Earlier this month, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) quietly released joint revisions to three healthcare antitrust policy statements which it now considers “overly permissive”. While two of the policies date back to the 1990s and relate to information sharing, the most significant, published in 2011, stated that certain ACOs were “highly unlikely to raise significant competitive concerns”. Instead, the FTC and DOJ say their policy will be to review these arrangements on a case-by-case basis.
The Gist: While unlikely to alter the ACO landscape significantly, this new guidance signals a departure from Obama-era policies that gave outsized priority to ACO development in cost-reduction efforts. Until now, ACOs were passed over for scrutiny, while regulators focused on more traditional hospital mergers in an attempt to prevent outsized market leverage.
Moving forward, the Biden administration must strike a delicate balance between policies that encourage greater coordination amongst independent healthcare entities working together to improve patient care and lower costs, and the market leverage that such coordination can generate.
The Biden administration is trying to jump start a Medicare program that pays health providers based on patient outcomes rather than by how many services they perform.
Why it matters: The alternative payment effort was created through the Affordable Care Act, but participation has plateaued since 2018 amid waning interest from providers.
Driving the news: The Biden administration finalized an overhaul of the initiative, known as the Medicare Shared Savings Program, on Tuesday. Changes include offering groups of providers in rural and other underserved areas upfront payments to help them start out in the program.
The rule includes other provisions to make it less financial risky for provider groups to join, and makes it easier for participants to earn money back from the government year after year — a central perk of joining the program.
Zoom out: Medicare traditionally pays on a “fee-for-service” basis pegged to the number of patients seen and volume of procedures performed.
But one of the main funding sources for Medicare is set to run dry in 2028 if the federal government doesn’t make changes. Advocates say the solution at least partially lies in value-based care programs, like the Shared Savings Program.
Under the program, doctors, hospitals and other providers join form groups known as accountable care organizations. ACOs take responsibility for the care of a set of traditional Medicare patients.
If ACOs reduce total care costs for their members, they can get back a portion of that savings from the government. ACOs at more advanced stages of the program must pay the government back if total patient spending crosses a threshold.
By the numbers: ACOs have saved the federal government more than $17 billion since 2012, according to the National Association of Accountable Care Organizations.
In 2022, 483 ACOs participated in the program and took care of more than 11 million Medicare enrollees. But that’s down from 517 ACOs participating in 2020.
CMS set a goal last year to bring all 63 million-plus Medicare beneficiaries into a value-based care model by 2030. ACOs are a key player in achieving the goal.
Go deeper: Providers and value-based care advocates are also pushing Congress to extend a 5% pay bump for providers that participate in advanced alternative payment models, including some tracks of the Medicare Shared Savings Program. The bonus expires Dec. 31.
“If the bonus is not continued, it will soften or dampen the momentum toward alternative payment models, because it would create this mentality, or the view, that we’re not serious about that transformation,” said Mara McDermott, vice president at McDermott+Consulting and executive director of the Value Based Care Coalition.
Losing the bonus would also make it harder to recruit new providers into alternative payment models, she added.
The American Medical Association and five other health care groups launched a separate coalition Tuesday to rally around an extension of the 5% bonus.
“Patients and the healthcare system in the United States quite literally cannot afford to return to the days before Medicare incentivized healthcare providers for generating good results,” Clif Gaus, CEO of the National Association of ACOs, said in a news release about the coalition.
Also notable: The rule finalized Tuesday outlines physician payment rates for 2023. Interventional radiologists and vascular surgeons will see the largest Medicare cuts among physician specialties next year, though the final cuts are slightly lower than what CMS proposed in July.
Congress could stave off the cuts when they come back to Washington later this month.
“The Medicare payment schedule released today puts Congress on notice that a nearly 4.5 percent across-the-board reduction in payment rates is an ominous reality unless lawmakers act before Jan. 1,” American Medical Association President Jack Resneck said in a statement.
CMS finalized a slew of other policy proposals Tuesday, including provisions to reduce barriers to behavioral health care.
The belief that healthcare should, and would, transition from “volume to value” was a key pillar of the Affordable Care Act (ACA). However, with more than a decade of experience and data to consider, there is little indication that either Medicare or the healthcare industry at large has meaningfully shifted away from fee-for-service payment. Using data from the National Association of Accountable Care Organizations, the graphic below shows that the Medicare Shared Savings Program (MSSP)—the largest of the ACA’s payment innovations, with over 500 accountable care organizations (ACOs) reaching 11M assigned beneficiaries—has led to minimal savings for Medicare. In its first eight years, MSSP saved Medicare only $3.4B, or a paltry 0.06 percent, of the $5.6T that it spent over that time.
Policymakers had hoped that a Medicare-led move to value would prompt commercial payers to follow suit, but that also hasn’t happened. The proportion of payment to health systems in capitated or other risk-based arrangements barely budged from 2013 to 2020—remaining negligible for most organizations, and rarely amounting to enough to influence strategy. The proportion of risk-based payment for doctors is slightly higher, but still far below what is needed to enable wholesale change in care across a practice.
While Medicare has other options if it wants to increase value-based payment, like making ACOs mandatory, it’s harder to see how the trend in commercial payment will improve, as large payers, who are buying up scores of care delivery assets themselves, seem to have little motivation to deal providers in on risk.
