Members of an influential congressional advisory committee on Medicare are torn on how best to regulate telehealth after the COVID-19 public health emergency, hinting at the difficulty Washington faces as it looks to impose guardrails on virtual care without restricting its use after the pandemic ends.
During a Thursday virtual meeting, the Medicare Payment Advisory Commission expressed its support of telehealth broadly, but many members noted snowballing use of the new modality could create more fraud and abuse in the system down the line.
Key questions of how much Medicare reimburses for telehealth visits and what type of visits are paid for won’t be easily answered, MedPAC commissioners noted. “This is a really, really difficult nut to crack,” Michael Chernew, MedPAC chairman and a healthcare policy professor at Harvard Medical School, said.
Virtual care has kept much of the industry running during the coronavirus pandemic, allowing patients to receive needed care at home. Much of this was possible due to the declaration of a public health emergency early 2020, allowing Medicare to reimburse for a greater swath of telehealth services and nixing other restrictions on virtual care.
However, much of that freedom is only in place for the duration of the public health emergency, leaving regulators and legislators scrambling to figure which new flexibilities they should codify, and which perhaps are best left in the past along with COVID-19.
It’s a tricky debate as Washington looks to strike a balance between keeping access open and costs low.
In a Thursday meeting, MedPAC debated a handful of policy proposals to try and navigate this tightrope. Analysts floated ideas like making some expansions permanent for all fee-for-service clinicians; covering certain telehealth services for all beneficiaries that can be received in their homes; and covering telehealth services if they meet CMS’ criteria for an allowable service.
But many MedPAC members were wary of making any concrete near-term policy changes, suggesting instead the industry should be allowed to test drive new telehealth regulations after COVID-19 without baking them in permanently.
“I don’t think what we’ve done with the pandemic can be considered pilot testing. I think a lot of this is likely to go forward no matter what we do because the gate has been opened, and it’s going to be really hard to close it,” Marjorie Ginsburg, founder of the Center for Healthcare Decisions, said. But “I see this just exploding into more fraud and abuse than we can even begin imagining.”
Paul Ginsburg, health policy chair at the Brookings Institution, suggested a two-year pilot of any changes after the public health emergency ends.
However, it would be “regressive” to roll back all the gains virtual care has made over the past year, according to Jonathan Perlin, CMO of health system HCA.
“These technologies are such a part of the environment that at this point, I fear [it] would be anachronistic not to accept that reality,” Perlin said.
Among other questions, commissioners were split on how much Medicare should pay for telehealth after the pandemic ends.
That parity debate is perhaps the biggest question mark hanging over the future of the industry. Detractors argue virtual care services involve lower practice costs, as remote physicians not in an office don’t need to shell out for supplies and staff. Paying at parity could distort prices, and cause fee-for-service physicians to prioritize delivering telehealth services over in-person ones, some commissioners warned.
Other MedPAC members pointed out a lower payment rate could stifle technological innovation at a pivotal time for the healthcare industry.
MedPAC analysts suggested paying lower rates for virtual care services than in-person ones, and paying less for audio-only services than video.
Commissioners agreed audio-only services should be allowed, but that a lower rate was fair. Commissioner Dana Gelb Safran, SVP at Well Health, suggested CMS should consider outlining certain services where video must be used out of clinical necessity.
Previously, telehealth services needed a video component to be reimbursed. Proponents argue expanded access to audio-only services will improve care access, especially for low-income populations that might not have the broadband access or technology to facilitate a video visit.
Another major concern for commissioners is how permanently expanding telehealth access would affect direct-to-consumer telehealth giants like Teladoc and Amwell. If all telehealth services delivered at home are covered, that could allow the private companies to “really take over the industry,” Larry Casalino, health policy chief in the Weill Cornell Department of Healthcare Policy and Research, said.
Because of the lower back-end costs for virtual care than in-office services, paying vendors the same rate as in-office physicians could drive a lot of brick-and-mortar doctors out of business, commissioners warned.
UnitedHealth Group, both the nation’s largest health insurer and largest employer of physicians, just announced plans to continue to rapidly grow the number of physicians in its Optum division.
This week CEO Dave Wichmann told investors in the company’s fourth quarter earnings call that Optum entered 2021 with over 50,000 employed or affiliated physicians, and expects to add at least 10,000 more across the year.(For context,HCA Healthcare, the largest for-profit US health system, employs or affiliates with roughly 46,000 physicians, and Kaiser Permanente employs about 23,300.) Optum is already making progress toward its ambitious goal with the announcement last week that the company is in talks to acquire Atrius Health, a 715-physician practice in the Boston area.
