• ACO calculations explained

    I’m getting a lot of emails, so I’m going to break it down even further.  Here’s how the ACO payments and penalties work. Let’s start with the diagrams. First up is the one-sided ACO:

    And now the two-sided ACO:

    Let’s get oriented.  Spending is on the y-axis.  The diagonal line shows increasing efficiency of ACOs as you move from left to right. More efficient ACOs (further to the right) will spend less relative to their benchmark. What’s a benchmark? OK, let’s get into it.

    The benchmark is what HHS says an ACO should spend. So if an ACO spends more than the benchmark, they spent too much. They’re inefficient. If they spent less than the benchmark, then they saved money. They were efficient. (This efficiency/inefficiency terminology is mine, not HHS’s. I just find it useful to think about it that way. But, an ACO could “overspend” at random too. They could have a bad year, have a lot of sicker than normal patients. Same goes for efficiency. It could be luck once in a while.)

    Every ACO is also assigned a sharing rate based on their quality performance and whether they have members who use a Federally Qualified Health Center or Rural Health Center. The sharing rate is the proportion of the savings that the ACO generates that they could get back in revenue. The government keeps the rest. For a one-sided ACO, the maximum sharing rate is 52.5%. For two-sided ACOs, the maximum sharing rate is 65%. That’s on the savings side.  For two-sided ACOs, which face penalties, the sharing rate on penalties is (1-sharing rate on savings).

    The MLR is the Minimum Loss Rate. It is a percentage of the benchmark. If a two-sided ACO spends more than (benchmark + MLR) (or, in words, more than MLR over the benchmark), then they must pay the government back (1-sharing rate on savings) *spending above the MLR line. That’s the red. It maxes out depending on year, but even in year three, no ACO would owe more than 10% of the benchmark. One-sided ACOs never owe a penalty (which is why there’s no red on the one-sided ACO diagram). That’s the difference between a one- and two-sided ACO.

    The MSR is the Minimum Savings Rate. For two-sided ACOs, this is always 2% of the benchmark. For one-sided ACO’s, it’s at least 2% and dependent on the size of the ACO. For spending between the (benchmark+MLR) and (benchmark-MSR), no penalties or bonuses are paid. Once spending drops below (benchmark-MSR), however, the ACO starts to earn a bonus (green). It’s calculated by the spending below the (benchmark-threshold) times the sharing rate. For two-sided ACOs, the threshold equals the MSR (2%), so they earn more earlier. Bonuses cap out at a maximum equal to 7.5% of benchmark for one-sided ACOs and 10% of benchmark for two-sided ACOs.

    Hope this helps!

    • Thanks for churning out updates with such furry.

      After reading a lot of the ACO commentary in the blogosphere I feel like what is needed is a crash course/refresher on medicare spending and maybe even a list of the many players that will WORK WITH ACOs: PCPs, hospitals, LTACs, SNFs, home care, AL, RCF, wellness, care managment, community base services.

      People are writing about ACOs as one monolithic beast which for the purpose of understanding the ACO itself—the members, legal structure and EMR—is fine, but it does little to advance the understand of WHY ACOs developed in the first place and WHO will be working with them to provide care.

      The short version is that an ACO is CMS’s best new plan to keep benificaries out of the hospital, the most costly place to be. People must not understand acute & post-acute care very well if they really buy in to the “all carrot no stick” meme.

      Hospitals ALREADY get bashed with a stick. That stick is known as a medicare patient. CMS hopes that an ACO will either keep patients out of the hospital, or that it will ensure that hospital patients get discharged after a short LOS to, in most cases, a SNF. That SNF then better provide great care and not discharge back to hopital. This goes on and on until the patient returns home.

      The shared savings is the carrot but CMS thinks that what will makes this really work are the readmit pentalties (stick) that hit the hospitals and hospitals control the volume (stick) so SNFs and other post-acute care settings play nice. SNFs have to discharge quicker to home care and again, better be sure that pateint is headed home and not on the track back to the hospital for the cycle to start again.

      The current system encourages hositals to discharge fast and the SNFs to maxmize LOS and RUG rates without worring about sending patients back to the ER. It costs a lot.

      Will it work? Maybe. Demonstrations look good but like most CMS tweaks this may end up being adopted, adapted to and eventually gamed, just like the system now.

      • Eric, how do you come by your knowledge of the players and gaming the system? The latter is my fear as well. Especially if the AMO demos and “pioneer” projects don’t submit reports available to the public.

    • Excellent point Eric. I have seen purchases of hospitals with SNFs in our area that appeared to be designed to maximize income for the network via the SNF.


    • Oy. why do we have to use the abbreviation MLR? It’s already taken! Medical loss ratio regulations are a big part of PPACA’s insurance reforms.