Potential for Savings: Businesses and Government Entities Experimenting with ACOs

The Patient Protection and Affordable Care Act (“PPACA”) permits the federal government to utilize Accountable Care Organizations (“ACOs”) in certain circumstances. Beyond the PPACA’s approval of the use of ACOs, businesses are beginning to look into contracting with ACOs with the hope that an ACO will be able to reduce health care costs while simultaneously improving health care outcomes.

The general idea behind an ACO is to provide doctors and hospitals with a financial incentive to keep patients healthy while eliminating some unwanted incentives that exist in the current system. An ACO manages all the component parts that provide healthcare to individuals, including primary-care physicians, specialists, and hospitals. The ACO then is paid to administer care to a set number of people. The ACO is compensated more generously if the ACO manages to keep the cost of care down while meeting certain quality metrics.

Under a traditional fee-for-service model, doctors and hospitals get paid based on the number of medical procedures they perform, and doctors and hospitals have a perverse incentive to provide as much healthcare as possible (however, doctors have ethical obligations to maintain moral integrity, intellectual honesty and clinical competency, and it is my belief that most physicians abide by these codes) . If patients have health insurance with low deductibles and/or low co-pays, then patients have little incentive to push back against those medical service providers that attempt to provide unnecessary services. The ACO model is meant to cut back on this perverse incentive; however, ACO’s do not eliminate with the fee-for-service model entirely. An ACO is simply paid a bonus if it keeps health care usage low, and with some ACOs, the participating organizations are hit with a financial penalty if health care usage and costs surpass a particular level.

ACO’s are similar to, but not identical to, health maintenance organizations (“HMOs”). Unlike HMOs, ACOs do not require that their members utilize healthcare services that are in-network. An ACO tracks patients’ healthcare usage and attempts to reduce that usage as much as possible by efficiently sharing information with health service providers, but the ACO does not exercise direct control over a patient’s choice of medical service providers; however, like other forms of health insurance, the ACO can charge patients more for out-of-network services.

In its administration of Medicare, the Center for Medicare & Medicaid Services (“CMS”) is currently experimenting with an ACO model for some patients. One of CMS’s experimental ACO programs is known as the Pioneer model, which was designed for organizations with experience in administering coordinated care. The program recently published the results attained in its first year of operation. The voluntary program had 32 participants that covered 669,000 Medicare beneficiaries. The cost of providing care to the beneficiaries covered by the Pioneer model increased by 0.3 percent for the year, compared to the 0.8 percent increase in cost seen for similar Medicare beneficiaries that were not covered by the Pioneer model. Thirteen of the organizations produced enough savings to share in savings totaling $87.6 million, two had shared loses totaling around $4 million, and the remaining seventeen organizations neither produced enough savings nor enough loses to receive a bonus or a penalty. All 32 organizations that participated in the Pioneer model outperformed traditional fee-for-service Medicare in fifteen quality measures.

Despite the Pioneer model’s success, nine of the 32 participants will be leaving the program after the first year. With that said, seven of the participants will be instead participating in the Medicare Shared Savings Program, which is a different ACO model that puts providers in a position with less risk of losing money compared to the Pioneer model.

Private entities are also starting to show interest in utilizing the ACO model. Intel recently announced that it has engaged in an agreement with Presbyterian Healthcare Services (“Presbyterian”) to administer a narrow-network ACO model. For the 5,400 employees that will be covered by the agreement between Intel and Presbyterian, Intel elected to forge a relationship directly with the ACO provider instead of utilizing a national health insurance company as a middle-man. Somewhat ironically, Presbyterian was one of the two participants that dropped out of the Pioneer Program and that did not elect to participate in the Medicare Shared Savings Program. Because of the organizations history, Presbyterian’s continued commitment to experimentation with the ACO model may be a good indicator of the ACO model’s continued viability.

Additional information and a short video on ACOs provided by CMS can be found here.


About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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