The uncertain economics of ACOs

Hospitals are being asked to reinvent themselves.

Potentially, one of the best health-delivery reforms to emerge from health reform is the accountable care organization (ACO). An ACO is a network of health-care providers willing to be held accountable for achieving measurable quality improvements and reduced spending growth for up to 5,000 Medicare patients. In exchange, an ACO would share the savings with Medicare. The government hopes the model succeeds and spreads throughout the health-care system.

The goal is to improve coordination of patient care and provide an incentive to avoid wasteful services encouraged by fee-for-service medicine.

The most likely ACO configuration would include a hospital, primary-care physicians and specialists. The nation’s largest health systems already have these elements under common ownership and are best suited to meet the January 2012 deadline for the program’s inauguration. The Congressional Budget Office (CBO) estimates that there will initially be 75 to 150 ACOs and that the program will save Medicare about $5 billion by 2020.

However, many are concerned that ACO formation will give large health-care organizations even greater market power (see discussion below).

ACOs may be suffocated at birth because of overbearing regulation. The 429-page document governing ACO creation attempts to thread the needle by encouraging hospitals and physicians to form ACOs without sticking the government with the tab if the effort fails. The results, many experts say, are meek incentives that do not justify the steep startup costs. Other hurdles include requirements to document 65 quality measures and submit marketing materials for federal editing.

ACOs have two alternatives for a three-year arrangement. Those willing to bear greater risk can earn up to 60 percent of the savings they achieve. However, they will have to repay Medicare for cost overruns. The maximum risk would be 10 percent of what Medicare would have spent on patients if they were not in ACOs.

This so-called two-sided risk may appeal most to established integrated-delivery systems that already operate much like ACOs.

The one-sided risk model allows ACOs to avoid financial risk in the first two years, but they would be eligible to keep only 50 percent of the savings. They would face penalties of up to 7.5 percent in the third year.

Consultant Steven Lieberman, a 30-year CBO veteran, wrote in a Health Affairs blog, “The proposed regulation imposes unfavorable economics, unrealistic requirements, high uncertainty and significant risks for ACOs.”

The Medicare Physician Group Practice (PGP) demonstration, the model upon which the ACOs were built, was not financially promising. Only half of the 10 participating practices produced savings by the fourth year.

Researchers crunched the numbers from the PGP demonstration and concluded that an ACO with an average of $1.7 million startup costs would have to have an unlikely 20 percent profit margin for the three-year period to recoup costs.

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