As was the case with other health plans, United’s health insurance business took an expected hit last quarter due to increased costs from COVID testing and treatment, combined with rebounding healthcare utilization. Optum, however, saw revenue up over 20 percent, which drove much of the company’s overall fourth quarter growth.
Expect United, and other large insurers, flush with record profits from last year, to continue to expand their portfolio of care, digital and analytics assets(see also Optum’s recently announced plan to acquire Change Healthcare for $13B) as they looks to grow integrated insurance and care delivery offerings.
It’s part of what we expect to be a 2021 “land grab” for strategic advantage in healthcare, as providers, health plans, and disruptors look to create comprehensive platforms to secure long-term consumer loyalty.
The FTC wants to figure out how hospitals’ acquisitions of physician practices has affected competition.
The agency sent orders to some of the nation’s largest insurance companies, including UnitedHealthcare, Anthem, Aetna, Cigna, Florida Blue and Health Care Service Corporation.
This action is part of a larger effort underway at the agency to consider new questions and areas of study to help it understand the ultimate impact of mergers. The hope is that those studies will yield evidence to better equip the agency to legally challenge mergers in the future.
Health economists cheered the news online following the FTC’s Thursday’s announcement about studying physician practice buy-ups.
Martin Gaynor, former director of FTC’s Bureau of Economics, tweeted: “This is a big deal – a huge # of physician practices are now owned by hospitals.” Gaynor is a health economist at Carnegie Mellon.
In the orders, the FTC asks the insurers for data such as the total billed charges of all health providers, total deductibles, copays and coinsurance paid by the patient. It also asks for data tied to each inpatient admission and outpatient and physician episodes during the time period in question, which will likely result in a barrage of data for the agency to review.
“The study results should aid the FTC’s enforcement mission by providing much more detailed information than is currently available about how physician practice mergers and healthcare facility mergers affect competition,” the agency said in a statement.
This area of study expands the agency’s current work. One area already of interest within this broader retrospective merger review program is the scrutiny of labor markets.
One area of concern for the FTC is states’ willingness to greenlight COPAs, or certificates of public advantage (COPAs), which essentially shield mergers from federal antitrust regulators in exchange for prolonged state oversight.
A quick stop at the local Whole Foods Market recently yielded surprising insights into the dilemma faced by physician practices in the COVID-era telemedicine boom.
The store location opened just last year, part of a brand-new residential and shopping complex designed for busy professionals. It’s larger than the old-style, pre-Amazon era stores, and was designed to integrate Amazon’s online grocery operations into the bricks-and-mortar retail setting. There’s a portion of the store set aside for Amazon “shoppers” to receive and pack online orders for pickup and delivery, along with an expanded array of convenience-food offerings for the app-powered consumer to scan and purchase.
But when COVID hit, the volume of online orders went through the roof, and the store hired a small army of Amazon shoppers (including one of our own adult children who’s on a “gap year”) to keep up with demand. The result has been barely controlled chaos—easily 70 percent of the shoppers in the aisles last weekend were young Amazon employees “shopping” on behalf of online customers. They’re all held to an Amazon-level productivity standard, which makes the pace of their cart-pushing somewhat frantic and erratic. And the discreet area at the front of the store for managing the Amazon orders has become a noisy hub, making entering and exiting the store problematic. Even the “regular” store employees at Whole Foods have begun to complain about the disruption caused by the Amazon fulfillment operation.
It’s acautionary tale for traditional physician practices and other care delivery organizations looking to “integrate” telemedicine into normal operations. Integration sounds great in theory, but in practice raises important questions:
1)What physical space should be set aside for delivering virtual care?
2)Should telemedicine work be done in a separate, centralized location, or in existing clinic space?
3) How does the staffing of clinics need to change to meet the demand for virtual care?
4) How can we flex staffing up and down based on demand for telemedicine?
5)If new staff are required, how will they be incorporated into the existing team—or should they be managed separately?
6)What operational metrics will they be held accountable for, and what impact will those metrics have on other operational goals?
If Amazon, a worldwide leader online, renowned for running tight, precision, productivity-driven operations, is having trouble figuring out physical-virtual integration at the front end of their business, imagine how difficult these challenges will be for healthcare providers. The sooner we start to dig into these issues and find sustainable solutions, the better.
