Payment Models for ACOs

An ACO may use a range of payment models (e.g., fee for service — with or without shared savings arrangements, capitation for specific defined populations (e.g., diabetes), or global capitation — based on a payment per person, rather than a payment per service provided, etc.). The traditional transaction-based payment model does not provide the incentives required to support ACOs and population health. As the reimbursement model migrates toward payment for value, this will change. It is anticipated that ACOs will increasingly be reimbursed under a capitated model that incentivizes optimal quality, safety, efficiency, and health outcomes for populations of patients.

ACOs are accountable to the patients they serve and to third-party payers for the quality, appropriateness, efficiency and safety of the healthcare they provide. In addition to attending to the ill and injured, providers who work under these plans need to focus on preventive healthcare since there is greater financial reward in prevention of illness than in treatment of the ill. These plans dissuade providers from the use of expensive, newly developed treatment options that may be less effective or have only a marginally higher success rate versus time-honored alternative choices.

Under capitation, healthcare providers assume part or all of traditional insurance risk. Revenues are fixed and each patient enrolled in a capitated plan makes claims against the total resources of the provider. By accepting a fixed payment, participating physicians essentially become the enrolled patients’ insurers by resolving patients’ claims at the point of care delivery. In doing so, physicians assume the responsibility for the patients’ unknown future healthcare costs.

Large providers have a bigger population than smaller providers. The increased population size of large providers allows them to more effectively manage variations in service requirements and costs — and, hence manage risk better. However, even large ACOs may not be able to manage global risk as effectively as a large insurer. The populations managed by large insurers typically dwarf the population of existing provider-sponsored ACOs. As a result, the insurers’ annual costs as a percentage of annual cash flow fluctuates far less than an ACO managing a much smaller population. In the case of ACOs with smaller patient populations, the potential variation in annual costs is greater, and the risk that costs could exceed a provider’s annual revenues is larger. The smaller the population under a capitated agreement, the more likely that a relatively few number of costly patients can significantly affect a provider’s costs and increase the provider’s risk of insolvency.

An ACO consisting of physician groups and hospitals generally lacks the requisite accounting, actuarial, underwriting, and financial experience, and capability for managing risk. However, their most significant issue is the greater degree of variation in estimates of annual average patient costs. This leaves the ACO at a significant financial disadvantage in comparison to insurers whose estimates of a population’s risks and costs are far more accurate due to a larger sample size. Because their risks are inversely related to the size of the population under their care, ACOs will inevitably try to increase the number of patients under their care in a capitated plan. This will incentivize mergers, acquisitions, and growth. The only way an ACO can manage populations as effectively as a larger insurer is to achieve populations the size of a typical large insurer and incorporate the level of expertise and risk assessment characteristic of a large insurers.

ACOs could potentially be sponsored by a variety of existing types of healthcare provider organizations including large physician groups, physician and hospital alliances (i.e., Physician-Hospital Organizations or PHOs), integrated delivery networks (IDNs) and independent practice associations (IPAs). All of these organizational entities possess management and organizational elements that are necessary to form an ACO. However, each of these organizations typically falls short of the full expertise and infrastructure needed to assume the risk of managing populations and to achieve the cost structures required to succeed as an ACO.