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Hospital Participation in ACOs Associated With Other Value-Based Program Improvement
David Muhlestein, PhD, JD; Tianna Tu, BA; Katelyn de Lisle, BS; and Thomas Merrill, BA
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Hospital Participation in ACOs Associated With Other Value-Based Program Improvement

David Muhlestein, PhD, JD; Tianna Tu, BA; Katelyn de Lisle, BS; and Thomas Merrill, BA
Analyzes whether hospital participation in accountable care organizations is associated with a hospitalís quality and cost improvement outcomes in other Medicare value-based payment programs.


Objectives: This paper analyzes whether hospital participation in an accountable care organization (ACO) impacts a hospital’s quality improvement and cost reduction outcomes in other value-based purchasing (VBP) programs, including the Hospital Value-Based Purchasing Program (HVBP), the Hospital Readmissions Reduction Program (HRRP), and the Hospital-Acquired Conditions (HAC) Reduction Program.

Study Design: Using VBP performance data and Leavitt Partners’ ACO data, 2 analyses were performed: 1) a descriptive comparison of VBP performance of hospital ACOs compared with non-ACO hospitals, and 2) a longitudinal analysis of hospitals that became part of an ACO during the second year of performance data.

Methods: In the descriptive analysis, we compared VBP scores for hospital ACOs with non-ACO hospitals. To estimate the effect that becoming an ACO had on a hospital, we evaluated the performance of hospitals that became part of an ACO to all hospitals that never became part of an ACO.

Results: For fiscal year 2016, hospital ACOs performed better than non-ACO hospitals for the HRRP, but not on the HVBP and the HAC Reduction Programs. Longitudinal analysis, however, reveals that results are varied, with evidence that hospitals joining ACOs did increasingly better than their peers for the HRRP, but had inconsistent results year-over-year with the HVBP.

Conclusions: Despite similar goals, hospital participation in an ACO is not correlated with improved performance in all Medicare VBP programs. Organizations pursuing accountable care and also attempting to maximize Medicare VBP program performance must recognize the differences in program objectives and create strategies unique to each.

Am J Manag Care. 2016;22(7):e241-e248

Take-Away Points
Critiquing the effectiveness and overlap of value-based purchasing (VBP) programs is essential for shaping health reform. This paper analyzes whether hospital participation in an accountable care organization (ACO) impacts a hospital’s quality and cost improvement outcomes in other Medicare VBP programs. The following learnings can influence practice and policy decisions: 
  • Despite similar goals, variation exists in hospital ACO participation and VBP program outcomes. Organizations must build strategies unique to the differing program objectives. 
  • High ACO hospital readmissions reduction scores may signify that ACO-participating hospitals will focus priorities on measures that overlap between programs. 
  • Scoring methodology changes may contribute to lack of correlation between program performance.
Since the passage of the Affordable Care Act (ACA), CMS has undertaken several initiatives to encourage providers to assume more financial and clinical responsibility for the care of the Medicare patients they serve. Although different in implementation, many of these initiatives overlap in terms of desired outcomes. Broadly speaking, accountable care organizations (ACOs) and value-based purchasing (VBP) programs seek to drive healthcare quality improvements and cost reductions. This paper analyzes whether hospital participation in an ACO program, Medicare, or otherwise correlates with a hospital’s outcomes in CMS-implemented value-based payment programs, including the Hospital Value-Based Purchasing Program (HVBP), the Hospital Readmissions Reductions Program (HRRP), and the Hospital-Acquired Conditions (HAC) Reduction Program.

Accountable Care Organizations

ACOs are provider-led healthcare entities that bear responsibility for the financial and clinical outcomes of a patient population by coordinating care across providers.1 Although all ACOs strive to reduce costs and improve outcomes, the market is varied in terms of ACO organizational structure, ownership, and patient focus.2 ACOs are generally led by hospital providers, physician groups, or a combination of the two that seek to improve the care they provide, whether it is inpatient, outpatient, or both. Within the ACO model, provider behavior change and delivery reform is promoted through financial responsibility. Organizations and insurers enter into a contractual or risk-based agreement that is associated with the financial and clinical outcomes of a defined population; thus, accountable care entities are often classified by the payers with whom they share financial responsibility. Although patients are attributed to an ACO via their primary care physician, the risk-bearing entity is typically the hospital or provider group. As of January 2016, there were 838 ACOs, many of which have accountable care contracts with both public and private payers.2 There are 1217 total ACO-payer contracts: 32% of are commercial contracts, 51% are government, and 17% are government and commercial.2

Medicare ACO Activity

The ACO model was first legislatively encouraged within the Medicare program through the ACA, and Medicare ACOs make up a significant portion of the ACO market.3 Medicare ACOs are created by attributing patients—based on actual utilization of primary care services—to ACO organizations that will include the spectrum of healthcare providers, including physicians and hospitals. The current Medicare accountable care models are the Pioneer ACO program, which commenced in January 2012, and the Medicare Shared Savings Program (MSSP), which began in April 2012; a third program, the Next Generation ACO model, began in 2016.

Commercial and Medicaid ACO Activity

Commercial payers and their provider partners have also formed commercial variations of the ACO model, including commercially developed quality measures.4 To date, the level of commercial ACO activity is greater than both of the federal programs combined, measured in either individual contracts or total covered lives.5 State-level ACO dynamics are also becoming increasingly prevalent, as Medicaid agencies struggle to find politically feasible ways to control the costs of their expanding healthcare assistance programs. Several states have adopted Medicaid versions of the ACO model, with many more either running pilot programs or actively exploring legislation that would enable accountable care initiatives.6 

ACO Payment Models

The amount of financial risk absorbed by an ACO varies from incentive payments to upside-only bonus arrangements, and to upside- and downside contracts and full capitation. The 2 most common models are either a shared savings—including upside- and double-sided arrangements—or partial or full capitation.7 In shared savings, ACOs that spend below project costs share in a portion of earned savings; if also sharing in risk, ACOs pay a penalty for spending above projections.1 Most Medicare ACOs to date are in an upside-only shared savings model. However, some Pioneer and Next Generation ACOs have assumed more comprehensive financial responsibility in models that enable capitation, where organizations bear greater degrees of upside- and downside risk for spending compared with a negotiated rate. The private market reflects the most diversity among payment models.

