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Shared Savings Program for Accountable Care Organizations: A Bridge to Nowhere?
Robert A. Berenson, MD
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Shared Savings Program for Accountable Care Organizations: A Bridge to Nowhere?

Robert A. Berenson, MD

The Shared Savings Program design is at risk of not providing a sufficiently strong business case to convince provider organizations to change their practice cultures.

Accountable care organizations (ACOs) have emerged over the past 2 years as the newest big thing in healthcare. Hospitals, physician organizations, community health centers, and lots of other organizations are holding strategic planning meetings to figure out how to get some of the ACO action that the Patient Protection and Affordable Care Act promises.

The specific provisions of the Affordable Care Act that people are excited about are Sections 3022 and 10307, which delineate a Medicare Shared Savings Program and include the broad requirements for organizations that as ACOs would be eligible for participation under the new payment approach. As a program, rather than a pilot or demonstration, any entity that meets the eligibility criteria gets to participate. And because it is a program, the Centers for Medicare & Medicaid Services (CMS) will issue program regulations rather than a request for proposals, with proposed regulations expected to be issued by year-end.

The impetus for establishment of ACOs, which are charged with holding down spending while meeting quality criteria, comes from the growing pressure of escalating healthcare costs on public and private insurers combined with evidence that at least some of this spending appears to not improve either quality of care or patients’ experience with care. Although experts dispute the exact amount of wasted spending, it is generally thought to be substantial.1-4

Even a small reduction in the excessive spending—more precisely, a small reduction in the rate of increase in healthcare spending—on the order of about 2 percentage points in real, per capita growth per year would essentially forestall the need for possibly more arbitrary approaches to cost containment and the specter of actual rationing of care. Accountable care  organizations are thought by many to hold great promise for cost containment because, unlike the “regulatory” approaches used by many managed care plans, the ACO approach would give responsibility for containing costs to clinicians, who can better target waste and inefficiency if motivated to do so, rather than distant third-party public and private payers.

Further, ACOs offer the promise of decreasing the fragmentation of healthcare delivery by bringing under one virtual roof the various medical specialists and other health professionals and institutions that need to coordinate care for the growing number  of patients with multiple chronic conditions. In one recent accounting, half of Medicare beneficiarieshad 5 or more chronic conditions and were responsible for 76% of Medicare spending in 2006.5 A Medicare patient with 5 or more chronic conditions averages 37 physician visits, sees 14 different physicians, and fills 50 prescriptions a year.6,7 Patients with multiple chronic conditions often receive suboptimal care despite the fact that individual clinicians may be practicing according to their own professional standards.

In theory, the ACO would address the fragmented care that too often results from competent clinicians practicing in silos, producing different diagnoses and treatment plans, prescribing incompatible medications, and delivering redundant, costly care. Although a lot of current activity is focused on the addition of promising chronic care coordination and management programs to current healthcare delivery, the ACO—again, in theory—would take practice redesign to a broader level, producing a different business model for success and an altered culture to achieve that success with active involvement of all clinicians and other professionals across the spectrum of care that patients receive.

In practice, numerous provider organizations appear to be well positioned to meet the expectations one would have for ACOs. These include very successful physician-led, multispecialty group practices, such as Scott and White Healthcare in central Texas and Group Health of Puget Sound in Seattle; physician–hospital organizations such as Advocate Health in Chicago; hospitals with employed medical staff such as Virginia Mason in Seattle and Carilion Health System in Virginia; and independent practice associations (IPAs) and management services organizations such as Monarch Health Care in southern California and Physician Health Partners in Denver. Some already own their own health plans and can participate in Medicare through the Medicare Advantage (MA) program.

A real-world model for developing ACOs is “delegated-capitation,” which is being used by health maintenance organizations (HMOs) in much of California and some other markets where medical groups and IPAs (generally without the organizational  inclusion of hospitals) are functioning and, subsequent to a market shakeout in the 1990s, are now doing pretty well.8 In fact, the ACO idea is not really new; in the 1990s, these organizations were labeled provider-sponsored organizations (PSOs), and there were great hopes for them to enter traditional Medicare. Indeed, the Balanced Budget Act of 1997 established the opportunity for direct contracting between Medicare and PSOs, without having a health plan intermediary.

