Category Archives: Accountable Care

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.


ACO at Three Years: Not Quite What We Were Hoping For

CMS has just released the results from the third year (2014) of the ACO program.  The goal of the ACO program is to improve the quality while reducing the costs of healthcare.  It is the centerpiece of  “value-based” reimbursement that is dominating the efforts in healthcare reform.  After three years of operation involving  32 Pioneers and 404 shared savings (MSSP) ACOs, it appears that the model is falling short of its goal.

Over these three years, ACOs have improved their scores on the 33 quality measures.  However, many providers that are not part of an ACO are also hitting these same quality targets as they strive to meet Meaningful Use, PQRS, and PCMH requirements.  CMS has not compared the quality measurements of ACOs and non-ACOs because the difference, if any, would likely be small.

A financial  incentive was built into the ACO model to encourage providers to reduce wasteful spending while improving quality.   Since the program was launched in 2012, most ACOs have not saved enough money to earn a bonus.  The programs that received a bonus payment in 2014 included 11 of the remaining 20 Pioneer ACOs (55%), and 92 of the 404 MSSP ACOs (23%).

The aggregate savings of all of the ACOs has been in the range of 1 to 1.5%.   Since some of those savings are returned to the ACOs as a bonus, the savings for Medicare are quite a bit smaller.  Total Medicare savings in 2014 (year 3) was $411 million, which,  based on an ACO enrollment of 7.8 million seniors (14.1% of all Medicare beneficiaries), the savings to Medicare represent 0.49% of the total expenditures on ACO patients.  Furthermore, at least some of the $411 million must have been used to administer the program.

In the first three years, ACOs invested a total of $1.5 billion to set up and run these programs.  Thus far they have received only $656 million back in bonus payments.  The high cost of running an ACO, plus the pressure  to accept downside risk are among the reasons that many ACOs are considering an exit from the program, as indicated by Clif Gaus, CEO of NAACOs (National Association of ACOs).

Although the data gives little reason to be optimistic, HHS and CMS seem very committed to the ACO model.   Pushing forward with this model will promote more provider consolidation given the challenges of setting up and running an ACO.  The increase in costs that typically follows provider mergers will likely exceed any savings that ACOs might generate.

The ACO program is not living up to the needs of our healthcare system.  If we are looking for healthcare value, it may be time for a different strategy. Continue reading

Anatomy of the World’s Most Expensive Healthcare System

Many leading healthcare experts believe that fee for service is the root cause of our extremely expensive healthcare system.  While there is an element of truth to this position, it is only part of the story.  Meanwhile, multiple fundamental design flaws that drive healthcare costs upward are not being given the credit they deserve.

Top 5 reasons that Healthcare costs are so high:

1.  Insured patients have not been concerned about the costs of healthcare.  Until recently, a third party payer has covered most healthcare costs and the percent paid by healthcare consumers has been steadily falling from 50% in 1960 to 12% in 2010 (1).   Without skin in the game, the healthcare consumer has had no incentive to reduce costs and the provider has had no constraint from offering high cost care.  The landscape is changing with the cost-sharing insurance strategies that are placing more financial responsibility with the consumer. High-deductible and co-insurance policies are forcing healthcare consumers to learn about cost and value.

2.  Patients and providers are unaware of the costs of care.  Unconcerned about the costs of care, consumers have engaged in healthcare without any knowledge of the costs. Consumers get an MRI of the brain for $3900 when they could have one for $425, or an endoscopy for $7700 when they could have had one for $500.  Neither consumers nor providers have had access to the information about cost (2).  Several organizations around the country have been striving to introduce cost transparency but, thus far, patients have been slow to access the data.  Leaders in this space include Castlight, Healthsparq, Robert Wood Johnson Foundation, Healthcare Blue Book, Clear Health Costs, Costs of Care, Catalyst for Payment Reform (CPR), Health Care Incentives Improvement Institute (HCI3). Health Care Cost Institute (HCCI), Change Healthcare, and FAIR Health.  Cost data without meaningful and reliable quality measures will be very difficult for consumers to interpret.

