It's Time to Revamp Medicare ACOs

It's Time to Revamp Medicare ACOs
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Medicare Accountable Care Organizations (ACOs) were created by the Affordable Care Act (ACA) to improve the efficiency of the networks of hospitals and doctors that deliver services to Medicare patients and thereby lower the government’s costs. So far, however, ACOs haven’t produced any savings for the federal government. ACOs would become more efficient and innovative if they were forced to compete with the other options beneficiaries have for getting their Medicare-covered benefits.

ACOs were created to fill a void in the Medicare program. Medicare’s traditional, unmanaged fee-for-service insurance program is widely understood to foster waste and overuse of services. Medicare Advantage (MA) provides a private, managed-care alternative to the traditional program, but MA plans are typically insurance-led entities. Many hospital systems and physician groups believe they are in a better position than insurers to manage the clinical process on behalf of patients. Medicare ACOs provide them with the opportunity to form their own managed care arrangements separate and apart from the MA program.

Most ACOs participate in the ACA’s Medicare Shared Savings Program (MSSP). MSSP ACOs that meet quality standards and provide care at a sufficiently lower cost get to keep half of the savings they generate.

The Centers for Medicare and Medicaid Services (CMS) recently released ACO performance data for 2016. There were 432 ACOs participating in the shared savings option in 2016. All but 22 of the ACOs were “one-sided risk” ACOs, which means they could earn a bonus payment but were not at risk for a penalty if they exceeded their spending targets. Only 31 percent of the ACOs produced enough savings to earn a bonus payment for 2016. Another 25 percent of the ACOs reduced costs but not by enough to earn a bonus payment. The other 44 percent of the ACOs incurred expenses above the benchmarks that were set for them by CMS.

Overall, the ACOs produced gross savings in Medicare of $691 million in 2016. However, after taking into account the bonus payments paid by CMS to the highest performing ACOs, the net effect of the MSSP program was an increase in Medicare costs of $39 million for 2016.

The ACO results for 2016 closely track what occurred in previous years. With bonus payments included in the calculation, ACOs increased Medicare’s costs by $216 million in 2015.

Provider-led managed care can serve an important role in Medicare, but the current ACO program is flawed because it relies on coercion rather than incentives.

Under the current program, Medicare beneficiaries are not given the opportunity to enroll in ACOs; instead, they are assigned to them based on their medical claims experience. When a physician joins an ACO, all of the beneficiaries who use that physician as their main point-of-contact for health services are designated by CMS as enrolled in the physician’s ACO. The cost of caring for these patients then automatically becomes part of the evaluation of the ACO’s performance. There were some 9 million Medicare beneficiaries assigned to ACOs in 2016, but very few of these beneficiaries were aware of their “enrollment” in these organizations.

Further, with the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Congress chose to penalize doctors who decline to join ACOs. Under the law, physicians who join ACOs with two-sided risk (i.e., the ACO can be penalized for increasing costs) ultimately can get fee increases of 0.75 percent each year. Those who do not join such ACOs (or similar arrangements, as designated by CMS) will get fee increases of only 0.25 percent each year.

The combination of the ACO rules for physicians and beneficiaries is striking. Physicians are being pushed into joining ACOs to increase their fees, and when physicians join ACOs, their Medicare patients come with them. The hope among some ACO advocates is that Medicare fee-for-service will be transformed into a more efficient program without the Medicare beneficiaries even noticing that something had changed.

This coercive approach may increase the apparent size of the ACO program, but it will not help the ACOs become more efficient over time. Because the beneficiaries are never asked whether they want to be assigned to an ACO, they are not obligated to stay in-network when they get their care. They retain the right to see any physician they want at no additional cost to themselves. Further, many physicians are not entirely clear on whether individual patients they serve are in or out of their ACOs. CMS is trying to partially address this problem with a voluntary web service that allows patients to designate their primary care physicians. If a physician chosen by a beneficiary participates in an ACO, then the beneficiary will be assigned to that ACO too. It is not clear how widespread the use of this voluntary selection option will be when it becomes available next year.

It is not possible to run high-performing managed care operations without clarity regarding the enrolled population because the best integrated care plans are not passive. They pro-actively reach out to their enrollees to keep them as healthy as possible so as to avoid costly interventions later. Loosely run ACOs are not capable of engaging with their patients in this way.

In addition, the current heavy reliance on coercion of physicians is likely to backfire over time. Instead of improving care, physicians who join the ACO program just to avoid fee cuts will resent their circumstances and will press for regulatory changes to lessen the administrative burden of participating in an ACO. Their efforts will make it difficult for the ACOs to operate effectively. The end result is likely to be a program that isn’t all that different from today’s high-cost fee-for-service option.

ACOs should be revamped so that they are presented to the beneficiaries as a clear and distinct enrollment option, alongside unmanaged fee-for-service and MA plans. Further, the beneficiaries selecting ACOs should know in advance that they will be getting their care through an organized network of providers, akin to the preferred provider organizations (PPOs) offered in the commercial market. Beneficiaries would retain the right to see any licensed provider, but they would pay higher cost-sharing for services if they went out of the ACO network.

The ACOs would have to compete with MA plans based on the premiums they would charge and on the services they would offer. High-performing ACOs would attract beneficiary enrollment because they would be able to share the savings they produce with the beneficiaries in the form of lower premiums and better coverage. ACOs providing premium discounts to their enrollees would be tagged with the aggregate cost of those reduced premiums when their financial performance was measured against their benchmark.

A revamped ACO option should be part of a larger restructuring of the process by which beneficiaries make choices about their Medicare coverage. In addition to the basic Medicare coverage options, beneficiaries also have the option to purchase Medicare prescription drug coverage and supplemental insurance to partially cover their cost-sharing requirements. CMS should build an online portal that allows beneficiaries to see clearly what the various combinations of coverage options will cost them in terms of the premiums they would pay as well as their cost-sharing requirements when they use services.

ACOs can play an important role in Medicare. Unmanaged fee-for-service is inefficient and costly. There is a need in the program for a provider-led managed care option that delivers better value than traditional Medicare. But Medicare patients should not be assigned to ACOs without their knowledge or consent, and there shouldn’t be a need to rely on assignment to grow the ACO program. The ACOs that are worth having in Medicare are the ones that will have no trouble attracting voluntary beneficiary enrollment because of their low costs and high quality.

James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute. He is the author of “Improving Innovation in Health Services Through Better Payment Reforms,” published by the Regulatory Transparency Project of the Federalist Society.

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