First Impressions of the Medicare ACO Rule

On March 31, CMS released the long-awaited “Medicare Shared Savings Program: Accountable Care Organizations” document (ACO Rule). Read the details here (strong suggestion: unless you’re working on your PhD in ACOs, start with the fact sheets).

There are many surprises. Here are eight first impressions on this 429 page tome:

  1. The bar has been set high…very high.  Tire kickers need not apply.
  2. Don’t expect to see many or any small ACOs.
  3. Patients will be confused by ACOs.
  4. Concerns over maintaining competition and avoiding antitrust are being taken seriously.
  5. CMS scores points for coordinating the ACO Rule across Federal agencies.
  6. CMS loses points for micromanagement and a controlling mindset.
  7. Possible losers — hospitals, ACO vendors.
  8. Possible winners — physicians, health plans.

The details follow.

1) The bar has been set high…very high.  Tire kickers need not apply.

Discussions around HITECH EHR legislation requirements often invoked the metaphor of setting the bar at the “right” level:

  • Low enough to get doctors and hospitals to undertake the challenge of adopting EHRs and collecting incentive payments
  • High enough to advance community adoption and meaningful use of EHRs

There is no pretense of setting the bar at the “right” level in the ACO Rule. The bar has been set high…very high…and there are no apologies.

The infrastructure, operational and reporting requirements for setting up an ACO have teeth. Here are a few of the more prominent fangs:

  • At least 50% of the primary care physicians in the ACO must be meaningful users of EHRs by the start of year 2
  • 65 quality measures must be compiled and reported on
  • Downside risk is unavoidable. The ACO Rule sets up a two–sided risk model. One option allows the ACO to assume both upside and downside risk for all three years of the contract. The other option allows the ACO to opt only for shared savings *(i.e. only upside risk) in years one and two, but requires the ACO to assume downside risk in year three. There is no escape.
  • Eight mandatory requirements define patient centered care
  • Patients must be given the ability to access electronic summary records
  • Strict requirements are spelled out for governance, reporting on ACO results, etc.

What’s the likely result of setting the bar high? CMS assumes there will be around 75-150 approved ACOs. That strikes me as about right. Prior to the release of the ACO Rule, I would have guestimated that we’d see 750 to 1,000 ACOs approved.

Thus, at least for now ACOs will not be mainstream armies occupying every American community. Approved ACOs will be elite, highly trained and well equipped special forces units.

CMS strategy could also be described as “swinging for the fence – taking a big, deliberate swing for the home run”.  CMS is pressuring ACOs to achieve transformational change, not incremental change. This is risky, but it’s also gutsy.

2) Don’t expect to see many or any small ACOs.

While the ACO Rule allows for the formation of ACOs with as few as 5,000 patients, don’t expect many takers.

The numerous reporting requirements (see above) are mostly fixed costs and won’t vary greatly based on the size of the ACO. This favors larger ACOs with scale and capital.

Small ACOs will have no market clout. How will an ACO with 5% market share be able to sign up specialists and other community care providers?   …ergo…how does a small ACO establish the needed supportive medical neighborhood to help it manage quality and costs?

Finally, while the potential of upside bonuses might have attracted some small ACOs, the unavoidability of downside risk in year three likely will deter small ACOs.

But I also see some creative opportunities here. Will health plans wake up to the opportunity to collaborate and even invest in ACOs (instead of whining about antitrust fears)? Will the idea of a getting a stake in a small number of elite, special forces ACOs attract private capital?

3) Patients will be confused by ACOs.

The ACO enabling legislation in the PPACA had wording that required retrospective retribution of patients to an ACO. While this was well intentioned — the idea was not to limit patient choice of providers — this approach has many unintended consequences. The biggest headache for the ACO is managing a population of patients without knowing who they are.

Thus, patients won’t actively have to sign up for an ACO, yet they’ll be assigned to an ACO – and care providers will be required to explain this to patients.

There are many idiosyncratic and potentially confusing notification requirements in the ACO Rule. For example, there’s a requirement that patients have the right to opt out Medicare’s sharing their data with the ACO. So at some point the patient will have to be handed a form that says “I understand that I have been retrospectively attributed to Acme ACO and that I have the right to choose NOT to have Medicare share data about me with Acme ACO.”

How are patients likely to react to this? “What do you mean I’m in Acme ACO? …I never signed up for that. What’s an ACO? What’s retrospective attribution? What kind of data about me will be shared? I think the safest thing to do is not to share my data with anybody.”

4) Concerns over maintaining competition and avoiding antitrust are being taken seriously.

The FTC and DOJ released a separate notice on a proposed Antitrust Enforcement Policy regarding ACOs.

5) CMS scores points for coordinating the ACO Rule across Federal agencies.

A reading of the ACO Rule highlights extensive efforts to coordinate with other Federal health initiatives: HITECH EHR incentives, PQRS, readmissions prevention, value based purchasing.

