Relying on ACOs and TCOC Contracting to 'Bend the Cost Curve'

Published Online: December 12, 2013
Jon Christianson, PhD
There is no question that the number of accountable care organizations (ACOs) in Medicare and total cost of care contracts (TCOCs) in the private sector is growing, along with the amount of care provided under these contracts.1 Common characteristicsof  both types of contracts are that a provider group agrees to care for an attributed population of patients under a fixed budget, with the  potential to benefit financially through “shared savings” and by meeting quality goals.2 The hope is that paying providers in this   way will improve quality of care and population health, promote efficiency in care delivery, and ultimately “bend the cost curve.”3 While all these are commendable goals, the greatest emphasis appears to be on the potential for ACOs and TCOCs to reduce the rate of growth in per capita healthcare costs, without negatively affecting quality.

In some ways, we have been down this path before. In the 1980s, when capitated contracts first came into vogue, it was argued that health plan contracts that transferred financial risk to providers would curtail provision of unnecessary services, ultimately reducing costs to payers or at least the rate of growth in their costs. There were concerns that changes in provider behavior under capitated  contracts could harm quality of care, but many health plans attempted to guard against this possibility by placing quality-related bonuses in contracts, specifying upper bounds on provider gains and losses, and analyzing claims data to detect trends that might indicate inappropriate care.4 What is different now? One important difference is that consumers do not enroll in ACOs or with provider groups being paid under TCOC contracts. Instead they are attributed to these entities based on their past history of service use and can continue to seek care from the providers of their choice. Presumably this will alleviate consumer concerns about health plan influence on provider decisions. At the same time, better data and quality measures combined with greater provider performance transparency will make it easier for health plans and consumers to identify providers who deliver poor quality care and will shame providers into improving their performance. It is clearly too early to tell if ACOs and TCOCs will improve provider efficiency without also reducing quality, although early findings from analyses of a TCOC contract between the Blue Cross and Blue Shield of Massachusetts and providers in that state certainly are promising.5

To date, most of the analytic attention being given to ACO and TCOC contract designs has focused on how best to encourage providers to become more efficient. This attention is certainly warranted, as there are many “moving parts” that must be in sync if contract goals are to be achieved. For instance, if attribution algorithms inappropriately assign patients to providers, incentives for efficiency are attenuated. The same is true if methods used to “risk adjust” attributed populations of patients are not adequate to avoid penalizing providers who care for sicker patients. And, there has been great debate in the design of Medicare ACOs regarding risk-sharing specifications. These decisions are complicated by the fact that provider groups vary in their experience in managing panels of patients and assuming financial risk. For instance, under private sector TCOC contracts some larger provider groups with experience managing financial risk do not see the need for “shared gain/shared loss” provisions. Instead, they prefer to adjust their degree of risk exposure through the purchase of reinsurance.

How these issues relating to contract design are resolved will have important impacts on the ability of ACO and TCOC contracting approaches to reach their goals. However, an issue that could prove more important, but has received less attention, is the setting of  global budgets initially and their subsequent adjustment over time. Here it is important to distinguish between costs to providers  and costs to payers. The incentives that these contracts create for providers could lead to reductions in their costs of providing care. Under typical ACO or TCOC contracts, payers can capture at least a portion of the provider cost savings (should they occur) through a combination of shared savings as specified in yearly contracts, but also—and likely more important and controversial—through adjustment of budget targets over time. There are technical aspects to the setting of budgets, of course, but for ACO contracts political clout also will play a role, and for TCOC contracts market leverage will come into play. In both cases, experience suggests that, even if efficiencies are obtained without harming quality, a favorable impact on longrun cost trends for payers and, ultimately, consumers is far from certain.

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Issue: December 2013
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