While financial upside of moving to risk hasn’t been significant enough to move the market to date, we aren’t suggesting health systems throw out their population management playbook—to meet mounting cost labor pressures, systems must deliver lower cost care, in lower cost settings, with lower cost staff, just to maintain economic viability moving forward.
Despite the hype, accountable care organizations (ACOs) and other Medicare-driven payment reform programs intended to improve quality and lower healthcare spending haven’t bent the cost curve to the extent many had hoped.
A recent and provocative opinion piece in STAT News, from health policy researcher Kip Sullivan and two single-payer healthcare advocates, calls for pressing pause on value-based payment experimentation. The authors argue that current attempts to pay for value have ill-defined goals and hard-to-measure quality metrics that incentivize reducing care and upcoding, rather than improving outcomes.
The Gist: We agree with the authors that current value-based care experiments have been disappointing.
The intention is good, but the execution has been bogged down by entrenched industry dynamics and slow-to-move incumbents. One fair criticism: ACOs and other “total cost management” reforms largely focus on the wrong problem. They address utilization, rather than excessive price.
But we’re having a price problem in the US, not a utilization problem.Europeans, for example, have more physician visits each year than Americans, yet spend less per-person on healthcare. It’s our high prices—for everything from physician visits to hospital stays to prescription drugs—that drive high healthcare spending.
The root cause: our third-party payer structure actively discourages real efforts to lower price—every player in the value chain, including providers, brokers, and insurers, does better economically as prices increase. That’s why price control measures like reference pricing or price caps have been nonstarters among industry participants.
Recent reforms that increase price transparency, while not the entire solution, at least shine a light on the real challenges our healthcare system faces.
The for-profit, 39-hospital Steward system manages 171K lives across the Medicare Advantage, Medicare shared savings, and Medicare direct contracting programs. This deal will allow Miami-based CareMax, a publicly-traded, value-based care company with 42 senior centers (mostly in Florida) and 34K lives under management, to expand across Steward’s footprint, which includes Texas and Arizona, states with rapidly growing Medicare populations.
The Gist:This deal is an example of the rise of venture-funded MSO (medical services organization) services that aim to subsume and scale value-based care functions from hospitals and medical groups. Steward wagers it can find greater success in managing risk in partnership with CareMax, moving a greater share of its Medicare population into risk, and outsourcing care management and patient engagement functions.
Many health systems have spent substantial resources building out accountable care organizations and risk-based Medicare businesses over the last decade. While selling these assets to a company like CareMax may be one way to generate a return, particularly for those frustrated by lower-than-anticipated gains from moving to value-based care, it also requires relinquishing control of functions likely central to the future health system business model.
On Thursday CMS announced it will replace all versions of its Global and Professional Direct Contracting (GPDC) model, which allowed primary care providers to take full or partial risk on managing cost of care for traditional Medicare beneficiaries, after progressive Democrats raised concerns about whether a growing presence of Medicare Advantage insurers and private equity-backed groups in the model might compromise patient care and access in the traditional Medicare program. GPDC will be replaced with a new three-year demonstration called Accountable Care Organization Realizing Equity, Access and Community Health (ACO REACH), to start enrollment in 2023. The 51 current participants in the GPDC model can move into ACO REACH as long as they meet new requirements, which include developing plans to identify and address health disparities, and ensuring providers control three quarters of governing boards (as compared to a quarter in the GPDC model). Private equity and insurer applicants can still apply, but must demonstrate a track record of direct patient care, delivering quality outcomes, and serving vulnerable populations.
The Gist: ACO REACH is largely a “re-skinning” of the Direct Contracting program, rather than a significant overhaul. Physician, health system, and ACO groups, who were concerned that the program would be canceled altogether, were pleased with the announced changes to the model, although debate continues on whether the new guardrails will effectively address concerns around for-profit insurer and investor participation.
Like Direct Contracting before it, ACO REACH will be an important vehicle for risk-ready providers to move more extensively into full-risk contracting, without launching a plan or partnering directly with a MA insurer.
Many of the Center for Medicare and Medicaid Innovation’s value-based care payment models are undergoing a review, according to the Centers for Medicare & Medicaid Services (CMS).
The statement to Fierce Healthcare comes after CMS quietly updated and delayed several payment models, including pulling a controversial model that ties payments to geographic health outcomes.
“CMS remains steadfast in its commitment to transforming the healthcare system into one that rewards value and care coordination,” the agency said. “The CMS Innovation Center and its alternative payment models help execute that commitment.”
The agency added it hopes to design models that support the adoption of value-based care.
“Many of the CMS Innovation Center’s models are currently under review, and we look forward to providing updates when available,” CMS said.
CMS did not return a request for comment on how many models are under review or which ones are being scrutinized.
The statement comes after CMS has quietly updated the webpages for two payment models to note major changes. The agency made an update to the webpage for the Geographic Direct Contracting Model that said it was currently under review.
A request for applications for the model was posted Jan. 1, and the first performance period was expected to start in 2022 and run through 2024.
The model was intended to improve quality and lower costs for Medicare beneficiaries across a region, and providers in that region can enter into value-based payment arrangements.
Providers can build integrated relationships and invest in population health to better coordinate care, the agency said when the model was released last December.
But the model has gotten pushback from some provider groups. The National Association of Accountable Care Organizations has criticized the model, saying it could confuse patients who may not know whether they are participating in a direct contracting entity.
