Two papers raise a few problems with how ACOs are paid and offer some remedies: (1) A paper by Rudy Douven, Thomas McGuire, and J. Michael McWilliams published in Health Affairs earlier this year and (2) a white paper by Michael Chernew, Thomas McGuire, and J. Michael McWilliams. Below are notes for each in turn, a mix of quotes and my own paraphrases and comments.
(1) The Douven paper
- “As of early 2014 over 360 provider organizations had contracted with Medicare as ACOs in the Pioneer program or the Shared Savings Program.” This number is over 400 now.
- “[W]e estimate that for every dollar increase in spending in the last year before an ACO starts a new three-year contract, the ACO will get back between $1.48 and $1.90 during the contract period.” This stems from how the ACO benchmarks (to which actual spending is compared for the purposes of calculating bonuses and penalties) are established. Spending in the three years before the contract set the benchmark. But the final year before the three-year contract is weighted heavily (60%) in that calculation, incentivizing ACOs to overspend in that year, which can lead to bonuses collected in the subsequent three years.
- The benchmark is adjusted year-to-year: “The benchmark is  adjusted annually by a national inflation factor to establish the spending target in each contract year. It is also adjusted for year-to-year changes in the case-mix of patients served by the ACO.”
- The benchmark is rebased with each three year contract. This means an ACO that saved a lot is penalized in the next contract with a lower benchmark. An ACO that didn’t save gets more breathing room. See any problems with that?
- Suggested improvements include equally weighting three years of spending to establish the benchmark; using more years in the calculation; not rebasing benchmarks with each successive three-year contract renewal but at some later, unspecified time; establishing benchmarks based on other, perhaps similarly efficient providers rather than on the organizations own, historical spending; blending the current benchmark (or some variant) with spending by other ACOs in the same market or markets. These ideas are not all mutually exclusive and benchmark calculation approach could vary by performance (i.e., whether an organization is gaining or losing efficiency).
- It probably goes without saying that no approach is perfect: each has strengths and limitations, which you can read about in the paper. But these ideas are likely to be improvements over the existing benchmark calculation. (I wonder why the existing calculation is so obviously flawed. Or was it not obvious when it was set? How did it get established as it did? Were these scholars consulted at the time? I do not know the history.)
- “Basing payments on cost performances on peer groups has worked well in Medicaid payments to psychiatric hospitals and psychiatric units in New Hampshire, accommodating systematic differences in casemix while maintaining incentives for cost-effective care.”
(2) The Chernew white paper
- “As is true of virtually every Medicare payment area, the regulatory framework needs to evolve as experience accumulates.”
- “[T]he aim of the ACO programs is to create incentives which are strong enough to encourage providers to change behavior, but not so stringent that providers will not participate.”
- “Despite general evidence of success, organizations have been leaving the Pioneer program. In July 2013, nine Pioneers left this ACO model after the preliminary results for the first performance year were released. In August 2014, another Pioneer dropped out, followed by three more in September shortly after the second year performance results were announced, leaving 19 remaining Pioneer ACOs. The apparent paradox of generally positive results but declining participation in the downside risk model may signal shortcomings in the program structure.”
- “[A] large organization may have the option of becoming an ACO or developing an MA plan. Such an organization, whose spending exceeds the local MA benchmark based on local FFS spending, would have an incentive to become an ACO. The more efficient organizations would have an incentive to create MA plans.” I had not considered the ACO vs MA tradeoff before. This is particularly interesting, and complicated.
- “[I]f an ACO reduces utilization (say avoids an MRI) such that Medicare spending drops by 1000 dollars, the revenue drops only by $1000*(1- the shared saving percent) and costs drop by the variable cost of the MRI (assume $400). Thus the profit of such a program is the avoided variable cost ($400) – (1-shared saving percent)*$1000. If the shared saving percent is 50%, the net program actually loses $100. That is because the MRI had contributed $600 to the bottom line ($1000 revenue less $400 variable cost). When the MRI is not done, the provider loses that $600 but only gets back $500.” I had not factored into my thinking that only some of the cost of care is variable. In particular, start-up costs to establish an ACO and redesign practices are fixed and potentially large. They need to be recouped. This is important.
- “Specifically, empirical estimates suggest variable costs could be as low as 16% of total costs.” Yow! All of this supports the idea that the proportion of savings shared with organizations may be too low.
- “Profitability is greater in organizations with more patients in the ACO because spillover losses are less and savings are generated on more patients.” Let’s unpack that: Consider the likelihood that an ACO can only practice in one way. It doesn’t treat a non-Medicare patient any differently than a Medicare one. That means if it reorganizes to reduce revenue from Medicare (some of which could be made up for with a bonus from Medicare), it loses revenue on non-Medicare patients too, a spillover effect. But it receives no bonus on the non-Medicare patients, so this non-Medicare revenue loss is a pure loss. On the one hand, we want spillover effects, to the extent they reflect more efficient care. On the other hand, there’s no incentive from Medicare for them. (Private insurers should appreciate them, but the vast majority aren’t paying in an ACO-like manner, though some are.)
- The paper includes suggestions for reform. The preferred approach articulated is to set benchmark updates after an initial period based on some preset growth rate, modified by initial efficiency. That is, updates should grow more slowly for less efficient organizations and faster for more efficient ones. This approach severs the link between benchmark updates and prior savings. Updates could be set within this framework to balance rate of convergence toward common risk adjusted benchmarks within a market and encouraging participation, even by less efficient organizations (which is where most of the savings will come from long term). In the future, a payment neutral system between ACOs and Medicare Advantage could be considered.