Why Do We Need ACOs and Insurance Companies?

Why Do We Need ACOs and Insurance Companies?


Six years ago Ezekiel Emanuel and Jeffrey Liebman made the foolish prediction that ACOs would eat the insurance industry’s lunch. “By 2020, the American health insurance industry will be extinct,” they wrote. “Insurance companies will be replaced by accountable care organizations….”  This would happen, they argued, because ACOs are just so darned good at lowering costs compared with insurance companies.

The first Medicare ACO programs began in 2012. Today there are 800 to 1,000 ACOs in business. [1] But ACOs aren’t even close to displacing the insurance industry. The most obvious reason is they don’t want to be insurance companies – they don’t want to bear full insurance risk. And the reason for that is they can’t cut costs. The performance of the Medicare ACOs, which are the only ACOs for which we have reliable data, illustrates both problems: Very few want to accept “downside risk” (the risk of losing money if they can’t cut costs); and they are incapable of cutting costs.

ACO hype confronts reality: Reality wins

Anyone paying attention to the research knew even before 2012 that ACOs wouldn’t cut costs for a general population (as opposed to a small slice of the population that is very sick). The Physician Group Practice Demonstration, which was widely seen as the first test of the ACO concept, raised Medicare spending. According to the final evaluation of the demonstration, the ten participating ACOs raised Medicare’s costs by 1.2 percent over the five years the demonstration ran (2005-2010), and it might have been worse if the ACOs hadn’t upcoded. [2] This failure to cut costs occurred despite the fact that the ten participating “group practices”/ACOs were very experienced in managing risk. They had names anyone who studies health policy would recognize, including Dartmouth-Hitchcock Clinic, Geisinger Clinic, and Marshfield Clinic. According to the final report on the demo, “Seven of the ten participants had currently or previously owned a health maintenance organization ….” (p. 15)

The latest reports from CMS on its Medicare ACO programs, which report 2016 data, indicate the current crop of ACOs are equally incapable of cutting costs. The data contained in the reports indicates the ACO programs are merely breaking even, and that’s only if you don’t count the costs to the ACOs of doing whatever it is ACOs do. The staff of the Medicare Payment Advisory Commission (MedPAC) prepared a graph for the commission showing how each of CMS’s ACO programs did in 2016. This graph, presented at the commission’s January 2018 meeting, appears below. (The graph appears on slide 8 here )

The graph presents the results for the 458 ACOs that participated in CMS’s three ACO programs – the Medicare Shared Savings Program (MSSP, which began in 2012), the Pioneer program (which began in 2012 and ended in 2016), and the NextGen program (which started in 2016). You’ll see that 410 of the ACOs, or 90 percent, were in “track one” of the MSSP, which means they were willing to accept only upside risk (the chance to make money if they came in under a target level of spending). We see as well that all three programs roughly broke even (again that’s not counting the cost of the interventions ACOs deploy in their attempt to cut costs).

The graph’s most discouraging news, from the point of view of ACO advocates, is the underwhelming performance of the eight diehard ACOs that remained in the Pioneer program in 2016. The graph indicates those ACOs cut Medicare’s costs by a mere seven-tenths of one percent in 2016, the fifth and last year of the program. Like the ten ACOs that participated in the Physician Group Practice demo, those eight ACOs were the crème de la crème – the entities most likely to succeed at the ACO game. They were the crème de la crème of the cohort of 32 ACOs that CMS selected to enter the Pioneer program in 2012, and those 32 ACOs were in turn the crème de la crème of all ACO candidates in 2011 when CMS accepted applications for the Pioneer program.

Because ACOs in the Pioneer program would have to accept both up- and downside risk, CMS was very selective in choosing the original 32 Pioneer ACOs. As the Advisory Board  put it in an article published just before the Pioneer program began, “The 32 Pioneers underwent a rigorous evaluation – including a comprehensive review of applications and in-person interviews….” And yet by 2016 only eight of these rigorously evaluated ACOs remained. The dropouts were those who lost money or expected to lose money. Thus, if we were to take an “intent to treat” approach in evaluating the Pioneer program and asked how well all 32 performed, the result would probably be worse than the 0.7 percent savings achieved by the eight diehard ACOs that participated for all five years.

Why did we need ACOs in addition to insurance companies?

What were ACO proponents thinking would happen? We know they thought ACOs would perform much better than they have. But how much better? Did they agree with Emanuel and Liebman? Did they think ACOs would gradually accept total insurance risk and go on to outcompete the insurance industry? We don’t know. We don’t know because ACO proponents never bothered to ask an elementary question: “Are we proposing to create an ACO industry because we think the HMOs and the managed care tools they popularized have failed, and if so, why do we think ACOs will succeed where HMOs and managed care plans have failed? What tools will ACOs use that the insurance industry hasn’t already experimented with?”

