On May 4, 2015 Department of Health and Human Services (HHS) Secretary Burwell announced that the Pioneer ACO program had saved the federal government $384 million and improved quality in its first two years and would therefore be expanded. HHS also released a 130 page independent program evaluation by L&M Policy Research that served as the basis for the Centers for Medicare and Medicaid Services (CMS) Actuary’s certification of the Pioneer program.
Burwell is a bit of a cheerleader.
Burwell’s triumphant announcement was an intended shot in the arm for the troubled Pioneer ACO program, 40 percent of whose initial 32 members dropped out in the first two years. It also illustrated the yawning reality gap between DC policymakers and the provider-based managed care community. In reality, the Pioneer program badly damaged CMS’s credibility with the provider-based managed care community and sharply reduced the likelihood that the ACO will be broadly adopted.
It brings to my mind constantly how can administrators, legislators be so disconnected from the grass roots of health care. Do they do this just to keep their jobs ?
If the Secretary’s goal of having 50 percent of regular Medicare’s payments come through “Alternative Payment Methodologies” by 2018 is to be met, that growth is unlikely to come from either the Pioneers or the larger Medicare Shared Savings Program (MSSP). Table I below shows why.
Table I: Pioneer ACO Top Savers
But look at what CMS paid out in performance bonuses to their biggest Pioneer savers: $295 million in savings generated only $31.4 million in bonus payments. Rewards were so meager that four of the eight top performers dropped out of the program, a fifth opted to defer calculating their bonus until the end of year three, and a sixth (Atrius) earned no bonuses in either of the first two years despite generating over $36 million in savings.
Table II: Pioneer Managed Care All-Stars
Surprisngly many of the ACO failures were mature managed care entities who had 20 years of managed care experience.
When one looks more broadly at the Pioneer cohort, the fifteen mature clinical enterprises with at least twenty years of managed care experience fared poorly (see Table II). Most of these managed care All-Stars were not strangers to managing the risk of Medicare patients, either sponsoring their own fully insured Medicare Advantage (MA) plans or contracting with MA carriers on a full risk basis.
Seven of the fifteen All-Stars dropped out of the Pioneer program after two years. The All-Stars earned only 7 bonuses in 30 possible program years and were paid a paltry $20.2 million despite L&M attributing over $185 million in savings to them (Table II). Healthcare Partners, which owned three of the Pioneer franchises (NV, CA, and JSA) dropped out of the Pioneers, but was purchased by DaVita in 2013 for $4.4 billion, a market validation of the strength of their model. (We added University of Michigan to this cohort because they were a surprise success story in the aforementioned PGP demo. University of Michigan was unable to replicate its PGP success in the Pioneer program).
The explanation for this curious outcome is that CMS used prior years’ spending benchmarks for calculating bonuses rather than comparisons of actual spending by the Pioneers to local non-participating beneficiary spending as in the L&M consulting report. The benchmarks CMS used penalized mature managed-care organizations operating in low utilization markets. Acres of low hanging fruit (meaning lots of previously unexamined and uncontrolled health care utilization) seemed to be a precondition for success in the Pioneer program. Metropolitan Boston, one of the nation’s lushest “cherry orchards,” generated 42 percent of the estimated savings for the entire Pioneer program, according to the L&M analysis. And the plummeting savings from year one to year two of the Pioneer program ($280 million to $104 million) raised questions about how rapidly the participants ran out of accessible fruit.
Perhaps the dismal financial statistics were biased by comparing apples with oranges.
Provider Economics Matter
A little context is important here to complete the picture. Based on our experience, the average American hospital in 2015 only covers about 90 percent of its expenses incurred in treating Medicare patients. So to participate in the Medicare ACO program, providers are being asked to spend many millions in capital and operating expenses for perhaps a one-in-six chance of reducing their Medicare losses by 1 or 2 cents on the dollar of actual spending.
That’s not a very appealing risk/reward relationship. The economics of Medicare’s ACO program greatly resembles Tom Sawyer’s famous fence painting project, where Tom talked his friends into paying him to let them paint his fence. It is telling that, thus far, CMS has not released analysis of the actual set-up and operating expenses of their ACO cohorts that would enable independent estimates of the return on investment experience so far.
Unless participation in the ACO program is made mandatory, which would provoke a firestorm of reaction from hospital and physician communities, it is unlikely that providers who do their homework will join future versions of this program in significant numbers.
What Should HHS Do Now?
Medicare shared savings is not a new idea. CMS has been testing it for a decade, beginning with the Physician Group Practice demonstration in 2005. It is a reasonable forecast given the past decade’s experience that the ACO is not going to be a viable total replacement option for the regular Medicare program. A fall back position would be to leave the ACO as a contracting option for provider organizations in the high-cost Medicare markets, e.g. letting provider organizations compete to lower Medicare spending in their areas.
