Recent Performance of Medicare ACOs Does Not Indicate Universally Lower Costs or Improved Quality

 

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Lona Fowdur is a Senior Economist with EI. She specializes in Applied Industrial Organization, and has analyzed issues involving antitrust in a wide variety of industries including healthcare and energy. EI Vice President John M. Gale also has been involved in numerous health care matters.

The Centers for Medicare and Medicaid Services (CMS) recently announced the 2014 quality and financial performance results of Medicare Accountable Care Organizations (ACOs). Although performance has improved somewhat relative to 2013, overall results remain mixed. The experience with ACOs calls into question the assumption that alternatives to more formal integration arrangements like mergers and acquisitions can generate substantial cost savings with simultaneous quality improvements.

ACOs are networks of otherwise unaffiliated providers that can obtain approval from CMS to become jointly responsible for the coordinated care of an assigned Medicare patient population. Under their agreement with CMS, ACOs are eligible to participate in the Medicare Shared Savings Program (MSSP) and to receive bonuses if they generate sufficient savings and attain certain quality levels. CMS calculates the savings relative to a benchmark based on the per capita costs of care of the ACO’s assigned patient population in each of the three years preceding the ACO’s formation.

The potential to reduce costs while simultaneously improving quality can be extended to commercially insured patients via joint negotiations by the ACO participants with commercial health plans. In a 2012 joint policy statement, the Federal Trade Commission and the Department of Justice (the Agencies) determined that as long as an ACO fulfills CMS’s eligibility criteria and uses the same governance, leadership, and administrative processes to serve patients in commercial markets, the ACO will be permitted to conduct joint negotiations with private payers, subject to some antitrust restrictions. In particular, the statement defines an antitrust safety zone whereby an ACO is considered highly unlikely to raise significant competitive concerns when its share of jointly offered services is 30 percent or less in each participant’s primary service area. The relevant services include physician specialties, major diagnostic categories for inpatient services, and outpatient categories for outpatient services. To fall within the safety zone, all hospitals and outpatient-facility participants must be non-exclusive to the ACO. For ACOs that fall outside of the safety zone, the Agencies provided some guidance, including a description of the types of behavior to avoid and the process for an expedited 90-day review whereby the Agencies would evaluate the competitive impacts of the ACO under the rule of reason.

The performance of ACOs under the MSSP provides little evidence so far that ACOs consistently reduce costs while improving quality. Of the 404 ACOs in the MSSP program, only 92 (23%) earned shared savings for 2014. Although an additional 89 ACOs did reduce health care costs compared to their benchmark, they did not qualify for shared savings, as they did not meet their minimum savings thresholds. Moreover, more than half of ACOs did not realize any savings. CMS also reported that among ACOs that entered the program in 2012, only 37 percent generated shared savings, while 27 percent of those that entered in 2013 and 19 percent of those that entered in 2014 earned shared savings. Thus, while the likelihood of savings increases with time in the program, the majority of even the most experienced participants failed to generate savings.

With regard to quality, ACOs that reported in both 2013 and 2014 improved on 27 of 33 quality measures. Detailed performance data that could allow a formal evaluation of the extent of the progress made are not yet available. A 2014 study evaluating performance in the first year of participation did not find a significant correlation between improved quality and earned savings. Perhaps this is because in the first year of participation, ACOs were required only to report quality metrics, not to show improvements. The same study found that if quality benchmarks were in place, of the $296.8M in earned savings distributed for the first year, CMS would have withheld $71.1M due to the failure to meet the benchmarks. Another recent study of both Medicare and commercial ACOs found that as of the end of 2014, less than half of the ACOs had implemented the care management and care coordination activities that were being monitored, suggesting that quality improvements were still inchoate.

CMS programs that allow participants to earn a higher level of savings by taking on more risk have had only limited success. Along with the MSSP, CMS created the Pioneer program for ACOs willing to share downside risk as an initiative designed to test the effectiveness of a higher risk-reward payment model. In the first year, only 13 of the 32 Pioneer ACOs achieved shared savings. By the end of 2014, only 20 Pioneer ACOs remained in the program and only 11 of those earned shared savings while three owed losses.

Based on CMS’s initial rules, participants on Track 1 of the MSSP (with shared-savings potential, but no downside risk) would have been required to switch to Track 2 (with downside risk for realized losses) after three years of participation on Track 1. Those rules were changed earlier this year. Participants may now either remain on Track 1 or pick among several new Track 2 options that can be tailored to the risk tolerance of individual participants. CMS indicated that without the rule change, an estimated 85 percent of participants would opt out of the MSSP program. So far, only three ACOs have switched to Track 2. Since assuming more risk can increase ACOs’ share of the savings they achieve, this reluctance to assume risk suggests that most participants are not optimistic about the potential for reducing costs.

The number of beneficiaries assigned to Medicare ACOs is an indicator that the ACO framework so far has only attracted a limited number of provider groups. A 2015 CMS fact sheet reports that only 7.3 million Medicare beneficiaries, approximately 15 percent of the Medicare population, are currently assigned to an ACO in the MSSP program. If ACOs can indeed lower costs and simultaneously improve quality, more providers could be expected to form such alliances or be driven out of the market. Earlier this year, the Ninth Circuit upheld the Federal Trade Commission (FTC) challenge to an Idaho hospital’s acquisition of a physician group based on the FTC’s view that the claimed procompetitive efficiencies from the proposed acquisition could have been achieved without a full merger. At a workshop examining healthcare competition that the Agencies jointly hosted in February of this year, FTC Chairwoman Edith Ramirez reiterated this view and referred to ACOs as an alternative to mergers that could potentially lower healthcare costs and improve quality. Based on the mixed performance of ACOs so far, it is unclear how successful this framework will be at delivering these desired outcomes.