ACO Final Rule Lowers the Bar for Forming and Operating an ACO – Not sure it really matters …


CMS today released the final rule on Accountable Care Organizations (ACOs); the rule can be found here

Our review of the preliminary rule concluded ACOs, as designed, would have little effect on costs. CMS’ changes to the proposed rule are important, and lead us to at least tweak our view of ACOs

Originally, we concluded that because of the costs (in particular the requirement for a common EMR) and risks (in particular the risk of having to pay CMS for costs above the benchmark) involved in starting and operating an ACO, that only hospitals were in a position to realistically form ACOs, since other candidates (e.g. physician groups) to form and lead ACOs simply lacked the requisite systems and capital. The final rule provides for some ACOs on ‘Track 1’ to share in (albeit modest) savings but not downside risks, which eliminates – or at least dramatically mitigates – the capital requirement. And, the final rule no longer establishes EMRs as a condition of participation, which at least potentially lowers the systems (and again, capital) barrier. (However quality metrics, which can heavily affect the rate of shared savings, still argue for a common EMR). Admittedly these changes raise the odds of ACOs forming, and raise the percentage of ACOs that are likely to be formed by entities other than hospitals

That said, hospitals still should be the most motivated to form ACOs, so the effect of these revisions having opened the door to others may be quite small. Because hospitals are the single largest source of costs – and thus the single largest source of savings – in an ACO, it’s far better (from the hospital’s perspective) to be the hammer (the driver of the ACO) than the nail (the target of the ACO). And, because ACOs should tend to affect Medicare admission patterns – and by extension commercial admission patterns as well – hospitals are uniquely motivated to form ACOs in order to affect (or at least defend) higher-margin commercial admissions patterns. So in a way, the revised rule lets more players on the field, but in a manner somewhat analogous to telling your pre-teen he’s now eligible to suit up for the NFL – now being this Sunday

Our other concerns – and in fact our largest concern – remain unaddressed by the revisions. To our minds the fatal flaw in the design of ACOs is that no member wants to reduce costs by reducing her own billing; she only wants to reduce costs by decreasing the billings of others (arguably with little regard to whether the others are ACO members). This is true for the simple reason that total potential shared savings to any individual provider from not rendering a given service appear to be dramatically less than the marginal profit to that same provider of rendering the service. And with the largest source of costs (and thus potential savings – i.e. the hospital) still likely to dominate ACO formation and leadership, we don’t see large savings as a result. More ‘game theoretically’, the ACO concept, as designed and modified, describes a system whose equilibrium state of affairs will be (we believe) to defend Medicare billings and (Medicare and commercial) admissions patterns, i.e. to defend costs and market share. The defensive motives in the ACO game far outweigh any motive to generate savings – thus we believe no useful savings will be generated

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