Rethinking the Medicare ACO

Medicare is orchestrating a change in the way healthcare providers are reimbursed for their services. The goal is to replace the current fee for service system which offers no impediment to high volume, wasteful spending, with new systems that link provider reimbursement to the achievement of higher quality, lower cost care. To that end, two approaches have emerged: one utilizes the traditional fee for service system but adjusts pay to the level of performance; the other gives a fixed fee to groups of providers to care for their population, and rewards them with a bonus if they improve quality and lower the cost of care. The latter are referred to as “Alternative Payment Models” (APMs) and include bundled payments for single episodes of care, and Accountable Care for a year of all-inclusive healthcare.

Momentum is building for expanded use of the APMs. The announcement last year by HHS Secretary Sylvia Burwell of the goal to have 50% of Medicare reimbursement through an APM by 2018 has set the stage for rapid change.  This past summer, Congress reinforced that goal by passing the “doc fix” law, MACRA (Medicare Access and CHIP Reauthorization Act), which will go into effect in 2019. The law incorporates value-based payment strategies either through the APMs, or through fee for service with performance incentives (MIPS, Merit-Based Incentive Payment System). By offering an annual 5% bonus from 2019-2024 to providers using the APMs, MACRA is clearly promoting the alternative models. Since the ACO model encompasses the full spectrum of care, and will involve more providers than bundled care, it is considered the ultimate goal of Medicare’s value-based payment strategy.

The ACO Experience, 2014

The ACO (Accountable Care Organization) program was in its third year of operation in 2014. The participating ACOs included 20 Pioneers that accepted downside risk from the outset, and 333 Shared Savings Plan ACOs that are not accountable for financial losses but can share in any savings that are generated if quality scores allow. Data from CMS detailing the quality improvements and expenditures by the Pioneer and Shared Savings ACOs in 2014 were recently released and revealed the following:

  • Medicare Accountable Care Organizations (ACOs) saved a total of $411 million in 2014 after spending nearly $60 billion on their patient population (Table 1)
  • Bonus payments totaling $401 million were given to some of the ACOs in 2014 making the net savings to Medicare $9.2 million (0,01% of costs).
  • ACO benchmarks (funding per patient per year) varied from $5,017 to $21,546 in 2014.
  • The higher the benchmark, the easier it was for an ACO to generate savings.
  • ACOs in the top benchmark quartile received nearly five times more bonus money than those in the bottom quartile in 2014 (Table 2).

Table 1: Financial Summary of the ACO Programs, 2014

  Shared Savings ACO Pioneer ACO All ACO’s
Number of Programs 333 20 353
Average Benchmark $10,285 $10,901 $10,349
Total Target Benchmark (billions) $52.89 $6.93 $59.82
Total Amount Saved ( millions) $291.5 $119.6 $411.1
% of Benchmark Saved 0.55% 1.79% 0.69%
Total Bonus Paid to ACOs (millions) $341.2 $60.6 $401.8
Net Savings for Medicare (millions) $49.8 $59.0 $9.2
% Savings by Medicare -0.09% 0.85% 0.01%


Table 2: Shared Savings ACO Bonus Based on Benchmark Quartile

Quartile Average Benchmark % Savings Over Benchmark Bonus Paid (Millions) % of Total Bonus
I $7,874 0.80% $33.1 9.70%
II $9,047 0.37% $63.8 18.70%
III $10,400 1.10% $90.0 26.40%
IV $13,778 2.35% $154.3 45.20%



The performance of the US healthcare system is improving in many ways, facilitated by the introduction of electronic medical records. As the process of healthcare delivery improves, so too can the quality of care, particularly if providers have an incentive to make this happen. Linking reimbursement to performance is well underway with all third party payers, thus ensuring a path to higher quality healthcare. ACO and non-ACO providers alike are fully engaged in this effort.

Quality improvements, however, do not necessarily produce lower costs. No correlation was found between quality scores and savings among the 333 Shared Savings ACOs in 2014.   Many of the savings that accrue from better care will take years or decades to be realized.   Therefore, quality improvement alone will not satisfy the urgent need to reduce healthcare spending.

APMs are fundamental to the cost cutting strategy chosen by HHS, and the ACO model is the most important component. The data on ACO performance in 2014, however, were not very promising.  Most of the current ACOs (74% of the Shared Savings ACOs and 45% of the Pioneers) did not receive a bonus in 2014 and are still footing the bill to participate in the program. It is estimated that ACOs have invested a total of $1.5 billion over the past three years for set up and maintenance.  Bonus payments have partially covered these costs, but more than $800 million has been funded by providers.  Since only enthusiastic medical centers signed up for the ACO program in its early stages, their inability to reduce spending and cover their costs reinforces the decision by thousands of practices to stay on the sidelines.

