More on the Uncertain Economics of Accountable Care Organizations (ACOs)

In this last post about Accountable Care Organizations (ACOs), the Disease Management Care Blog promised to take a follow-up look at how ACOs will get paid and how they can save money. It's a good thing that it didn't say that it would explain how the economics will work, because it promises to be very complicated. So says the DMCB, thanks to insights gleaned from reading this Integrated Healthcare Association White Paper again. This is a very insightful report that looks at the experience of the California market when it comes to the dizzying mix of fee-for-service, capitation and shared savings medical group contracting arrangements.

First off - and assuming ACOs really do save money - if multiple insurers in a State are all contracting equally with multiple ACOs, no single insurer will experience any lasting economic benefit. That's because the savings from any efficiency gains would be spread out throughout the risk pool and be a one-time event. What's more, if a single ACO attempts to compete on price by underbidding its rivals, it's unlikely that the insurers will collectively see any significant drop in overall costs, which means that consumers won't ultimately see any decrease in their premiums. The DMCB thinks that one way to fix this is to allow ACOs and insurers to enter into semi or fully exclusive contracting arrangements. Unfortunately, this has implications for consumer choice (would patients agree to be locked or incented into using only one ACO's physicians?) and could perpetuate the "most favored nation" contracting dysfunction.

Secondly, organized physician entities and their hospitals have been very reluctant to agree to capitation for their pricier services. As a result, capitation is typically applied to low cost high volume services like primary care. Given how shrewd providers are about the financial risks from capitation, the DMCB suspects that if hospitals readily agree to more modest arrangements like "shared risk" and "gainshares," that will signal their belief that they can get more money from the deal. This increased cost obviously won't translate into lower insurance premiums for consumers, unless providers are willing to accept significant up-front reductions in their fee schedules. That is unlikely.

Last but not least, the organized physician entities and hospitals have only just begun to enter into various performance-based, risk pool and gain share arrangements. This makes it too early to tell how this will work in "real world" markets that exist outside integrated delivery systems. This reminds the DMCB that if the authors of the Affordable Care Act were sure that ACOs really do save money, they wouldn't have set it up as a pilot program.

Given all the uncertainty, the best approach to implementing ACOs may be one of "incrementalism." That would minimize unintended consequences and allow for small changes to accumulate over time. Unfortunately, that would take years. Add to that the time it will take to evaluate the impact on cost and quality, and the U.S will be many years into additional cost inflation, changing political landscapes and new economic challenges.

Bottom line: there are too many economic uncertainties about ACOs. If anyone tells you otherwise, don't believe it.