Health Reform: ACO's

Let me start by saying that ACO's (Accountable Care Organizations) are a good idea and that hospitals and physician groups would be wise to start organizing themselves in this way. No matter what happens with payment reform, cost-efficient, high quality systems will have a competitive advantage.

Nevertheless, the Medicare ACO initiative approved by Congress in the new health reform legislation is something of a disappointment. I think the best way to characterize it would be as a new (and expensive) Medicare fee-for-service provider type. This is ironic because the stated reason for changing the way Medicare delivers care and pays was to move beyond fee-for-service.

Medicare participating hospitals and physicians organized as ACO's will be responsible for all Part A and B services for an enrolled population (at least 5,000). Hospitals and physicians and other providers will be paid in the usual fee-for-service way. At the end of a defined period, CMS will calculate the difference between these fee-for-service payments and a CMS-derived benchmark that is based on historical spending. If the ACO meets certain evidence-based medicine and quality benchmarks and actual fee-for-service spending for the ACO is lower than the CMS benchmark the ACO will be eligible to share a percentage (TBD) of the calculated savings. This model is like an incentive or performance-based contract used by many private payers today with some PHO's or multi-disciplinary physician groups.

There are a few challenges involved in adopting this approach broadly for Medicare. It is not immediately clear what the ROI will be on the infrastructure investment needed to create an ACO just for Medicare. This is especially true because other parts of the health reform legislation direct Medicare to reduce payments to hospitals and physicians, who will naturally want to understand the net impact of all the reimbursement changes before making significant IT or clinical integration investments and managing all the services for an enrolled population. CMS also holds all the ACO purse-strings, and until it is clear what the benchmarks are, what percentage of savings an ACO will be allowed to retain, how the risk adjustment will work, etc there will be skepticism. And, of course, the fledgling ACO will need to convince participating hospitals and physicians, who are used to making up Medicare payment shortfalls through utilization and cost-shifting to private payers, that changing the way they practice and making the necessary infrastructure investments is worth it, especially when the alternative is the usual fee-for-service model.

It will be interesting to see whether this initiative, structured as it is, produces actual Medicare cost savings.