Cost Conundrum: How Accountable Are ACO’s?

Among the many ways the Affordable Care Act tries to drive down healthcare costs is through Accountable Care Organizations.

Just what are ACOs? HMOs in drag? And are they working?

Here’s how we see the ACO landscape today:

• Although their launch has been somewhat troubled, Accountable Care Organizations are here to stay.

• The Centers for Medicare and Medicaid Services (CMS) is driving the adoption of ACOs, with some private payers joining in.

• Data collection and analysis hold out the promise of reducing inefficiencies.

• ACOs don’t take on a lot of risk if they can avoid it. That in turn will affect how much money they can actually save the healthcare system.

• In a related development, some payers – including a new industry alliance – are looking closely at the role of health insurance third-party administrators (TPAs), to see if further cost can be taken out of the system there.

What Is an ACO?

First, a bit about terminology. While ACOs undertake some responsibility for the cost of delivering care, they are not “all in,” as are HMOs. (For a good video explaining ACOs, see this from Kaiser Health News.)

Here’s how healthcare economist Austin Frakt, writing in the New York Times, explains the differences between ACOs and HMOs:

“ACO-like contracts typically do not rely on full capitation. Instead, they usually put providers at risk for a portion of the cost of care; that risk is shared with insurers … Another big difference is that 1990s H.M.O.s and capitation contracts didn’t require providers to meet quality targets to receive full payment. Today’s accountable care organizations tie bonus payments to quality, a feature intended to mitigate against providers’ sacrificing quality for lower cost. Finally, accountable care organizations are developing in a climate of far better information resources — electronic medical records and techniques for using the data they collect for quality measurement and improvement — than existed in the 1990s.”

If ACOs are to succeed, those “better information resources” are essential.

CMS, other payers, and employers are increasingly relying on the ability of health informatics to take cost out of the overall system. As HealthPayer Intelligence put it, “Real-time data on patients who are hospitalized or in emergency rooms would tremendously benefit ACOs as they work to reduce medical costs.”

That kind of data only comes from sophisticated, closely integrated health IT systems. “Analytics systems for integrating clinical processes and improving population health management (are) being supported by more health payers, according to a study from Deloitte,” the article added.

The Outsized Role of Medicare

CMS looms large in the ACO world. In 2014 alone, “Medicare paid $60 billion to 353 ACOs to take care of nearly 6 million Medicare beneficiaries,” NPR reports.

Unfortunately, the result was a net loss of nearly $3 million to the Medicare trust fund. “It’s turning out to be tougher to transform care and realign delivery than people had expected,” said Eric Cragun, of The Advisory Board Company.

CMS wasn’t the only one losing money. A number of ACOs have pulled out of early arrangements, citing financial factors.

“Each of these ACOs made very substantial investments in infrastructure: new data systems, care management and care coordination systems that probably run anywhere between 1 and 2 percent of their target budget,” Robert Murray, President of Global Health Payment, told Policy and Medicine. “If you apply that to the results of the ACOs, you would find that even a significant proportion of those meeting Medicare’s goals would be underwater financially.”

Moreover, as NPR reported, “ACOs’ appetite for taking risk remains small. The number of ACOs opting for the largest potential bonuses and penalties has shrunk from 32 at the start of the program to 19” as of last September.

Nonetheless, the ability of ACOs to reduce cost and provide value-based care continues to attract many payers to the concept, according to HealthPayer Intelligence. The number of ACO’s is growing rapidly.

Big Employers Mobilize

Aside from ACOs themselves, big employers are continuing to scrutinize healthcare costs in a related effort to maximize “accountable care.” Verizon, Starbucks and Macy’s are among 20 companies that have formed the Health Transformation Alliance. The industry initiative has also drawn support from some insurers.

Placed under the microscope by alliance members are middlemen, such as pharmacy-benefit managers and third-party administrators (TPAs) that operate health insurance programs for companies.

“It’s certainly an area that we’re interested in and we’ve got to really understand where the data brings us,” Bill Allen, chief human resources officer at Macy’s, told the Wall Street Journal.

Whether through an ACO or self-insurance programs, it’s all about reducing cost. Will it work? It’s still too early to tell.