Pioneer ACOs: Anatomy Of A ‘Victory’

On May 4, 2015 Department of Health and Human Services (HHS) Secretary Burwell announced that the Pioneer ACO program had saved the federal government $384 million and improved quality in its first two years and would therefore be expanded. HHS also released a 130 page independent program evaluation by L&M Policy Research that served as the basis for the Centers for Medicare and Medicaid Services (CMS) Actuary’s certification of the Pioneer program.

Burwell’s triumphant announceand ment was an intended shot in the arm for the troubled Pioneer ACO program, 40 percent of whose initial 32 members dropped out in the first two years. It also illustrated the yawning reality gap between DC policymakers and the provider-based managed care community. In reality, the Pioneer program badly damaged CMS’s credibility with the provider-based managed care community and sharply reduced the likelihood that the ACO will be broadly adopted.

If the Secretary’s goal of having 50 percent of regular Medicare’s payments come through “Alternative Payment Methodologies” by 2018 is to be met, that growth is unlikely to come from either the Pioneers or the larger Medicare Shared Savings Program (MSSP). Table I below shows why.

A Flawed System Rewarded Those In High-Spending Areas, Not Good Performers

As with the Physician Group Practice (PGP) Demonstration that preceded the Pioneers, savings among the Pioneers are highly concentrated in a fraction of the participants. According to the L&M report, the top eight performers saved Medicare $295 million, 78 percent of the consultant report’s claimed savings! In the PGP demo, two of the ten participants (Marshfield and the University of Michigan) generated almost 70 percent of the savings.

Table I: Pioneer ACO Top Savers


But look at what CMS paid out in performance bonuses to their biggest Pioneer savers: $295 million in savings generated only $31.4 million in bonus payments. Rewards were so meager that four of the eight top performers dropped out of the program, a fifth opted to defer calculating their bonus until the end of year three, and a sixth (Atrius) earned no bonuses in either of the first two years despite generating over $36 million in savings.

Table II: Pioneer Managed Care All-Stars


When one looks more broadly at the Pioneer cohort, the fifteen mature clinical enterprises with at least twenty years of managed care experience fared poorly (see Table II). Most of these managed care All-Stars were not strangers to managing the risk of Medicare patients, either sponsoring their own fully insured Medicare Advantage (MA) plans or contracting with MA carriers on a full risk basis.

Seven of the fifteen All-Stars dropped out of the Pioneer program after two years. The All-Stars earned only 7 bonuses in 30 possible program years and were paid a paltry $20.2 million despite L&M attributing over $185 million in savings to them (Table II). Healthcare Partners, which owned three of the Pioneer franchises (NV, CA, and JSA) dropped out of the Pioneers, but was purchased by DaVita in 2013 for $4.4 billion, a market validation of the strength of their model. (We added University of Michigan to this cohort because they were a surprise success story in the aforementioned PGP demo. University of Michigan was unable to replicate its PGP success in the Pioneer program).

The explanation for this curious outcome is that CMS used prior years’ spending benchmarks for calculating bonuses rather than comparisons of actual spending by the Pioneers to local non-participating beneficiary spending as in the L&M consulting report. The benchmarks CMS used penalized mature managed-care organizations operating in low utilization markets. Acres of low hanging fruit (meaning lots of previously unexamined and uncontrolled health care utilization) seemed to be a precondition for success in the Pioneer program. Metropolitan Boston, one of the nation’s lushest “cherry orchards,” generated 42 percent of the estimated savings for the entire Pioneer program, according to the L&M analysis. And the plummeting savings from year one to year two of the Pioneer program ($280 million to $104 million) raised questions about how rapidly the participants ran out of accessible fruit.

Implications For The Medicare Shared Savings Program

The performance of the Pioneer cohort has significant implications for the broader Medicare MSSP program, which has ten times as many participants. Most of the Pioneers were selected because they already had built and successfully used the expensive information technology (IT) platforms and utilization management systems essential to managing the care of older people.

New provider groups desiring to participate in the MSSP program faced millions in infrastructure spending to set up their ACOs and millions more in annual operating expenses, as well as the usual execution risks and losses associated with developing and operating a new business model. In 2011, the American Hospital Association estimated that an ACO with a single, 200-bed hospital could expect to spend $5.3 million in set-up costs, and then incur $6.3 million in annual operating expenses to participate in the MSSP. For a 1,200-bed, five-hospital system, set-up costs were estimated to be $12 million and annual operating expenses to be $14 million.

