Warren Skea
Benjamin Isgur

At a Glance

As hospitals prepare for a new world of shared payments under the ACO model, they need to make determinations with respect to four key areas of concern:

  • Integration-whether the organization can realistically deliver all that is required for shared savings  
  • Cost versus benefits-whether the benefits of becoming an ACO exceed the costs  
  • Patient loyalty-whether their patient population is sufficiently loyal to help ensure the organization will succeed as an ACO  
  • Risks versus rewards-which option among ACO models is most financially attractive based on an analysis of the particular data sets  

The term accountable care organization (ACO) is now ubiquitous in the healthcare landscape. Nearly every healthcare organization has investigated whether it should invest in becoming an ACO or participate in one. On Jan. 1, 2012, the first round of Medicare ACOs will be launched, bringing with them new ways of managing patient care with the goal of improving patient outcomes and reducing costs. These ACOs are being formed at the direction of the Affordable Care Act; other ACOs that are independent of the Affordable Care Act will emerge as well.

ACOs will undertake an approach to population healthcare management focused on preventing hospitalizations and readmissions and reducing emergency department visits. The ACO model will be just one of a variety of care models that emphasize delivering higher quality at reduced cost. Such models require closer alignment between hospitals and physicians-and a recent study by PwC's Health Research Institute found that both sides understand the importance of alignment in an era of reform.

In its report on the study findings, the Health Research Institute notes that more than half of physicians believe that hospitals and physicians will be more closely aligned through ACOs in the next five years (From Courtship to Marriage, Part I: Why Health Reform Is Driving Physicians and Hospitals Closer Together, December 2010). Physicians are seeking financial security through traditional and innovative compensation arrangements with hospitals, such as co-management models, while hospitals are recognizing the need to partner with physicians to improve clinical outcomes and reduce inpatient costs. Further, to position themselves as ACOs and participate in bundled payment arrangements, providers need adequate physician participation.

With the release of the final ACO regulations on Oct. 20, hospital finance executives now face three important questions:

  • Are ACOs worth the performance and financial risks?
  • How will shared savings and losses actually flow through an ACO?
  • What are the potential gains and losses?

A Shared Savings and Shared Risk Model

Although the final regulations for ACOs eased several cost-intensive aspects of the proposed regulations, such as meaningful use requirements, significant investments will still be required to organize and maintain a successful ACO.

Just how much a prospective ACO will need to spend to set up and maintain an ACO network is still uncertain and site specific. Independent cost analyses by the Centers for Medicare & Medicaid Services (CMS), the American Hospital Association, and the Institute for Health Technology Transformation show broad disparities in projected set-up and continuance costs. As such, prospective ACO participants need to ensure that the shared savings from ACO participation enable the recovery of these investments, at a minimum.

To participate in the Medicare Shared Savings Program (MSSP), an ACO must select from one of several models. The choice involves two types of models: a "one-sided" model that carries no financial risk and a "two-sided" model that offers higher pay-outs, but carries downside risk. The Center for Medicare & Medicaid Innovation (CMMI) has developed the "Pioneer ACO Model," designed for more experienced organizations. To share in savings to the Medicare program, an organization should spend less on beneficiaries than the benchmark that Medicare establishes for that group.

In addition to choosing from among the different models for participation, prospective ACO participants must determine the level of physician integration they will pursue for their ACO networks and how deeply cost savings will be pursued throughout the entire organization. The exhibit on page 46 illustrates the difference in financial outcomes between an integrated and nonintegrated ACO pursuing the Pioneer ACO Model. The Pioneer model was chosen for this illustration because applications for participation are already in process; however, the parameters of the exhibit are relevant for all ACO models.

The analysis displayed in the exhibit clearly demonstrates the financial incentive for ACO participants to develop an integrated approach. By operating in an integrated manner,an ACO could receive up to $5.9 million in shared savings payments from CMS and achieve a robust return of 10.6 percent on its ACO investment. By comparison, a nonintegrated, single-hospital ACO with little to no infrastructure in place could expect to receive about $240,000 in shared savings reimbursement and a 0.46 percent ROI.

Why the stark difference in financial outcomes between the two approaches? Integration with physician practices or other health systems allows ACOs to shift health services to their most cost-effective delivery location while also expanding the size of their beneficiary groups, resulting in reduced costs and greater economic leverage. In short, costs are reduced and savings increase.

Action Steps for Hospitals

Hospitals should consider taking action in the following areas to prepare for a new world of shared payments under the ACO model.

Integration. The organization should determine whether it can realistically deliver all that is required for shared savings, given its current level of integration and physician involvement. For instance, patients who are part of the ACO population will inevitably cross specialties and ACO boundaries, creating concerns around the timeliness and completeness of Medicare data. ACOs will need to look for ways to obtain clinical data on beneficiaries that seek care outside the ACO-for example, by joining a local or regional health information exchange or by offering a portable personal health record to beneficiaries.

Cost versus benefits. The bar for qualifying to become an ACO is high, and organizations need to consider whether the benefits of becoming an ACO exceed the costs. Many hospitals are choosing to observe ACO implementation at other organizations before applying for ACO status. However, estimated financial results will vary significantly from hospital to hospital, depending on each hospital's infrastructure, level of physician alignment, and medical costs. It will be necessary to model the changes required for participation based on the organization's own data and the ACO regulations.

Patient loyalty. ACO beneficiaries will be part of an open model that allows them to choose where they would like to receive services. Organizations considering forming an ACO therefore should analyze their patient population to ascertain whether the patients are sufficiently loyal to help ensure an ACO will be successful. ACOs also should track their assigned beneficiaries and regularly measure the beneficiaries' level of satisfaction with the care and service they receive. Success will be determined by how aggressively ACOs coordinate care capabilities and how they link care coordination with primary care physicians and related specialists to achieve more standardized care pathways.

Risks versus rewards. Hospitals considering an ACO strategy should analyze the particular data sets of ACO models to determine the most financially attractive option. Partnering with physician groups is an attractive option for ACO participants to better align incentives, mitigate financial risks, and optimize potential savings. Hospital leaders who have determined that the ACO model is their best option should then determine a specific ACO strategy and execution plan. Some may determine that other options are preferable, however, including:

  • Not becoming an ACO and simply serving as an "outsourced solution for high-quality/low-cost inpatient and outpatient services"
  • Acquiring all ACO components of a health system
  • Participating in joint ventures and risk-based contracting with those that have ACO services



The Time for Decision Making Is Now

With the release of the final rules for ACOs, the new world of shared payments under the ACO model will be multifaceted and will present both risks and rewards for healthcare providers. Now is the time for hospitals to determine whether participation in an ACO is the right choice for their organization and, if so, which specific strategy and implementation options should be pursued. The steps that hospitals take now to prepare for the world of shared savings and shared risk will be critical to their success under a value-based business model.

Warren Skea, PhD, is a director, PwC's Health Industries Practice, Dallas (warren.h.skea@us.pwc.com).

Benjamin Isgur, MPAff, is a director, PwC's Health Research Institute, Fort Worth, Texas, and a member of HFMA's Lone Star Chapter (benjamin.isgur@us.pwc.com). 


Publication Date: Thursday, December 01, 2011

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