this purpose- surety bonds. An issuer like Swiss Re would provide an assurance that the obligation will be paid if incurred, in return for a small fee. They would also require a cash collateral depending on the level of risk assumed, and on regulatory requirements and the availability of reinsurance. While complicated, these financial instruments are a key part of the smooth functioning of financial institutions and businesses throughout the economy.

A key factor in an issuer’s calculation of the cash collateral required is is the time period of the bond. A bond with a 3-year term, renewed annually, has a dramatically different profile for an issuer than a 7-year bond. When CMS proposed to lengthen the contract periods for ACO contracts from 3 to 5 years, they also proposed to lengthen the time period for repayment mechanisms from the current 5 to 7 years.

However, surety bonds are nearly always issued for a maximum of 5 years, due to reinsurance and regulatory complications surfacing beyond this time frame.  Most notably, reinsurance treaty prohibits insurers from writing bonds with terms exceeding 5 years. Aledade has brought CMS’s proposal to the attention of One Beacon Surety Group and Swiss Re. After discussion and analysis both organizations came to the conclusion that if the proposed  7-year term is finalized, all surety bonds would require 100% cash collateral, defeating the purpose of the surety bond!

This would impose a significant liquidity and capital burden, limiting a ACO’s ability to invest in innovations that deliver higher quality care at lower cost.  This would be especially problematic for physician-based and small, rural ACOs, neither of which have access to low-cost capital.

Therefore, Aledade strongly urges CMS to set the Pathways to Success repayment mechanism duration to 3 years, with a required annual renewal with the appropriate updated repayment mechanism amount. This approach would allow CMS to (1) continue to protect the financial integrity of the program by ensuring that all continuing and renewing ACOs will remain capable of repaying losses, and (2) preserve the viability of surety bonds so physician-led and small, rural ACOs access capital and liquidity.

We greatly appreciate the thought and analysis CMS has put into the proposed Pathways to Success program. Thank you for your consideration and we look forward to contributing to the continued success of the program.