3.  Private insurance companies have been able to increase premiums annually and , therefore, have had little incentive to hold down the costs of care. This trend has reached its limit as businesses have been shifting more of the costs of insurance coverage to employees.  For many low and middle class families, costs have hit a breaking point with deductibles in the range of $4000-$8000 per year.  Consumers can no longer ignore costs when choosing their healthcare providers.   AHIP (America’s Health Insurance Plans) recognizes that it is time to lower healthcare costs and is supporting the idea of fee transparency.(3)

4.  Providers have incentive to spend more – resulting in more income and more protection from malpractice claims.  Elimination of the fee for service system is the most widely touted solution for controlling healthcare costs.  The proposed solution is designed to remove the provider’s incentive for more healthcare spending either by making all physicians employees, or by creating a financial incentive to spend less (ACO, bundled care).  However, salaried physicians working for large institutions that retain their profit motive, and may still be pushed to think of profits first.(4,5).  Physicians are now gravitating to salaried positions in large institutions where the contracted fees from private insurance carriers are substantially higher (6).   It is unlikely that any cost savings from this model will balance the cost increases that accrue from consolidation….particularly since ACOs, to date, have only managed to save about 1% of costs. (7)

5.  We do not have enough primary care providers.   The US has the highest ratio of specialists to primary care providers in the world – driven largely by the lack of medical student interest in primary care.  The lower earning potential of primary care in the face of very high college and medical school debt, leads most new physicians to choose specialty care.  More specialists leads to higher costs of healthcare.(8)   Reforming the relative value payment scale to recognize the benefits of primary care would help to alleviate this imbalance.

Making consumers aware and concerned about healthcare costs will drive them to seek high value providers.  Combine this with incentives for providers  to be more efficient with healthcare resources, and the mechanisms for real cost reduction will be in place.  Failure to address all of the flaws in our current system will limit the success of healthcare reform.



1.  Baicker, Katherine, and Dana Goldman. 2011. “Patient Cost-Sharing and Healthcare Spending Growth.”  Journal of Economic Perspectives, 25(2): 47-68.

2.  Michelson, Dan,  “Doctors don’t know or care about cost?  That’s half right.”  Healthcare IT News, 2/20/14

3.  AHIP web site: “Rising healthcare costs”

4.  “Hospital Chain Said to Scheme to Inflate Bills”, Julie Creswell and Reed Abelson, The New York Times, Jan 23, 2014.

5.  “A Hospital War Reflects a Bind for Doctors in the US”, Julie Creswell and Reed Abelson, The New York Times, Nov 30, 2012.

6.  “Apprehensive, Many Doctors Shift to Jobs With Salaries”,  Elisabeth Rosenthal, The New York Times, Feb 13, 2014.

7. “ACOs Saving Some Money, But Medicare is Short on Details”, Jenny Gold, Kaiser Health News, Jan 31, 2014.

8.  “What’s The First Step in Transforming American Health Care”  Robert Pearl, Forbes, Feb 20, 2014.

Accountable Care: We Can Do Better Than This

With the spotlight shining on healthcare over the past few months during the troubled roll out of the Affordable Care Act (ACA), Americans are now painfully aware that health care, and the insurance to pay for it, are extremely expensive.  Millions of uninsured Americans are now able to purchase healthcare insurance, but will need a subsidy to make the premiums affordable.  Many, however, will find that high deductibles will impede their access to care.  Those not qualifying for a subsidy may find that their new policy is more expensive than their old one, and that the provider networks are much more limited.  Pre-existing conditions can no longer get in the way of finding healthcare coverage, but this humane provision of the ACA has driven up the cost of insurance.   These are some of the challenges confronting consumers in the world’s most expensive healthcare system.

Reducing the cost of care (and insurance) must be the primary focus in the next phase of healthcare reform.  The Affordable Care Act is relying on Accountable Care Organizations (ACO) to make this happen.  Thus far, over 5 million Medicare recipients get their healthcare from one of 360 Medicare ACOs.  Private insurers are also encouraging this model and have written ACO contracts with well over a thousand medical practices.

Numerous reviews tout the virtues of ACOs including better quality and lower cost of care, more satisfied patients, payment for value rather than volume of care, fewer hospitalizations, better coordination of care, and so on.   It is important to note that the improvements in healthcare that are attributed to ACOs, have also been incorporated into non-ACO practices throughout the country.  Currently, there are more than 5000 Patient Centered Medical Homes that use the same methods as ACOs to improve care: electronic health records, patient portals for improved communication, care coordination for the most fragile patients to keep them out of hospitals and to prevent hospital re-admissions, use of practice data to improve population health, patient safety, adherence to screening guidelines, and patient satisfaction.   Thanks to the influx of technology, the process of healthcare delivery is improving almost everywhere.

