The (Unfortunate) Irrelevance of ACOs

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Accountable Care Organizations (ACOs) are CMS-designed and sanctioned groups of Medicare providers that cooperate to produce greater quality of care, and savings in which member providers can share. Under the proposed rule there are few (risk-adjusted) savings available, and few if any reasons to cooperate. As proposed, ACOs have little investment relevance

Costs of entry are considerable (clinical systems primarily; legal and administrative infrastructure secondarily), as are risks (upside potential for shared savings is, at least after 2 years of operation, matched 1:1 by the risk of having to refund cost-over runs)

With a few notable exceptions achievable gains generally are too modest to warrant these costs and risks for primary care physician groups that might want to form an ACO – thus we expect very few ACOs will be formed and driven by primary care physicians

Hospitals are a different story; with deeper admin / systems / capital capacities hospitals are better able to bear costs of entry (and risks of over-runs). And, because physicians likely will tend to admit their commercial patients to the same hospital as their Medicare patients (i.e. to the hospital in their ACO), hospitals see spill-over benefits from forming ACOs

Thus ACOs form, and hospitals tend to control them – which means care patterns and associated costs are less likely to change. Because the marginal profit from performing a Medicare procedure is greater than the marginal shared savings from not doing a procedure, ACO providers will not try to meet savings benchmarks by reducing their own Medicare charges, but will instead seek to meet benchmarks by reducing other providers’ (including ACO members’) charges

Hospitals will not reduce their own Medicare charges – especially if they control the ACOs – but cannot effectively reduce other providers’ charges. As a result, very little has changed, other than the need for hospitals to form (and fund) ACOs in order to secure their referral networks

There is a bright spot: to participate in shared savings ACOs must meet quality targets, and these quality targets practically require ACOs to adopt a common electronic medical record (EMR) across all participants; and, the quality targets in no small way may define characteristics of (i.e. create standards for) the EMR. Thus to the extent ACOs form – even if they have little or no effect on care patterns or costs – the standardization and adoption of EMRs almost certainly will accelerate

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