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ACO-Bound? Consider the Financials First

By David A. Lips, for HealthLeaders Media  
   December 30, 2010

Section 3022 of the Patient Protection and Affordable Care Act is has the innocuous name, "Medicare Shared Savings Program." Accountable care organizations are at the heart of this program, which is intended to coordinate healthcare providers serving patient populations of at least 5,000. Unlike many other parts of PPACA, this section does not establish a pilot program. Instead, it creates a fully active program with its own reimbursement structure.

The opening sentence of new Section 1899 of the Social Security Act indicates that there are significant financial dimensions to creating and running ACOs. To wit:

Not later than Jan. 1, 2012, the Secretary [of the Department of Health and Human Services (HHS)] shall establish a shared savings program … that promotes accountability for a patient population and coordinates items and services under [Medicare] parts A and B, and encourages investment in infrastructure and redesigned care processes for high quality and efficient service delivery (emphasis added). Indeed, the incentive for establishing an ACO is financial. If an ACO provider network manages costs and meets quality targets on patient care, Medicare will pay it a portion of its savings to the Medicare program.

ACOs may be modeled in various ways. Section 1899(b)(1) lists several possible configurations: professionals (physicians, physician assistants, nurse practitioners, and clinical nurse specialists) in group practices, networks of individual practitioners, joint ventures between hospitals and professionals, and hospitals employing professionals. ACOs do not have to include hospitals, although hospitals would be helpful partners because they would probably already have good infrastructure for reporting the information that HHS will require.

Once established, an ACO enters into a contract with HHS that lasts at least three years to provide a continuum of care to patients that HHS assigns to it (not necessarily with the patients' knowledge or consent). To participate in the program, ACOs must have the following:

  • A formal legal structure that would allow the organization to receive and distribute payments for shared savings … to participating providers of services and suppliers
  • Enough primary-care providers to handle at least 5,000 patients
  • A way of implementing "quality and other reporting requirements"
  • A leadership and management structure that includes clinical and administrative systems
  • Processes to promote evidence-based medicine and patient engagement, report on quality and cost measures, and coordinate care, such as through the use of telehealth, remote patient monitoring, and other such enabling technologies.

All of these elements but the second will potentially require a substantial investment.

The goal of ACOs is to improve quality of care and drive down costs by providing an incentive (through shared savings) for better patient outcomes and lower expenditures (for example, by lessening the need for intensive care). Rather than being paid on the number of medical services provided, physicians, hospitals, and practitioners in ACOs have the opportunity to be paid, in part, at the end of each ACO contract year for keeping patients healthy, based on comparing current costs with per-beneficiary Medicare expenditures over the past three years. But the feasibility of creating or entering into an ACO depends on regulations that are due to be released this January, covering the following points:

  • What are the required performance standards?
  • What is their benchmark and how will they be measured?
  • What configurations of ACOs are permissible other than those described in Section 1899?
  • What are the reporting requirements?
  • What is the basis of comparison used to determine cost savings?
  • How much savings are required before savings are shared?

ACOs will require up-front costs. Among the most obvious is intellectual technology that will report and store data. Since all providers in an ACO will be jointly accountable for quality and cost measures, IT will have to be compatible for multiple providers in order to allow them to share information. The IT costs may be high enough to weed out small physician groups and solo practitioners from considering joining an ACO. And the up-front costs may be bigger than expected. Most early clinically integrated networks, which are precursors to ACOs, took longer than was anticipated to put in place and had greater than expected start-up cost and staff requirements. Recently organized physician groups may also lack the history needed for benchmarking costs that would be required for an ACO.

In addition to up-front costs, ACOs will require continuing expenses relating to reporting. These expenses will involve personnel, IT maintenance, and continual coordination among the different members in an ACO.             

ACOs also involve financial and legal risk because so much rests on the forthcoming regulations and on inevitable fine tuning that will occur in the future. Right now, it is unclear how ACOs will be reconciled with the requirements of HIPAA, which restricts sharing patient information among independent providers; the Stark Law, which prohibits Medicare claims for physician services due to referrals to entities with which the physicians have a financial relationship; and antitrust, which has hitherto frowned on physician-hospital joint ventures and independent healthcare providers acting in concert.

While Section 1899 gives the Secretary authority to waive ACO participants from federal fraud and abuse regulations, those waivers – if they are even granted – may come with their own strings.

In 2005, the Centers for Medicare & Medicaid Services sponsored a Medicare Physician Group Practice demonstration involving 10 big integrated delivery systems over five years. The participants in this demonstration project, which ended in spring 2010, were the forerunners to ACOs. Participating physician practices were given awards based on both cost savings and quality improvements (unlike ACOs, which would be eligible for awards measured only by cost savings as long as quality targets are met). In the second year, while all participating practices were paid for quality improvements, only four were paid for cost improvements, based on exceeding target expenditures by at least 2%. The awards to the practices equaled 80% of the cost savings above the 2% threshold.

The Dartmouth-Hitchcock Clinic received the most: $6.69 million. Marshfield Clinic got $5.78 million, and the University of Michigan Faculty Group Practice received $1.24 million. Everett Clinic, a group practice of more than 300 physicians in the state of Washington, received the smallest payment for cost savings: $129,268. (Payments for all five years have yet to be calculated.) Everett Clinic paid more than $1 million in up-front infrastructure costs. The average up-front payment was $489,000 plus $1.26 million in operating costs in the first year. These costs are low estimates considering that the provider systems in the demonstration project had already absorbed other integration costs before the project got under way.

As commentator Trent Haywood tellingly observed, "given that eight out of 10 participants did not receive any shared savings from Medicare in the first year, these investment costs were significant and not offset by any savings. Thus, healthcare executives should anticipate losses prior to gains in the implementation of the ACO model."

Reflecting on his experience in the demonstration project, the president of Everett said that the 5,000 minimum number of patients for an ACO is most likely too small.

The current fee-for-services model may encourage physicians and hospitals not to enter into arrangements like ACOs that will cut their volume of services and, hence, their revenue, at least if the potential shared savings are not great. On the other hand, Medicare and private payers may give preference over time to ACOs. Providers that are not associated with an ACO may find themselves either left out of potential payer networks or otherwise penalized for not having joined an ACO. The exercise of creating an ACO and being accountable for quality and cost improvements may spawn efficiencies and better patient care that will outlast any contract with HHS.

As with much of healthcare reform, uncertainty rules the day at present. The chief medical officer of one organization involved in a pilot ACO, organized in 2009 under the auspices of the Dartmouth Institute for Health Policy and Clinical Practice and the Brookings Institution's Engelberg Center for Health Care Reform, explained that even estimating the shared savings that would financially justify participating in an ACO is hard to calculate.


David A. Lips is an attorney at the Indianapolis office of Hall, Render, Killian, Heath & Lyman, a healthcare focused law firm. He may be reached at dlips@hallrender.com.

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