While the ACO model addresses some of the problems in our flawed system, it perpetuates or creates others.   What follows are some of the problems inherent in ACOs that rarely get mentioned:

1. Patients of an ACO do not share in the incentive to lower healthcare costs.   Without engaging the consumer in this way, there is nothing to keep them within the confines of an ACO where costs can be controlled.  Furthermore, since the patient is unable to reduce healthcare expenses by making healthier lifestyle choices, the ACO has lost an opportunity to motivate positive behaviors.

2.  ACO patients will not be engaged in decisions to lower the cost of care.   Strategies for cost control will be dictated by ACO policies.   Complex clinical decisions, where cost may play a significant role, may not include input from the patient.  Care options will be limited in this “prix fixe” model of healthcare.  If the ACO is successful at reducing healthcare costs, Medicare will lower the bar (per member per year allocation) after 3 years, forcing ACOs to adhere to an even more restrictive menu of care options.  The absence of cost transparency will keep consumers in the dark, just as they are now, and make it impossible to identify the high value healthcare providers.

3. Risk sharing models of care such as the ACO impose a conflict of interest on providers by giving a financial incentive to reduce the costs of care.  After achieving specific quality improvements, ACOs will be eligible for a bonus equal to 50-60% of the savings generated in the previous year.   ACO providers that overspend their targets will be nudged to fall in line.   Patients will become suspicious that even appropriate recommendations for cost control are being made to pad the bonus for the ACO providers.  The consequence will be an erosion of “trust” in the doctor-patient relationship, an essential ingredient for quality healthcare.   With tort reform nowhere in sight, decisions to cut costs by withholding care will add to the liability risk of clinicians.

4. Consolidation of providers is encouraged by the large up-front costs necessary to form an ACO.   Larger practices are more likely to monopolize a community and command higher fees from third party payers.  Less competition will lead to less innovation, and of course, fewer options for patients.

5.  The ACO model has produced almost no savings in the first 6 years of its implementation even with the most enthusiastic of medical centers.  The 5 year pilot program (Physician Group Practice Demonstration Project) that involved 10 medical practices and ran from 2005-2010 produced a total savings of just 1.1%.  More disturbing, however was the result of the 32 Pioneer ACOs in their first year of operation.  These were centers with enough confidence to accept a downside risk if they overspent their target.   Despite an abundance of “low hanging fruit” in their first year of operation, these practices, in aggregate, increased costs of care by 0.3% (compared to 0.8% in a control group).  Nine of the 32 Pioneers have dropped out of the ACO program.  How will this look in year 10 of operation with practices that are not as enthusiastic?

We can do better than this.  One alternative is based on transparency of cost and quality.  With access to data on healthcare costs and quality of care, consumers will be able to select their providers, just as they would any other service in a free market economy.   This will preserve competition, help consumers identify high value care, and allow them to participate in all of their own care decisions.  It will also engage patients in ways that may inspire better lifestyle choices.  Costs will fall because consumers with higher out-of–pocket expenses are becoming more concerned, will resist unnecessary spending, and will find lower cost options.  High value screenings and immunizations can be encouraged by reducing the out-of-pocket expense for these services.  Quality will improve because the market will demand it.   Accurate and meaningful measures of quality will need to be established.  Many providers of care, as well as hospital and insurance administrators understand that these are essential steps for a sustainable healthcare system.    We cannot afford to wait 10 years to see if ACOs will evolve to lower healthcare costs.  For the sake of a struggling economy, and consumers that are paying a larger share of their healthcare expenses, cost reduction must begin now.



Wilensky G, Lessons from the Physician Group Practice Demonstration –  A Sobering Reflection.  N Eng J Med, 2011; 365:1659-61.

Colla CH, Weinberg DE, Meara E, et al., Spending Differences Associated with the Medicare Physician Group Practice Demonstration, JAMA, Sept 12, 2012,  308(10):1015-23.

Christensen c, Flier J, Vijayataghavan V, The Coming Failure of Accountable Care, The Wall Street Journal, Feb 19, 2013, p A15.

Munro D, Healthcare Pricing Transparency Gains Momentum, Forbes, June 9, 2013.

Robinson JC, Brown TT, Increases in Consumer Cost Sharing Redirect Patient Volumes and Reduce Hospital Prices for Orthopedic Surgery. Health Affairs, 2013, Aug; 32(8):1392-7.  10.1377/hlthaff.2013.0188.

Daymore J, Champion W, The Pioneer ACO First Year Results: A Fuller Picture.

Harvey HB, Cohen IG, The Looming Threat of Liability for Accountable Care Organizations and What to Do About It. JAMA, 2013;310(2):141-142. doi:10.1001/jama.2013.7339.