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Do Accountable Care Organizations Work?

Do Accountable Care Organizations Work?
By Aditya Singh • Issue #17 • View online
The federal government has been working for decades to control the cost of healthcare. Because of the cost of medical equipment, education, research, and long-term costs associated with chronic conditions, which the US will see more of as its population ages, healthcare spending is one of those areas that we naturally expect to always be on the rise.
The question is how does the system prevent increases in spending to get out of hand.
As the federal agency that administers Medicare and oversees work with states to manage Medicaid, the Centers for Medicare and Medicaid Services (CMS) have been experimenting with different models of healthcare organization to reduce long-term costs. One such model is the accountable care organization (ACO), but do they actually introduce the cost savings that they promise?

The Basics
The CMS website offers a pretty concise definition for what an ACO is, and it gives a good starting point for assessing the structure of ACOs, successes, and drawbacks.
ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to their Medicare patients.
Note, that ACO’s are specifically for treating members of Traditional or Original Medicare.
What makes ACO’s unique is that their payments are tied to measures of quality and cost controls. Typically, providers giving care to Medicare beneficiaries are paid a fee for medical services. Under the ACO structure, providers are in a value-based purchasing agreement where their payments are tied to performance.
The idea is that in an ACO, providers are highly encouraged to exchange information about patients and closely coordinate their care. In the long-run, this should reduce expensive preventable hospitalizations and treatments through better quality of care across providers over a longer period of time. To incentivize this intensive process of coordinating care for patients, ACO’s can share the savings they create for the Medicare system among the providers in the organization.
In short, Kaiser Health News summarizes ACO’s:
The law takes a carrot-and-stick approach by encouraging the formation of accountable care organizations (ACOs) in the Medicare program. Providers make more if they keep their patients healthy. 
There are different levels of risk that providers in the ACO may choose to share with the organization. Level 1 VBP gives providers normal fee-for-service payments and allows providers to share net savings across the ACO.
Level 2 also exposes the providers to sharing losses on top of fee-for-service – the idea being that lower fee-for-service payments leave room for the opportunity for higher shared savings. Of course, this also means that in the event that the ACO faces losses, providers have to share some of the costs.
Level 3 is only really attainable for ACO’s that demonstrated success with the Level 2 VBP model. Just like the Level 2 system, Level 3 VBP has potential for upside and downside, but it does away with fee-for-service payments to providers in favor of paying providers a flat per-member-per-month rate.
Track Record
CMS started approving Pioneer ACO programs in 2011, and soon after, the Medicare Shared Savings Program (MSSP) was launched shortly afterward to facilitate wider adoption of the ACO model across the country. Under MSSP, ACO’s could work with CMS to treat patients of Medicare, but other ACO’s partnered with health insurers have sought to expand the model to private sector and groups not covered by Medicare – namely those under 65 years of age.
The net savings have yet to be substantial. In 2015, savings from ACO’s under MSSP accounted for 0.02% of spending on Medicare. These savings have also not been equal, with ACO’s led by physicians generating most of the savings. In fact, ACO’s led by hospitals ran an average of $112 million in excess Medicare spending over a three year period.
Consider the above graphic by McKinsey & Company. The finances of ACO’s depend on a variety of factors.
  1. Bonus Payments - Increased revenue from the incentive payments for good quality and cost savings
  2. Demand Destruction - Decreasing the need for future hospitalizations and use of medical services leads to lost revenue for those operations
  3. Market Share Gains - ACO’s are laser-focused on coordinating patients within the system, which keeps patients within the ACO system rather than seeing doctors outside
  4. Operating Costs - These are general overhead costs for managing care, administrative tasks, and analytics
This implies that to see any significant savings, ACO’s need radically better infrastructure to communicate clinical information and care plans and exceptional savings over the long run to offset lost future revenue. Of course, the alternative is to turn to market consolidation to keep patients within the system, an outcome that may not be best for patients.
An Industry's Takeaway
Existing healthcare IT software typically do not make cross-platform information exchange, which makes coordinating care incredibly difficult due to the complexity of communicating updates to medical history for multiple clinicians. These disjointed operations simply make ACO’s face steep administrative costs to meet quality measures and cost savings requirements.
At the same time, these models contain patients to a predefined group of care providers, offering the promise of better care with less freedom to the patient to choose their provider. As multiple economists have pointed out, this structure may also be a factor that makes ACO’s more likely to increase concentration in a healthcare market, which gives these providers freedom to raise prices for their services. In fact, the Department of Justice has made an expedited review process for antitrust enforcement of ACOs.
The issues facing ACO’s seem to hit on a recurring theme in healthcare that care coordination leads to reduced cost… but the incentives aren’t there to encourage organizations to face the up-front cost of radically changing workflows and infrastructure to facilitate remarkably better care coordination.
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Aditya Singh

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