7 Steps to Navigate Payment Allocation Under ACOs

Under the Medicare Shared Savings Program, a Medicare ACO can receive payment for meeting quality metrics and reducing costs. If a Medicare ACO reduces its Medicare expenditures below a benchmark, it is eligible to receive part of the savings from Medicare — up to 50 percent for ACOs in the shared savings only track and up to 60 percent for ACOs in the shared savings/losses track, depending on the ACO's performance score. In the first year, an ACO can collect on this potential shared savings if it reports on all 33 quality measures. Performance requirements for savings will then be phased in, such that in the second year eligibility for savings will depend on the ACO's performance on 25 measures and reporting on eight, and for the third year, performance on 32 measures and reporting on one measure.

For the second and third year, the ACO must meet the quality performance standard on 70 percent of the measures in each of four domains to receive savings. The domains are patient/caregiver experience, care coordination/patient safety, preventative health and at risk population. The potential shared savings an ACO can receive incentivize meeting quality and cost benchmarks, as these funds would supplement participants' fee-for-service Medicare payments. Unlike Medicare fee-for-service payments, however, which follow specific rules set by CMS, each ACO creates its own system for allocating the shared savings among its participants.

Commercial ACOs typically use a similar payment structure, in which participants are compensated based on Medicare's fee-for-service rates or productivity and have the opportunity to receive additional payments by achieving certain quality and cost goals. In contrast to a Medicare ACO, a commercial ACO can create its own set of metrics and thresholds for receiving performance-based payments. Wade Johannessen, PhD, a director at Sg2, says it is common for commercial ACOs to split potential shared savings between the payor and ACO equally, as is possible under the Medicare ACO program. As in the Medicare ACO model, the commercial ACO also independently decides how to divide its share of the savings among participants.

The question of how to allocate payments in an ACO is one of the most difficult questions facing healthcare leaders. Here are seven steps to follow when deciding how to share payments fairly while maintaining a profit.

1. Commit to collaboration and transparency.
The premise of an ACO is that different healthcare providers will work together to achieve better outcomes. As such, it is essential that each participant of the ACO commit to being transparent and to negotiating shared payments in a cooperative manner. This negotiation should occur at the very outset, according to Dr. Johannessen, as sharing savings is one of the core features of an ACO.

Being honest and open is especially important when forming new relationships with physicians, who may mistrust the hospital due to historically weak relations between physicians and hospitals. "If you're going to have a successful ACO, all parties are going to have to feel that they are recognized for their work and come to some sort of agreement, says Beth Kase, JD, an attorney at Fenton Nelson.

Participants of the California Public Employees' Retirement System ACO, which include San Francisco-based Dignity Health, Blue Shield of California and Hill Physicians, collaborate to create a risk share agreement and cost targets. Negotiations related to the risk share agreement began in early 2009, and the ACO launched Jan. 1, 2010. "A critical element to building trust and collaboration is the agreement that all three parties will share risk in all healthcare service categories," says Michael Blaszyk, CFO of Dignity Health. Commitment by senior leadership to work cooperatively and transparently has also been key to successfully working together, he says.

2. Establish non-incentive payment methodology. Under the Medicare ACO model, physicians and other providers will continue to be paid on a fee-for-service basis. In commercial ACOs, the commercial payor may use fee-for-service or a different model of compensation. Ms. Kase and Harry Nelson, JD, managing partner of Fenton Nelson, suggest commercial payors may use the resource-based relative value scale, which is the method Medicare uses to determine physicians' fees. Under this model, each procedure is assigned a relative value that is based on physician work, practice expense and malpractice expense and adjusted for geography; this relative value unit is then multiplied by a conversion factor.

"Being an early model, we are likely to see a smaller incentive component. There will be some money reserved for incentives linked to outcomes, but the vast majority will inevitably be tied to an RBRVS system or something like it because there is not enough data or infrastructure to set up a [solely] outcome-based system in America at this point," Mr. Nelson says.

3. Assess the population. As part of developing a payment allocation system for shared savings, ACO participants need to assess the population mix in their community. The type of population can determine which participants in the ACO will bear more risk, and who should therefore receive a greater portion of the savings. If a commercial ACO is in a community with a high percentage of Medicare patients, for instance, the hospital may have more expenses compared to an outpatient center because Medicare patients are more likely than non-Medicare patients to require hospitalization. The ACO may thus decide to give a higher share of the savings to hospitals because they would spend more on the patients to meet quality goals.

Each ACO's unique mix of population, geography and providers necessitate that each organization create a payment structure that is best suited to it. "ACO partners should consider their market, strategic objectives and the environment as they customize [the ACO] to meet the needs of their respective communities," Mr. Blaszyk says.

Similarly, under the Medicare ACO model, CMS will set each ACO's cost benchmark by using separate cost categories for different populations, including end-stage renal disease patients; disabled patients; aged/dual eligible Medicare and Medicaid beneficiaries; and aged/non-dual eligible Medicare and Medicaid beneficiaries.

