I’m a big fan of Garrison Keillor and his mythical Lake Wobegon. And, as someone who loves statistics, his description always brings a smile to my face – “Welcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.” Of course, that is statistically impossible.
This is one of the inconvenient statistical truisms that many executives overlook when considering pay-for-performance and risk-based arrangements. These payment arrangements are developed using some basic statistics that include a pesky probability – for every “average” assumption in the model, half of the actual results will be higher or lower than that assumption. (For more, see this article on financial risk, Understanding The “Risk” In An “At-Risk” Contract) And, with the many increasing opportunities (or competitive requirements) to participate in pay-for-value arrangements of many types (see Succeeding In The Face Of New Competition and Medicare Bets Big On Pay-For-Value), this is an issue that we’ll hear more about in the very near future.
The current situation with Medicare accountable care organizations (ACOs) provides a great example of the complexity. We’ve had Medicare ACOs since the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010, with a few basic types of payment arrangements (see OPEN MINDS Update On Accountable Care Organizations). Originally, there were 31 ACOs in the program when it started. Now there are 424 ACOs in the program (see 89 ACOs Join Medicare Shared Savings Program In January 2015).
Among the many reasons for provider organizations to create ACOs is the possibility of “sharing in savings.” In fact, in 2014, CMS paid about $315 million in shared savings Medicare payments to ACOs in its Shared Savings Program (MSSP). The catch? About 43% of the total, or $135.2 million, went to just 10 ACOs (see 10 ACOs Earned $135 Million In Medicare Shared Savings Payouts, 43% Of Total Shared Savings Payments), with payments ranging from $28.3 million to $9.4 million.
Of the 114 ACOs that started in 2012, only 107 successfully reported the quality of care benchmarks, and only 32 generated sufficient savings to earn shared savings payments ($247.7 million). In 2013 the number of “successes” went down as another 106 ACOs started the program, 102 of which successfully reported the quality of care benchmarks, and only 20 of which generated sufficient savings to earn shared savings payments ($68.2 million) (see Medicare Shared Savings Program Accountable Care Organizations Performance Year 1 Results).
And, the levels of financial risk in the Medicare ACO program are on the increase – CMS is making changes to the MSSP program to support transfer of more financial risk arrangements (see Medicare Proposes Change To ACO Program To Ease Transition To Performance-Based Risk Arrangements). Currently, the initial MSSP ACO three-year contracts allowed the ACOs to choose from two risk-sharing arrangements:
- Track 1 – This is a one-sided model in which the ACO only shares savings
- Track 2 – This is a two-sided full-risk model that offered the ACO a greater percentage of shared savings but also required the ACO to repay CMS if costs were higher than expected.
The new option, called Track 3, will help those ACOs currently in track 1 transition to track 2. In other words, these ACOs will be making the transition from only sharing in the upside to the full risk model. (If you think this isn’t a problem, keep in mind that one ACO in Track 2 overspent its target by $10 million and owed shared losses of $4 million.)
I expect the prospects of “more upside” will be a big driver for executives to opt to create new ACOs (and ACO-like models). But, the costs are high. The American Hospital Association disagrees with the $1.8 million estimate of CMS for starting an ACO. Their estimate of the costs of the necessary elements to successfully manage the care of a defined population? $11.6 to $26.1 million (see New Study Finds the Start Up Costs of Establishing an ACO to be Significant). Why the expense? Because the infrastructure to manage financial risk for a population is high (see Does My EHR Have The Functionality Needed To Manage Risk-Based Contracts? and Three Competencies For Risk-Based Contracting: Advice From An Executive Who Is There) and financial resources are needed to manage the cruelty of statistical “variance” in the population. So, the move to risk-based contracting and population management is not one to take lightly (and with more analysis than in this health care executive “spoof” video sent to me by an unnamed friend).
I think it is the right strategic move for many provider organizations – with the right planning and the right financing.
These issues are even more complicated for specialist organizations – where value-based contracting fits in the world of integrated care management. For more on that, check out these resources in our Industry Library:
- Follow The Money: The Golden Rule Of Health & Human Services
- Goodbye FFS, Hello Risk: How To Successfully Operate Under A Managed Care Contract
- Risk-Based Financing Models On The Rise
- Consider the Risk Before You Consider the Contract
- Managing Risk-Based & Performance-Based Contracts: How To Succeed In Moving Beyond Fee-For-Service
- Provider Capitation as the Route to Medical Homes: A CEO’s Perspective on the Potential for Risk Contracts
- Stop Managing Care: Start Managing Financial Risk
- Under The Bundled Umbrella: The New Financing Models Shaping Health Care
And for a cutting edge session, join me in New Orleans on June 17 for the 2015 OPEN MINDS Strategy & Innovation Institute session, led by my colleague, Joe Naughton-Travers – The Coming Wave Of ACOs: A Look At The Landscape Strategies For Specialist Organizations.