Creating Sustainability in Accountable Care

This post was co-written by Farzad Mostashari, MD, founder of Aledade (headshot)

Accountable care organizations (ACOs) are the cornerstone of policy makers’ pledge to convert more than half of all healthcare dollars to alternative payment models by 2018. CMS has led the way by creating new models like the Medicare Shared Savings Program (MSSP), which rewards doctors for delivering better care and lowering the total cost of care (Disclosure: Aledade partners with primary care practices to create and operate ACOs). Under the MSSP, providers share in savings realized over a projected benchmark if they meet quality targets.

A study by Leavitt Partners shows the number of Americans in ACOs—currently at around 23 million—will soar to more than 100 million by 2020. But is “accountable care” merely a transitional pathway from totally unmanaged “fee for service” toward capitated payments and health maintenance organization-style managed care? Or will accountable care prove to be a third durable payment and delivery destination offering more choice than managed care and better value than fee for service, with softer incentives for both providers and patients?

I don’t believe that we know the answer to that question yet, and, perhaps wisely, policy makers have been somewhat cagey about committing to one strategy or another. The Next Generation ACO program ingeniously created a pathway toward capitation, or all-inclusive population-based payments as CMS refers to them, by allowing ACOs—with full immunity from what would normally be considered violations of anti-kickback regulations—to negotiate capitated Medicare payments to “affiliates” in essence using CMS as their claims administrator.

Meanwhile, the MSSP also continues to evolve toward sustainability with continual improvements—none more significant than the recent proposed rule issued by CMS around how the “benchmark to beat” is to be calculated in the future. The comment period on this rule closes on March 28, and I assure you that this is no boring technical detail; it is, in fact, a fascinating example of the delicate balancing act of good policy making that merits our attention and input.

The goal of good policy in a market economy is to align individual incentives with societal good. Successful policy creates an environment where public welfare is furthered not only by direct government action and grants, but also by private organizations acting in their own interests. In healthcare, the “volume to value” movement seeks to align the interests of healthcare providers with the societal triple aim of better care, better health, and lower costs. But how should that “value” be measured and rewarded? How to establish the counterfactual “expected costs” as the benchmark for ACO doctors to beat?

The policy goal is to reward both improvement and attainment, without creating perverse incentives. If the ACOs started with a regional benchmark (“attainment”) then providers with higher than average benchmark have no incentive to participate, taking away the biggest societal gain, while providers who are already lower cost are paid more automatically without anything changing. So the program began by setting the first 3-year contract’s benchmark by projecting forward from recent historical costs (“improvement”). Perhaps wisely, policy makers punted on the inherent and obvious flaw in this approach. The most common question asked by sophisticated investors and policy neophytes alike has been unanswered until now: “if the organization has to keep reducing costs below historical benchmark, won’t the returns dwindle to nothing? What happens in the long run?”

Continually resetting a purely historical benchmark gets harder and harder over time, and will lead the most successful ACOs to drop out of the program. Last year’s rules provided a temporizing stop-gap, replacing a “full ratchet” with a “partial ratchet” whereby the pace of adjustment was slowed but leaving the fundamental inexorable unsustainability unaddressed.

Regulators have struggled to strike a balance between maintaining incentives for private organizations to continue to seek profit in reducing cost, while also seeking to ensure that there continues to be value created for society and the taxpayer. In keeping with comments submitted by us and others, CMS is now proposing to gradually move away from a purely historical benchmark (beat your own past performance) to a regional benchmark (beat your neighbor’s performance). In this way, value created by ACOs is defined commonsensically as “did people in the ACO get better care than they would have if the ACO had not existed.”

We acknowledge that getting the transition right—from rewarding improvement to rewarding attainment—is devilishly difficult. Transition to a regional benchmark too fast, and ACOs that still have high costs will leave the program. Transition to a regional benchmark too slow, and ACOs with low costs will lose their financial viability. We support the proposed transition of 35% regional comparison in an ACO’s second contract (years 4, 5, and 6) and 70% regional in its third contract (years 7, 8, and 9).

But this is only part of the solution. With healthcare costs rising every year, the benchmark must also be projected forward. CMS currently uses national inflation for annual updates of the benchmark within a contract period, but this creates an imperfect view of the counterfactual (what would have occurred had the ACO not existed). Regional updates using county weighted, risk-adjusted costs (as is done in Medicare Advantage) create more accurate benchmarks and therefore more accurate measure of ACO value. CMS is indeed proposing to switch to such regional inflation in future contracts but is adding complexity and reducing predictability by proposing to continue to use national inflation in the first contract (first 3 years). An ACO should be rewarded because a person in Dover, Delaware, got better care in the ACO than a like population outside of the ACO. Regional updates do that, while national inflation updates dilute that difference.

The benchmark must also account for differences between people’s health in order to accurately compare one person’s costs to another. To be sure, this adjustment creates opportunities to shift money around in the healthcare system without creating value, a practice CMS calls “coding intensity” in the proposed rule. Currently, CMS is using a blunt instrument to combat this practice. Simply put, it does not let risk scores to go up for the same population year over year. This is done without consideration of whether that population had a bad run of cancer or an unusually high number of unavoidable accidents. This prevents accurate comparison and therefore prevents accurate measurement of value. This transfer of insurance risk to ACOs is one of the biggest barriers to ACO sustainability over the long run, and increases the risk of providers dumping patients whose true risks are rising. People do in fact tend to get sicker over time, and pretending otherwise can only last so long.

It looks like 2016 is shaping up to be the most pivotal year in healthcare policy in a long time—possibly the most pivotal year since 1965. CMS is actively listening and working with private-sector partners to iterate and improve the alignment between what’s good for society, what’s good for patients, and what’s good for doctors entering these new payment models. All of us in healthcare, and particularly those of us who are in population health, must make the most of every opportunity to inform the changes that will be happening this year, and will illuminate the path forward.