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PERSPECTIVE The ACO Model — A Three-Year Financial Loss?


The NEJM” reports on ACO in their “Health Policy and Reform” Report.

The accountable care organization (ACO) model is rather controversial among health care experts. Its proponents tout the potential savings and coordinated care that could be achieved through this model.1 Others, however, point out that the model is not without risks, such as the potential for anticompetitive effects as providers leverage it to concentrate market power.2,3

Because of the need to stem the spiraling costs of the Medicare program and the need to shift the health care system from volume-based to value-based rewards, the ACO has been put forward as a possible model for restructuring traditional Medicare coverage.4 In particular, Section 3022 of the Patient Protection and Affordable Care Act requires the Secretary of Health and Human Services (HHS) to establish the Medicare Shared Savings Program by January 1, 2012. With this rapid movement toward ACOs, one would expect that the previous government demonstration of the model would have produced promising results that warranted its rapid expansion. Our analysis of the results from the demonstration suggests otherwise.

CMS conducted the PGP Demonstration from 2005 to 2010, using a hybrid payment model that consisted of routine Medicare fee-for-service payments plus the opportunity to earn bonus payments known as shared savings. Eligibility was narrowly restricted to a select group of large physician group practices with the necessary experience, infrastructure, and financial strength (participants invested $1.7 million, on average, in the first year alone) to succeed in the demonstration. Thus, the structure of the demonstration should have resulted in a high likelihood of positive results. Yet most PGP participants did not break even on their initial investment.

The available data indicate that 8 of the 10 PGPs in the demonstration did not receive any shared savings payments in year 1. In the second year, 6 of the 10 practices did not receive such payments, and in the third year, half the participants were still not eligible for any shared savings to offset their initial investment. Given that the percentage of shared savings in the first 3 years was so low for experienced, integrated physician practices, it seems highly unlikely that newly established, independent practices would be able to average the necessary 20% return on their investment.

In addition, the participants did not receive provider- feedback reports and bonus payments in a timely manner, which may have negatively affected their ability to perform more effectively and receive greater shared savings. These limitations, however, do not significantly alter our overall findings. In fact, we were very conservative in our analysis, since we did not incorporate the operating costs for the second and third years of the demonstration. If we had included such costs, the projections would have been even worse.

The high up-front investments make the model a poor fit for most physician group practices; the time frame in which one can expect a reasonable return on the initial investment is more than 5 years; and even the majority of large, experienced, integrated physician group practices could not recover their initial investment within the first 3 years. Absent changes to the design of the ACO model, the analysis suggests that before agreeing to become part of an ACO, physician group practices must conduct due diligence and explore participation in viable alternatives such as other initiatives involving bundled payments for episodes of care.


For policymakers, the urge to do something must be tempered by the risk of disrupting the entire value-based–purchasing movement. We are concerned that physicians and providers may unwittingly undermine future value-based–purchasing efforts if the ACO model fails to live up to the high expectations that do not comport with the data. Our analysis suggests that there are options for addressing the design weaknesses of the ACO model. One is for CMS to limit participation in the Medicare Shared Savings Program to a narrow group of provider organizations that can absorb the likely financial losses in the early years of participation. CMS could limit eligibility in a manner consistent with the original design framework for the PGP Demonstration. This option would be consistent with the GAO report, which questioned how far the ACO model could be extended beyond the 1% of physician practices that resemble the organizations that participated in the original demonstration.

Alternative Solutions:

A second, more inclusive option would be to change the payment design

from an annual model to a cumulative model. In the cumulative model, CMS could assess performance over the aggregate number of years during which an organization had participated in the ACO program and reduce the shared-savings threshold accordingly, making it more likely that physicians could demonstrate significant improvements. For policymakers and payers, such a cumulative model would distinguish organizations that wish to leverage the ACO model for short-term, anticompetitive gains from those that wish to be rewarded for an investment in better-coordinated delivery of health care.

The conceptual underpinnings of the ACO model are laudable. By addressing the payment defect in the current model, policymakers would reward organizations for making the long-term financial commitment necessary to establish and maintain a value-based delivery system.

Sec’y Sibelius, “Can You Hear Me Now?” Tags: ,,

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