Ken PerezWhen he was leaving his post as the Centers for Medicare & Medicaid Services (CMS) administrator, Donald M. Berwick, MD, shared in an interview with the New York Times that 20 to 30 percent of healthcare spending is waste that yields no benefit to patients. Given that large amount of waste, surely, then, one would have thought that almost all of the original 32 Pioneer accountable care organizations (ACOs)—many of which are generally considered the most sophisticated healthcare organizations in the nation—should have been able to shave a few percentage points off their costs during their first year in the program and, thereby, meet or beat their expenditure benchmarks.

As we know from a July 16 press release from CMS, that was not what happened. Although every one of the Pioneer ACOs successfully reported the required quality measures, a majority—60 percent—failed to produce shared savings, missing their cost-reduction (or more accurately, cost curve bending) targets. Moreover, two of the Pioneer ACOs incurred sufficiently large losses requiring penalty payments to CMS. 

Because CMS’s complicated process for establishing expenditure benchmarks incorporates the last three years of per beneficiary costs for each ACO’s population, one could contend that heretofore high-performing provider organizations are placed at a disadvantage, because they may find it increasingly difficult to wring out more savings—the diminishing returns phenomenon. In that same vein, one could say that the Medicare ACO programs are skewed in favor of poor-performing organizations and/or ACOs with high-cost populations with a lot of room for improvement. For example, according to the Kaiser Family Foundation, New Hampshire ranks ninth highest in both healthcare expenditures per capita and annual growth in health care, spending $7,830 per person in 2011. The Dartmouth-Hitchcock ACO, centered in Lebanon, New Hampshire, successfully generated $1 million in savings for CMS in the first year of the Pioneer ACO program. 

Historical cost handicaps and advantages aside, is it realistic to expect ACOs to achieve their cost-reduction targets in the first year of the program, and if not, why is that the case? A majority of the Pioneer ACOs failed to meet their financial objectives, which is consistent with the experience of the Physician Group Practice Demonstration (2005-10), a precursor to the current Medicare ACO programs, in which only two of 10 participating physician groups generated shared savings in the program’s first year. Also, as Advocate Physician Partners CEO Lee Sacks and chief medical officer Mark Shields shared in a presentation at the AMGA 2013 Annual Conference in March, in terms of sequence of impact, the AdvocateCare ACO’s quality metrics were put in place in six months, but it took longer to impact the major levers of cost: length of stay (6-12 months), readmissions (12-24 months), admissions/1,000 (12-24 months), and emergency department visits/1,000 (24-36 months). The lesson: Successful cost reduction in year one is the exception, not the rule, and look for brighter days to come in year two and beyond in ACO programs.

Any parent taking children on a long car trip has fielded the question, “Are we there yet?” The most common reply is, “No, but we’re on the right road.” And so it is with the ACO journey to bend the cost curve and improve quality.

Ken Perez is a healthcare policy and IT consultant in Menlo Park, Calif.

Publication Date: Thursday, August 29, 2013