Accountable Care Organizations Version 3.0: Will this one Work?

Thursday, CMS Administrator Seema Verma announced major changes to the Medicare Shared Savings Program (aka “Accountable Care Organizations”). The new version, dubbed Pathways to Success, is intended to fix problems in versions 1.0 and 2.0, but the jury’s out.


Medicare is an insurance program for seniors 65 and older. It began as the centerpiece of President Lyndon Johnson’s Great Society program in 1965, providing hospital insurance most lacked. By 1966, it covered 19 million at a cost $10 billion to the federal government. Today, it covers 59 million (18% of the population) and costs $707.4 billion (20.1% of total healthcare spending).

Through the years, lawmakers expanded the program, adding coverage for physician services (Part B), prescription drugs (Part D), adults with disabilities, and patients requiring kidney dialysis. In tandem, they tested strategies to control the program’s growing costs: cuts to physicians, hospital and post-acute reimbursement have been their staple as other approaches i.e. vouchers, increased age eligibility, et al faced political backlash.

Along the way, industry experts recognized that encouraging physicians and hospitals to lower unnecessary costs made sense. Thus, over a 15-year period, policymakers tested two models.

Version 1.0: Medicare Physician Group Practice Demonstration Project (2005-2009)

Hypothesis: The hypothesis for the Physician Group Practice (PGP) Demonstration Project was that physicians control 80% of healthcare spending through the strength of their recommendations to their patients. So, rewarding physicians for avoidance of unnecessary costs was a plausible idea.

Activity: In 2005, 10 large multi-specialty groups participated in the five-year demonstration: Billings Clinic, Billings, Montana; Dartmouth-Hitchcock Clinic, Bedford, New Hampshire; The Everett Clinic, Everett, Washington; Forsyth Medical Group, Winston-Salem, North Carolina; Geisinger Health System, Danville, Pennsylvania; Marshfield Clinic, Marshfield, Wisconsin; Middlesex Health System, Middletown, Connecticut; Park Nicollet Health Services, St. Louis Park, Minnesota; St. John's Health System, Springfield, Missouri; University of Michigan Faculty Group Practice, Ann Arbor, Michigan. Benchmarks for spending were set and quality was monitored against 32 measures.

Results: All participating groups achieved quality gains. Two achieved Medicare savings above their benchmarks in year one and 5 had achieved benchmark savings by year 3. But most complained the benchmarking goals were flawed and costs for participation in the program non-sustainable.

Conclusion: Policymakers concluded that Medicare costs might be reduced through physician-led care coordination but the approach is complicated. Other factors, such as demand, medical inflation, patient preferences and competition and others must be considered and benchmarking methodologies improved.

Version 2.0: Medicare Shared Savings Program (MSSP) (2012-2018 phase-out)

Hypothesis: With proper incentives for shared savings, an improved methodology for benchmarking historic trends and setting savings targets and credible measures for monitoring patient quality, clinically integrated networks of providers (physicians, or physicians working with hospitals) can achieve meaningful savings for Medicare. To achieve these, incentives for their participation should be attractive.

Activity: Three Tracks were offered to voluntary participants: Tracks 1 and 2 involved upside risk; Track 3 required upside and downside risk. Participation has been strong: By 2017, 561 of 649 Medicare ACOs were in the MSSP program: 460 (82%) in Track 1 serving 10.5 million Medicare fee-for-service beneficiaries.

Results: The results have been mixed. Costs for set-up and operation, including legal, consulting fees, and information systems have been higher than anticipated exceeding $5 million for many. Quality metrics have improved every year for most, ending 2017 at 94.7%. But only one in three (primarily physician sponsored MSSPs) received a shared savings rebate from Medicare ($796 million in 2017) and instead of saving Medicare $1.7 billion as projected, MSSPs cost Medicare $384 million more than budgeted.

Per CMS, “Upside-only ACOs nominally increased Medicare spending relative to their cost targets, while two-sided ACOs decreased Medicare spending relative to targets, after accounting for shared savings earned by ACOs and losses owed to Medicare. Within upside-only ACOs, low revenue (physician-led) ACOs in fact decreased spending relative to their benchmarks in aggregate, while high revenue (hospital-based) ACOs increased spending relative to their benchmarks and increased spending enough that spending for upside-only ACOs in aggregate was in excess of their benchmarks.”

Conclusion: The MSSP improved patient care but failed to achieve Medicare savings. For most, their risks were low and the upside was marginal. In addition, benchmarking methodologies used to determine shared savings targets failed to account for regional variability. And the MSSP ACO effort might have contributed to consolidation among providers which might reduce competition and choices for consumers.

Version 3.0: Pathways to Success (2019-2023)

Hypothesis: Per CMS August 9: “The results show that ACOs that take on greater levels of risk show better results for cost and quality over time.  Our approach generally is to reward providers with more flexibilities as they take on increasing accountability for spending; to engage and incentivize beneficiaries to achieve and maintain good health; and to reduce gaming.  As providers assume greater levels of risk, CMS aims to provide them with greater flexibility to innovate and deliver high-quality care.”

Proposal: The new ACO program replaces the MSSP’s three tracks with two: a Basic program that replaces Tracks 1 and 2, and an Enhanced program that replaces Track 3 for more experienced ACOs.  Participation will be for 5 years instead of 3, with financial risk phasing in after the first two years. The shared savings available to participants will be cut in half (from 50% to 25%) and ACOs in the Basic program will be forced to assume financial risk by 2020. Pathways’ ACOs are encouraged to utilize telehealth and electronic health records and required to inform beneficiaries about the ACO in the Pathways program.  

Industry reaction: the American Hospital Association urged a slower implementation timeline. The National Association of ACOs called it “misguided” predicting it “will upend the ACO movement by creating havoc with a significant overhaul introducing many untested and troubling policies.” No doubt, CMS will receive thousands of comments by its deadline of Oct. 16.

My take: Accountable care organizations are a work in progress. They have served a useful purpose: by organizing physicians and hospitals to share clinical and financial risk, they have created a conceptual framework for lowering costs without compromising patient safety or quality.

Notably, ACOs, whether at risk or not, improved the quality of care provided to their patients. But most failed to produce Medicare shared savings. The most successful, as it turns out, were ACOs sponsored by physician organizations rather than those led by hospitals.

For most ACOs, Medicare shared savings became a secondary aim: positioning their organization to manage financial risk with private insurers, Medicaid and large employers via the creation of clinically-integrated networks is the rationale.

And the MSSP benchmarking methodology had flaws: ACOs that effectively reduced Medicare spending in prior years were penalized in subsequent benchmarking years if they lowered spending. So, gaming the savings target was widespread.

Pathways to Success is a step in the right direction: it allows ACOs to engage Medicare beneficiaries directly, it forces downside financial risk, it reduces gaming of benchmarking, it recognizes the role EHRs and telehealth play, and it balances savings for Medicare with the ACO’s shared bonuses.

After six years of experience, the time has come to put real ‘accountability’ in Accountable Care Organizations. Medicare cannot afford to support programs with weak incentives that do not deliver value.
— CMS Administrator Seema Verma

Pathways to Success is the government’s latest effort to slow Medicare spending. The jury is out on whether it will be successful. No doubt, lawyers and consultants are licking their chops, and large multi-specialty physician organizations, especially those that are independent, are singing, “I told you so.” Most enrollees push back against proposed changes to Medicare and trust their physician to do what’s best for their care. Equipping clinicians to engage beneficiaries to more actively cut unnecessary costs is perhaps the greatest challenge to Pathways.

Stay tuned. This is, after all, Accountable Care Organizations Version 3.0.  No doubt, there’s more to come.