ACOs: The elusive goal of first-year cost reduction
When he was leaving his post as the head of the Centers for Medicare and Medicaid Services, Donald M. Berwick, MD, 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 CMS’s July 16 press release on the Pioneer ACO program’s first-year results, that was not what happened. While every one 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 ACOs to achieve their cost-reduction 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, AdvocateCare, almost assuredly the largest commercial ACO in the nation, was able to put quality metrics in place in six months, but it took much longer to see an impact on 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, for ACOs, but look for brighter days to come in year two and beyond.