The best predictor for receiving a bonus in the ACO program is the height of the assigned benchmark.  The nearly five fold difference in bonus payments between high and low cost ACOs indicates that CMS is giving more financial support to the higher cost, higher volume, lower “value” centers – precisely the opposite of their stated goal.   Without major revision in the method of setting benchmarks, the ACO program will have little appeal to providers working in low cost regions of the country.

Although the data on cost reduction gives little reason to be optimistic, HHS and CMS are committed to the success of the ACO program.   The 5% bonus for participation in the ACO program from 2019-2024 may entice many providers to join before its benefit has been proven. The incentive may also encourage more provider consolidation which will likely result in higher costs for both government and private payers.

“Paying for value, not volume” is a popular slogan that touts the objectives of the ACO model and targets the abuses of fee for service, but after a five year demonstration project and now in the third year of the program, ACOs have had no impact on the cost of healthcare. This challenges the very premise of the APM risk-sharing strategy – that providers will reduce spending when given a financial incentive to save. Either the incentive is too small to change behavior, or the amount of “wasteful” spending under provider control in a fee for service model is overstated. In any case, MACRA encourages adoption of APMS despite such underwhelming preliminary data.

Will the ACO Improve With Time?

Some might argue that it is too early to pass judgment on the ACO program which was only in its third year in 2014.   Indeed, the performance of the Shared Savings ACOs in their first and second years was well below that of the third year programs. The dramatic decline between year 3 and year 2 programs (Table 3) is hard to explain based on just 6-8 months less experience. The lack of significant progress between the year 1 and year 2 programs also casts doubt on the benefits of more experience.

Table 3: Performance of Shared Savings ACOs in 2014 by Years of Involvement

Years in the ACO Program 1 2 3*
Total Benchmark (billions) $15 $18 $20
Total Savings (millions) $5 $7 $294
Total Bonus Paid (millions) $68 $95 $179
Savings by Medicare (millions) $63 $102 $115
# of Programs/# that Saved Money 119/57 103/57 111/67

*Year 3 programs were either 6 or 8 months into their third year during 2014.


Liability Risks

Thus far, little attention has been paid to the liability risks associated with ACOs.  However, this was the subject of a recent address by Dr Agrawal of CMS at a meeting of the American Bar Association.  Liability risks increase when providers are given a financial incentive to restrict care.  Decisions by ACO providers not to offer expensive diagnostic and therapeutic options are not likely to be discussed with patients or documented in the medical record.  This is quite different from the liability risk in a fee for service model where the provider may have an incentive to use more healthcare services, but all options are discussed with the patient who can refuse unwanted services.

The incentive to reduce spending imposes a conflict of interest on providers that will likely have deleterious effects. When providers have to make clinical decisions under pressure to reduce spending, and do so without involving the patient, more errors will be made. Furthermore, providers often recommend less expensive options for care that are entirely appropriate, but may leave the patient wondering whether this is sound advice or just a bonus opportunity.  The doctor-patient relationship may erode over the perceived conflict of interest.

The Transparency Option

For all of the reasons above, many providers may opt out of the APMs, forego the 5% bonus, and stick with an upgraded version of fee for service. MIPS creates incentives for providers to improve quality, enhance the delivery process, and reduce spending that mimic the incentives of the ACO program. Again, the financial incentives to providers are small, and alone, they will probably do little to reduce overall spending. In fact, because it was designed to be cost neutral, Medicare is not expecting to save any money through the fee for service option.

However, a fee for service model can take advantage of an untapped resource, the healthcare consumer. In the face of co-insurance or high deductibles, healthcare consumers are well known to be a potent force for cost control. If a portion of the 20% coinsurance built into Medicare were restored, then synergies between patient and provider would emerge to reduce healthcare spending. This new dynamic would encourage open discussions about the costs and benefits of care, which will enhance the importance of the doctor-patient relationship and add a new dimension to quality care. Such discussions will not occur in the exam rooms of the alternative payment models.

Harnessing the consumer’s drive to reduce healthcare spending should be a high priority, but must include strategies to prevent underutilization, and to ensure fairness across the socioeconomic spectrum. Engaged patients armed with reliable data on cost and quality will finally be able to shop for healthcare “value.” It is time to test the benefits of transparency. Medicare should lead the way.