Two key provisions in the Patient Protection and Affordable Care Act aim to engage doctors and hospitals in risk-sharing arrangements with Medicare and private payers. Three years after the law's enactment, the status of their implementation remains a work in progress, and results are widely variable.

Two Major ACA Programs that Shift Risk to Providers

Medicare Shared Savings Program (Section 3022): Frequently referenced as "accountable care organizations," these provider-sponsored efforts revolve around a clinically integrated group of primary and specialty physicians who agree to a multiyear contract with Medicare or private payers wherein they assume risk for outcomes and savings. In most cases, the ACO enlists hospitals and post-acute providers as collaborators and in some cases as a business partner that provides expertise in managing risk. To date, more than 220 ACOs are participating in the Medicare Shared Savings Program and 240 others have been set up to manage commercial populations via agreements with an employer or private insurer. Launched Jan. 1, 2012, results have varied widely.

Episode-based payments (Section 3023): This section requires the secretary of Health & Human Services to create a five-year pilot program testing alternative payment methods for an episode of care. The goal: "to improve the coordination, quality and efficiency of health care services." The bundled payment program launched Jan. 1, 2013, with most hospitals choosing a subset from the 48 conditions authorized by CMS. Impressive results (savings) have been achieved in pilots sponsored by Geisinger Health System and Premier, but for most efforts, it's too early to know their full impact.


Key Structural Features

Current Status

Long-term Prospect

Accountable Care Organizations

Clinically integrated provider organization.
Outside business partners usually contracted to provide operational expertise in managing risk.
Startup costs range from $2 million to $5 million depending on organization’s risk management core competencies.
Medicare ACO requires at least 90 percent achievement on 33 quality measures to be eligible for shared savings.

460 currently operating. Hospitals positioning ACO as strategic effort to align physicians.
Major health insurers positioning as business partners to negate potential for loss of leverage.

Promising structure for provider organizations wishing to assume risk for population health management with multiple payers.

Bundled Payments

CMS identified 48 conditions for its initial rollout.
Connectivity with post-acute providers and organizing specialists and allied health professionals are major challenges.
Hospitals now achieving agreement on which DRGs are to be grouped as bundles.
Lump sum payment to the risk-taking sponsor of the program.

Largely pursued by mid-sized and larger hospitals and health systems.
Challenging to hospitals in negotiating fees to physicians and allied health professionals who are directly engaged in the episode of care.

Promising, with substantial savings achievable to organizations experienced in managing clinical risk with payers and Medicare. Can be problematic if used by private payers with reference pricing and narrow network strategies.


Clearly, hospitals are pursuing both concepts with vigor, but there have been mixed results. It's too early to know how these concepts will play out. ACOs cover wider range of clinical conditions and, on the surface, require an organization to assume more financial risk than bundled payments, but both require new structural changes to care delivery, and different ways of paying participants.

The lessons thus far are:

Costs for bearing risk are significant: Both programs require investment in health information technology to facilitate measurement and monitoring of clinical and financial risk by clinical teams (doctors, hospitals, post-acute and allied health professionals). To date, HIT investments, legal costs and consulting fees have far exceeded what sponsors imagined. In most cases, savings are not estimated to justify the investments: rather, risk sharing is justified to boards and business partners as a strategic investment necessary for long-term positioning. In bundled payments, the negotiation about how the lump sum is to be allocated across all participants is inclined to create internal tension among physicians, hospital-based service providers and post-acute providers.
Getting care teams to operate in clinically integrated structures is hard: Agreement about the evidence-based care pathways and treatment protocols upon which each population’s health will be standardized is easier said than done. In most medical communities, adherence to evidence-based practices is widely variable, and physicians push back from any challenge to their individual clinical autonomy. Turf battles and scope of practice issues frequently pop up. And the challenges of medication adherence, roles of pharmacists and post-acute providers, alternative health and others add an element of risk not traditionally considered in many communities. Outside consulting firms and health plans offering to partner are prone to oversimplify “clinical coordination of care,” thus exacerbating tension and trust issues that often evolve in the implementation. Whether in the ACO or within a team’s approach to managing the bundled payment, organizing medical clinical care delivery in a team-based model is central to achieving success.

Payer relationships might be problematic: In most communities, risk-sharing with health insurers and employers is limited. They’re waiting to see whether the savings are real before jumping in, and suspicious that clinically integrated efforts might be little more than a cartel to keep costs high. Commercial health plans are keen to be business partners to ACOs, while encouraging their customers, employers and consumers to use narrower networks and reference pricing to purchase acute services. As a result, a business partnership with a commercial health plan might be problematic, especially if a hospital operates in a market with several other plans.

Looking ahead …

The market increasingly will force hospitals to take risk along with their physicians. Private health plans, employers, Medicaid and Medicare are committed to shifting risk to doctors, hospitals, and post-acute providers. Simultaneously, providers face margin erosion as the sequester is implemented, and commercial payers — health plans and employers — seek steeper discounts. To assume risk, given these economic realities, hospitals will need to partner where appropriate and/or reallocate, and capital commitments to achieve core competence in managing risk.

The relationships between hospitals and physicians complicates risk-sharing arrangements. The majority of primary care physicians and one in four specialists are aligned with a single hospital or health system. Risk-sharing experiences with aligned physicians have proven no easier than with independents, and can be more complicated if a payer requires a specified allocation of payment mechanism or clinical protocol uncomfortable to the physicians.

The infrastructure and core competencies for risk-sharing are foreign to most provider organizations. For most, adding a business partner makes business sense. But choosing a partner can be tricky, especially if the partner is also a payer in the community. New questions arise: How will other plans react? Will the nonbusiness partner plans retaliate in their contracting? Who will own the data? And is the partner trustworthy?

ACOs and bundled payments represent a significant opportunity for hospitals to achieve competence in risk management. Though dissimilar in many functional elements, they both require formalizing clinical and financial policies and procedures for managing the health and costs for patient populations.

Risk sharing via ACOs and bundled payments will gain momentum in hospitals regardless of the long-term fate of the Affordable Care Act. They're market-driven — and, for most hospitals, a significant challenge with a handsome upside if managed effectively.

Paul H. Keckley is a health economist and leading expert on U.S. health reform and its impact. He recently retired as executive director for the Deloitte Center for Health Solutions, where he directed the center's nonpartisan studies that are prominently featured in congressional testimony and industry publications. His H&HN Daily column appears the first Monday of every month.