How Can Accountable Care Organizations (ACOs) Generate Savings to Share?

The existence of the new healthcare organizational structure, the Accountable Care Organization (ACO), has taken off like none other. As of June 2012, there were 221 ACOs in 45 states testing various methods of sharing risk, up from 160 in November of 2011. Although there is tremendous interest and rapid growth, it remains to be seen if ACOs can be successful. How are ACOs going generate enough savings to share? Because the transformation to an ACO requires a significant capital investment, restructuring role and responsibilities, usually hiring new resources and redesigning workflows, how are these investments going to pay off for the provider making these changes?

A Health Affairs study shows that the savings are unlikely to come from quality improvement efforts alone. Dr David Eddy used the sophisticated Archimedes simulation model to analyze the effects of the Shared Savings Program quality measures and performance targets on Medicare costs in a simulated population of patients ages 65–75 with type 2 diabetes. They found that a ten-percentage-point improvement in performance on diabetes quality measures would reduce Medicare costs only by up to about 1 percent over a five year period. When you consider the costs of attaining this level of performance improvement the savings would decrease or become a net cost increase. To achieve greater savings, accountable care organizations will have to lower costs by other means, such as through improved use of information technology and care coordination. This is the reality of the challenge of quality improvement. Although it is the right thing to do, even in a shared savings environment, at least for the short term, it may not be profitable.

So what are the critical success factors for an ACO to generate enough savings such that there is a profit margin? The Return-On-Investment (ROI) for making these changes from a provider perspective will depend on the provider’s ability to achieve a certain level of cost reduction, generally greater than 2%. If this is not achieved, margins are worsened because the capital costs will not be reaping benefits and the organizational changes will be disruptive without generating value. At the same time you are, by design, decreasing your FFS volume which may have been the cash cow sustaining your margins. Becker’s Hospital Review discusses how to calculate provider revenue loss in an ACO. The important point is that in the new world of value based reimbursement, you create margin by safely decreasing the use of services and creating internal efficiencies to do so at the lowest possible cost. This is the new game. And, very importantly, old foes can be critical allies in achieving this goal. In particular, this shift in the reimbursement model now aligns provider and health plan incentives.

As cost became an issue over the past 30 years for the ultimate payers or funders of healthcare services (i.e. the government and employers), health plans have successfully and profitably become a powerful middle man. Because, for every financial transaction, one person’s cost is the other’s income, this tug of war between health plans and providers has been waging for years. Health plans have used various means to decrease their cost and providers have fought back with countermeasures to increase their revenue. This situation has lead to an acrimonious relationship between health plans and providers characterized by a lack of trust and bitter battles to gain an advantage with sometimes very high stakes. In the late 1990’s, there was an inappropriate and disastrous shift of insurance risk to providers that led to provider losses and increased the animosity between health plans and providers.

There are two kinds of risk to manage as it relates to the use of healthcare services. First is insurance risk, which is the risk that a patient will develop a catastrophic illness or injury such as cancer or have severe injuries from an auto accident. This is generally the purpose of insurance. Insuring against this risk is the primary reason why health insurance companies exist. The second kind of risk is performance risk. Performance risk is the risk of over-, under- or mis-use of healthcare services for a particular condition, illness or injury. This is particularly difficult to manage because the gold standard is so difficult to determine. So much is based on patient characteristics, co-morbidities, medical evidence and clinical judgment. When costs in healthcare began to dramatically increase, it was noted that there was great variation in the use of services for the same condition. This was evidence that clinical performance risk was not being managed. Health plans stepped in to do so. Health plans have build up infrastructure over several years to micromanage the clinical performance of providers through various means which typically culminate in denial of payment for services deemed inappropriate. These tools include guidelines, data analytics, predictive models, case managers and other clinical staff, disease management systems and provider profiling systems. This has been a frustrating situation for physicians who have had their clinical judgment challenged and for patients who have been caught in the middle. However, now the game has changed. In an ACO world, health plans and providers have the same perspective on what are costs. The goal is to decrease cost from the perspective of the government or employer payer. Therefore there is an opportunity for health plans and providers to align efforts and partner to create a higher quality and more efficient system. This health plan infrastructure can be used to help providers manage clinical performance risk. Patients still need to be aligned but that is a topic for another time.

A health plan that has been particularly aggressive in developing new ACO-like reimbursement models with providers is Cigna. They recently published early results of their Collaborative Accountable Care initiative. In terms of what must providers do, beyond quality improvement, to reduce costs, care coordination seems to be a critical success factor. In the Cigna model, registered nurses who serve as care coordinators employed by participating practices are a central feature of the initiative. They use patient-specific reports and practice performance reports provided by Cigna to improve care coordination, identify and close care gaps, and address other opportunities for quality and efficiency improvement. This effort included referrals into Cigna’s programs for complex case management. Cigna provided significant resources and support for the practices including consulting support. Cigna reported interim quality and cost results for three geographically and structurally diverse provider practices in Arizona, New Hampshire, and Texas. Although not statistically significant, the early results demonstrated favorable trends in total medical costs and quality of care.

As successful ACO models emerge, it becomes clear that quality improvement will be necessary but not sufficient and partnerships with plans may be a way to accelerate progress and help fund the infrastructure needed. Although there are lingering trust issues and there will be other battlegrounds to negotiate, in the ACO model of care, plans and providers can be on the same side.


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