CMS also quietly pushed back the first performance period for the Kidney Care Choices model, which aims to improve the quality of dialysis care.
The model had an implementation period for 2020 that enabled participants to create the necessary infrastructure for the model, which aims to bundle care from treatment of chronic kidney disease all the way through kidney transplantation and post-transplant care.
Starting Jan. 1, 2021, providers were supposed to start taking on financial accountability including capitated payments.
But CMS posted an update on the webpage for the model, saying the start of the financial performance period will now be Jan. 1, 2022. The agency did not give a reason for the delay.
CMS’ review comes on the heels of a separate analysis conducted under the Trump administration on the value generated by the payment models. The analysis found bundled payment models that gave providers an amount of money for an entire episode of care had mixed results, while global budget models, which give providers a fixed amount for the total number of services given over a certain period of time, were given a more positive review.
It remains unclear whether that analysis is playing any role into the review undertaken by the Biden administration.
The Medicare Shared Savings Program saved the agency $1.19 billion in 2019, according to CMS performance results of 541 accountable care organizations released Monday.
This marks the third year of savings for the value-based care program and its largest yet, CMS Administrator Seema Verma wrote in a Health Affairs blog post Monday. ACOs taking on more risk continued to outperform those that didn’t, Verma wrote, including those under its Pathways to Success rule rolled out in December 2018.
ACOs in the Pathways to Success program generated net per-beneficiary savings of $169 compared to $106 for legacy track ACOs, Verma said, suggesting the policies are incentivizing ACOs to deliver more coordinated and efficient care.
Dive Insight:
ACOs are groups of doctors, hospitals and other providers with payments tied to the cost and quality of care they provide beneficiaries. According to Verma’s post, the number of ACOs taking on downside financial risk has nearly doubled since the Pathways to Success program launched for those in the Medicare Shared Savings Program.
New participation options under the rule require accountability for spending increases, generally after two years for new ACOs, and close evaluation of care quality. The new benchmarks and speed at which ACOs would need to take on downside risk was initially shot down by ACOs.
But CMS also created an option for “low-revenue” ACOs, generally run by physician practices rather than hospitals, allowing them an additional year before taking on downside risk for cost increases.
According to the blog post, physician-led ACOs performed better than hospital-led ACOs.
But the National Association of Accountable Care Organizations said only 5% of eligible ACOs took CMS’ offer on the Pathways to Success program structure early and instead chose to remain under the previous MSSP rules.
“To get program growth back on track, Congress needs to take a close look at the Value in Health Care Act, which makes several improvements to the Medicare ACO program and better incentivizes Advanced Alternative Payment Models,” trade group CEO Clif Gaus said in a statement.
Farzad Mostashari, CEO of the Aledade, pointed to physician-led ACOs out-performing hospital ACOs in a statement on the results. “What we need now is to help more practices participate in these models of care,” he said.
Low-revenue ACOs, typically physician-led, had per beneficiary savings of $201 compared to $80 per beneficiary for high-revenue ACOs. Low-revenue ACOs in the Pathways to Success program saved $189 per beneficiary while high-revenue ACOs in the program saved $155 per beneficiary, according to the 2019 performance results.
Several factors will shape the financial performance of physician- and hospital-led organizations under total cost of care payment models.
Introduction
Broad consensus has long existed among public- and private-sector leaders in US healthcare that improvements in healthcare affordability will require, among other changes, a shift away from fee-for-service (FFS) payments to alternative payment models that reward quality and efficiency. The alternative payment model that has gained broadest adoption over the past ten years is the accountable care organization (ACO), in which physicians and/or hospitals assume responsibility for the total cost of care for a population of patients.
Launched by the Centers for Medicare & Medicaid Services (CMS) Innovation Center in 2012, Pioneer ACO was the first such model design to generate savings for Medicare. In this incarnation, Medicare set a benchmark for total cost of care per attributed ACO beneficiary: If total cost of care was kept below the benchmark, ACOs were eligible to share in the implied savings, as long as they also met established targets for quality of care. If total cost of care exceeded the benchmark, ACOs were required to repay the government for a portion of total cost of care above the benchmark.
Payment models similar to the one adopted by Pioneer ACOs also have been extended to other Medicare ACO programs, with important technical differences in estimates for savings and rules for the distribution of savings or losses as well as some models offering gain sharing without potential for penalties for costs exceeding the benchmark. State Medicaid programs as well as private payers (across Commercial, Medicare Advantage, and Medicaid Managed Care) also have adopted ACO-like models with similar goals and payment model structures. Of the roughly 33 million lives covered by an ACO in 2018, more than 50 percent were commercially insured and approximately 10 percent were Medicaid lives.2
On the whole, ACOs in the Medicare Shared Savings Program (MSSP) have delivered high-quality care, with an average composite score of 93.4 percent for quality metrics. However, cost savings achieved by the program have been limited: ACOs that entered MSSP during the period from January 1, 2012 to December 31, 2014, were estimated to have reduced cumulative Medicare FFS spending by $704M by 2015; after bonuses were accounted for, net savings to the Medicare program were estimated to be $144M.3 Put another way, in aggregate, savings from Medicare ACOs in 2015 represented only 0.02 percent of total Medicare spending. The savings achieved were largely concentrated among physician-led ACOs (rather than hospital-led ACOs). In fact, after accounting for bonuses, hospital-led ACOs actually had higher total Medicare spending by $112M on average over three years.4
While savings from MSSP have been relatively limited, in aggregate, numerous examples exist of ACOs that have achieved meaningful savings—in some cases in excess of 5 percent of total cost of care—with significant rewards to both themselves as well as sponsoring payers (for example, Millennium, Palm Beach, BCBSMA AQC).567 The wide disparity of performance among ACOs (and across Medicare, Medicaid, and Commercial ACO programs) raises the question of whether certain provider organizations are better suited than others to succeed under total cost of care arrangements, and whether success is dictated more by ACO model design or by structural characteristics of participating providers.
