The Centers for Medicare and Medicaid Services (CMS) has proposed a shared savings arrangement with hospitals, physicians, and other healthcare providers that integrate and coordinate their services through accountable care organizations (ACOs) and achieve cost savings to Medicare as a result. In return, CMS offers, through the Medicare Shared Savings Program (MSSP), to return a portion of the amounts saved to the ACOs.

MSSP applications are due early in 2012 for ACO starting dates of April 1 or July 1, 2012. An application must include a plan for distributing shared savings or losses to providers within the proposed ACO, but CMS has not spelled out procedures for developing such a plan. Drawing up a savings-distribution plan requires careful, detailed decisions potentially affecting every provider entity within the new system.

The framework for allocating savings within an ACO described in this paper emphasizes rewards for an ACO’s component entities based on their relative contributions to the organization’s total shared savings and quality performance.

The paper focuses on CMS-contracted MSSP ACOs, as contained in the Patient Protection and Affordable Care Act (PPACA) of 2010, because they are facing the task as an immediate issue. However, the approach could also be applied to risk-sharing arrangements within any integrated delivery system.