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Explaining Sluggish Savings under Accountable Care

Article · January 29, 2018

Despite aggressive targets set by Medicare for the spread of value-based payment arrangements and widespread agreement on the importance of delivery-system reform, progress toward lower spending growth and a transformed delivery system has been slow. Accountable care organizations (ACOs) are a prime example: nearly 1000 organizations operate as ACOs, but they have generated limited savings. Even in the third year of Medicare ACO contracts, fewer than half of ACOs received a bonus for reducing spending. To guide policy and help providers succeed, it would be useful to understand why so few ACOs are achieving savings. Data-driven empirical work on ACO performance has yielded few insights into the specific characteristics of ACOs that lead to success.1 We believe it would be helpful to consider how economic and organizational theories might explain early results from the ACO experiment.

ACOs are remarkably diverse. To spur innovation and encourage participation, Medicare sets few constraints on the forms that ACOs can take. As a result, participating organizations include both long-standing integrated systems and more recently formed entities, such as hospitals and private practices that came together to pursue ACO contracts.2 Understanding this diversity — and the related variation in performance among these organizations — may provide insight into how to accelerate improvement in ACO performance.

We paired data from the Centers for Medicare and Medicaid Services and the National Survey of ACOs to compare performance in the first 3 years of ACO contracts for three types of ACOs: integrated delivery systems, outpatient-physician–practice ACOs, and coalitions of independent hospitals and practices (see graph). In the first year of ACO contracts, approximately 30% of ACOs in each group received bonuses. After that, trends differed. The percentage of integrated delivery systems receiving bonuses remained constant over the 3 years. Among hospital coalitions, that figure held steady in year 2 but jumped to 47% in year 3. Finally, among physician-group ACOs, the percentage achieving savings steadily increased to 43% in year 2 and 51% in year 3.

Proportion of ACOs Achieving Shared Savings under Medicare ACO Programs in the First 3 Years of Payment Contracts

Proportion of ACOs Achieving Shared Savings under Medicare ACO Programs in the First 3 Years of Payment Contracts. Data are from the Centers for Medicare and Medicaid Services (CMS) public release file and the National Survey of ACOs (NSACO) (N=137; cohort consistent over all 3 years). The NSACO response rate was 71% among eligible ACOs. Physician-group ACOs are ACOs consisting only of physician groups and no other provider types. Hospital-coalition ACOs are ACOs that are not integrated delivery systems and that include a hospital. Mean number of clinicians is the number of full-time-equivalent primary care and specialty clinicians participating in the ACO. Proportion of ACOs achieving savings comes from publicly available CMS data. Click To Enlarge.

What might explain these differences? Myriad context-specific factors affect the performance of individual ACOs, but few characteristics have been shown to systematically explain ACO performance.1 We identified four cross-cutting explanations for the failure of ACOs to achieve savings right away (or at all) — two economic and two organizational (see table). Economic explanations emphasize the breadth and depth of financial incentives in ACO programs, whereas organizational explanations emphasize organizational processes and complexity.

Possible Explanations for Medicare ACO Programs’ Generation of Limited Savings

  Click To Enlarge.

Economists worry about weak incentives. In the Medicare Shared Savings Program, nearly all participants opted to receive a bonus if they generate savings but bear no financial responsibility for losses. Transitioning providers to sharing in downside risk may result in greater behavior change and savings, although the literature on this subject is mixed.3,4 A second explanation suggests that having more patients covered by ACO-like contracts may strengthen incentives.

Providers with few patients covered by ACO-like contracts face a problem colloquially described as “having a foot in two canoes.” Initiatives that generate savings in the care of a provider’s ACO patients will reduce income from its fee-for-service patients — an effect that led some integrated networks to fail during the managed care era.4 Until providers reach a tipping point in the number of patients covered by risk-based contracts, it will be hard for organizations to generate substantial savings.

We believe that all ACOs would benefit from having more patients covered by ACO-like contracts, something we routinely hear from providers. Lack of downside risk may help explain the performance of integrated delivery systems: complex existing systems might require stronger financial incentives to change their behavior. In contrast, the increasing proportion of physician-group and hospital-coalition ACOs achieving savings over time suggests that sharing in downside risk may not be necessary for these types of ACOs to generate cost savings if they are given enough lead time.

