Questions remain how and if ACOs will function

The Health Care and Education Reconciliation Act of 2010 introduced the broad application of a new conceptual acronym – ACO. It will take the rest of this decade before enough dust settles for participating physicians to know exactly what accountable care organizations (ACOs) mean for them and if they will work. It will require time to see if ACOs improve health care as promised and also reduce overall costs.

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The term ACO has been used widely in health care and political circles since 2006. It is interesting to witness the stampede that followed its introduction as many physicians, hospitals and insurance companies embraced this new unproven form of managed care. It is reminiscent to the unquestioning manner initially seen for new HMOs in the late 1970s. Today, just as it was then, many physicians, hospitals and insurance companies are afraid they will be left out and are forming new organizations in their own markets – some making it part of their strategy to maintain and even increase their market share.

According to the ACO final rules published in the Federal Register in November 2011, the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary predicted that between 50 and 270 group practices will participate in ACOs and serve between 1 million and 5 million Medicare beneficiaries. The actuary estimates the group practices will save CMS $470 million for 2012 through 2015 from the implementation of the Shared Savings Program. The actuary estimates a total aggregate median impact of $1.31 billion in bonus payments to participating ACOs in the Shared Savings Program for 2012 through 2015.

What will it take?

Becoming an ACO requires a network of physicians and hospitals to go at-risk and share the responsibility of providing care to a patient population. In the Health Care and Education Reconciliation Act of 2010, an ACO must agree to manage the health care needs of a minimum of 5,000 Medicare beneficiaries for at least 3 years. As new regulations have been released, many physicians believe this form of managed care involving 5,000 to 20,000 patients may not be large enough to balance negative selection factors because subpopulations have unique health problems that involve varying degrees of care.

Douglas W. Jackson,

To do well financially in an ACO, one would select a healthy population as the healthiest half of our population accounts for 3% of health care costs. Likewise, if an ACO involved the 5% of the population who generate 47% of all health care costs, then the outcome will be different. A small population sampling may be overpowered even with the best of intentions and physicians. The way ACOs will achieve savings for the Medicare program will be to reduce the number of hospitalizations and, most likely, reduce the incomes of specialists. The new incentives for hospitals and specialists are designed to change to a system that no longer rewards with income tied to doing more.

Increased government oversight

A number of federal agencies oversee, audit and regulate ACOs, and all the issues needed to participate in a Medicare Profit Sharing Program. The same groups oversee private practice methodologies of profit-sharing and ownership of ancillary services. These include:

• CMS, which formalized the rules for profit sharing in ACOs and will control reimbursement;
• the Secretary of Health and Human Services who established a new medical board that will decide which treatments and services will be reimbursed;
• the Office of Inspector General who will oversee how federal law will be applied to the physician self-referral law and the anti-kickback statutes with the Shared Savings Program;
• the Federal Trade Commission and the Department of Justice who will define the antitrust implications of ACOs; and
• the Internal Revenue Service who will determine the tax-exempt status and be a large force to ensure that all Americans have the defined level of health care coverage.

A perfect storm

It appears that ACOs will give more power to hospital administrators and insurance companies, which will be a disadvantage to physicians. Hospitals and insurance companies are aggressively hiring salary-based physicians. The push to make physicians employees is coming at the same time when the most younger physicians do not want to be in private practice. Many of the graduating physicians want a guaranteed salary, defined hours and job security without the financial risks of starting a practice. The hospitals and insurance companies present themselves under the banner of an ACO, saying they will not only pay a salary but also share profits under the new system. The ACO contracts imply that physicians will be paid as providers for “appropriate services” and rewarded for not doing unnecessary tests.

The underlying premise of ACOs is that physicians, clinics and hospitals will work together in groups with the common goal of trimming spending and improving the quality of care. How the savings will be defined year-to-year has not been fully described. It will be formulated by crunching the projected costs from historical patient data. It appears going forward there will be continued pressures to reduce Medicare reimbursements and there are no assurances that these newly formed ACOs will survive.

The ACO models have not been tested over broad-based applications. There are examples of currently functioning organizations being held up to support the ACO concepts. However, if one looks closely at these ideal institutions, most have evolved over several decades and have large enough patient populations to reduce the financial risks. Many of the institutions have a history of partially or totally functioning in a capitated environment.

From 2005 and 2010, CMS field tested the ACO model with selected large group physician practices. Medicare promised to share a portion of the savings if the practices could reduce their spending below a baseline rate. The selected physician groups had mixed results with their savings, and it has been suggested that the more successful practices used aggressive coding for the more severe illnesses in their populations. A few practices made profits for each year of the project. It would seem desirable to widely circulate the actual results of those pilot studies. As many hospitals already lose money on Medicare, the question remains how they will save their shrinking bottom lines.

The race to form ACOs

Despite the limited available data on the actual risks, the race to form new ACOs has started. CMS has started receiving applications – a number that far exceeded expectations – for the ACO Shared Savings Program in January, and the first ACOs are expected to launch in the next month. Hospitals, physician practices and insurers across the United States have and are making plans to form ACOs not only for Medicare beneficiaries, but also for patients with private insurance. Some groups have already started calling themselves ACOs.

ACOs will have their physicians salaried with savings incentives and bonuses if the providers reduce costs. Physicians will be paid in some manner based on a measurement of their effectiveness and better patient outcomes. Physicians and hospitals will have to meet specific quality benchmarks, focusing on prevention and careful management of patients with chronic diseases. In other words, providers will get paid more for keeping their patients healthy and out of the hospital. Profits will be also achieved with rationing as the main mean for costs savings. If ACOs do not improve care, then is it the HMO scenario again? It appears specialists, including orthopedic surgeons, will be paid much less as perceived “overutilization” is brought under control. When most physicians become employees, it is ironic that they will most likely need union representation or a collective bargaining mechanism to maintain their levels of compensation.

Is it worth it?

As the Obama administration continues to release the proposed rules for qualifying as an ACO, some initial enthusiasm has waned. Hospital and physicians groups more clearly understand the financial risks. According to the final rule, the aggregate costs associated with the start-up investment of ACOs participating in the Shared Savings Program will range from $29 million to $157 million. Ongoing annual operating costs for the participating ACOs are also estimated to range from $63 million to $342 million.

For many of the larger ACO organizations, it will be years before they recover the initial start-up investments in their electronic medical records system, quality measurements and improvements in patient care. Smaller ACOs may have difficulty recovering start-up costs and weathering negative revenues during the start-up period. Many new organizations will find it challenging to achieve both cost-savings and participate in shared savings during the first few years and before seeing any financial benefits. As with any government program, one can expect there will be burdensome and increased reporting requirements.

ACOs will start as we see more Americans retire and the costs of the Medicare program soar. Any savings from ACOs will not remotely reduce the impact on our financial deficit. The projected 3-year savings from ACOs is from $470 million to the most optimistic projection of $1.1 billion. This is to be compared to the projected 3-year Medicare spending of $1.8 trillion for 2012 to 2014, according to the CMS Actuary. The savings from ACOs, if they do occur, do not even touch our deficit spending problems.

References:

• Department of Health & Human Services. Medicare Program; Medicare Shared Savings Program: Accountable Care Organizations. Federal Register. Nov. 2, 2011. Vol. 76, No. 212. www.gpo.gov/fdsys/pkg/FR-2011-11-02/pdf/2011-27461.pdf. Accessed Feb. 17, 2012.

• Douglas W. Jackson, MD, is the Chief Medical Editor of Orthopedics Today. He can be reached at Orthopedics Today, 6900 Grove Rd., Thorofare, NJ 08086; email: OT@slackinc.com.