ACO proponents never indicated that they had given a moment’s thought to that question. They never came right out and said, “Managed care plans have had their day in the sun, they haven’t worked, and now we need to replace them with a new entity we’re calling the ‘accountable care organization,’ and here’s why.” They just demanded that Congress authorize CMS to set up an ACO program in Medicare alongside the Medicare Advantage program, and that private-sector payers create a private-sector ACO industry alongside the insurance industry.

Congress, with even less forethought, agreed. Congress inserted provisions into the Affordable Care Act authorizing CMS to set up Medicare ACO programs, President Obama signed the ACA in March 2010, and CMS implemented the Pioneer and MSSP programs early in 2012. In 2015, Congress did it again: They enacted MACRA, which encourages the formation of even more ACOs. At no time in this higgledy-piggledy ACO-creation process did any of the participants publicly address the question, “How will ACO magic differ from HMO magic, and if there is no difference, why are we doing this?”

A handful of ACO advocates did attempt to distinguish ACOs from HMOs after the ACA was enacted, but their distinctions were meaningless or misleading. Of these after-the-fact distinctions, the three most frequently heard were: (1) Doctors will be running ACOs, not “distant,” uncaring HMOs; (2) ACOs do not limit patients to a network of “preferred” providers as HMOs do; and (3) modern information technology makes it possible for ACOs to provide much better care than HMOs ever did. Emanuel and Liebman, for example, trotted out all these distinctions. [3]

The first claim – that doctors are running ACOs, not HMOs – is laughable. HMOs and other insurers are setting up their own ACOs, and even the ACOs that were not established by insurers have very little physician involvement in management. [4] The claim that ACOs do not limit choice of provider is, strictly speaking, true at this moment, but that is changing because ACOs are not happy with the enormous “leakage” they suffer because they can’t force their “attributees” to stay in network. Finally, the argument that information technology improves quality of care is an exaggeration of IT’s impact on quality, and in any event, the insurance industry has as much access to IT as ACOs do.

But even if these false distinctions between ACOs and HMOs were true, they wouldn’t tell us what it is ACOs do that HMOs don’t do. So what if doctors really are running ACOs? So what if ACOs have yet to force patients to stay within ACO networks? What does that tell us about what ACO doctors are doing that doctors micromanaged by the insurance industry are not doing?

Comparing one black box to another

The failure of ACO proponents to answer the question, Why do we need both ACOs and insurance companies, is creating problems for Medicare which now has to administer three separate programs – the traditional fee-for-service program, the new ACO program, and the Medicare Advantage (MA) program. Life for CMS, and for MedPAC (which has to advise CMS and Congress), was difficult enough when CMS had to administer just the FFS and MA programs. It has become infinitely more difficult with the insertion of the ACO program in 2012 and the enactment of MACRA in 2015. The complexity of today’s Medicare program has driven up CMS’s administrative costs, and has forced MedPAC into long discussions about how to ensure that all three programs are paid fairly.

The same problem now afflicts state Medicaid programs that were forced by their legislatures to balkanize into the same three sectors – a FFS sector, a privatized Medicare-Advantage-like sector, and an ACO sector.

In my next post, I will discuss the attempts MedPAC and Minnesota’s Medicaid program have made over the last few years to apply more uniform payment rules to their ACO and managed-care-plan programs. MedPAC and Minnesota’s Department of Human Services (DHS), which runs the Minnesota Medicaid program, apparently want to answer the question ACO proponents never bothered to ask: Are ACOs more efficient than insurance companies? MedPAC seems to want to answer that question by forcing all three Medicare sectors to compete on a level playing field to see which ones are driven to extinction by the others. Minnesota’s DHS seems to want to answer that question by forcing its ACO and MA-like sectors to compete on a level playing field. I use the word “seems” because MedPAC and DHS can’t bring themselves to come right out and say they expect ACOs to beat the insurance industry or vice versa. But they are willing to say they want to create competition between the two types of entities under uniform payment rules.

As we shall see, MedPAC’s attempts to create a level playing have failed, and DHS’s attempt appears to be well on its way to failing.

[1] Our knowledge about Medicare ACOs is very limited, but at least we know how many of them there are. We don’t even know the number of entities that call themselves ACOs that contract with private-sector payers (insurance companies and self-insured employers). The estimates are all over the map. A directory of ACOs claims to list 800 of them. Elliott Fisher, who invented the ACO label in 2006 with MedPAC, alleges there are 1,000 .

