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ACOs: A New Way to Cut Health Care Costs?

April 26, 2011
CHI Health

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ACOs: A New Way to Cut Health Care Costs?

For those of you tracking developments in health care reform, it’s likely that you’ve been hearing the terms, “Accountable Care Organization” and “Medicare Shared Savings” a little more often lately. But do you know what they really mean?

If not, then we hope that the following article – which was originally developed for our staff and physicians – will help you better understand the changes that are likely headed our way.


If a health care provider can find a successful way to decrease costs while still achieving high quality care, then they should get a cut of those savings … makes sense, right? Unfortunately that’s just not the way things currently work. But that’s all set to change in 2012, when the Medicare Shared Savings Program is set to take effect.

Medicare Shared Savings was introduced last March as part of health care reform. Just as its name suggests, this new program aims to incent providers to lower Medicare costs (while still achieving quality care) by offering the chance to share in those savings. But Medicare isn’t going to send a check to every provider who cuts costs. Instead, HHS has developed a set of proposed regulations to form what are called Accountable Care Organizations (ACOs).

What is an Accountable Care Organization?
An ACO is a group of providers (hospitals, clinics, rehab facilities, hospice, etc.) and suppliers of services (physicians and other practitioners) that work together to coordinate care for the Medicare patients they serve (Medicare Parts A & B only). They are patient-centric organizations in which the patient and providers partner in care decisions.

Through the Medicare Shared Savings Program, ACOs will have the opportunity to share in the cost of savings they provide to Medicare, as long as they continue to achieve quality care. Patient, provider and supplier participation is voluntary.

Tracking Quality
As you’ve likely noticed, the cost-savings won’t mean a thing if the providers within an ACO don’t provide a certain level of quality care. CMS plans to measure quality using 65 nationally recognized metrics in five key areas:

  • Patient experience
  • Care coordination – this includes better access to information, pending patient approval
  • Patient safety
  • Preventive Health
  • At-risk population/frail elderly health

An ACO that successfully reports the required quality measures during the first year of the program will be deemed eligible for a bonus. During the second and third year the ACO must meet set standards for each quality measure.

So how does the shared savings component actually work?
The Medicare Shared Savings Program expects approximately 75-150 ACOs to take part in the program. Each ACO must serve at least 5,000 Medicare beneficiaries (determined by primary care services) for three years. Providers must be a part of an ACO to share in the savings; however they will continue to be paid under traditional Medicare fee-for-service rules.

Once the ACO is formed, CMS will develop two key benchmarks to determine if it is eligible for shared savings:

  1. Expenditure benchmark: estimate of how much Medicare would have paid providers in the absence of the ACO
  2. Minimum sharing rate: how much did the ACO save as compared to the expenditure benchmark

If an ACO has met the quality standards listed above and exceeds the minimum savings rate, it will be eligible to share in the savings. Medicare is also offering additional incentives for those ACOs that care for beneficiaries who receive services from a Federally Qualified Health Center or rural health clinic.

What is the risk?
You’re probably wondering why anyone would hesitate to sign up. Providers still receive fee-for-service payments from Medicare, but if they are able to lower costs then they’re eligible for a cut. Sounds like a pretty safe way to make some extra money – or at least improve some of the major issues facing our industry, right?

Unfortunately it’s not that simple. Each ACO will be asked to choose from two models of risk:

  1. One-sided – in this model of risk, the ACO will share up to 50% of the cost savings without any risk for the first two years; the ACO will then share both the savings and loss in the 3rd year.
  2. Two-sided – in this model of risk, the ACO takes on its share of the risk right from the start, but by taking on more risk, it will be eligible to share a larger chunk of the savings (up to 60%) all three years.

Other items of note:

  • Patients can seek care from any provider they choose
  • Patients can opt out of sharing data
  • Providers must inform each beneficiary they are part of an ACO and that they are eligible for additional payment from Medicare for improving quality of care and reducing overall cost
  • CMS estimates 1.5-4 million Medicare patients will participate
  • CMS projects $940 million in savings in the first three years to be shared among 75-150 ACOs
  • Each ACO will be governed by a Board that must include participating ACO providers and Medicare beneficiaries
  • The infrastructure of an ACO will cost well over $1 million
  • Final regulations will be out in the fall (currently we are reviewing the draft regulations)

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