Developing an ACO: How to Manage Risk

CMS recently released the long-awaited rules for accountable care organizations. Now hospital leaders face the daunting task of sifting through over 400 pages of regulations to understand how to develop ACOs. One element of ACOs that leaders already know, however, is that integrating system involves a level of risk. Determining how much risk an organization is willing to take and how the organization manages that risk may in turn determine the success of the ACO. Jeff Gruen, MD, MBA, partner and head of global Healthcare Services and Health Information Technology at the management consulting firm PRTM, describes the benefits and losses of risks involved with ACO development.

Two programs
The proposed rules outline two approaches to develop an ACO: a shared savings model in which organizations can receive financial rewards risk-free until the third year and a shared savings/losses model in which organizations can receive higher benefits, but at a risk of losing money from the beginning. The two programs allow healthcare organizations with and without experience in integration to participate in ACO development. Dr. Gruen says the inclusion of two options shows that CMS is committed to ACOs as a part of healthcare reform. "I expect that the majority of hospitals will participate in the more conservative program. [However,] I do believe that a group of organizations that have experience are aggressive and will really embrace the second program. For them, the second program doesn't go far enough [in terms of risk and potential gain,]" Dr. Gruen says.  

Although the two options allow for more participation from healthcare providers, providers who choose the second option and even more aggressive commercial plan programs may find themselves in a situation where "the rich can get substantially richer and the poor can fall farther behind," says Dr. Gruen. He explains that organizations that have experience with integration or are bold will most likely opt for the second program, which could quickly net significant financial benefits. In contrast, the inexperienced organizations will likely choose the first option, which allows for modest gains, or choose not to participate. Dr. Gruen says the former organizations, which are proficient in risk management, will likely successfully participate more quickly in programs with more risk and reward, and thereby may "accumulate surpluses which can be reinvested in infrastructure building and in creating better patient experiences. [They can] become more attractive to patients, physicians and get larger and more powerful. Their peers [who are] not participating and not gaining those surpluses may actually fall further and further behind."

Dr. Gruen compares these predicted behaviors to different exercise routines: "[The experienced organizations] are essentially choosing to go to the gym every day and hit the weights. The opportunity for those who participate in the [shared savings/losses] program is that they'll build their risk management muscles. Those who play in the [shared savings] program are weekend warriors who work out once or twice a month."

While the shared savings program may appeal to organizations that have not yet integrated with other systems, its long-term effects may prove otherwise. "A middle-of-the-road kind of payment program like the first model is actually not very attractive over time," Dr. Gruen says. Furthermore, the shared savings program may not be truly risk-free for the first two years; healthcare organizations risk resources and time — two years of modest rewards for the benefit of no penalties for the same period. Thus, both ACO options contain risks and rewards. While the second option clearly explains the financial benefits and risks, the first option describes a financial benefit but does not reference the risk of falling behind.

"It is very important for providers and competitive markets to think seriously about the downsides of moving too timidly and look seriously at the benefit of moving quickly to a new world where risk contracting becomes the norm," Dr. Gruen says.

Risk management
Managing risk will be essential to successfully developing an ACO, Dr. Gruen says, because the benefits are far higher than those where no risk is required. Dr. Gruen describes three steps healthcare leaders can take to manage risk:

1. Align senior management team.
Dr. Gruen says hospital leaders should first "align their senior management team on a vision of how this new world [of healthcare reform] works and where they want to be in it." Discussions should be based on facts instead of opinions that can separate the group, Dr. Gruen says. He suggests making financial models to use facts to predict outcomes of different options under healthcare reform. Most organizations have suboptimal models and do not understand the implications of likely scenarios for participating versus staying on the sidelines, according to Dr. Gruen.

2. Develop "no-lose" capabilities to manage utilization.
Dr. Gruen says healthcare leaders should first focus on capabilities that apply to both a fee-for-service and a risk environment to help the system transition to a risk approach to ACOs.

3. Recognize the magnitude of the change. Dr. Gruen says this step requires strong change management principles as the organization shifts to a new care delivery model. One way to manage the change is to focus on goals for the patient and the provider experience. Understanding patients' and providers' experiences will help leaders decide how to manage risk, because patient outcomes will be a metric used to reward ACOs and providers will be deluged with new processes they need to adopt. It is critical that those new processes are coordinated and phased-in with a logical and easy to understand sequence.

Looking ahead
Many people have debated the likelihood of ACOs' permanently changing healthcare delivery. Dr. Gruen says, "I believe that we're feeling the first rumblings of what will be a 9.5 earthquake on the Richter scale of how healthcare gets delivered." He also suggests it may be "safer" to assume the trend will last so organizations can take advantage of the programs that provide benefits for changing.

One change related to ACOs is that fixed assets and capital will become less important for the success of a healthcare provider, according to Dr. Gruen. Instead, value of care will be the basis of competition. "The assumption may be dangerous for hospitals, even those that have had strong market positions for long time and have relatively stable profit margins, to assume [the dominance of capital and fixed assets] will continue."

Although healthcare leaders and the media have been focusing on ACOs, particularly since the rules were released, Dr. Gruen says, "It's important to recognize that there will be other kinds of payments and reforms CMS will be emphasizing in addition to ACOs."

Learn more about PRTM.

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