by Benjamin P. Geisler, MD, MPH

Everybody is talking about Accountable Care Organizations or ACOs these days.

The reason being that the Centers for Medicare and Medicaid Services or CMS has released the rules for shared savings between ACOs and CMS.

The complete proposed rule is 429 pages long and they’re seeking comments on it now until early June.

What is an ACO?

ACOs will take care of Medicare patients. An ACO is supposed to be formed by a group of providers, hospitals or physician groups, or both, so there will be no “middle men” that could manage the providers (and siphon off more money!), as was the idea in the Medicare Advantage program.

The ACO model is not just another attempt to curb costs, but ACOs will also be held accountable for the quality. Other than that, CMS will not regulate them much. The idea is that different ACOs can develop different models of organizing and paying for care, as long as they meet the budget and quality goals. Decentralized accountability and leadership with (monetary) sticks and carrots is likely to produce better results for the whole country than central rules with no enforcement: If ACOs incur too many costs or do not meet the quality targets, they may have to forgo payments or even pay CMS money back; if, on the other hand, they meet or beat their goals they can get bonuses.

How much money will this save CMS?

CMS hopes that ACOs could save it $170-960 million over three years, so $60-320 mio. annually. GoozNews writes that that’s a “droplet” given the $1.8 trillion budget for that period (0.01-0.05%, to be precise). However, one should bare in mind that ACOs will not care for Medicaid patients (which, supposedly, are also included in this budget, albeit most is for the Medicare program).

Also, ACOs will only care for 1.5-4 million beneficiaries, so that’s only between $14 and $213 for beneficiary per year.

If start-up costs in the first year are between $132-263 mio., then the savings in years 2 and 3 would already be $126-438 million or $32 to $292 per enrollee. The hope is that ACOs will pay off more years after they’re introduced, I couldn’t find anything on projections. As Elliott Fisher and others wrote last year in Health Affairs, the ACO model relies on quality improvement that will eventually lead to cost-savings system-wide, and on “reliable and progressively more sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through improvements in care”. The performance measurements (or standardized “metrics”) are not yet in place, and most are just process measures (which are though to lead to better outcomes), not actual outcome measures.

What kind of a payment models are we talking? Is this the end of fee-for-service?

The short answer is: No, it’s not the end of fee-for-service!

Some might think the ACO models means capitation for sure, but Medicare will still pay for each service a clinician or a facility provides. This means that still the more services a provider organization renders, the more he/she is paid, and, as it is often recognized, this is the wrong incentive (purely economically, why should the individual clinician provide less services if they’re paid by the number of procedures?). So the ACO payment model only differs from the traditional fee-for-service model in the following ways: it’s all about the bonuses and penalty payments. Estimates are about $800 mio. in bonuses and $40 mio. in penalty payments over three years.

As you can see, the success of a ACO will depend on how they will land within the “sweet spot” of not cutting to many services and getting enough bonuses and if they can influence their decision-makers (the individual clinicians!) to provide only reasonable services and referrals that will increase quality.

Why should an existing provider organization become an ACO and who will apply?

ACOs will have a minimum size of  5,000 “ensured lives”. So this not for a small physician group. Rather, the first systems that will apply and be approved as ACOs will be already integrated health care systems. Physicians in those organizations will likely already be used to working together closely and there will be a focus on primary care. In some, physicians might be salaried and make only as much use of hospital stays, referrals, tests and procedures as medically necessary. Having said that, I realize that medical practice varies heavily and is influence by the local or sub-regional “medical culture” (as proven by the Darmouth Atlas and eloquently described by Atul Gawande). Therefore, if supposedly already low cost/high quality regions like,

Grand Junction, Colorado
Tallahassee, Florida
Cedar Rapids, Iowa
Portland, Maine
Grand Rapids, Michigan
Asheville, North Carolina
Newark, New Jersey
Manchester, New Hampshire
Buffalo, New York
Rochester, New York
Bend, Oregon
Everett, Washington
La Crosse, Wisconsin

(as identified by the Institute for Healthcare Improvement) will have the first or the most ACOs, the potential savings for CMS might rather be small while ACOs will or will not be paid slightly or a lot more. The latter depends on if the estimates of CMS will be regional (or even sub-regional) or national estimates. ACOs will be paid 50-60% of the savings, but if there aren’t much savings in a given region, than ACOs are stuck with their costs.

Will this work? What are other consequences?

For CMS, it’s almost a win/win. If ACOs won’t incur savings, they will have to pay 7.5% of the costs above the “expected” costs in the standard model (or 10% if you’re shooting for the 60% bonus). So CMS will only lose if the ACOs’ patients will cost more than 107.5% (or 110% for the more risk-seeking ACOs). Of course, these figure do not include the costs of setting up and running this system. The hope is, I guess, to change the entire or a large proportion of the system, and not just <1% of the entire budget.

For the provider organizations, this is a huge chance. Currently, most hospitals just break even with Medicare patients, some lose money on them. Throughout the country you could already see that independent practices and small physician groups were acquired. If you improve your operations in an integrated system, set up quality improvement and potentially reduce the usage of some unnecessary tests and treatments, this will also have repercussions for how your organization treats other patients. There will be some investments, but the pay-off will also come from non-Medicare patients.

Nevertheless, this is not for everybody. If the provider organization is more fragmented, if there is weak physician leadership, if there is a high usage of specialists in the system and they’re independent, it will be difficult to get everybody on board to form a high-performing ACO.

For patients, this is a mixed blessing. You could argue that in some ACOs there will be restrictions for seeing specialists and other services, something that patients usually hate. However, if quality and outcomes improve in the ACO model, this would be highly desirable. The first thing that will happen is that Medicare patients will be sent a notice, and if they don’t want their information to be shared in the ACO, they can actually opt out. I’m just wondering: how will this play out politically?

Benjamin P. Geisler is a comparative effectiveness researcher who blogs at Health Care Value Strategies.

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