Economic explanations suggest that the key issue is motivation: providers know how to save money, but they need financial motivation to change their behavior. An alternative set of explanations draws on organizational theory and literature and suggests that providers either don’t know how to achieve savings (at least initially) or that they have to focus on other things — such as organizational, start-up, and compliance work — before they can implement the changes necessary to save money.4,5

One organizational explanation for the progress that different kinds of ACOs have made toward generating savings relates to knowledge: when joining an ACO, independent physician practices with little knowledge of new care models may have ideas about how to save money, but they may need time to work out what to do and how to do it. Such groups may need to explore care management models or learn how to improve care transitions. This explanation may be particularly apt for outpatient-physician–practice ACOs and some hospital-coalition ACOs that are new to the game.

Another organizational explanation is that the complexity of ACOs affects their performance. First, most ACOs are not preexisting organizations; they are collections of independent providers, such as a community hospital and local private-practice physicians who decided to pursue an ACO contract together.2 These new organizations must accomplish a great deal of foundational work, such as forming a board; determining how to share bonuses; and completing tasks that require internal coordination, such as reporting quality measures. Then they must agree on and implement a joint strategy for pursuing cost savings. In these ACOs, we expect that progress toward generating savings may be delayed, because setting up a functional ACO will initially require attention and effort. This initial added work may explain why the proportion of hospital-coalition ACOs earning bonuses remained stagnant in year 2 but increased in year 3.

Second, organizational complexity probably challenges integrated systems. Although all ACOs must learn how to change ingrained practices among clinicians, the large, complex, and diverse networks of providers in an integrated delivery system present an added challenge for clinical transformation. Overcoming the inertia in these systems may be like trying to turn a large battleship. In contrast, outpatient-physician–practice ACOs are small and have a simple organizational structure, which probably makes them more nimble and able to more quickly implement (or discard) new initiatives — and generate savings. Newly formed coalition ACOs must spend time developing organizational infrastructure, but these groups aren’t encumbered by existing organizational processes.

We believe these explanations support taking a nuanced approach to encouraging, motivating, and rewarding providers. For all providers, moving a greater share of patients to value-based payment arrangements may support efforts to transform care and remove the barrier of conflicting incentives. Larger, integrated systems may benefit from a wider breadth of incentives and from stronger incentives that include sharing in downside risk. Shifting too quickly to risk sharing for newly formed ACOs, however, could backfire: among a subset of ACOs, it may be critical to allow providers enough time to settle into new organizational forms and develop and implement strategies in a deliberate and thoughtful manner. ACOs are as diverse as the U.S. health care system, and saving money in health care is notoriously hard. Developing policy approaches that accommodate this diversity will be important for payment and delivery reform to achieve its potential.

From the Dartmouth Institute for Health Policy and Clinical Practice, Lebanon, and the Geisel School of Medicine at Dartmouth, Hanover — both in New Hampshire.

1. Ouayogodé MH, Colla CH, Lewis VA. Determinants of success in shared savings programs: an analysis of ACO and market characteristics. Healthc (Amst) 2017;5:53-61. CrossRef | Medline
2. Lewis VA, Tierney KI, Colla CH, Shortell SM. The new frontier of strategic alliances in health care: new partnerships under accountable care organizations. Soc Sci Med 2017;190:1-10.
CrossRef | Web of Science | Medline
3. Hellinger FJ. The impact of financial incentives on physician behavior in managed care plans: a review of the evidence. Med Care Res Rev 1996;53:294-314. CrossRef | Web of Science | Medline
4. Burns LR, Pauly MV. Accountable care organizations may have difficulty avoiding the failures of integrated delivery networks of the 1990s. Health Aff (Millwood) 2012;31:2407-2416. CrossRef | Web of Science | Medline
5. Burns LR, Goldsmith JC, Sen A. Horizontal and vertical integration of physicians: a tale of two tails. Adv Health Care Manag 2013;15:39-117. CrossRef | Medline

This Perspective article originally appeared in The New England Journal of Medicine.

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