Accountable Care Organizations

Six Ways to Address Non-Performance-Related Variation in ACO Contracts

January 22, 2015 1:11 pm

Before entering into a shared savings contract, payers and providers should discuss how to account for factors unrelated to the cost or quality of care that can skew incentive payments.

“An ACO can be doing all the right things and end up getting penalized for some events that are somewhat out of their control,” says Phil Kane, director in the network and competitive analytics group for Florida Blue, the Blue Cross Blue Shield brand in Florida.

As described in a related article, Accounting for Non-Performance-Related Variation in Shared Savings Contracts, factors unrelated to performance, such as patient attribution and product mix, often come into play when determining shared savings incentive payments.

While not yet a perfect science, payers and providers can begin to address non-performance-related variation in a number of ways.

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Apply Risk Adjustment

Payers should use risk adjustment to account for varying acuity levels of members throughout the contract term of an ACO. For example, if an ACO adds a pediatric practice, a risk adjustment method that accounts for the change in demographics can address the resulting variation in PMPM costs.

This process may include using demographic factors, such as age, gender, or risk score factors, such as the Centers for Medicare & Medicaid Services’ hierarchical condition categories model.

Control When Practice Groups or Members Can Be Added

The addition (or withdrawal) of providers or members to an ACO has a material effect in how measurements are calculated. Requiring that providers and members can only be added at predetermined intervals agreed on by both payer and provider—or at the end of a particular measurement/contractual period—will promote consistency and reduce variation.

The downside is that, if a provider leaves a practice but is still part of the measurement, the ACO’s incentives may not reflect the actual efficiency of the remaining providers.

Find Other Measures that Demonstrate Performance Improvement

Kane suggests using a PMPM trend comparison to market. The incentive is tied to how the ACO is performing against other organizations in the market.

The downside is that many ACOs are already high-cost relative to the market (see the table below). Although the ACO may outperform the market trend in terms of “xx percent” (say 6.5 percent versus 7 percent), the ACO’s costs may still remain much greater than the market (say $386 versus $353). Yet, the ACO receives an incentive.

ACO Trend Comparison to Market

  ACO Target      ACO Actual      Market     
Baseline PMPM cost      $362 $362 $330
Trend 5.0% 6.5% 7.0%
Actual PMPM cost $380 $386 $353

Provider performance may also be gauged on factors other than total cost of care, such as utilization-specific measures (for example, ED visit rates, inpatient days per thousand members, or avoidable readmission rates). The downside to this approach is that these measures may not move in the same direction as the total cost of care (PMPM) performance.

“We have seen instances where ED rates have declined, but the actual PMPM has increased,” says Kane. “Because of the dynamics of medical expense trend, we’ve encountered many instances where there’s a decline in a performance measure (e.g., ED rates per 1,000, admits per 1,000) and still observed a PMPM increase.”

Pool Incentive Arrangements with Other Entities

Incentives for several independent ACOs are aggregated, and each ACO receives a portion of the total, which can spread out the variability, helping to reduce the impact. The downside is that the incentive is tied to the performance of all the ACOs, not an individual ACO.

Truncate High-Cost Members

Under this method, the ACO covers the cost of care up to a predefined amount, say $100,000, limiting the out-of-scale influence of high-cost members on overall PMPM costs. The downside is that because costs of care for the patients still have to be covered, payers are required to retain additional savings to fund that cost.

Account for Quality

Quality performance is often a trigger for ACO financial incentives, or at least a requirement for participation.

“Florida Blue doesn’t pay incentives for quality in our commercial ACO arrangements,” says Kane. “However, an ACO is not eligible for an incentive unless they can pass pre-defined quality measurements. We call this a ‘quality gate’ for payment.”

Other payers will adjust the ACO incentive payment based on their quality performance, says Kane. For example, the ACO will receive 100 percent of the eligible incentive if they meet 100 percent of the quality measures; 80 percent of the incentive, if they meet 80 percent of the measures, etc.

Access related article: Accounting for Non-Performance-Related Variation in Shared Savings Contracts

Karen Wager is a freelance writer who regularly contributes to HFMA publications and Forums.

Quoted in this article: Phil Kane is director in the network and competitive analytics group for Florida Blue, an independent licensee of the Blue Cross and Blue Shield Association, Jacksonville, Fla.

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  • What other ways can providers and payers account for non-performance-related variation in ACO contracts?
  • Have you tried any of the approaches described above? Please share your experience.


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