In the pages that follow, we examine these questions in two ways. First, we analyze “the math of ACOs” by isolating four factors that contribute to overall ACO profitability: bonus payments, “demand destruction,” market share gains, and operating expenses. Following these factors, we illustrate the math of ACOs through modeling of the performance of five different archetypes: physician-led ACOs; hospital-led ACOs with low ACO penetration and low leakage reduction; hospital-led ACOs with high ACO penetration; hospital-led ACOs with high leakage reduction; and hospital-led ACOs with high penetration and leakage reduction.
The Math of ACOs
In the pages that follow, we break down “the math of ACOs” into several key parameters, each of which hospital and physician group leaders could consider evaluating when deciding whether to participate in an ACO arrangement with one or more payers. Specifically, we measure the total economic value to ACO-participating providers as the sum of four factors: bonus payments, less “demand destruction,” plus market share gains, less operating costs for the ACO (Exhibit 1).
In the discussion that follows, we examine each of these factors and understand their importance to the overall profitability of ACOs, using both academic research as well as McKinsey’s experience advising and supporting payers and providers participating in ACO models.
1. Bonus payments
The premise of ACOs rests on the opportunity for payers and participating providers to share in cost savings arising from curbing unnecessary utilization and more efficient population health management, thus aligning incentives to control total cost of care. Because ACOs are designed to reduce utilization, the bonus—or share of estimated savings received by an ACO—is one factor that significantly influences ACO profitability and has garnered the greatest attention both in academic research and in private sector negotiations and deliberations over ACO participation. Bonus payments made to ACOs are themselves based on several key design elements:
The baseline and benchmark for total costs, against which savings are estimated8 ;
The shared savings rate and minimum savings/loss rates;
Risk corridors, based on caps on gains/losses and/or “haircuts” to benchmarks; and,
Frequency of rebasing, with implications for benchmark and shared savings.
1a. Baseline and benchmark
Most ACO models are grounded in a historical baseline for total cost of care, typically on the population attributed to providers participating in the ACO. Most ACO models apply an annual trend rate to the historical baseline, in order to develop a benchmark for total cost of care for the performance period. This benchmark is then used as the point of reference to which actual costs are compared for purposes of determining the bonus to be paid.
Historical baselines may be based either on one year or averaged over multiple years in order to mitigate the potential for a single-year fluctuation in total cost of care that could create an artificially high or low point of comparison in the future. Trend factors may be based on historically observed growth rates in per capita costs, or forward-looking projections, which may depart from historical trends due to changes in policy, fee schedules, or anticipated differences between past and future population health. Trend factors may be based on national projections, more market-specific projections, or even ACO-specific projections. For these and other reasons, a pre-determined benchmark may not be a good estimate of what total cost of care would have been in the absence of the ACO. As a result, estimated savings, and hence bonuses, may not reflect the true savings generated by ACOs if compared to a rigorous assessment of what otherwise would have occurred.
Recent research suggests that an ACO’s benchmark should be set using trend data from providers in similar geographic areas and/or with similar populations instead of using a national market average trend factor.9 It has been observed in Medicare (and other) populations that regions (and therefore possibly ACOs) that start at a lower-than-average cost base tend to have a higher-than-average growth trend. For example, Medicare FFS spending in low-cost regions grew at a rate 1.2 percentage points faster than the national average (2.8 percent and 1.6 percent from 2013 to 2017 compound annual growth rate, respectively). This finding is particularly relevant in low-cost rural communities, where healthcare spending grows faster than the national average.10 Based on this research, some ACO models, such as MSSP and the Next Generation Medicare ACO model, have developed benchmarks based on blending ACO-specific baselines with market-wide baselines. This approach is intended to account for the differences in “status quo” trend, which sponsoring payers may project in the absence of ACO arrangements or associated improvements in care patterns. Some model architects have advocated for this provider-market blended approach to benchmark development because they believe such an approach balances the need to reward providers who improve their own performance with a principle tenet of this model: That ACOs within a market should be held accountable to the same targets (at least in the long term).
The shared savings rate is the percentage of any estimated savings (compared with benchmark) that is paid to the ACO, subject to meeting any requirements for quality performance. For example, an ACO with a savings rate of 50 percent that outperforms its benchmark by 3 percent would keep 1.5 percent of benchmark spend. Under the array of Medicare ACO models, the shared savings rate percentage ranges anywhere from 40 percent to 100 percent.11
In some ACO models, particularly one-sided gain sharing models that do not introduce downside risk, payers impose a minimum savings rate (MSR), which is the savings threshold for an ACO to receive a payout, typically 2 percent, but can be higher or lower.12 For example, assume ACO Alpha has a savings rate of 60 percent and MSR of 1.5 percent. If Alpha overperforms the benchmark by 1 percent, there would be no bonus payout, because the total savings do not meet or exceed the MSR. If, however, Alpha overperforms the benchmark by 3 percent, Alpha would receive a bonus of 1.8 percent of benchmark (60 percent of 3 percent). An MSR is common in one-sided risk agreements to protect the payer from paying out the ACO if modest savings are a result of random variations. ACOs in two-sided risk arrangements may often choose whether to have an MSR.
