Why are ACOs so important to CMS?
Many observers believe that CMS's ultimate goal in healthcare reform is to pay for covered services at capitated rates that are just high enough to assure adequate levels of quality and access for patients, but also low enough that providers are delivering affordable services at high levels of efficiency.
Mindful that capitated payment under managed care during the 1990s failed, CMS seems to have made a note of the major causes of that failure in an attempt to not repeat them. These include:
To avoid such pitfalls this time around, CMS is planning to roll out several initiatives, including its Medicare Shared Savings, or accountable care organization program, which if successfully implemented would allow the agency to set capitated rates that would pass most of the risk on to providers and insurers in ways that:
In a real sense, the successful development of ACOs would permit CMS to contract directly with providers in much the same way the agency now contracts with insurers under the Medicare Advantage program. That is, by setting capitated rates and then deciding how much to increase them from year to year.
CMS wants providers to do all the heavy lifting
CMS has stated that ACOs should reward providers for their demonstrated success in delivering patient-centered care across multiple care settings by offering financial incentives to clinically integrated provider organizations that will induce them to deliver better quality of care and cost savings simultaneously.
To accomplish these results, primary care providers would minimize the acuity of their Medicare patients' health problems, many of which are chronic, by improving their health status and reducing the incidence of diagnostic work ups, emergency room visits, specialty physician referrals and hospital admissions. The establishment of Medical Homes is expected to increase access to primary care practitioners by liberalizing payment policies for a wider range of primary care providers’ services.
The final rule for ACOs enumerates requirements, limitations and waivers which are intended to assure that clinical quality will be maintained or improved as providers work together to minimize the consumption of higher cost services, become proficient in managing risk, motivate the participants to do the right things, and finally to share among themselves the portion of total savings that CMS decides to award them.
Essentially, CMS is offering the providers who might form an ACO a negative-sum game in which:
This arrangement, therefore, requires the ACO, if it becomes successful in reducing consumption of its participants' services (i.e., to reduce its revenue levels), to receive only a part of the savings realized. At the same time, the ACO will be required to simultaneously cut its fixed and variable costs sufficiently to offset the corresponding reductions in its revenue if it is to maintain or improve its bottom line, and then has to distribute savings according to rules agreed upon by its participants under the aegis of CMS regulations.
Even though the final rule increases the likelihood that participants' financial results would be better than under the proposed rule, their prospects would not improve enough to adequately reward such Herculean accomplishments during the three-year run of a demonstration contract.
Negative returns under the ACO final rule
We modeled an ACO's financial results, with a set of assumptions which fit a hospital that serves 5,000 Medicare lives and saves 6 percent per member per year under a one-sided risk model during the entire three-year period.
To at least breakeven from participating in the demonstration, the ACO would have to pursue some combination of increasing the number of Medicare and other lives aligned with its PCP members, reducing its levels of fixed and variable costs, which are mainly located in the hospital setting, and/or increasing service intensity to patients other than Medicare to boost revenue.
Alternative courses of action
In any case, the voluntary Bundled Payment for Care Improvement inititative which is expected to start in early 2012, is more likely to offer a greater
opportunity for hospitals/systems to work with their specialty physicians under one of four models laid out by CMS.
Under Model 4 of the Bundled Payment initiative, CMS offers an opportunity for a hospital and its physicians to bid for a discounted bundled payment for the entire DRG-designated episode, which includes all hospital and physician services involved in diagnosing and treating the patient, including the 30 days following discharge. If these providers reduce the average Part A and Part B costs of the episode by more than the payment discount, they would share in the
net cost savings.
The bundled payment approach provides an opportunity to combine the P4P approach offered by Medicare with a gainsharing initiative by the hospital and its physicians to the mutual benefit of the payor, the hospital and the participating physicians.
The trick for hospitals in contracting successfully for bundled payments to cover an entire acute episode of care will be to:
As risk is expected to be increasingly shifted toward providers over the next five to 10 years and continuous cost savings initiatives become de rigueur, transformations and considerable downsizing in acute-care service capacity can be expected as more and more of the care is rendered in ambulatory settings.
