In a recent blog post, Jonathan Pearce, principal of Singletrack Analytics, questioned the financial advantages of health systems' participation in the Medicare Shared Savings Program as accountable care organizations.
Despite belief by some in the industry that ACO participation will lead to financial benefits, Mr. Pearce argues that participation could actually lead to lower net income because payments to providers in the ACO are reduced. He writes:
Mr. Pearce goes on to explain, in detail, how the shared savings model will work, providing an example of how a hospital could lose out because of ACO participation.
Mr. Pearce admits that while a physician-only ACO would profit by preventing hospital admissions, few physician groups lack the infrastructure and resources to form an ACO. He then provides what he sees as the "only three ways in which an ACO could 'make money,'"according to the Medicare's definition of shared savings — that is incurring costs below a target based on actual historical provider payments.
Mr. Pearce ends his post by writing that while there are "many other non-financial reasons for ACO formation…providers contemplating forming ACOs need to look at the complete financial picture, including the loss of FFS revenue."
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Despite belief by some in the industry that ACO participation will lead to financial benefits, Mr. Pearce argues that participation could actually lead to lower net income because payments to providers in the ACO are reduced. He writes:
"For some reason they all seem to show the ACO 'making money' in the end, with 'making money' being defined as receiving a shared savings payment from CMS.
I'd define 'making money' a little differently — to me it means that the participating providers realize a higher net income from participating in the ACO than from not participating, holding all other factors — especially market share — equal. This means that shared savings from the ACO must be balanced with the reductions in payments to providers that created those savings."
Mr. Pearce goes on to explain, in detail, how the shared savings model will work, providing an example of how a hospital could lose out because of ACO participation.
"Consider an avoided admission resulting in a $4,000 decrease in payments to the hospital and a $1,000 reduction in physician payments. In a Medicare ACO, the ACO organization would receive approximately $2,500 of that amount, with the remainder going to CMS. But the ACO would distribute that savings among the ACO’s participants, including physicians and possibly post-acute providers. Assuming a 50/50 split of ACO savings between the hospital and other providers, the hospital would receive $1,250 of the $4,000 in FFS payments that it had lost. The physicians as a group would receive $1,250 having lost $1,000 of FFS payments.
While this arrangement is disadvantageous to the hospital, it is advantageous to physicians as a group, who had lower reductions in payments but enjoyed a higher percentage of the hospital's payment reductions"
Mr. Pearce admits that while a physician-only ACO would profit by preventing hospital admissions, few physician groups lack the infrastructure and resources to form an ACO. He then provides what he sees as the "only three ways in which an ACO could 'make money,'"according to the Medicare's definition of shared savings — that is incurring costs below a target based on actual historical provider payments.
- If ACO participating providers are able to reduce payments to other providers that are outside of the ACO. But, Mr. Singleton conceded this seems "difficult to achieve."
- The inflation rate used to increase the cost targets is disproportionately higher than the actual rate at which the ACO's provider payments would increase over time. He writes, however, this "couldn't be counted on."
- Payments to the ACO's providers really do decrease, but the providers are able to decrease their costs proportionately, so that the effect on net income is zero or positive.
Mr. Pearce ends his post by writing that while there are "many other non-financial reasons for ACO formation…providers contemplating forming ACOs need to look at the complete financial picture, including the loss of FFS revenue."
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