Both factors impact the payout an ACO receives. Between 2012 and 2018, average earned shared savings for MSSP ACOs were between $1.0M and $1.6M per ACO (between $10 and $100 per beneficiary).13 However, while nearly two out of three MSSP ACOs in 2018 were under benchmark, only about half of them (37 percent of all MSSP ACOs) received a payout due to the MSR.14
1c. Risk corridors
In certain arrangements, payers include clauses that limit an ACO’s gains or losses to protect against extreme situations. Caps depend on the risk-sharing agreement (for example, one-sided or two-sided) as well as the shared savings/loss rate. For example, MSSP Track 1 ACOs (one-sided risk sharing) cap shared savings at the ACO’s share of 10 percent variance to the benchmark, while Track 3 ACOs (two-sided risk sharing) cap shared savings at the ACO’s share of 20 percent variance to the benchmark and cap shared losses at 15 percent variance to the benchmark.15 In contrast with these Medicare models, many Commercial and Medicaid ACO models have applied narrower risk corridors, with common ranges of 3 to 5 percent. In our experience, payers have elected to offer narrower risk corridors. Their choice is based on their desire to mitigate risk as well as the interest of some payers (and state Medicaid programs) to share in extraordinary savings that may be attributable in part to policy changes or other interventions undertaken by the payers themselves, whether in coordination with ACOs or independent of their efforts.
Payers also may vary the level of shared savings (and/or risk), between that which applies to the first dollar of savings (versus benchmark) compared with more significant savings. For example, by applying a 1 percent adjustment or “haircut” to the benchmark, a payer might keep 100 percent of the first 1 percent of savings and share any incremental savings with the ACO at a negotiated shared savings rate. Depending on what higher shared savings rate may be offered in trade for the “haircut,” such a structure has the potential to increase the incentive for ACOs to significantly outperform the benchmark. For example, an ACO that beats the benchmark by 4 percentage points and earns 100 percent of savings after 1 percentage point would net 75 percent of total estimated savings. However, under the same risk model, if the ACO were to beat the benchmark by 2 percentage points, they would only earn 50 percent of total savings. Such a structure could therefore be either more favorable or less favorable than 60 percent shared savings without a “haircut,” depending on the ACO’s anticipated performance.
1d. Frequency of rebasing
In most ACO models (including those adopted by CMS for the Medicare FFS program), the ACO’s benchmark is reset for each performance period based (at least in part) on the ACO’s performance in the immediate prior year. This approach is commonly referred to as “rebasing.” The main criticism of this approach toward ACO model design—which is also evident in capitation rate setting for Managed Care Organizations—is that ACOs become “victims of their own success”: Improvements made by the ACO in one year lead to a benchmark that is even harder to beat in the following year. The corollary is also true: An ACO with “excessive” costs in Year 1 may be setting themselves up for significant shared savings in Year 2 simply by bringing their performance back to “normal” levels.
Even in situations where ACOs show steady improvements in management of total cost of care over several years, the “ratchet” effect of rebasing can have significant implications for the share of estimated savings that flow to the ACO. Exhibit 2 illustrates the shared savings that would be captured by an ACO, if it were to mitigate trend by 2 percentage points consistently for 5 years (assumes linear growth), under a model that provides 50 percent shared savings against a benchmark that is set with annual rebasing. In this scenario, although the ACO would earn 50 percent of the savings estimated in any one year (against benchmark), the ACO would derive only 16 percent of total savings achieved relative to a “status quo” trend.
Exhibit 2
Some ACO model designs (including MSSP) have mitigated this “ratchet” effect, to some extent, by using multi-year baselines, whereby the benchmark for a given performance year is based not on the ACO’s baseline performance in the immediate prior year but over multiple prior years. This approach smooths out the effect of one-year fluctuations in performance on the benchmark for subsequent years; by implication, improvements made by an ACO in Year 1 and sustained in Year 2 create shared savings in both years. Under a three-year baseline, weighted toward the most recent year 60/30/10 percent (as applies to new contracts under the MSSP), the ACO in Exhibit 2 would capture 22 percent of total estimated savings over 5 years. If the model were instead to adopt an evenly weighted three-year baseline, that same ACO would capture 28 percent over 5 years.
In select cases, particularly in the Commercial market, payers and ACOs have agreed to multi-year prospective benchmarks. Under this approach, the benchmark for performance Years 1 to 5 (for example) are set prospectively in Year 0; the benchmarks for Years 2 and 3, for example, are not impacted by the ACO’s performance in Year 1. If this approach were to be applied to the ACO depicted in Exhibit 2, they would earn fully 50 percent of the total savings, assuming that the prospectively established 5-year benchmark was set at the “status quo” trend line. While prospective multi-year benchmarks may be more favorable to ACOs, they also increase the sensitivity of ACO performance to both the original baseline as well as the reasonableness of the prospectively applied trend rate.