At some point most free-standing hospitals in competitive markets will feel a need to join an integrated healthcare delivery system which has many of the characteristics of an ACO. In the meantime, most hospitals will need to focus on:
Initiatives to minimize inpatient case costs and manage risk are more likely to pay off for most hospitals over the next five years than trying to take great leaps forward that may be too risky or ambitious.
Mr. Reynolds is president, Reynolds & Company Management Consultants. He can be reached at jreynolds@jxreynolds.com.
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Many observers believe that CMS's ultimate goal in healthcare reform is to pay for covered services at capitated rates that are just high enough to assure adequate levels of quality and access for patients, but also low enough that providers are delivering affordable services at high levels of efficiency.
Mindful that capitated payment under managed care during the 1990s failed, CMS seems to have made a note of the major causes of that failure in an attempt to not repeat them. These include:
- Few evidence-based quality standards pertaining to the process and outcomes of care.
- Virtually no capabilities on the part of hospitals and most physicians outside of California to manage risk.
- Inadequate information technology capabilities to support hospital and physician managers' need for real-time information.
- Rationing of care, often through fairly arbitrary denials, by the insurers who took capitated payment, to maximize their profits.
- Conflicting financial incentives between physicians and hospitals that tended to create overutilization of oversupplied acute care service capacity.
- The tendency of hospitals to cost shift their losses from HMO-covered patients to Medicare until the Balanced Budget Act of 1997 transformed relationships, spiked increases in private insurance premiums and ended that era.
To avoid such pitfalls this time around, CMS is planning to roll out several initiatives, including its Medicare Shared Savings, or accountable care organization program, which if successfully implemented would allow the agency to set capitated rates that would pass most of the risk on to providers and insurers in ways that:
- Are consistent with explicit quality standards set by National Qaulity Form and others.
- Maximize the population's health status and minimize demand for acute care interventions by utilizing primary care providers to manage chronic conditions more effectively through medical homes.
- Reduce the unit costs of hospital and specialty physician services per episode of care by combining the use of bundled payments, which amounts to pay-for-performance, with gainsharing methods.
- Integrate the delivery and financing of healthcare through ACOs which would develop the tools and relationships necessary for successfully coordinating and managing risk, quality, access and financial results under capitated payment policies.
In a real sense, the successful development of ACOs would permit CMS to contract directly with providers in much the same way the agency now contracts with insurers under the Medicare Advantage program. That is, by setting capitated rates and then deciding how much to increase them from year to year.
CMS wants providers to do all the heavy lifting
CMS has stated that ACOs should reward providers for their demonstrated success in delivering patient-centered care across multiple care settings by offering financial incentives to clinically integrated provider organizations that will induce them to deliver better quality of care and cost savings simultaneously.
To accomplish these results, primary care providers would minimize the acuity of their Medicare patients' health problems, many of which are chronic, by improving their health status and reducing the incidence of diagnostic work ups, emergency room visits, specialty physician referrals and hospital admissions. The establishment of Medical Homes is expected to increase access to primary care practitioners by liberalizing payment policies for a wider range of primary care providers’ services.
The final rule for ACOs enumerates requirements, limitations and waivers which are intended to assure that clinical quality will be maintained or improved as providers work together to minimize the consumption of higher cost services, become proficient in managing risk, motivate the participants to do the right things, and finally to share among themselves the portion of total savings that CMS decides to award them.
Essentially, CMS is offering the providers who might form an ACO a negative-sum game in which:
- All of the savings in fee-for-service payments would accrue to CMS.
- CMS would then share some of the savings with the ACO.
- The ACO would distribute its share of savings to its participants in accordance with the dictates of CMS.
This arrangement, therefore, requires the ACO, if it becomes successful in reducing consumption of its participants' services (i.e., to reduce its revenue levels), to receive only a part of the savings realized. At the same time, the ACO will be required to simultaneously cut its fixed and variable costs sufficiently to offset the corresponding reductions in its revenue if it is to maintain or improve its bottom line, and then has to distribute savings according to rules agreed upon by its participants under the aegis of CMS regulations.
Even though the final rule increases the likelihood that participants' financial results would be better than under the proposed rule, their prospects would not improve enough to adequately reward such Herculean accomplishments during the three-year run of a demonstration contract.
