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

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The American Journal of Accountable Care, December 2013, Volume 1, Issue 1

There is no question that the number of accountable care organizations in Medicare and total cost of care contracts in the private sector is growing, along with the amount of care provided under these contracts.

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.

There are 3 general approaches that can be taken in setting budgets and, perhaps more importantly, year-to-year increases in budgets. Using the language of health service researchers, the problem is finding an appropriate “comparison group.” Some argue that the ideal comparison group would yield an exact picture of what the performance of the provider group under contract would have been if it had not signed the contract. Of course, there is no such ideal comparison group, so payers are forced to settle for proxies. In practice, there are 2 options. First, payers can set initial budgets (payments) based on a similar group of providers, tracking the performance of this group over time and adjusting budgets of contracting groups based on the rate of change in the comparison group. Because comparison groups are never perfect, some risk adjustment is required. This is essentially the approach that Medicare took in the early days of the current Medicare Advantage program, using performance in fee-for-service Medicare to set rates and make rate adjustments for contracting health plans, and in its “physician group practice demonstration.”6 There are all sorts of drawbacks to this approach, including continual disputes over the choice of the comparison group (eg, with Medicare health plans, should the fee-for-service comparison group be drawn from the same county, the same region, or nationally?), and the fact that the comparison group, and the environment in which it operates, can change in ways that make its use less defensible over time. In some cases,the comparison group can simply disappear. For example, when some Medicaid programs began contracting with health plans on an experimental basis to serve beneficiaries, they used the experience of Medicaid beneficiaries not in these plans to guide changes in contract rates. However, as they enrolled more beneficiaries in plans, the number in comparison groups shrunk. Beneficiaries in these groups became less representative of the beneficiary population in Medicaid health plans and, in some cases, too small for reliable estimates. Some health plans have used external comparison groups to inform the setting of budgets in their private TCOC contracts, but their exact methods are not clear.7

The second approach, a version of which was adopted in CMS’ ACO program, is to use patients served by the provider group under contract to set the budget.8 In a sense, the group is its own comparison. Historical provider expenditures for the group of patients are calculated; 2 or more years generally are included, with more weight typically given to more recent years. This historical yearly expense then is trended forward to the contract year. The choice of the trend rate is critical,9 and it is typical to choose a trend rate that is tied to an externally calculated number, such as regional healthcare expenditures, or the trend in expenditures for health plan or public program participants not covered by the contract. Usually, in the private sector, the trend rate is negotiated as part of the contract, as it can incorporate the mutually agreed upon goals of payers and providers. As such, it has an aspirational element, while also reflecting the relative negotiating leverage of the parties involved.

A third approach relies on payers to create incentives that encourage providers to “reveal” the dollar amount that they think is adequate to provide necessary care to an attributed population. his typically has involved some sort of competitive bidding process. Medicare currently uses this approach in setting rates for medical equipment and supplies and, in the past, used its demonstration authority to test competitive bidding to set payment rates for contracting health plans.10 Medicaid programs also have used competitive bidding approaches to set rates when contracting with health plans.


Unfortunately, experience with all 3 of these approaches is not promising with respect to the ability of ACOs and TCOC contracts to “bend the cost curve” for payers in the long run. In the public sector, the decisions about process will be complicated, they are unlikely to be made under the media spotlight, and their ultimate impact on costs over time will be difficult to establish. Much will be at stake for providers, who will push hard to see that their interests are served. The government’s desire to have a “successful” program—defined year to year by retaining or increasing participants—will make it responsive to provider concerns. This is the classic “regulatory capture” scenario, which has been overused in the past, but still has some merit. Matters can be further complicated when legislators intervene to alter payments in response to provider pressure, as has been the case with passage of legislation aimed at “correcting” perceived “geographic inequities” in Medicare provider payments and Medicare Advantage payments.

With respect to private sector TCOC contracts, initial benchmarks and their rate of increase will be settled through negotiation. However, many recent studies have concluded that the leverage in payment negotiations now favors providers, because the provider market has become increasingly consolidated at the community level, and employers have resisted offering health plans with networks that exclude key provider organizations.11 There is no reason to believe this dynamic will be altered by changing the way in which providers are paid. In fact, concern has been expressed that ACOs and TCOC contracts will encourage further provider consolidation.12 As the Massachusetts attorney general has observed, “A shift of payment methodology is not the panacea to controlling costs.”13

Competitive bidding models administered by government also seem problematic as a means of setting budgets simply because government has had difficulty implementing them effectively in the past. Providers typically resist this approach, citing concerns about the impact on quality of care that could result from acceptance of bids that are “too low” and, in all likelihood, believing that they will fare better in a regulatory process. On the other hand, program administrators worry that competitive bidding processes will result in rates that are “too high” and therefore use bids to establish starting points for a negotiated rate-setting process. This strategy raises questions about the usefulness of the information contained in the initial bids, specifically whether these bids actually reflect provider estimates of the true cost of delivering care.

Despite this pessimistic assessment of the potential for ACOs and TCOCs to modify increases in payer costs in the long run, there are 2 recent developments that bear watching. McClellan and Fisher12 observe that “It is…important to keep in mind that ACOs are not managed care insurers” but that does not mean that they will not offer insurance products. In fact, some provider organizations with ACO and/or TCOC contracts now are positioning themselves as “narrow-network” options in private health insurance exchanges or within Medicare Advantage plans. In these contexts, they compete directly for “enrollees” rather than having patients attributed to them. If this generates effective price competition for patients among ACOs and TCOC contractors and other plan options, then ACO and TCOC contracting may well contribute, albeit inadvertently, to “bending the cost curve” over time.Author Affiliation: From Division of Policy and Management, School of Public Health, University of Minnesota.

Author Disclosure: The author reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject

of this article.

Address correspondence to: Jon Christianson, PhD, Division of Policy and Management, School of Public Health, University of Minnesota, Box 729, Minneapolis, MN 55455. E-mail: Peterson M, Muhlestein D, Gardner P. Growth and dispersion of accountable care organizations: August 2013 Update. Salt Lake City, UT: Leavitt Partners, Center for Accountable Care Intelligence; 2013.

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7. Bailit Health Purchasing LLC. Shared-savings payment arrangements in health care: 6 case studies. New York, NY: The Commonwealth Fund; New 2012.

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9. Lieberman S. Proposed CMS regulation kills ACOs softly. Health Aff blog. kills-acos-softly/. Posted April 6, 2011. Ac cessed April 7, 2011.

10. Dowd B, Coulam R, Feldman R. A tale of four cities: Medicare reform and competitive pricing. Health Aff (Millwood). 2000;19(5):9-29.

11. Berenson RA, Ginsburg PB, Christianson JB, Yee T. The growing power of some providers to win steep payment increases from insurers suggests policy remedies may be needed. Health Aff (Millwood). 2012;31(5):973-981.

12. McClellan M, Fisher E. Accountable care organizations: a framework for evaluating proposed rules. Health Aff blog. accountable-care-organizations-a-framework-for-evaluating-proposed-rules/.Published March 31, 2011. Accessed June 3, 2011.

13. Mechanic RE, Santos P, Landon BE, Chernew ME. Medical group responses to global payment: early lessons from the ‘alternative quality contract’ in Massachusetts. Health Aff (Millwood). 2011;30(9):1734-1742.