• ACOs: one- vs two-sided risk

    I understand that the “shared-savings” financial incentives for accountable care organizations (ACOs) are one-sided. That is, ACOs can only benefit from meeting quality and cost targets. At worst, if they fail to meet them, they’d still get all their fee-for-service payment they’d receive outside of the shared-savings program. Only Medicare is taking risk for high costs, not providers in this bonus-only arrangement.

    A November 22nd letter from MedPAC to Donald Berwick (brought to my attention by HealthReformGPS) suggests that at least that organization is thinking about a two-sided risk model.

    In a bonus-only model there is some incentive to control spending for services from providers outside the ACO. But that incentive is weaker for services the ACO provides directly because the ACO still receives FFS payments for those services and those payments are certain. Receiving a bonus is uncertain because of random variation and even more uncertain if there is a high threshold to overcome. Thus, the incentives in a bonus-only model for controlling spending are relatively weak. […]
    To increase the strength of the underlying incentives Medicare should consider implementing a two-sided risk model in addition to a bonus-only model. In a two-sided risk model the ACO would share in some portion of savings (and be at risk for the same portion of spending over the target). [Emphasis mine.]
    If Medicare really implements a two-sided risk model, ACOs stand a far better chance at making a dent in program costs. Putting some cost risk on providers is exactly what is lacking from our current system, in which that risk is borne by tax payers and program beneficiaries.
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