Hospital Value-Based Purchasing Programs in Medicare

Similar to ACOs, providers participating in VBP programs have financial incentives that are linked to provider performance on specific care measures. Depending on a provider’s success in meeting pre-established quality and efficiency targets, they are either rewarded bonuses or penalized through reduced Medicare reimbursements. Although VBP initiatives vary across health settings, this analysis focuses on 3 hospital-based VBP strategies, which are summarized below.

In contrast to the optional ACO program, as authorized by the ACA, participation in Medicare VBP programs is mandatory for all eligible hospitals that accept Medicare payments.8 Participation is based on providing acute care and primarily includes short-term acute care hospitals and critical access hospitals, although some specialty hospitals are also included; federal Veteran’s Administration and Department of Defense hospitals are not. For each program, CMS adjusts the reimbursement rate for all services at a hospital. For example, doing poorly on readmission reductions could result in a hospital receiving only 99% of total eligible Medicare payments for all inpatient services provided to all Medicare beneficiaries. Thus, VBP program penalties represent a significant government effort to improve care quality. A summary of VBP penalties and metrics for each payment year is included in Table 1.

Hospital Value-Based Purchasing Program

Under the HVBP, CMS provides incentive payments to hospitals for the quality of care they provide to Medicare patients. Quality is rewarded by how closely best clinical practices are followed and how well the hospital enhances a patient’s hospital stay experience.9 The program applies to payments on or after October 1, 2012, and affects payment for inpatient stays in 2985 hospitals across the United States.10

Medicare provides quality incentive payments based on one of 2 available methods—either how well the hospital performs on each measure relative to the national average (achievement), or how much the hospital improves performance on each measure compared with their baseline (improvement).10 To assess total performance, CMS compares both a hospital’s achievement and improvement scores for each applicable HVBP measure and assigns final scores based on the higher of the two. Scores are then aggregated to create a composite score, from which incentive payments are determined.10 Hospitals are either penalized for poor performance or receive bonus payments for good performance. The size of the HVBP incentive has increased over time, from 1% of total Medicare payments in 2013 to 1.75% in 2016 (Table 1). Payment adjustments have ranged from 0.99% to 1.01% in 2013, to 0.9825% to 1.03% in 2016.

Hospital Readmissions Reduction Program

The HRRP provides a financial incentive for hospitals to reduce preventable readmissions.11 For the HRRP, specified conditions include heart attack, heart failure, pneumonia, total hip and knee repairs, and chronic obstructive pulmonary disease conditions. Rather than employing a reward system as in the HVBP, the HRRP incentive is based on a financial penalty for excess avoidable readmissions—which is a measure of the hospital’s readmission performance compared with the risk-adjusted national average.11 This excess readmissions ratio is then multiplied by the sum of base-operating DRG payments per specified condition, from which a final penalty is calculated.

Although the original fiscal year (FY) 2013 penalty could lead to a maximum of a 1% reduction on a hospital’s Medicare Diagnosis-Related Group reimbursement, the penalty increased to 2% in FY2014 and was capped at 3% in FY2015.11 Payment adjustments are based on a percentage of total payments, meaning that adjustments ranged from 0.99 to 1.0 in FY2013 to 0.97 to 1.00 in FY2015.

Hospital-Acquired Condition Reduction Program

The HAC Reduction Program is intended to improve inpatient safety by imposing financial penalties on hospitals that perform poorly with regard to hospital-acquired conditions, which are specified through CMS rule-making each year.12,13 Hospital HAC performance is assessed based on a hospital’s total HAC score, which ranges from 1 to 10, with 10 indicating the poorest performance. Total scores are determined by a weighted average of 2 domains: 1) patient safety, and 2) healthcare-associated infections—although other measures will likely be added in the future.13 From FY2015 onward, Medicare’s acute inpatient prospective payment system (IPPS) hospitals that rank in the highest quartile of total HAC scores (score of 7 or higher) will receive a 1% DRG payment reduction for all discharges.13


Value-based purchasing data were obtained from Medicare’s acute IPPS final rule data files for FY2013 through FY2016.14-17 For the HVBP and the HRRP, 4 years of payment adjustment and performance data were available (FYs 2013, 2014, 2015, and 2016). For the HAC Reduction Program, 2 years of penalty data were available (FY2015 and FY2016). Because the amount of the potential penalties or bonus payments changed over time (1% of total payments in FY2013 to 3% beginning in 2015), to compare year-over-year performance, we normalized the penalties for each year to show trended data. After normalization, the mean of each year’s value is 0, with a standard deviation of 1.

Data on hospital participation in ACOs were obtained from the Leavitt Partners ACO database, which tracks organizations that are participating in accountable care arrangements and includes information on the hospitals participating in each arrangement and when the ACO went into effect. From this data, we were able to assign the quarter in which a hospital first became part of an ACO. Of the 3950 hospitals for which we were able to obtain any VBP data, 1566 are affiliated with or owned by an ACO in the Leavitt Partners database, and are thus considered to be a part of an ACO. We controlled for hospital characteristics based on number of beds, region, and ownership. Data were obtained through the end of November 2015.


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