4. Designate responsibilities for services.
Determining responsibilities for providing services is important as it creates accountability for meeting quality and cost metrics and clearly identifies who should get paid for each service. To reduce spending, the ACO should take into account different healthcare settings' costs for providing the same service when designating responsibility for services. For example, it may be less expensive to provide imaging in a physician office rather than a hospital.

Discussing each provider's costs for services is essential in creating a fair payment distribution model. "Separate out what the profits are from what the real costs are," Mr. Nelson says. "Have a conversation about who's providing what personnel and what services, and what the costs are, and figure out how to allocate profits based on achieving shared goals."

5. Agree on metrics. Each ACO participant's share of savings will be given only if that participant meets the ACO's quality and cost goals. "There is essentially a savings pool and the ability to achieve that payout is determined by the providers' performance on quality measures," Dr. Johannessen says. "You may be eligible for fifty percent, but that's subject to meeting various quality gates." Because payments are partly based on meeting quality goals, the ACO needs to agree on the metrics for which each participant will be held accountable. "Some have a graded approach, some have a threshold approach and others have a complex outcome-based numerical grade that determines the percentage of the total dollars allocated to you," says Akram Boutros, MD, founder and president of BusinessFirst Healthcare Solutions.

The shared savings model has specific metrics Medicare ACOs must meet to receive incentive payments. For example, in the patient/caregiver experience domain, one measure is "Getting timely care, appointments and information." Performance on each measure is scored; these scores determine what percent of savings the Medicare ACO can receive, which is capped at 50 percent and 60 percent depending on whether the ACO is in the savings only or savings/losses track.

6. Develop other revenue streams. One way to meet cost reduction goals is to lower healthcare utilization of high-cost services, such as by reducing hospital readmissions. Many of hospitals' services are high cost; reducing utilization of these services would thus generate less revenue for the facility. "If hospital spend is about 50 percent of healthcare dollars and physician spend is about 15 percent, most of the savings are going to come from the fifty percent," Dr. Boutros says.

Savings from meeting utilization goals will thus be particularly important for hospitals, as reduced utilization will most likely cost hospitals more than other providers. "A lot of the savings are going to be generated by better coordinating care which should lead to fewer hospitalizations and reduced revenue to the hospital," Dr. Johannessen says. Hospitals can recoup some of their lost revenue from the shared savings, but they may not be able to balance out the losses completely. "Without growing market share, no amount of shared savings will make up for the likely decrease in revenue to the hospital," Dr. Johannessen says. This risk necessitates that hospitals create new means of revenue, such as providing more outpatient services, to outweigh this potential loss.  

For example, some hospitals are providing management services. "They have been acting as management service organizations, but they will [be] even more so in an ACO structure," Ms. Kase says. Other options for hospitals to gain revenue include providing administrative services, such as coordinating information technology and billing services. Hospitals may also partner with a physician group to form a surgery center and would receive some profits based on that ownership, according to Ms. Kase.

"Hospitals need to find another model to preserve their profitability and their relevance," Mr. Nelson says. "One of the reasons we see hospitals moving to the [medical] foundation model in California and integrating with physicians is to find ways to get at physician revenue and provide more outpatient services. They are moving to revenue streams that are not based on hospitalization, but a whole range of outpatient services."

7. Determine risk and calculate percentages. After assessing the population, designating service responsibilities and agreeing on metrics, the ACO can estimate the amount of risk each participant bears in meeting benchmarks for shared savings. The ACO can then decide what percentage of savings each participant should receive based on the participant's risk.

The CalPERS ACO uses "a three-way risk-sharing [model] with upside and downside risk for achieving cost and quality targets in five categories: total facility, professional, mental health, pharmacy and ancillary," Mr. Blaszyk says. The ACO participants decided to overlay the existing payment terms with the three-way risk agreement to best align incentives. The terms of the risk share agreement are renegotiated by the three ACO participants annually. The payment/reimbursement terms are negotiated independently of the risk share agreement and occur confidentially between Blue Shield of California and Dignity Health and Blue Shield of California and Hill Physicians.

Dr. Boutros says payment breakdowns for hospitals and physicians vary the most from one ACO to another, whereas post-acute care organizations typically receive about 10 to 20 percent of savings. An ACO may decide to give physicians and hospitals an equal share, but often physicians end up receiving less, according to Dr. Boutros. For example, an ACO may allocate 50 percent of savings to the hospital, 40 percent to physicians and 10 percent to post-acute care.

The difference in payments for physicians and hospitals depends largely on the integration of physicians with the hospital. "The biggest deciding factor I've noted is the viewpoint of the most senior leader in the organization," Dr. Boutros says. "If they see physicians as clear partners, they tend to be more equitable with the share; those who see physicians as a necessary 'cog in the wheel' tend to give them less."

More Articles on ACOs and Payment:

11 Best Practices for Commercial Payor Negotiations on New Payment Models
8 Biggest Mistakes an ACO Can Make

The ACO Game of Wealth, Power and Local Politics

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