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Most ACOs may lose money initially

Experts say the health care model can work, but it needs to be constructed carefully to ensure financial viability.

By Victoria Stagg Elliott — Posted April 7, 2011

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Hospitals and large health systems are investing significant sums to establish accountable care organizations, but they may lose money on these projects in the first few years, according to a study published online March 23 in The New England Journal of Medicine.

"Most organizations were not able to achieve the cost savings that were expected or keep the initial investments required to support an ACO," said Keith Kosel, PhD, a study author and senior director for research at the VHA Inc. network of health organizations in Irving, Texas. "The concept is really viable, but it really needs a little bit of tweaking around the edges."

ACOs have been proposed as a means of controlling health care costs. Physicians and other health care professionals still receive fees for services but get bonuses for saving money while maintaining quality.

The NEJM article analyzed data on participants in the Centers for Medicare & Medicaid Services' Physician Group Practice Demonstration (link).

Early adopters, for the most part, did not recoup their set-up costs in the first three years of operation. The 10 integrated health systems that were studied spent an average of $1.7 million to take part in the demonstration project. Eight received no shared savings payments in the first year of the project. Six got a payment in the second year, and five received a bonus payment in the third year.

People involved in establishing ACOs and the authors of the paper say the model has significant potential, but rules and regulations need to take into account lessons learned in early projects.

"There is good reason for health care providers to be cautious when thinking about being an accountable care organization," said Chester Speed, vice president of public policy at the American Medical Group Assn.

On March 31, CMS proposed rules for the Medicare Shared Savings Program that will be launched by Jan. 1, 2012, as required under the Patient Protection and Affordable Care Act (link).

The agency is taking comments until June 6 as it works toward a final rule.

The authors of the NEJM study suggest that the ACO model will be more economically sustainable if bonus payments are issued based on cumulative savings over several years rather than annually. How patients and their expenses are assigned to physicians or health systems, how goals are set for an institution and how to make feedback timely need to be addressed.

"If you are not aware of how you are performing, it's difficult for any improvements to be made," Speed said.

Participants in the Medicare demo said geographical variation in health care spending was a significant issue. Savings in comparison to regional medical expenditures were more difficult to achieve if costs in the area were already low.

"It was not profitable for us," said internist James Lee, MD, medical director for hospital efficiency at the Everett Clinic in Washington, who headed the clinic's participation in the demonstration project. "Everett is already in one of the lower-cost regions. We had to lower costs in comparison to the local market, and that was a challenge. The issue of geography must be addressed."

Everett spent about $1 million on infrastructure for its ACO, but earned only about $125,000 in shared savings payments.

Physician organizations, including the American Medical Association, have adopted policy on how ACOs should be structured. They have hosted education sessions for members and sent comments to HHS on the proposed rules.

The Association says ACO participation by physicians should be voluntary and that barriers for small practices should be eliminated. The AMA has asked the Federal Trade Commission for relief from antitrust rules to permit small practices to collaborate in an ACO while continuing to be independent.

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