Negative returns under the ACO final rule
We modeled an ACO's financial results, with a set of assumptions which fit a hospital that serves 5,000 Medicare lives and saves 6 percent per member per year under a one-sided risk model during the entire three-year period.
- Under this scenario, the financial benefit to CMS over the 3-year contract would be $5.1 million This would be a 3 percent reduction from its 3-year baseline spending level of $170 million.
- A 50 percent distribution of the first dollar savings would also benefit the ACO over 3 years by $5.1 million. Unfortunately, the net reduction in its revenue, including its share of the savings, would still be -$5.1 million. This outcome reflects the 50 percent of savings out of the ACO's revenue base that would go to CMS.
- Uncovered fixed costs of the ACO would total $2.55 million over the 3-year period.
- Variable costs of the same amount would also need to come out of its cost base.
To at least breakeven from participating in the demonstration, the ACO would have to pursue some combination of increasing the number of Medicare and other lives aligned with its PCP members, reducing its levels of fixed and variable costs, which are mainly located in the hospital setting, and/or increasing service intensity to patients other than Medicare to boost revenue.
Alternative courses of action
In any case, the voluntary Bundled Payment for Care Improvement inititative which is expected to start in early 2012, is more likely to offer a greater
opportunity for hospitals/systems to work with their specialty physicians under one of four models laid out by CMS.
Under Model 4 of the Bundled Payment initiative, CMS offers an opportunity for a hospital and its physicians to bid for a discounted bundled payment for the entire DRG-designated episode, which includes all hospital and physician services involved in diagnosing and treating the patient, including the 30 days following discharge. If these providers reduce the average Part A and Part B costs of the episode by more than the payment discount, they would share in the
net cost savings.
The bundled payment approach provides an opportunity to combine the P4P approach offered by Medicare with a gainsharing initiative by the hospital and its physicians to the mutual benefit of the payor, the hospital and the participating physicians.
The trick for hospitals in contracting successfully for bundled payments to cover an entire acute episode of care will be to:
- Identify significant opportunities in that hospital for reducing average inpatient case costs at the DRG level by improving and standardizing the care process for those targeted kinds of patient problems/procedures, including the cost of related readmissions and physician services within 30 days.
- Offer the physicians who treat such patients the possibility of benefitting financially if they formalize and follow clinical protocols that reduce complications/deaths/readmissions along with average cost per case.
- Make an investment in the cost of pursuing the initial opportunity which can subsequently be built upon with other DRGs as a way to continue bending the cost curve while maintaining profitability over time.
- Bid successfully for acute inpatient episodes by analyzing clinical and financial information at the DRG level and estimating the hospital’s volumes, unit costs, unit revenues and margins as well as those of the attending physicians for Medicare PPS patients before and after the gainsharing intervention.
As risk is expected to be increasingly shifted toward providers over the next five to 10 years and continuous cost savings initiatives become de rigueur, transformations and considerable downsizing in acute-care service capacity can be expected as more and more of the care is rendered in ambulatory settings.
At some point most free-standing hospitals in competitive markets will feel a need to join an integrated healthcare delivery system which has many of the characteristics of an ACO. In the meantime, most hospitals will need to focus on:
- Converting their primary care practices to Medical Homes and expanding that service capacity by adding non-MD practitioners and IT/communication systems that can manage chronic medical problems and make speedy referrals to the most appropriate physicians.
- Developing the IT capabilities required to manage and report on clinical and financial processes and outcomes, using standardized clinical protocols and metrics.
- Learning how to integrate their clinical and financial interests with those of their physicians in improving clinical quality, reducing unit costs and aligning the financial interests of their physicians.
- Starting now to reduce cost per episode of care through bundled payment and/or gainsharing initiatives with their physicians so that early efforts at case cost reduction will be profitable.
- Deciding early on which choices, if any, for becoming part of an integrated delivery system are available and desirable, and beginning to nurture key relationships.
Initiatives to minimize inpatient case costs and manage risk are more likely to pay off for most hospitals over the next five years than trying to take great leaps forward that may be too risky or ambitious.
Mr. Reynolds is president, Reynolds & Company Management Consultants. He can be reached at jreynolds@jxreynolds.com.
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