With “repeal and replace” underway and an alternative payment program skeptic leading the Department of Health & Human Services (Secretary Tom Price, an orthopedic surgeon who believes value-based payment programs add complexity to the work of clinicians), the future of ACOs is being questioned. After huge investments by hospitals and physicians in their setup and operation, what’s their fate? 

Background on ACOs

The concept of the ACO is not new. It’s an updated version of the integrated delivery networks (IDNs) of the 1990s designed to align incentives for physicians and hospitals to enable care coordination for chronic disease management. In the Affordable Care Act (Section 3022), clinically integrated provider organizations were afforded the opportunity to participate in the new Medicare Shared Savings Program, volunteering to take financial risk for at least 5,000 Medicare enrollees for three years. If they succeeded in creating savings for Medicare while maintaining a consistent level of quality, they’d share in the savings. Simple enough!

Both efforts (IDNs and ACOs) aimed to reduce costs for Medicare. Both posit that better care coordination by providers armed with technologies, data, processes and incentives results in better outcomes and lower costs. In 2012, the Centers for Medicare & Medicaid Services estimated that ACOs could save Medicare $940 million over four years if 270 organizations participated in the program. Where do we stand today?

Collectively, ACOs have generated approximately $1.29 billion in total Medicare savings since 2012.

Breakdown: Between 2012 and 2013, the ACO model saved a total of $384 million ($279.7 million in 2012; $104.5 million in 2013); $411 million in total savings in 2014 (Year 3); and $466 million in 2015.

Current state of ACO activity:

  • Depending on the source and definition, there are between 850 (Leavitt Partners) and 1,300 (Definitive Healthcare) ACOs operating today. The majority of these participate in the Shared Savings Program.
  • There are ACOs in every state, led by California with 74. Two Shared Savings ACOs (Advocate Health Care in Illinois and Physician Organization of Michigan) manage more than 100,000 Medicare lives, according to Leavitt.
  • More than 28 million individuals are served by an ACO: 8.3 million Medicare, 2.9 million Medicaid and 17.2 million in commercial. Data about the performance of ACOs that contract with commercial and Medicaid payers is sparse, however.
  • Among 477 ACOs contracting with Medicare in 2015, 31 percent performed well enough to share savings with Medicare, and quality scores improved for 91 percent of them. Both were increases from 2014. (Muhlestein et al. Health Affairs Sept. 9, 2016)

What lessons have been learned?

Care coordination across multiple sites of care vis á vis an ACO results in improved efficiency and outcomes. The rationale for the ACO model has been validated, but savings for payers may be secondary to improved outcomes as their primary benefit. As it turned out, ACOs in markets that were costly produced the highest savings, but quality improvement resulted in virtually every market in which the ACO model had been implemented.

The infrastructure, skill sets, care coordination processes and actuarial risk associated with ACOs is expensive and evolving. Organizations with large, multispecialty medical groups or networks that sponsor their own health plans or have experience in capitated contracts fared best. Newcomers struggled, spending up to $10 million to capitalize their efforts. And new solution providers are bringing more and better tools to ACO sponsors. Specialized operational expertise and sophisticated analytic tools to assess and monitor clinical and financial risks and care coordination processes have become key differentiators for the professional firms that have established strong practices in the ACO era. Firms like Leavitt Partners, Deloitte, PwC and others have made major investments in ACO analytics to date.

Payers are keen to see cost savings: They are agnostic about how it’s delivered. The jury is out on whether ACOs per se will be the model of choice for some payers. For Medicare and Medicaid populations, it appears to be a viable structure through which savings can be achieved long term, but it’s contingent on how care for their most costly cohorts is coordinated by clinical teams. By contrast, self-insured employers are testing a variety of strategies to reduce their costs, including the promotion of health savings accounts or direct contracting with local providers. An ACO relationship is not essential for most.

What’s ahead for ACOs?

  • The expected increase in health spending to 6 percent annually for the next decade will prompt close attention to the effectiveness of ACOs as a vehicle for reducing cost. Physician-led organizations that adhere to care standardization and incentives for their clinicians linked to cost savings will be sustainable. Others will falter. And industry consolidation means ACO consolidation: The scale, scope and clinical sophistication of the ACO will be key to valuations and affiliations.
  • The centerpiece for sustainable ACOs will be a comprehensive primary care network that integrates physical and behavioral health, pharmacy, dental, eye and nutrition services with heath coaches to change patient behavior. It’s not about primary care visits; it’s about primary care driven care coordination. From these primary care centric models, virtual ACOs that incorporate rural health and teleconnectivity, and clinical models that include social determinants of health in assessing risks and care coordination tactics will evolve.
  • The MSSP likely will morph. Quality measures will change. The Shared Savings Program formula will be altered. Some MSSP ACOs will test shared savings with enrollees themselves, rewarding medication adherence or self-care management. CMS will simplify its reporting requirements to encourage continuity in the programs and seek to reduce attrition of participants. And attention to formulary design and medication management, post-acute care coordination, digital connectivity and self-monitoring and alternative health modes of care will become imperatives to achieving savings.
  • Medicaid ACOs will be a growth opportunity. The shift of control from CMS to states via block grants or capitated payments will present an opportunity for ACOs, provided their primary and behavioral health capacity is adequate and actuarial risk assessment is precise going in.

How should hospitals navigate the uncertainty surrounding value-based payments and ACOs?

It is highly unlikely that ACOs will diminish as an organizing framework through which physicians and hospitals become more effective in managing the total cost of care. In fact, as costs increase, they’ll become more important. But the primary value created through ACOs likely will be quality improvement; cost reduction will be secondary, but nonetheless important.

ACOs are here to stay. How they fit into a medical group or health system’s contracting and population health strategies will change as regulations like MACRA kick in and as employers, insurers, Medicare and Medicaid assess their value.