[2] According to the final report on the Physician Group Practice Demonstration, “[T]he demonstration saved Medicare .3 percent of the claims amounts, while performance payments were 1.5 percent of the claims amounts.” (p. 64)

[3] Here’s an excerpt from the Emanuel-Liebman op-ed  in which they sought to persuade readers that ACOs are not your father’s HMOs. “ACOs are not simply a return to the health maintenance organizations of the 1990s. Although in both models patients are members of a provider network with a specific group of doctors and hospitals, and both are paid primarily per member rather than per procedure or test, there are big differences between them. HMOs were often large national corporations far removed from their members. In contrast, ACOs will consist of local health care providers working as a team to take care of patients who are likely to be members for years at a time. HMOs often cut costs not by keeping people healthy but by denying patients services and by forcing doctors and hospitals to take lower payments. In the 1990s, we lacked the information technology and proven models of integrated care delivery that we have now. These advances will allow ACOs to simultaneously improve health outcomes and reduce costs.

“A final bonus of A.C.O.’s is that they will lead to a better form of competition in health care markets. Today, consumers have to choose among insurance plans with a bewildering array of copayments, deductibles and annual out of pocket maximums — choices that few of us are any good at making. In the A.C.O. model, consumers will choose a primary care physician and the team of doctors and hospitals that are in the same group.”

[4] Claudia Schur and Janet Sutton report that only a tiny fraction of all doctors in Medicare ACOs play leadership roles, and up to half are unaware of who their ACO patients are or whether they are eligible for shared savings.

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12 Comments on "Why Do We Need ACOs and Insurance Companies?"

Today 11:03 pm

The health insurance companies are not going anywhere in 2020. Let’s be real! Are we really looking at a dominant Amazon, Berkshire, JP Morgan in the next 5 years? Yes, we are! Why Government spending is way up on health cost, private business is up on health cost, the individual market is up as well. Literally, this country is sinking into the black hole of health care cost which is due to so many different reasons. It’s complicated. The one market I believe that might rise and counter the Might Health Insurance Companies are cost-sharing ministry programs like Aliearacare, Liberty Health Share. Their plans are equally as good if not better than a Major Medical Plan but half the cost. But there always will be a need for women’s services that these plans don’t meet. It’s going to get crazy before the dust will settle on the healthcare market.

Mar 1, 2018

Kip, a warm blanket, every article….love them.
I use them every chance I can against the “value based” blowhards, etc.
I have a challenge for you…
How do we fix this mess? As a front line MD, I cannot see how we can undo the “sounds good” nightmare CMS ONC and the US gov has created…
Obviously MedPAC and even CMS/ONC is finally starting to hear that they have devastated the field…but even MedPAC is grasping at straws and rudderless at this point.
You see the cruel reality of ACOs MU MIPS MACRA, but what is the way out?

Feb 26, 2018

Several of the tax reduction elements of the recent tax reform legislation will run out in a few years. I can’t help but anticipate a recession would follow as a result of decreased domestic spending. The real problems underlying our nation’s health spending might well be replaced by a new strategy for controlling our nation’s health spending. Its not likely to be to our liking! Its time to recognize that the gravy train will soon huff and puff to a lurching stop.

Feb 26, 2018

Kip is mostly right even tough others have been more optimistic about other parts of the market. There are 2 major problems

1st because of politics these programs were introduced in a half assed way. Tell a big system that a teeny percentage of its revenue will come from a population of patients it can’t control? See how much attention that gets. You need everyone in that new system to make the big change. But ain’t going to happen in a world of “you like you’re plan, you can keep it.

2nd. What’s the institution at the center of these ACOs? Yup it’s called a hospital. No chance that any major hospital chain can change its spots and become an entity that will cut hospital costs. No more than Barnes & Noble could get into online bookselling….

Jeff Goldsmith
Feb 27, 2018

Lots of non-hospital ACOs, Matthew and. . surprise, surprise. . . they’ve done a lot better than the hospital ones. Though still not well enough to have made the program viable.

Biggest problem: ACO was a blunderbuss aimed at the wrong decade’s problem. Rapid cost ESCALATION was a late-90’s/early 00’s problem. By 2008 or so, cost escalation had slowed to a crawl, driven by fewer doc visits and declining hospital admits (and stalled pharma innovation) to the point were per capita Medicare cost growth was effectively zero.
So incenting providers to slow Medicare cost growth was a cruel joke: costs WEREN’T GROWING in real terms. Only ACOs that won big were located where BASE costs (e.g. the AAPCC) were absurdly high (Boston, Detroit, Houston, South Florida, e.g). The Obama-nauts made a major strategic error by focusing so much of their policy energy on ACOS, instead of on the dual eligible conundrum, where all the cost and risk is. Thanks, Bob and Zeke!

Kip and I have waged a lonely struggle against this stupid idea that became an industry really, that has wasted, by now, many billions in provider expense and wasted time and not saved the feds a damned penny.

Feb 27, 2018

Can someone explain to me why it is that folks like yourselves who write blogs can plainly see what policy makers can’t or won’t see?