Key takeaways
While in many cases healthcare organizations are highly focused on the percent of shared savings they will receive (shared savings rate), in our experience, the financial sustainability of ACO arrangements may be equally or more greatly affected by several other design parameters outlined here, among them: the inclusion of an MSR or a “haircut” to benchmark, either of which may dampen the incentive to perform; benchmark definitions including the use of provider-specific, market-specific, and/or national baseline and trend factors; and the frequency of rebasing, as implied by the use of a single-year or multi-year baseline, or the adoption of prospectively determined multi-year benchmarks.
2. Demand destruction
Although shared savings arrangements are meant to align providers’ incentives with curbing unnecessary utilization, the calculation of bonus payments based on avoided claims costs (as described in Section 1) does not account for the foregone provider revenue (and margins) attached to reductions in patient volume. The economic impact of this reduction in patient volume, sometimes referred to as “demand destruction,” is described in this section, which we address in two parts:
Foregone economic contribution based on reduced utilization in the ACO population; and,
Spillover effects from reduced utilization in the non-ACO population, based on clinical and operational changes that “spillover” from the ACO population to the non-ACO population.
2a. Foregone economic contribution
Claims paid to hospital systems for inpatient, outpatient, and post-acute facility utilization typically comprise 40 to 70 percent of total cost of care, with hospital systems that own a greater share of outpatient diagnostic lab and/or imaging and/or skilled nursing beds falling at the upper end of this range. These same categories of facility utilization may comprise 60 to 80 percent of reductions in utilization arising from improvements in population health management by an ACO. Given the high fixed costs (and correspondingly high gross margins) associated with inpatient, outpatient, and post-acute facilities, foregone facility volume could come at an opportunity cost of 30 to 70 percent of foregone revenue—that opportunity cost being the gross contribution margin associated with incremental patient volume, calculated as revenue less variable costs: Commercially insured ACO populations are more likely to fall into the upper end of this range and Medicaid populations into the lower end. This is the reason savings rates tend to be higher in the Commercial market, to offset the larger (negative) financial impact of “demand destruction.”
For example, a hospital-led ACO that mitigates total cost of care by 3 percent (or $300 based on a benchmark of $10,000 per capita) might forego $180 to $240 of revenue per patient (assuming 60 to 80 percent of savings derived from hospital services), which may represent $90 to $120 in foregone economic contribution, assuming 50 percent gross margins. As this example shows, this foregone economic contribution may represent a significant offset to any bonus paid under shared savings arrangements, unless the shared savings percentage is significantly greater than the gross margin percentage for foregone patient revenue.
For some hospitals that are capacity constrained, the lost patient volume may be replaced (that is, backfilled) with additional patient volume that may be more or less profitable depending on the payer (for example, an ACO that backfills with more profitable Commercial patients). However, the vast majority of hospitals are not traditionally capacity constrained and therefore must look to other methods (for example, growing market share) to be financially sustainable.
In contrast, physician-led ACOs have comparatively little need to consider the financial impact of “demand destruction,” given that they never benefitted from hospitalizations and thus do not lose profits from forgone care. Furthermore, primary care practices may actually experience an increase, rather than decrease, in patient revenue, based on more effective population health management. Even for multi-specialty physician practices that sponsor ACO formation, any reductions in patient volume arising from the ACO may have only modest impact on practice profitability due to narrow contribution margins attached to incremental patient volume. Physician-led ACOs may need to be concerned with “demand destruction” only to the extent that a disproportionate share of savings is derived from reductions in practice-owned diagnostics or other high-margin services; however, the savings derived from such sources are typically smaller than reductions in utilization for emergency department, inpatient, and post-acute facility utilization.
2b. Spillover effects
Though ACOs are not explicitly incentivized to reduce total cost of care of their non-ACO populations (including FFS), organizations often see increased efficiency across their full patient population after becoming an ACO. For example, research over the last decade has found reductions in spend for non-ACO lives between 1 and 3 percent (Exhibit 3).
Exhibit 3
The impact of spillover effects on an ACO’s profitability depends on the proportion of ACO and non-ACO lives that comprise a provider’s patient panel. Further, impact also depends on the ACO’s ability to implement differentiated processes for ACO and non-ACO lives to limit the spillover of the efficiencies. Although conventional wisdom implies that physicians will not discriminate their clinical practice patterns based on the type of payer (or payment), nonetheless many examples exist of hospitals and other providers with the ability to differentiate processes based on payer or payment type. For example, many hospitals deploy greater resources to discharge planning or initiate the process earlier for patients reimbursed under a Diagnosis Related Group (case rate) than for those reimbursed on a per diem or percent of charges model. Moreover, ACOs and other risk-bearing entities routinely direct care management activities disproportionately or exclusively toward patients for whom they have greater financial accountability for quality and/or efficiency. For physician-led ACOs, differentiating resource deployment between ACO- and non-ACO populations may be necessary to achieve a return on investment for new care management or other population health management activities. For hospital sponsors of ACOs that continue to derive the majority of their revenue from FFS populations outside the ACO, differentiating population health management efforts across ACO and FFS populations are of paramount importance to overall financial sustainability. To the extent that hospital-led ACOs are unable to do so, they may find total cost of care financial arrangements to be financially sustainable only if extended to the substantial majority of their patient populations in order to reduce the severity of any spillover effects.