In recognition of the steep learning curve, MSSP was set up to provide three years of so-called “one-sided” risk (meaning no losses incurred by participants if they missed their performance targets) before flipping to real (e.g. “two-sided”) risk. This one-sided risk phase was intended as a “training wheels” period for the newer ACOs before they were exposed to financial penalties if they overshot their spending targets.

If managed care All-Stars were unable to generate bonuses reliably in the Pioneer program, this suggests that the capital and operating risks for the inexperienced participants in the Medicare MSSP program far outstripped potential rewards.

This appears to have been the case. The MSSP program’s financial performance, with 220 participants, was even more highly concentrated than with either the Pioneers or PGPs, with 3 percent of the participants generating 50 percent of the savings and 15 percent generating 85 percent of the savings. That means that the other 190 MSSP participants generated virtually no return on the hundreds of millions they spent on set-up costs and operating expenses for their ACOs.

Provider Economics Matter

A little context is important here to complete the picture. Based on our experience, the average American hospital in 2015 only covers about 90 percent of its expenses incurred in treating Medicare patients. So to participate in the Medicare ACO program, providers are being asked to spend many millions in capital and operating expenses for perhaps a one-in-six chance of reducing their Medicare losses by 1 or 2 cents on the dollar of actual spending.

That’s not a very appealing risk/reward relationship. The economics of Medicare’s ACO program greatly resembles Tom Sawyer’s famous fence painting project, where Tom talked his friends into paying him to let them paint his fence. It is telling that, thus far, CMS has not released analysis of the actual set-up and operating expenses of their ACO cohorts that would enable independent estimates of the return on investment experience so far.

Unless participation in the ACO program is made mandatory, which would provoke a firestorm of reaction from hospital and physician communities, it is unlikely that providers who do their homework will join future versions of this program in significant numbers. In a survey last fall, only 8 percent of the MSSP participants indicated that it was likely that they would renew their participation in the program as then configured. Problems extended well beyond benchmarks and financial losses to data quality and timeliness, inadequate risk adjustment methodology, overstretched and inexperienced staff, and constantly shifting policies. The newly issued final MSSP regulations are unlikely successfully to have assuaged theseconcerns.

There was in the May 4 HHS press release a sunny obliviousness to provider economics. CMS Innovation Chief Patrick Conway commented: “This success demonstrates that CMS can design and test innovative payment and service delivery models that produce better outcomes for the Medicare program, and beneficiaries.” If the models don’t make business sense for providers, they will never scale to the entire health system.

What Should HHS Do Now?

Medicare shared savings is not a new idea. CMS has been testing it for a decade, beginning with the Physician Group Practice demonstration in 2005. It is a reasonable forecast given the past decade’s experience that the ACO is not going to be a viable total replacement option for the regular Medicare program. A fall back position would be to leave the ACO as a contracting option for provider organizations in the high-cost Medicare markets, e.g. letting provider organizations compete to lower Medicare spending in their areas.

This would return the program to the original policy objective for the ACO proposedin Health Affairs by Elliott Fisher and his Dartmouth colleagues in 2007 — not containing cost but rather reducing variation. Alternatively, CMS could offer assistance to the handful of breakout superstars in the early ACO years (Memorial Hermann, Beth Israel Deaconess, Steward, Montefiore, etc.) to enter the full-risk Medicare Advantage market where they get to keep 100 percent of the savings they generate and share them with beneficiaries in the form of lower out-of-pocket expenses.

With over 17 million Medicare beneficiaries voluntarily choosing MA thus far, and enrollment growing at more than 10 percent annually despite three years of CMS payment reductions in real dollars, it is increasingly clear the future of managed Medicare lies in the MA program, not with directly contracted shared savings models. More thought should be given to how to capitalize on MA’s expansion to save money both for the Medicare program and for beneficiaries.

Jeff Goldsmith is the Health Futures Research and Associate Professor of Public Health Sciences at the University of Virginia. Nathan Kaufman is the Managing Director of Kaufman Strategic Advisors LLC.

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  1. Jeff as usual you parse and explain in exemplary fashion. Yet, might the under the hood analysis (flaws) be ‘formulaic’, as in had the Pioneers (like MSSPs) been benchmarked to prior year spend (or whatever historical baseline more accurately reflects organic spend in Medicare FFS, might these risk savvy – more often than not MA or risk bearing HMOs been more suitably rewarded on ‘true savings’ to the Medicare Trust fund? Or is the deeper flaw your argument to date that the ACO program is too little too late (aka HMO-lite)?

    • Deeply flawed concept.

      Managed care without the risk: gin and tonic sans the gin, or vegan BBQ. The whole point of a global budget is for providers to have to make choices. If you can continue rocking along in FFS and make money the old fashioned way, the choices don’t bite.