Feb 27, 2018

Not so lonely, Jeff… 🙂

I appreciate the learned explanations, but I think at the bottom of it all there is this assumption that patients (or people in general) are stupid blobs and doctors are greedy bastards and both groups are inefficiently bouncing around in the wild, so to speak.
If you can just apprehend them and place them in tight little boxes, you can then throttle everything, or apply policy levers in the parlance of health philosophers. You can throttle expectations, utilization, costs, and that thing called quality, by prodding and stroking the beasts in an artificially intelligent fashion.
Sure it costs money to build the boxes, catch the animals, design the prod/stroke programs and fine tune them, but given time, lots and lots of time, maybe a generation or two, so everybody is born in captivity, it should work just fine. All we need to do is invest and wait patiently for the “culture” to change.

Jeff Goldsmith
Feb 28, 2018

Thomas Sowell’s observation- “Much of the social history of the Western world over the past three decades has involved replacing what worked with what sounded good” – applies with special force to healthcare payment policy.

This field, like many others, is prone both to management and policy fads, driven by policy entrepreneurs. I’ve written about the two strains of health policy that ascribe health cost growth to moral failure: conservatives blame the patient and progressives blame the docs. https://www.healthaffairs.org/do/10.1377/hblog20151027.051405/full/

Their “remedies”- HMOs, ACOs, high deductible plans, prior authorization, “skin in the game”, you name it- morph into billion dollar industries, with evangelists and lots of hungry vendors. Folks in our care system chase after each new idea as the proverbial “shiny object”. Woof, woof, woof.

Frankly, for those of us with more than a few decades of watching the process, it’s a little discouraging (and exhausting). As someone who has used the health system a lot recently, i just wish the care system would focus more effectively and single-mindedly on the damned patient and on the people who take care of us!


The evidence is clear from multiple Rand studies and more recent ones that the key is for patients to be able to directly benefit financially from prudent use of health services (the skin in the game theory)…and that this works even in the face of opaque pricing….the effect will gain power as prices become transparent. I agree ACO type plans may be a suitable approach for dual eligibles).
“We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which required all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending. ” Brot-Goldberg, Chandra et. al. 2015 (the link in your Health Affairs article).

Feb 27, 2018

“All we need to do is invest and wait patiently for the “culture” to change.”
Thankfully, I will be long dead before that happens.

Feb 26, 2018

The insurance industry is largely state regulated and represents a substantial employer within most states. The extensive, largely inconsequential, ACO endeavors are largely an insurance carve-out for a BHAG, aka big-hairy-audacious-goal, to begin risk-sharing within the healthcare industry. Recall that the only time health spending didn’t increase faster than inflation and economic growth was during the HMO era 1995-99 (see Altarum Institute Spending Briefs). Including 1995-1999, health spending has increased as a measure of the GDP by 2.31% annually compounded between 1960 and 2016 (not adjusted for economic growth or inflation): 5.0% in 1960 and 18.0% in 2016.

If the ACOs evolve to assume significant down-side as well as equal up-side risk, then health spending will finally increase less than economic growth, and Dr. Emanuel would eventually be correct. This is unlikely to happen without stop-loss protection for each ACO as distributed between the States and the Federal government, minus risk adjustment craziness. In return, the ACOs should engage their individual communities with a larger commitment to equitably available and ecologically accessible Primary Healthcare that is offered in each community. We certainly wouldn’t want a health system to game its patient population by where it locates its Primary Healthcare clinic locations. Supervising equitably available Primary Healthcare should involve a community based monitoring process.

The point of all this, of course, is the health spending changes that occur with more serious levels of unstable health (see chart). With advanced Primary Healthcare that is uniformly available to each citizen while they require low health spending, any required increase in health spending can be modulated with an emphasis on responsive “medical Triage” as connected to a trusting Primary Physician. Health Spending per citizen in 2016 per spending group is estimated as follows: 50%, 30%, 15%, 4% & 1% (estimated)
A. Low health spending citizen group 160 million at –$1,100.00 per person
B. Mild health spending citizen group 96 million at —$3,500.00 per person
C. Moderate hlth spdng citizen group 48 million at –$10,700.00 per person
D. High hlth spending citizen group 13 million at $ –$65,600.00 per person
E. Very high hlth spdng citizen group 3 million at $1,137,000.00 per person

Once a person’s health spending is on a trajectory to go higher past the C group, it is unlikely that our health care traditions could significantly change is evolving requirements. My plea is that we concentrate on the quality of healthcare before a citizen enters Group A or B. THis would especially apply to our nation’s maternal mortality incidence. Simultaneously, we will need a nationally sanctioned, community by community effort to mitigate any problems with its social mobility occurring for a citizen group, a Social Capital investment. FYI, total health spending in 2016 was $3.41 Trillion.
The citizen population, health spending rates follow the characteristics of a Power Law Distribution curve. Maybe the Industrial Engineers have some further insight to all of this.