The fact that only a couple of PSOs have participated in what is now called the MA program should offer caution about the prospects for ACOs.9 It appears that organizations capable of meeting the program criteria for risk-taking under MA rules chose either to obtain insurance licenses themselves to become full-fledged MA plans or to contract with insurance companies to serve Medicare patients. The latter activity has been spurred on in recent years by the substantial extra payments MA plans have received since 2004.10 Indeed, many would-be ACOs, such as Geisinger Health System and Kaiser Permanente, already participate in Medicare with their own MA plans. Given this experience, 2 questions need to be asked. First, why would the opportunity to become an ACO produce a different provider response than PSOs did? Second, which kinds of organizations would choose to participate in Medicare under the Shared Savings Program as ACOs?


Proponents of the shared savings approach for ACOs believe that an incremental, nonthreatening program design is the best way to gain initial participation by diverse provider systems across the country and to nudge them in the desired direction of change, with the possibility of strengthening the program design over time to more fundamentally change the business model and culture of the ACOs. Consistent with this notion of a glide path to transformation of healthcare delivery systems, some have suggested a tiered approach that over time would implement different design features, including the use of financial risk, in ACOs based on the extent of their organizational integration and capabilities.11

Unlike the PSO program, the shared savings design does offer the possibility of broad participation. However, if CMS is not careful, broad participation will likely happen because the members that make up the ACOs will not actually have to change the way they deliver care. Unless CMS chooses to put some teeth into the program through reasonably demanding eligibility criteria, the Shared Savings Program expects relatively little of ACOs.

The basic statutory requirements of the program are that ACOs need to have the capacity to deliver or arrange for the continuum of care for those patients assigned to it, to have a sufficient number of primary care professionals to provide services to at least 5000 beneficiaries (achievable by as few as about 10 primary care physicians with typical practices), and to report data on cost, quality, and overall patient experience for beneficiaries in traditional Medicare.12 Although Sections 3022 and 10307 give the Secretary discretion in using additional payment approaches, they specify in detail a shared savings payment approach whereby groups would be paid their usual Medicare fee-for-service reimbursements, with no penalties at all for higher spending, and could share in savings if the group provides care to assigned beneficiaries for less than a Medicare benchmark spending target, while passing readily achievable thresholds for patient service and quality of care.13

Under the legislated approach, there can be no limitation on patient choice of provider at the point of service, in contrast to the lock-in approach that many MA plans adopt. It is even possible that the Secretary could assign beneficiaries “invisibly” (without their knowledge) to an ACO on the basis of concurrent fee-for-service claims that indicate where they receive the preponderance of their primary care services, as was done in the Medicare Physician Group Practice (PGP) demonstration (discussed below). Under such an approach, it is possible that the ACO wouldn’t know which of its patients qualify it for shared savings payments.

To set the spending target, the ACO’s 3-year spending history for the beneficiaries assigned to it would be compared with a spending target that trends the historical spending forward by the projected increase in spending in Medicare Parts A and B nationally. If actual spending ends up being less than the projected spending by a certain percentage (eg, 2% in the PGP demonstration), the ACO would split the savings with Medicare (eg, 80%-20% in the PGP demonstration). The threshold and the percentage shares for the parties will be determined by CMS in forthcoming regulations.

The problem with this approach is there are no downside penalties for missing the spending targets. Given the reliance on fee-for-service, it is hard to see how a speculative bonus attained in the future would counter the direct fee-for-service rewards for providing more reimbursable services, especially for hospital-sponsored ACOs. The ACO might engage in some targeted programs to address a particular care area, but not engage in a broader approach to change the “more is better” culture that is pervasive under fee-for-service.

A further problem is that the ACO’s historic spending pattern for its assigned patients, “risk-adjusted” for health status, is used  as the base spending amount the ACO is workingwith. Therefore, previous practice inefficiency is baked into the calculations. Indeed, prospective ACOs even have an incentive to spend more before onset of the program to build up their 3-year historical  spending base. It is no wonder that some have described the anticipated ACO program as the “lottery.” Why not take a chance on sharing in savings that might occur for reasons having little to do with new organizational efforts to alter care delivery (eg, experiencing a season without influenza)?


As referred to above, the model for the ACO program, including invisible, claims-based assignment and shared savings with no risk payment approach, has been tested in the PGP demonstration project that began in 2005. In the demonstration, 10 group practices (with 1 practice actually functioning like an IPA, and most with strong hospital affiliations or ownership) were permitted to receive bonus payments if they passed quality-of-care thresholds and achieved savings on Part A and B Medicare spending compared with spending for a matched control group cared for by others in the same geographic area.

Copyright AJMC 2006-2017 Clinical Care Targeted Communications Group, LLC. All Rights Reserved.
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