ACOs: THE GOOD AND THE BAD

To muted applause and some sighs of relief from providers, HHS released the final ACO regulations last week.

The final version superseded the much-criticized draft regs published several weeks earlier. This previous draft was widely regarded as imposing overwhelmingly complex rules for the chance of sharing in any gains. As one commentator noted: “The promise of integrated, coordinated and cost-effective care provided by hospital-physician networks had run into the reality of having to invest millions dollars with a questionable ROI, a complex maze of up and downside risk calculations, reams of burdensome quality measures and overlawyered antitrust regulations.”

So the final less-unwieldy rules have been relatively well-received. On the other hand, fundamental questions about the viability and impact of ACOs remain:

1. Will the potential “bonuses” justify the financial investments?  Major hospital systems (likely to be the primary ACO sponsors) seem to be willing to play so long as the regulations are not too onerous. And as with other HHS initiatives, those willing to participate are likely to be those who are most confident that they can readily cut costs and gain the savings bonuses. On the other hand, ACOs that aren’t able to do a much better job of coordinating care will be unable to recoup their investments.     
2. Will there be losers? Physicians and hospitals who don’t participate in ACOs may find HHS squeezing rates to be in line with costs of competing ACOs. And even in successful ACOs, hospital staff and individual physicians may be in danger of losing their jobs as the ACOs try to reduce variable costs in order to achieve the “bonus-eligible” level.
3. Why are hospitals so interested in ACOs? It’s a great opportunity to tie physicians more tightly, thereby guaranteeing referrals and admissions and strengthening the hospitals’ rate negotiating positions.  At the same time, the hospital risk is small; the ACO component is expected to be tiny relative to the size of the Medicare program, and with beneficiary assignment made prospective in the final rules, the costs and risks for participating providers are even less.
4. Will ACOs really enhance cost-effectiveness? In some cases the answer will be yes, with the ACOs achieving the objectives of their government designers. In other cases, however, the pros of better integrated care will be more than outweighed by the cons of quasi-monopolistic hospital systems able to dictate their terms to insurers and other payers.

There is one more fundamental problem with the present ACO design: by randomly assigning Medicare beneficiaries to ACOs, much of the opportunity to impact the highest cost cases may be lost. A more targeted approach might begin to show the savings that the Medicare program desperately needs. On the other hand, HHS’ track record of success with its chronic care demonstrations gives little confidence that the government could indeed achieve these potential savings.

The bottom line seems to be: ACOs will generally demonstrate the virtues of integrated care (something that was known already), while—in too many cases—encouraging monopolistic hospital systems to become even more entrenched.