The Case for Administrative Benchmarks (and Some Challenges)

Most U.S. Medicare beneficiaries are in population-based programs where spending targets, known as benchmarks, are used to determine payments. These include both the Medicare Advantage (MA) program, which relies on private health plans to manage care, and Accountable Care Organization (ACO) models, where providers are rewarded if they efficiently deliver care. When well designed, these models can incentivize reductions in spending and improve patient outcomes. A crucial aspect of these models, however, is how the benchmarks are determined. Policy makers have multiple approaches at their disposal, and each comes with unique strengths and weaknesses. The most common benchmark setting approach is empirical in that benchmarks are tied to actual spending or near-term forecasts based on lagged spending in fee-for-service traditional Medicare (TM). Empirical benchmarks reduce the risk that plans and providers face from fluctuations in costs that are beyond their control. That risk is absorbed by Medicare, so program spending will rise or fall with TM spending. Empirical benchmark systems have several significant weaknesses — including a ratchet effect and a collective success problem — that make it difficult for plans and providers to share in savings over the long run. This limits the long-term success of these population-based models. In contrast, administrative benchmarks are set by taking a base rate (such as historical spending) and growing it by an administrative factor that can reflect policy goals, anticipated volume, and intensity growth, or a socially agreed-upon rate, such as gross domestic product growth. The key feature is that, without policy action, the benchmark trajectory is not influenced by realized spending trends. An example of the administrative benchmark approach is the Accountable Care Prospective Trend component of the benchmarks for ACOs in the Medicare Shared Savings Program, which uses an initial benchmark, based on baseline spending, that grows based on spending growth that was forecast when the program was launched rather than realized spending growth. This administrative benchmark allows benchmark growth to diverge from, rather than track with, realized spending growth, which avoids shortcomings of empirical benchmarks and allows for greater incentives to deliver care efficiently, providing predictability over time. The key to success for administrative benchmarks is that the administrative growth rate needs to be set low enough so that Medicare saves money relative to what would happen without ACOs or MA, but high enough to still encourage participation.