Key takeaways
The adverse impact of “demand destruction” is what most distinguishes the math of hospital-led ACOs from that of physician-led ACOs. The structure of ACO-sponsoring hospitals—whether they own post-acute assets, for example—further shapes the severity of demand destruction, which then provides a point of reference for determining what shared savings percentage may be necessary to overcome the impact of demand destruction. Though in the long term, hospitals may be able to right size capacity, in the near term when deciding to become an ACO, there is often limited ability to alter the fixed-cost base. Finally, the extent of “spillover effects” from the ACO to the non-ACO population further impacts the financial sustainability of hospital-led ACOs. Hospital-led ACOs can seek to minimize the impact through 1) differentiating processes between the two populations, and/or 2) transitioning the substantial majority of their patient population into ACO arrangements.
3. Market share gains
Providers can further improve profitability through market share gains, specifically:
Reduced system leakage through improved alignment of referring physicians across both ACO and non-ACO patients; and,
Improved network status as an ACO.
3a. Reduced system leakage
ACOs can grow market share by coordinating patients within the system (that is, reduce leakage) to better manage total cost of care and quality. This coordination is often accomplished by improving the provider’s alignment with the referring physician; for example, ACOs can establish a comprehensive governance structure and process around network integrity, standardize the referral process between physicians and practices, and improve physician relationships within, and with awareness of, the network. Furthermore, ACOs can develop a process to ensure that a patient schedules follow-up appointments before leaving the physician’s office, optimizing the scheduling system and call center.
Stark Laws (anti-kickback regulations) have historically prevented systems from giving physicians financial incentives to reduce leakage. While maintaining high-quality standards, ACOs are given a waiver to this law and therefore are allowed to pursue initiatives that improve network integrity to better coordinate care for patients. In our experience, hospitals generally experience 30 to 50 percent leakage (Exhibit 4), but ACOs can improve leakage by 10 to 30 percent.
Exhibit 4
3b. Improved network status
In some instances for Commercial payers, an ACO may receive preferential status within a network by entering into a total cost of care arrangement with a payer. As a result, the ACO would see greater utilization, which will improve profitability. For example, in 2012, the Cooley Dickinson Hospital (CDH) and Cooley Dickinson Physician Hospital Organization, a health system in western Massachusetts with 66 primary care providers and 160 specialists, joined Blue Cross Blue Shield of Massachusetts’ (BCBSMA) Alternative Quality Contract (AQC), which established a per-patient global budget to cover all services and expenses for its Commercial population. As a result of joining the AQC, reducing the prices charged for services, and providing high quality of care, CDH was “designated as a high-value option in the Western Mass. Region,” which meant BCBSMA members with certain plans “[paid] less out-of-pocket when they [sought] care” at CDH.16 Other payers have also established similar mutually beneficial offerings to providers who assume more accountability for care.1718 An ACO can benefit from these arrangements up until most or all other provider systems in the same market join.
Key takeaways
These factors to improve market share (at lower cost and better quality) can help an ACO compensate for any lost profits from “demand destruction” (foregone profits and spillover effects) and increased operating costs. The opportunity from this factor, which requires initiatives that focus on reducing leakage, can be the difference between a net-neutral hospital-led ACO and a significantly profitable ACO. An example initiative would be performance management systems that analyze physician referral patterns.
4. Operating costs
Finally, profitability is impacted by operating costs or any additional expenses associated with running an ACO. These costs generally are lower for physician-led ACOs than for hospital-led ACOs (and also depend on buy-versus-build decisions). In our experience, operating costs to run an ACO vary widely depending on the provider’s operating model, cost structure (for example, existing personnel, IT capabilities), and ACO patient population (for example, number and percent of ACO lives). However, we will focus on three specific types of costs:
Care management costs, often variable, or a marginal expense for every life;
Data and analytics operating costs, which can vary widely depending on whether the ACO builds or buys this capability; and
Additional administrative costs, which are fixed or independent of the number of lives.
4a. Care management costs
In our experience, care management costs to operate an ACO range from 0.5 to 2.0 percent of total cost of care for a given ACO population. These care management costs include ensuring patients with chronic conditions are continuously managing those conditions and coordinating with physician teams to improve efficacy and efficiency of care. A core lever of success involves reducing use of unnecessary care. ACOs that spend closer to 2 percent and/or those whose efforts focus on expanding care coordination for high-risk patients struggle to achieve enough economic contribution to break even. This is because care coordination (devoting more resources to testing and treating patients with chronic disease) often does not have a positive return on investment.19 ACOs that do this effectively and ultimately spend less on care management (around 0.5 percent of the total cost of care) tend to create value primarily through curbing unnecessary utilization and steering patients toward more efficient facilities rather than managing chronic conditions. This value creation is particularly true for Commercial ACO contracts, where there is greater price variation across providers compared with Medicare and Medicaid contracts, where pricing is standardized.
4b. Data and analytics operating costs
Data and analytics operating costs are critical to supporting ACO effectiveness. For example, high-performing ACOs prioritize data interoperability across physicians and hospitals and constantly analyze electronic health records and claims data to identify opportunities to better manage patient care and reduce system leakage. ACOs can either build or license data and analytics tools, a decision that often depends on the number of ACO lives. In our experience, an ACO that decides to build its own data and analytics solutions in-house will on average invest around $24M for upfront development, amortized over 8 years for $3M per year, plus $6M in annual costs (for example, using data scientists and analysts to generate insights from the data), for a total of $9M per year. Alternatively, ACOs can license analytics software on a per-patient basis, typically costing 0.5 to 1.5 percent of the total cost of care. Thus, we find the breakeven point at around 100,000 covered ACO lives; therefore, it often makes financial sense for ACOs with more than 100,000 lives to build in-house.
