The New Health Dialogue

This is the third post in our series on Accountable Care Organization or ACO. We are exploring what exactly constitutes an ACO, why we’re trying to make them work, and what they have to do with the new health reform law. In this post, we look at how ACO payment structures can promote high value care. Part I can be found here, Part II is here.

Payment Structures

ACO payment systems are all about encouraging doctors to spend less money on care while improving the quality. Changing how doctors distribute health care resources, through payment incentives, is crucial to the ACO concept.

The current "fee-for-service" payment structure that encourages volume of health care over value is just what it sounds like. Every health care service is reimbursed at a certain value; more services lead to more reimbursement. There's nothing inherently wrong with paying health providers for all of the services they perform -- the problem is there is no counterbalance to discourage overutilization or use of unnecessarily costly treatments. The ACO model starts the move away from fee-for-service. There are different ways to structure ACO payments. Two basic approaches are the shared savings model and the partial capitation model.

Shared Savings

In shared savings, participating providers maintain the basic fee-for-service payment schedule, but have the opportunity to earn bonus payments if they meet specified cost and quality targets. They aren't penalized if they don't meet the targets, so the option may be more palatable to organizations interested in implementing ACOs but worried about taking on a lot of financial risk, at least at the outset.

Medicare has already introduced an ACO demonstration project for shared savings, the Medicare Physician Group Practice Demonstration. (However, the shared savings model does not exclusively apply to Medicare, another payer -- public or private -- could also set cost and quality targets, and distribute the appropriate payments.) In a Medicare Shared Savings Program, Medicare first sets spending targets based on expected rises in health costs and past spending trends at the organization. Organizations with historically lower spending would be permitted a bit more leeway for increased costs than those who typically have higher spending. Medicare would then examine quality data from the ACO over time (a period of about three years has been suggested to reduce random statistical variation) and reward the ACO based on both spending goals and care quality.

A variation on this is the “symmetric” or “two-sided” shared savings model, which involves bit more financial risk for the ACO. In the two-sided model, every fee-for-service payment from Medicare would be subject to some amount of “withhold,” meaning the government would keep a portion. If the ACO meets the cost and quality targets, the withheld funds are returned.

Partial Capitation

In a capitation payment model, insurers pay providers a certain fee for each beneficiary in their care at regular intervals, usually some variation of per-member, per month. “Partial” capitation simply means that a portion of provider revenue would still come from fee-for-service payments, and a portion would come from periodic, flat payments. These payments would be tied to bonuses or penalties based on cost and quality targets, involving more financial risk up front than shared savings.

Getting a flat fee for each patient means that providers will take a financial loss on the patients that require expensive procedures, but make money on patients that can be treated at a low cost. For example, when a patient presents with back pain, they doctor could immediately order an MRI (which is costly, but not very effective at finding the source of the pain) or start out with a few physical therapy sessions, (which are cheaper and usually result in patients feeling better). In a pure fee-for-service system, there’s little incentive for the doctor not to order that MRI. In contrast, under a capitated payment system, doctors would be incentivized to prescribe the more affordable physical therapy more often than MRIs. (Because quality measurements -- not just money -- figure into this model, the doctor will still order an MRI when it really seems like the right diagnostic tool, they aren't incentivized to withhold care as occurred in some of the 1990s managed care scenarios.) This serves to further emphasizes the importance of the quality measurement component, as doctors should strive to prescribe the right treatment for each patient, not the cheapest treatment. The goal should be to improve value, not simply to cut costs.

Over time, ACO proponents hope that changes in “supply sensitive care” will constrain resource overuse and lead to larger cultural shifts in medicine, toward higher quality and lower cost. Fisher et al. (2009) estimate that up to 30 percent of health care spending in the United States is wasted on discretionary “supply sensitive” care, such as unnecessary referrals and imaging. Eliminating waste in the system will put us on a path toward a higher quality, more sustainable health care system.

In the next post, we will look at ACOs in the new health reform law.