Accountable Care Organization (ACO) Final Payment Rules Released, Now the Real Work Begins

The final rule for Medicare Shared Savings Program (MSSP), the payment engine for Accountable Care Organizations (ACOs), were released on October 20, 2011 with an editorial published by Berwick in the New Journal of Medicine (NEJM).  What is evident is that the Center for Medicare and Medicaid Services (CMS) did listen to the complaints and issues raised regarding the proposed rules.  Changes were made to create more flexible options and reduce barriers to broader participation.  Major changes include providing more timely, information to ACOs at the outset of the performance year through preliminary prospective alignment of beneficiaries; reducing the total number of quality measures by about half; allowing start-up ACOs to choose a “savings only” track without financial risk during their initial contract period; sharing savings with successful ACOs on a “first dollar” basis when the ACO achieves meaningful savings for the Medicare program; and creating a pathway for full participation of federally qualified health centers and rural health clinics.  Also, the Center for Medicare and Medicaid Innovation announced an advanced payment initiative that will allow small physician practices and rural community hospitals to receive up-front access to needed capital to enable the transition to an ACO model.

This more palatable model and options should encourage more organizations to sign up.  However, now the real work begins.  The ACO model is expected to be the framework for transforming the healthcare industry to a value-based payment model.  It is important to understand that the underlying fundamental change is that of shifting performance risk from the payers, including the government, to providers.  There are two types of medical care risks: (1) insurance risk which is the risk that someone will have some relatively unforeseeable medical issue like an auto accident or develop cancer that would lead to high medical costs and (2) performance risk which is the risk that a provider will provide inefficient and low quality care for a particular condition.  Insurance risk is addressed in the underwriting process that considers various risk factors and predictive models to assign risk levels and charge premiums accordingly.  As we have no perfect models, this is an inherent probabilistic exercise due to the uncertainty in determining insurance risk.  Members of a high risk category may never have an incident while those in a low risk categories may have a catastrophic incident.  Most insurance, such as auto and home insurance, is designed to insure against these kinds of catastrophic risks.

Due to the rising costs of healthcare, medical insurance evolved over time to attempt to also address performance risk.  Healthcare costs began to rise dramatically in the 1960’s and 1970’s and it became evident that there was significant variation in the costs and quality of care for the same conditions depending on provider and geography.  Insurance companies began to try to manage performance risk to address the opportunity to reduce costs that this variation represented.  This lead to the development of Health Maintenance Organizations (HMOs) and Managed Care Organizations (MCOs) of the 1980’s.  These organizations began to invest in medical directors, nurses and and expanded infrastructure to evaluate and manage the “appropriateness” of care being provided to their members.  They used very crude tools such as contracting provisions, benefit design and utilization review and, early on and temporarily, were very effective in decreasing the costs of care.  Despite the early success, the fact that one organizations’ costs are another’s income lead to battle lines being drawn.  HMO’s and MCOs were making significant profits at the expense of providers.  This conflict pitted providers vs insurance companies and set-up the “managed care backlash” of the late 1990’s and early 2000’s, as patients and politicians sided with the more highly trusted providers.

Now, the absolute level and rate of rise of healthcare costs are threatening to bankrupt the US and the “can” cannot be kicked any further down the road.  The opportunity is that the ACO model will appropriately shift risk to providers and, for the first time, align the incentives of payers and providers.  There is evidence that the changing reimbursement environment is driving more partnerships between providers and payers, such as the partnership between Aetna and Banner Health.  There is opportunity for alignment because each share in the savings IF performance risk is managed better than expected.  This will be an extremely complex undertaking.  Nevertheless, there is not really a better alternative on the table.  The real work will be for providers to make the transition to become more like insurance companies with an increased, laser focus on managing performance risk.  This makes sense because most of the decisions that drive costs are made by doctors on the delivery side.  This will require new skills, infrastructure, processes and analytics for providers.  Most importantly this will involve a shift in culture and thinking from focusing on the importance of volume to the importance of value.  In particular, for hospitals this will require new partnerships and realigned thinking since the greatest costs to the system are for inpatient care.  This will also require a cultural shift from visit-based care to enrollment-based care.  Providers are used to being reactive and waiting until the patient generates a visit to provide care.  Since patients with chronic disease can generate up to 75% of costs, managing performance risk MUST involve better managing patients with chronic conditions.   These patients require proactive outreach, behavioral modification coaching and on-going monitoring to decrease costs and improve quality.  This approach to care called Population Health Management (PHM) should begin as soon as the patient enrolls in a system of care.  Again, this requires a dramatic shift in culture, people, process and technology.  It will be interesting to see which organizations will successfully navigate this transformation and become a leader in the new model of value-based care delivery.  Now the real work begins.


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