ACOs: Will High Start up Costs and Downside Risk Limit Interest in This Health Care Reform Darling?

Providers considering applying to CMS to become an ACO should be aware that the proposed ACO rules are modeled in significant part after Medicare’s Physician Group Practice demonstration project.  Five years in the planning and launched in April 2005, the PGP Demonstration included 10 multi-specialty group practices in various regions of the country comprised of 230 to 1290 physicians (with an average of 627 providers including non-physicians able to bill Medicare as physicians).  The majority of the participants were located in small cities and served suburban and rural areas.  Each had between 10 and 65 medical office locations.
Despite the fact that eight of the participants had existing electronic health records systems in place, the participants reported nearly $500,000 on average in start-up expenses as well as an average of $1.2M in operational expenses in the first year (PY1) of the program.  Of this $1.7M, most participants identified initiating and operating case management programs as their highest start-up and operating expense in PY1.  Expenses associated with administrative processes were the second highest start-up cost and ranked third as an operational expense.  Patient education was the second highest operational expense and the lowest ranked start-up expenditure in PY1.  Disease management and medication related programs ranked fourth and fifth as operating expenses in PY1.
As proposed in the ACO regulations, Medicare paid the PGP Demonstration participants for specific items and services under the fee-for-service program, and the practices were eligible for cost and quality-based performance payments.  If a practice achieved Medicare Part A and B savings greater than two percent of target expenditures, it was eligible to receive up to 80% of the Medicare savings in excess of the two percent, up to a maximum of five percent of the group’s original spending target.  Medicare retained the first 2% of savings as well as a portion of the savings in excess of the 2%.
In PY1 of the PGP Demonstration, only two of the practices earned Medicare shared savings payments. These two groups earned shared savings in each of the four years of the demonstration and collectively earned $54.2M of the $78.1M in shared savings paid over the demonstration period.  The other participants were not as successful: one group earned shared savings payments in PY2 – PY4; two earned shared savings payments in PY3 and PY4; one earned shared savings in PY2 only, and four of the practices did not earn shared savings in any year of the PGP Demonstration.
Notably, there was no downside risk to PGP Demonstration participants for exceeding the spending target, although expenditures greater than two percent were carried forward to the next year and used to offset Medicare shared savings earned in that year.  However, in the proposed ACO regulations, CMS has clearly signaled that it wants “more, faster” in terms of savings to the Medicare Trust Fund and has put forward two models for shared savings, each of which has a downside repayment risk for the ACO in the event its average per-capita Medicare expenditures are at least two percent above its benchmark costs.

Under the one-sided model, to the extent that quality performance standards are met an ACO would be eligible to share in up to 50% of the Medicare savings (with the possibility of additional savings if the ACO serves beneficiaries who receive services from a Federally Qualified Health Center or Rural Health Clinic) exceeding the ACO’s minimum savings rate (which varies between 2% and 3.9% depending on the number of beneficiaries) up to a maximum of 7.5% of the ACO’s benchmark.  ACOs with fewer than 10,000 beneficiaries and meeting certain criteria — such as an ACO in which all participants are physicians or 75% of the ACO’s beneficiaries reside outside an MSA — would be exempted from the 2% net savings threshold and allowed to share in first-dollar savings.  In the third year of the agreement period under the one-sided model, the ACO would be at risk for repayment of spending if the per capita cost per beneficiary is more than 2% higher than the benchmark, not to exceed 5% of the benchmark.
In the two-sided model, the minimum savings rate is fixed at 2% and does not vary based upon the number of Medicare beneficiaries.  An ACO that meets quality performance standards and achieves savings greater than 2% of target expenditures would be eligible to share in up to 60% of the Medicare savings, including the initial 2%, up to a maximum of 10% of its benchmark.  Under the two-sided model, an ACO is required to agree to accept downside risk beginning in the first year of the agreement period.  An ACO would be at risk for repayment of spending if the per capita cost per beneficiary is more than 2% higher than the benchmark, not to exceed 2% percent of the benchmark in PY1, 7.5% in PY2 and 10% in PY3.
If the shared savings models remain unchanged after commentary is received, it will be telling to see which, if any, of the PGP Demonstration participants apply to CMS as an ACO and whether it is under the one-sided or two-sided model.  Readers interested in commenting on the proposed regulations have until June 6, 2011 to submit their suggestions to CMS.