Perspective

The ACO Model — A Three-Year Financial Loss?

Trent T. Haywood, M.D., J.D., and Keith C. Kosel, Ph.D., M.B.A., M.H.S.A.

N Engl J Med 2011; 364:e27April 7, 2011DOI: 10.1056/NEJMp1100950

Article

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.1Others, 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 While experts are trying to clarify such matters, many health care executives and physician practices are deciding whether to move forward with becoming ACOs. Yet they may be unaware that the limited data suggest that most organizations will lose money in the first 3 years under the ACO model.

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.

The overarching operational framework for the Medicare Shared Savings Program is consistent with design elements found in the Physician Group Practice (PGP) Demonstration of the Centers for Medicare and Medicaid Services (CMS). Thus, that demonstration should provide insights that can help us anticipate the results of pursuing the ACO model under Medicare.

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.

Using the data from the PGP Demonstration along with information contained in the 2008 report of the Government Accountability Office (GAO) and the 2009 HHS Report to Congress,5 we examined the financial characteristics of the 10 participating organizations to evaluate what their experiences might mean for physicians and providers contemplating pursuing qualification as an ACO. Specifically, we created a financial model to clarify whether participants in the PGP Demonstration were able to recover the initial investment required to participate in the ACO model. The graphRequired Operating Margin Needed for an ACO to Recover the Start-Up Investment. shows both the required margin and the time needed to recoup the original investment, which enable us to illustrate the financial risk associated with the ACO model. With a 5-year time horizon and the mean investment per PGP provider ($737), the required margin to break even is 13%. However, the current Medicare Shared Savings Program anticipates a minimum performance period of only 3 years. According to our analysis of the data from the PGP Demonstration, an ACO making the mean initial investment of $1.7 million will require the unlikely margin of 20% for the 3-year period envisioned by CMS.

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.

There are limitations to our analysis. First, it was limited to the available data, which consisted of the first 3 years of the demonstration. 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.

Less than a year from now, Medicare will implement an optional method for provider payment based on the design elements of the PGP Demonstration. Health care consultants, insurers, medical group associations, and others are devoting substantial resources to preparing hospitals and physician group practices for the establishment of ACOs. Yet our analysis calls into question whether the ACO model as it is currently designed can overcome several fundamental challenges that limit the broad expansion of ACOs beyond a targeted group of physician practices. 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.

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.

Disclosure forms provided by the authors are available with the full text of this article at NEJM.org.

This article (10.1056/NEJMp1100950) was published on March 23, 2011, at NEJM.org.

Source Information

From the VHA network of health care organizations, Irving, TX.

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