A stop-gap funding bill the president signed into law Thursday will keep the government open until mid-December and includes some provisions that could help providers’ bottom lines. The bill includes relief on advanced and accelerated Medicare loans and a delay of Medicaid payment cuts for disproportionate share hospitals.
The legislation extending government funding at current levels was passed by the House earlier this month and approved by the Senate on Wednesday. But more sweeping aid many providers wanted, including more grants for hospitals and a higher federal match rate for Medicaid, were left out of the legislation.
Provider groups like the American Hospital Association thanked Congress and the Trump administration for the relief, but AHA noted it would continue lobbying for Medicare loan forgiveness and an extended deadline for the Medicaid DSH cuts.
The continuing resolution, and its healthcare provisions within, are pretty much the only direct aid providers can expect from Washington before the looming November presidential election. Congress has largely punted on a fifth round of COVID-19 relief legislation amid partisan deadlock, with Republicans backing a much skinnier package than Democrats.
The CR delays the repayment date for $100 billion in advanced Medicare loans to providers by a year. CMS originally planned to start recouping the loans from providers’ fee-for-service Medicare payments in late July, but unilaterally decided to hold off as lawmakers negotiated the bill.
It also lowers the rate of recoupment to 25% for the first 11 months of repayment, down from the current 100% rate, and 50% for the next six months. Providers have 29 months to pay back the funds in full before interest kicks in, and the interest rate is decreased from 9.6% to 4%.
The original repayment terms and timeline would have been difficult for some cash-strapped doctor’s offices and hospitals to meet, as the burden imposed by COVID-19 hasn’t lifted and is worsening in many areas of the country. Many providers took out the loans earlier this year as a lifeline to stave off insolvency — still a very real threat for many practices.
About 35% of primary care physicians say revenue and income are still significantly lower than pre-pandemic levels, losses that could force them to close, according to a September survey by the Larry A. Green Center and the Primary Care Collaborative.
AHA CEO Rick Pollack said in a Wednesday statement the massive hospital association appreciated the provisions, but would keep pushing for full loan forgiveness, along with extending the delay of DSH cuts for all of the 2021 fiscal year. The CR pushed back the original payment cut start date from Dec. 1 to Dec. 12.
The Association of American Medical Colleges was more worried about the impact on the system.
“We are concerned that health care providers, researchers, students, and public health professionals — who have been our country’s first line of defense against COVID-19 — will remain in limbo despite ongoing challenges that the pandemic presents,” CEO David Skorton said in a statement. “We strongly believe that a larger COVID-19 legislative relief package is essential to our nation’s health.”
However, drastic estimates from providers on financial losses largely haven’t panned out, though public health experts do warn COVID-19 could worsen going into the winter months. AHA estimated U.S. hospitals would see operating profits fall by almost $51 billion in April, the month with the sharpest volume decline because of the pandemic. It’s likelier hospitals lost about half that, according to research from a congressional advisory board, with federal grants covering the worst of short-term losses.
The CR also includes a provision stopping Medicare beneficiaries from seeing a monthly $50 Part B premium hike next year. It will keep the government open until Dec. 11, setting up another funding fight to avoid a shutdown after the election.
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.
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.
“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.
National physician staffing firm Mednax announced the sale of its radiology practice—which includes teleradiology company Virtual Radiologic, known as vRad—to venture-backed Radiology Partners for $885M.
Publicly-traded Mednax has been hit hard by both contracting disputes with UnitedHealthcare, as well as pandemic-related volume declines. Both its anesthesiology and radiology businesses suffered big losses with the halt of elective procedures in the spring, and saw volumes decline between 50-70 percent compared to the prior year.
The company began divesting in May with the sale of its anesthesiology division to investor-backed North American Partners in Anesthesia. Mednax leaders say these decisions to sell were made independent of the pandemic, and that they have been planning to return to the company’s roots of focusing exclusively on obstetrics and pediatric subspecialty care, including changing its name back to Pediatrix.
Acquiring firm Radiology Partners is the largest radiology practice in the country, working with 1,300 hospitals and healthcare facilities. With this acquisition, it will have 2,400 radiologists practicing in all 50 states and the District of Columbia.
Hospital-based physician staffing firms have been especially hard hit by COVID-induced volume declines. This has created a softening in valuations and opened the door for investment firms to accelerate practice purchases.