6) CMS loses points for micromanagement and a controlling mindset.

Regular readers have heard my frequent carps on CMS based on personal experiences: “Many good individuals at CMS, but collectively it’s the biggest black hole in the universe.”

Here are a few of the zingers in the ACO Rule:

  • Required preapproval by CMS for initial and revised marketing materials. What a headache!
  • 25% withhold on shared savings. It’s already going to be difficult for ACOs to raise capital to meet CMS’ extensive operational and reporting requirements.
  • Provisions for patients to opt out of sharing their Medicare data with the ACO. How can an ACO manage overall care if you don’t know when patients go outside the ACO network?
  • Patient representative required on ACO governing board. Well intentioned, but micromanaging.

7) Possible losers — hospitals, ACO vendors.

Overall, the ACO rule contains many unexpected surprises.

The first possible loser is hospitals. Prior to the release of the ACO Rule, one widespread concern had been that the shared savings ACO would be viewed as a hedging (i.e., tire kicking) strategy by care providers — particularly hospitals that have the most to lose by ACOs reducing revenues for admissions and testing.

This is what a hospital might have been thinking prior to the issuance of the ACO rule:

“Let’s start an ACO — it will buy us time to see whether health care reform really sticks. The ACO statute doesn’t seem to have any downside risk since fee-for-service payments continue as-is. …and there’s potential for an upside bonus if (in the unlikely event) we actually reduce costs. We can start to build pilot systems for population health by managing the subset of patients that are assigned to our ACO; if ACOs don’t take root, we’ll just stop the pilots. We’ll also get a lead on aligning with our physicians and bringing them under the economic umbrella of the hospital.”

As described above, hospitals will have to choose whether to be fully in or out of ACOs – tire kickers need not apply.

It’s also clear that ACOs will need committed physician champions – hospitals will find it almost impossible to push an ACO on an apathetic or resistant medical staff.

At least for now, ACO vendors (e.g., health IT companies, consultants) also are likely losers (I can see you crying in your beer right now). Instead of armies of ACOs numbering around 1,000, vendors will have a likely market of only 75-150 special forces ACOs. Perhaps this will change as other ACO experiments are started under the CMS Innovation Center.

8) Possible winners — physicians, health plans.

As I’ve written previously, you’ve probably heard the metaphor that the most expensive medical instrument is the doctor’s pen —  70%+ of health care costs flow through a pen because doctors must prescribe pills, hospital admissions, medical procedures, tests, etc.

This is one aspect of health care delivery that doesn’t change under health care reform – the doctor’s pen controls costs both before and after reform.

The ACO Rule recognizes the important role of primary care physicians in a coordinated, patient centric health care system. Doctors will be kicking themselves if they don’t reach for this opportunity.

Finally – health plans have much to be thankful for with the ACO Rule:

  • Payer antitrust concerns are taken seriously, and hospitals’ appeals for broader loosening of other regulations (e.g. Stark laws) have not been recognized.
  • Wise health plans will view ACOs opportunistically – an opportunity to support care providers and invest in a more efficient delivery system.

Overall, kudos to CMS for a surprisingly aggressive and well reasoned ACO Rule.

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7 replies »

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  4. The ACO is another way to ration without saying the dirty little word. This time, the rationing is being done through the providers by encouraging a decreased use of resources. The “shared savings” can only be accomplished if the ACO meets a pre-established goal set by HHS. A portion of the savings goes to the ACO and the other to Medicare. And in the “two sided” system, the group is responsible for going over budget with potential repayment to Medicare.

    The only true way that members of the ACO can “break even” is if they hit the “Medicare average”. That means that they spent exactly what Medicare anticipated they would for the number of patients in the ACO. In essence, a fee for service group that now has greater capital and reporting requirements than a typical practice, but one that receives identical reimbursement. More work for the same pay. No thanks.

  5. Mark, BobbyG ,

    Seems we are all on the same wavelength. The clear trend is that delivery systems are being rebuilt bottom up in regions across the U.S.

    Centralized, top-down control from DC doesn’t fit. Berwick — or whoever occupies the CMS Administator role — has his hands full in changing CMS culture and systems.

  6. “I applaud the standards, but I would not have so many government-imposed rules for the smaller issues. I believe that a good idea would be to let private entities have their own rules for the minor issues.”

    I agree with that. After all, one of the things HHS/CMS is ostensibly encouraging is “innovation” in search of things that actually work to both improve care and save money. You’ve not gonna know in advance what proves to be “innovative.”

  7. Great article!

    A couple of thoughts on this rule:

    -It will be difficult to raise money for the entire health care bill because of the expansive bureaucracy overall, including this bill. Eliminating the private patient “costs” sounds great, but then taxpayers who will not use the services will have to pay-always a headache.

    -I applaud the standards, but I would not have so many government-imposed rules for the smaller issues. I believe that a good idea would be to let private entities have their own rules for the minor issues.

    Mark Cohen

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