Why Medicare ACOs Were Always a Bad Deal, and Why They Need an Exit Strategy

Last week, the tenth of 32 Medicare Pioneer ACOs dropped out of the program.  Others are expressing reservations about entering or continuing given the experience of Pioneers and the hundreds participating in the Medicare Shared Savings Program (MSSP).  To be clear, it’s not all bad news…but most ACOs will need an exit strategy, fast.

Medicare ACOs were never a fair deal.  As I pointed out last week, the problem with the Pioneers, and in fact with all Medicare ACOs, is that the rules tilt the playing field toward CMS, often to the detriment of the ACO. Most significantly, the downside risk, as required by CMS, is irrational.  Any ACO incurs substantial downside risk in the form of its investments to participate and its operating costs.

A rational deal would be: the ACO incurs operating costs, and it gets a share of any savings it generates.  The risk is that savings are not enough to cover costs.  Your reward is that you keep any excess over operating costs, although CMS couldn’t resist putting a ceiling on that, too.  Adding a financial penalty if costs exceed the benchmark doubles down on the downside, giving the ACO two ways to lose money, and only one way to make money — by generating savings in excess of costs.  Losses incur a penalty, in addition to operating costs.  Small gains still leave a loss if operating costs are not covered — so only large savings offer a profit.  This is not a fair deal, especially for ACOs in already-efficient markets like Sharp in San Diego.

In the CMS math, the “losses” that incur downside risk, and require refunds to CMS, result from per capita costs for Part A and B services for assigned beneficiaries exceeding a benchmark.  The benchmark is supposed to represent the per capita cost for these bennies if the ACO did nothing.  Costs below the benchmark represent the degree to which the ACO has succeeded in doing something effective.

I can think of only two scenarios in which costs would exceed this benchmark cost of doing nothing.  One is collusion by the ACO providers to increase Medicare billings.  That is illegal, and already carries stiff penalties, and nobody would try it in a public demonstration. That leaves only one other explanation: the benchmark is supposed to represent the per capita costs if the ACO does nothing.  If the ACO does something and still incurs a loss, that means that the benchmark is defective.  CMS does a poor job of incorporating risk adjustment into the benchmark, and, as in the case of Sharp, the benchmark is not necessarily adjusted year to year at a rate that reflects local market changes.  That means the downside risk imposed by CMS is really a penalty for its inability to get the benchmark right.  That is not a fair deal.

In addition to the problems with the downside risk requirement, even if you do generate large savings, your share of those savings will be reduced unless you achieve near perfection on 33 quality metrics selected by CMS.   The ink is barely dry on the first set of metrics, and CMS is already proposing to change half of them.  When one party to a deal keeps shifting the goal posts, it is not a fair deal.

So as we see it, as many as three-quarters of Medicare ACOs need an exit strategy, and fast.  Many Medicare ACOs’ 3-year demos will wrap up in 2015-2016, so as early as next year dozens will look at the significant investments in time and treasure and nonexistent ROI and say, “what’s next?”  They have three major choices:

1. Go back to traditional fee-for-service Medicare with a hole in their budget and scars on their asses. Pursue commercial ACO arrangements that are attractive, and effectively flush the investment in Medicare management down the toilet.
2. Enter, or go deeper into, contracts with one or more Medicare Advantage plans in the market, leveraging infrastructure and experience into a channel where money can be made and quality rewarded.  Most MA plans recognize that a Medicare ACO with a record of savings and quality is primed to be a good risk partner.
3. Build your own Medicare Advantage plan and move up the food chain.  A successful Medicare ACO has already mastered the hardest parts of eldercare: care management and an engaged network of high-performing providers.  What’s missing is insurance functions, which can be built or bought.

Those Medicare ACOs that choose the latter path have good reason to do so: Medicare Advantage remains a sound investment opportunity in most markets for 5 big reasons:

• Beginning in 2017, the MA benchmark is guaranteed to grow at the same rate as FFS Medicare, whereas the Medicare ACO benchmark resets every 3 years, confiscating most hope of shared savings.
• Medicare ACOs have to be good diagnostic coders to avoid losing revenue, whereas in MA that’s an enormous financial advantage under risk adjustment.
• ACOs share their savings with CMS; MA plans keep theirs.  Boom.
• Medicare ACOs with demonstrated quality watch CMS keep less of what they’ve already earned, while quality gets MA plans a bonus — and new entrants automatically start with a 3.5 Star Rating and a 3.5% bonus.
• Medicare ACO beneficiaries are “free range”. There is no lock-in and the same level of benefits for any Medicare provider.  The MA benefit design is a lock-in that favors in-network utilization.  Free range is only tastier when referring to carnivorous treats, not capitalist ones.

Those Medicare ACOs that choose the latter option need to move fast.  To evolve into a Medicare Advantage plan, a Medicare ACO needs to have confirmed its market’s financial viability, and then build or arrange for:

• state licensure and financial reserves, and must hold 100% of risk net of reinsurance;
• a highly developed function to manage Federal and state regulatory requirements;
• a sophisticated and accountable sales and marketing structure;
• transaction processing like eligibility, enrollment and claims;
• a member-centric member service operation.

These capabilities can be homegrown, obtained from the health plan down the street or from third-party vendors like TMG Health, or some combination thereof.  But either path takes time, and sound health plans aren’t built during a fire drill.  A Notice of Intent must be submitted to CMS in November and application made in February for the following contract year — so at this point you’re talking 2016 entry at the earliest, 2017 most likely.

If you’re a health system watching this all unfold, let me suggest this: instead of investing in a Medicare ACO, take your money to Vegas or to Medicare Advantage — in either place you know the rules and the odds.

Resources

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