We expect the pace of deals to quicken as independent practices experience continued financial strain—with large national groups leading the way, taking advantage of lower practice prices to build large-scale specialty enterprises.
The healthcare industry added 75,000 jobs last month, a decline compared with the 126,000 that were added in July, the latest federal jobs report shows.
But there are some bright spots for the industry that is still recovering from major unemployment earlier this year sparked by job losses due to the COVID-19 pandemic.
The Bureau of Labor Statistics’ jobs report released Friday showed that hospitals continue to add more jobs after several major subsystems furloughed and laid off workers at the onset of the pandemic in March.
Hospitals added 14,000 jobs in August, which was below the 27,000 jobs the industry added in July.
The industry shed 26,000 jobs in May as hospitals took massive revenue hits from the cancellation of elective procedures and lower patient volume due to COVID-19.
Job numbers continue to recover robustly for other sectors of the healthcare industry.
Physician offices added 27,000 jobs and dentists another 22,000 in August. Home healthcare agencies added 12,000 positions in August.
But things continue to get worse for nursing homes.
Nursing homes and residential care facilities lost 14,000 jobs. But it was the lowest number of job losses the industry has faced in months.
In July the sector lost 28,000 jobs. In June, 20,000 positions were shed.
While several parts of the healthcare industry are adding jobs, the overall picture has been bleak. The federal government reported last month that healthcare employment has been down by nearly 800,000 jobs since February.
Things could continue to get worse for both hospitals and physician offices. Experts predict that hospital volumes, which have rebounded since major drops in March and April, are still below pre-pandemic levels for some facilities.
For-profit health systems have been better able to weather a financial crisis caused by COVID-19 than their nonprofit counterparts because they could reduce more expenses, a new analysis from the Medicare Payment Advisory Commission finds.
The analysis released Thursday during MedPAC’s monthly meeting comes as providers struggle to recover from low patient volumes stemming from the COVID-19 pandemic. The report also explored how physician offices have fared.
Hospitals faced a massive dip in patient volume in March and April at the onset of the pandemic, which forced facilities to cancel or delay elective procedures. Patient volumes have since recovered to near pre-pandemic levels, MedPAC found.
But the recovery has been mixed depending on the hospital system.
MedPAC looked at earnings for three large nonprofit systems in the U.S. and four large for-profit systems in the second quarter and found a variation in how they handled the decline in revenue.
Aggregate patient revenue for the nonprofit systems declined by $1.5 billion and this led to a $621 million loss for the systems in the second quarter compared to the same period in 2019. Overall the systems had operating profit margins ranging from negative 13% to positive 5%.
The four for-profit systems saw a $3.5 billion decline in patient revenue. However, the systems posted an increase of $634 million in operating income.
This led to a range of operating margin increases of 1 to 14% in the second quarter compared to 2019.
The for-profit systems got more relief funding ($1.9 billion compared with $782 million) from a $175 billion federal provider relief fund created by the CARES Act.
But the biggest difference between for-profit and nonprofit systems was how they handled expenses.
“For-profit systems substantially reduced expenses in the second quarter, in aggregate reduced by $2.3 billion and that made up for lost revenue,” said Jeff Stensland, a MedPAC staff member, during the meeting.
Nonprofit systems only saw a $13 million decline in expenses.
The analysis comes as some larger for-profit systems like HCA Healthcare generate profits in the second quarter, while nonprofit systems such as Providence posted losses.
MedPAC did not name the systems that it analyzed nor did it delve into what expenses were reduced and how.
Some systems have taken to furloughing employees but all systems have faced increased expenses for personal protective equipment and some staff.
The analysis also looked at the financial impact of the pandemic on physician offices. MedPAC found that federal grants, loans and payment increases offset a majority of the revenue lost in March and May due to patient volume declines.
MedPAC estimated physician offices lost between $45 to $55 billion. However, offices got $26 billion in loans from the Paycheck Protection Program, which don’t have to be repaid if the majority of the funds go to payroll.
Physician offices also received $5 billion out of the $175 billion provider relief fund passed as part of the CARES Act.
Physicians also got $1 billion in savings from the temporary suspension of a 2% decline in Medicare payments created under sequestration.
Several factors will shape the financial performance of physician- and hospital-led organizations under total cost of care payment models.
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.
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.
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).
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.
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.
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.
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.
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.
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).