The economics of the ACO model

The recent New England Journal of Medicine article, “The ACO Model—A Three-Year Financial Loss?” by Trent T. Haywood and Keith C. Kosel, provides a financial analysis of the Physician Group Practice (PGP) Demonstration that the Centers for Medicare & Medicaid Services (CMS) conducted from 2005 to 2010.

Haywood and Kosel call into question the economic viability of the ACO model, but their analysis has some shortcomings and does not tell the complete story of the PGP Demonstration and the prospects for financial success with ACOs.

First, while they are correct in stating that the Medicare Shared Savings Program anticipates a minimum performance period of three years, the clear intent of CMS—as indicated by numerous vision-casting statements made by CMS Administrator Donald Berwick—is that the Medicare ACO program will be an enduring, permanent program, with ACOs participating in it for years to come.

Thus, to render judgment regarding the financial viability of the program based on a three-year time period places an artificial and unrealistic requirement on the program, especially given that a separate analysis projects a return on investment period of three to five years for the Medicare ACO program.

Second, the analysis by Haywood and Kosel was limited to the first three years of the PGP
Demonstration, which led to a misleading conclusion with respect to the financial payback of the initiative, since the physician groups in the PGP Demonstration kept improving each year in the program, with significant performance breakthroughs in the fourth year. The following should be noted:

•    The physician groups’ overall performance on quality and cost efficiency measures improved each year of the demonstration, with performance payments of $7.3 million in year one, $13.8 million in year two, $25.3 million in year three, and $31.7 million in year four.

•    Five of the 10 the physician groups (50 percent) earned incentive payments in year four.

•    The year four incentive payments averaged about $6.3 million per physician group, a figure that clearly swamps (by over three times) the $1.7 million average upfront investment Haywood and Kosel mentioned.

The bottom line is that while not every physician group in the PGP Demonstration received incentive payments, a majority—six of the 10—were able to cover their upfront costs as well as their estimated ongoing costs, achieving a positive ROI from participation in the program, many within three years.

Ken Perez is director of MedeAnalytics’ Healthcare Policy Team and Senior Vice President of Marketing.