4c. Additional administrative costs
Organizations must also invest in personnel to operate an ACO, typically including an executive director, head of real estate, head of care management, and lawyers and actuaries. The ACO leadership team’s responsibilities often include setting the ACO’s strategy (for example, target markets, lines of business, services offered, through which physicians and hospitals) and developing, managing, and communicating with the physician network to support continuity of care.
Key takeaways
Operating costs to run an ACO are significant. Ability to find ways to invest in fixed costs that are more transformational in nature may result in lower near-term profitability but can provide a greater return on investment in the long term both for the ACO and the rest of the system. The decision to make these investments is dependent on the number of lives covered by an individual ACO.
ACO Archetypes
Drawing on the analysis outlined above, we conducted scenario modeling of “the math of ACOs” using five different ACO archetypes, which vary in structure and performance under a common set of rules. These five archetypes include:
Typical physician-led ACO
Hospital-led ACO with low ACO penetration and low leakage reduction
Hospital-led ACO with high ACO penetration
Hospital-led ACO with high leakage reduction
Hospital-led ACO with high leakage reduction and high ACO penetration
Subsequently, taking an ACO’s structure as a given, we describe for each ACO archetype the key model design parameters and other strategic and operational choices that ACOs might make to maximize their performance.
Comparision of archetypes based on scenario modeling
Summarizing the four factors, the profitability of each archetype reveals certain insights (Exhibit 5).
Accountable care organizations (ACOs) are seeking flexibility from the Trump administration on mitigating any financial losses that could arise from treating the burgeoning coronavirus outbreak.
The concerns come as the coronavirus has spread to more than 1,200 people across the country and has healthcare facilities worried about being overwhelmed. ACOs are in a particularly difficult situation as they are on the hook for paying back Medicare if healthcare costs skyrocket.
ACOs participating in either the Medicare Shared Savings Program (MSSP) or the Next-Gen ACO program agree to take on some form of financial risk. If they meet spending targets, they get a share of the savings, but if that spending accelerates they must pay back the Centers for Medicare & Medicaid Services (CMS) for a share of the losses.
CMS does have a policy in place for “extreme and uncontrollable” circumstances that could impact the shared savings and losses.
Under the policy, CMS agrees to mitigate the amount of shared losses that an ACO has to pay back to Medicare. The amount is determined by looking at the duration of the circumstance and the percentage of an ACO’s beneficiaries are in the affected area.
CMS also has a policy in place to account for how an unforeseen circumstance could affect an ACO’s quality score.
If an ACO can’t report quality then its quality score, which impacts whether the ACO saved or lost money, will be pegged to the mean score for all ACOs in the MSSP.
The policy has usually been applied for natural disasters like wildfires or hurricanes but never for a pandemic. But ACOs are worried about whether the policy goes far enough.
For one thing, the policy does not address ACOs that otherwise would have gotten shared savings without the outbreak.
“Many ACOs, especially those new to accountable care models and smaller and rural ACOs that don’t have reserves rely on those shared savings to invest in the care coordination programs, IT, infrastructure that is necessary to rely no high-quality care,” said Allison Brennan, senior vice president of government affairs for the National Association of ACOs.
It would also be helpful for the Center for Medicare & Medicaid Innovation (CMMI), which oversees ACOs, to outline some scenarios on what applying the policy would look like, said Ashley Ridlon, senior vice president of health policy at Evolent Health, a value-based care consulting and services company.
ACOs are also concerned about the calculation of the benchmark, which is what ACO healthcare expenditures are measured against. The financial benchmark is calculated based on the previous three years of medical spending.
If the medical spending spins out of control due to the coronavirus, then spending would go well beyond the benchmark.
The CMMI could only take action, though, if the national spending is affected.
But ACOs worry CMMI, which oversees the MSSP and the Next-Gen Program, will only take action if the benchmark is changed on a national basis.
“The way CMMI will look at this is only if the national trend comes exceptionally off projections,” said Donna Littlepage, senior vice president of accountable care strategies for Carilion Clinic, a Virginia-based healthcare system with seven hospitals and more than 200 physician practices. “If this happens in small pockets and not nationally then ACOs will be hit hard and there won’t be a fix.”
However, if the benchmark is completely off the actual spending trend, then CMMI will have to step in, said Littlepage.
“It doesn’t do CMMI good to drive all ACOs into the red,” she added.
CMS said that it has the authority to retroactively modify the benchmark for ACOs in the Next-Gen program if the national spending trend is affected by the coronavirus or other factors such as a natural disaster.
“We are monitoring events and will determine at a later date if we need to make any modifications to our benchmarking methodology,” the agency said.
CMS said it can also update the benchmark for the MSSP after a performance year to adjust for any national or regional trends regarding spending and healthcare utilization.
The agency did not say if it will employ the “extreme and uncontrollable” circumstances policy.
The application cycle for MSSP opens April 20.
“We encourage ACOs to apply since applicants have multiple opportunities throughout the summer to update and revise their application,” the agency said.
HENRY KOTULA 