      Plus the political flaw: patients didn’t get a choice to participate or a share of the savings. It was as deeply paternalistic as the wave of “managed care” that provoked the famous 1990’s backlash and the only reason for no political reaction against it was the lack of “consumer” awareness. It violated an essential Berwickian principle: “Nothing about me without me!”

      This problem was lurking out there to stop it the moment it became widespread enough. With only 7% of the population “in one”, never reached critical mass.

      This was a really stupid idea and a waste of billions and a ton of leadership bandwidth.

      • Hard to argue with both analysis and aggregate ACO results to date. Having negotiated and tasked with management of global (100% download of risk from health plan [Medicare and commercial and pharma] to risk bearing physician entities (several times), I can say capitation (global budgeting and docs figuring out the real value of their services whether inside bundles or specialty pools) is inevitable AND a good thing even thought ‘there will be blood’ as we find our way to ‘fair value’ of hospital and physician services. (I’ve joked before that this process will make the mortgage meltdown and asset revaluation process look like a walk in the park). It recognizes the finality of resources, the inability to play the continued shell game of cost shifting since the only way to view our healthcare borg is from a total cost of care perspective, and the continued rise (albeit at a slower rate of increase) of premiums and passing the buck to the member/beneficiary at higher cost sharing game is over.

        So I think of and see these intermediate entities (to full risk bearing loads) as transitional bridges to this inevitable future… ‘ACO’ will stick as did HMO because who can argue in favor of ‘un-accountable care’? Still think mechanics and formula issues are active herr, hard to allocate a proportionality of contribution though. Just not willing to completely dismiss upside potential of ACO. Might the commercial market be better able to frame and remedy some if not all of the risk/rewards alignment flaws?

  2. Savings compared to benchmarks will cause one to soon arrive at the asymptotic part of the curve where future bonuses are infinitesimals dy. So ACOs are essentially a one-time game or a few-times-game that has to terminate when dy/dx=0, i.e. when you can’t save anything compared to the benchmark. Why enter businesses that have unequivocal endings next year? or the year after?

    • Bingo. The cost saving realized will also dry up as new requirements that raise overhead are stacked upon the old.

    • Bill, your equation is so simple and clear. It is a brilliant deduction one that ACO supporters refuse to go near.

    • Same is basically true of any clever new payment scheme. People will figure out the game and play it OR enough people will “optimize” that the savings potential disappears. Which means. . . you need the next game to be ready to come out of the chute when you reach about year 5.

      The problem with this one was that it was teed up at the time of the lowest health cost growth since Dwight Eisenhower’s last year as President (1960). It targeted a problem that had largely disappeared by the time they rolled it out. PLUS, the demo essentially failed
      (e.g. too few people were able to figure out how to do it.

      But none of that mattered because it became a FRANCHISE, the most lucrative consulting franchise in the history of healthcare consulting. And in healthcare’s Twaddle Echo chamber. . the next big thing whether it “worked” or not. (kudos to JD Kleinke for the metaphor).

  3. don’t know of anyone who has said their insurance premiums are coming down. I do know lots of people who say that their deductibles and copays are going up. And their premiums are going up and up. My premiums have nearly doubled since the passage of ACA. People feel squeezed.

    Defensive medicine is one area where we can potentially make headway without sacrificing quality.

    Let’s agree that no one knows what the actual cost of defensive medicine is. But, it’s reasonable to assume it’s not zero. If we want to test the hypothesis that defensive medicine can be pared back, the tort environment will need to change to a model like PCS. A doctor does not care if he is sued for $1 or $1M. Being sued is perceived as an onerous, capricious process. Doctors who are sued vow to never be sued again. As one ER doctor said, “I will scan patients until they glow.” As long as doctors are free to order tests, as long as patients pay for tests, and as long as doctors can be sued for not ordering a test, we will have a perfect trifecta for defensive medicine.

    • Freemarket Chick has it right. I am a Radiologist and I see a huge amount of unnecessary imaging performed – much of it to CYA.

      There should be guidelines and if they are followed a presumption of correct practice. Of course with the Trial Lawyers in charge of the Democratic Party and many State Legislatures it won’t happen.

      • So will docs at the regional level police each other, or will the big, bad, evil, insurers have to “deny care”? I am all for physician leadership — let’s see some. Because if we don’t see some and soon, it is going to be guys trained like i am left to do the best we can, and we can’t do nearly so well as docs can. Of course, I’ve been saying this for fifteen years…

        • You appear to have missed the point that Freemarket Chick and I are making. It is not possible for physicians to “police each other” with respect to the risk of a malpractice suit. Someone needs to police the legal system – and that ain’t happening.

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