ACO Cost Reduction: First Year a Pipe Dream?

ACO Cost Reduction: First Year a Pipe Dream?

Guest post by Ken Perez, healthcare policy and IT consultant.

When he was leaving his post as the head of the Centers for Medicare and Medicaid Services, Dr. Donald M. Berwick famously said that 20 percent to 30 percent of healthcare spending is waste that yields no benefit to patients.

Given that large amount of waste, surely then, one would have thought that almost all of the original 32 Pioneer ACOs—many of which are generally considered the most sophisticated healthcare organizations in the nation—should have been able to shave a few percentage points off their costs during their first year in the program and therefore, meet or beat their expenditure benchmarks.

As we know from a July 16 press release from CMS, that was not what happened. While all of the Pioneer ACOs successfully reported the required quality measures, a majority—60 percent failed to produce shared savings, missing their cost-reduction (or more accurately, cost curve bending) targets. Moreover, two of the pioneers incurred sufficiently large losses requiring penalty payments to CMS.

Because CMS’s complicated process for establishing expenditure benchmarks incorporates the last three years of per-beneficiary costs for each ACO’s population, one could contend that heretofore high-performing provider organizations are placed at a disadvantage, since they may find it increasingly difficult to wring out more savings—the diminishing returns phenomenon.

In that same vein, one could say that the Medicare ACO programs are skewed in favor of poor-performing organizations and/or ACOs with high-cost populations with a lot of room for improvement. For example, per the Kaiser Family Foundation, New Hampshire ranks ninth highest in both healthcare expenditures per capita and annual growth in healthcare, spending $7,830 per person in 2011. The Dartmouth-Hitchcock ACO, centered in Lebanon, New Hampshire, successfully generated $1 million in savings for CMS in the first year of the Pioneer ACO program.

Historical cost handicaps and advantages aside, is it realistic to expect ACO cost reduction will achieve their targets in the first year of the program, and if not, why is that the case?

A majority of the pioneers failed to meet their financial objectives, and this is consistent with the experience of the Physician Group Practice Demonstration (2005-10), a precursor to the current Medicare ACO programs, in which only two of 10 participating physician groups generated shared savings in the program’s first year.

Also, as shared in a presentation by Advocate Physician Partners Chief Executive Officer Lee Sacks and Chief Medical Officer Mark Shields at the AMGA 2013 Annual Conference in March, in terms of sequence of impact, the AdvocateCare ACO’s quality metrics were put in place in six months, but it took longer to impact the major levers of cost: length of stay (6-12 months), readmissions (12-24 months), admissions/1,000 (12-24 months), and ER visits/1,000 (24-36 months).

The lesson: successful cost reduction in year one is the exception, not the rule, and look for brighter days to come in year two and beyond in ACO programs. 

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