Healthcare Business News

Reform Update: Insurer's retreat from ACO investment raises questions about Medicare's program

By Melanie Evans
Posted: May 7, 2014 - 3:45 pm ET

Universal American, a publicly traded insurance company that has invested heavily to become the largest operator of Medicare accountable care organizations, will no longer finance existing ACOs where its executives see little hope of financial return. The decision raises questions about Medicare's ability to expand the program as the agency continues to seek new participants and hold on to those already experimenting with accountable care.

“Where we're seeing it's not working, we're going to stop investing,” said Robert Waegelein, chief financial officer for Universal American, which contracts with local physicians across 13 states to operate 34 ACOs in the Medicare Shared Savings Program. That's about one out of 10 ACOs launched under the program since 2012. “We just want to stop the bleeding,” he said.

Universal American invested $63 million though last December in Medicare accountable care efforts, financing ACO management of care coordination and information technology. The company's first quarter accountable care investment of $13.1 million was a drag on its earnings, analysts said.

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The decision will cut off further investment to an undisclosed number of Universal American's ACOs and highlights the financial risks and operational challenges for even well-capitalized ventures in accountable care, a new payment model being tested by Medicare, commercial insurers and self-insured employers.

Startup costs can be significant, said healthcare consultants, and a return on that investment is uncertain because many doctors and hospitals find accountable care's financial incentives too weak to offset the risks of practice changes to earn bonuses.

Accountable care offers financial incentives to providers that successfully reduce use and spending and meet quality performance targets. But by reducing use and spending, hospitals and doctors decrease their revenue from payers that continue to reimburse based on volume.

That's a difficult proposition at a time when public and private insurers are seeking to squeeze payments to providers, said Warren Skea, a director with PricewaterhouseCoopers. “Are you going to accelerate your potential loss” of revenue, he said. “That's not a rational response.”

Dr. Patrick Conway, acting director of the CMS Innovation Center, acknowledged the conflicting incentives for most ACOs in the Journal of the American Medical Association last month as he and other federal health officials called for all insurers to more aggressively shift away from volume-based payment.

“Long-term success will require clinicians and organizations to make fundamental changes in their day-to-day operations—and, for any individual clinician or organization, making operational changes will be attractive only if the financial incentives are large enough,” they wrote. “The financial incentives, in turn, will be large enough only if a critical mass of payers, in addition to CMS, support payment reform.”

But accountable care bonuses will likely be elusive unless hospitals and doctors change how they deliver care, said David Axene, president and consulting actuary for Axene Health Partners. “For all of this to work requires behavior change by providers.”

Limiting investment to profitable ACOs could undermine efforts to organize healthcare delivery in fragmented markets, Steven Lieberman, president of Lieberman Consulting and senior adviser of the Bipartisan Policy Center. “If you pick the winners, that's an advance, but it's not going to broadly disseminate ACO across the country,” said Lieberman, who is also a visiting scholar at the Brookings Institution Engelberg Center for Health Care Reform. Instead, accountable care may take hold only where hospitals and physicians already work closely together and have capacity to manage care and costs.

“If there are going to be winners and losers, will the winners tend to be reinforcing those parts of the country where we've had organized delivery systems,” he asked. “What does it mean for starting up organized delivery systems where we don't have organized delivery systems?”

Universal American will continue to invest in its successful ACOs and expects to expand its accountable care efforts, Waegelein said in an interview. “We're not giving up on the program,” he said. “Those folks that get it are going to get our continued support,” he said.

Medicare accountable care results are limited to 113 ACOs in the Shared Savings Program that began in 2012 and another 32 more experimental ACOs that launched that year under the CMS Innovation Center. Financial performance has been mixed so far, and of the 32 Innovation Center ACOs, known as Pioneers, two dropped out and seven switched to the less-risky Shared Savings Program.

Universal American announced the accountable care pullback as it released disappointing first-quarter results.

“In the aggregate, our financial results are clearly not where we want them to be,” said Richard Barasch, the White Plains, N.Y.-based insurer's chairman and CEO, during a conference call with analysts. “Our job, over the next several months, is to clean up and fix the items that detract from the overall value of our company.”

That includes its accountable care operations. “Two years into the program, our challenge now is to determine the size and scope of our ongoing investment in ACOs,” he said. “It's our intention to have a good core of profitable ACOs, stop making investment where we don't think the return is going to justify it.”

Medicare has yet to pay out revenue to successful ACOs that began operations in 2012, including 15 operated by Universal American, Barasch said, but the company does not expect to recoup its investments from its Medicare accountable care first-year results.

Barasch said the ACOs results this year would be crucial to identifying “a group of highly-engaged ACOs.”

Recession rebound and reform

Did the recession increase safety-net hospitals' financial strain? New research in the latest Health Affairs found the hospitals emerged from the recession in largely the same condition as they entered it. Roughly 30% of safety net hospitals operated with negative operating and net margins prior to the recession, the study said.

Safety net hospital net margins—which include not-for-profit operators' investment income and operating income—plunged in 2008 but rebounded, the study said, but cautioned temporary relief under the American Recovery and Reinvestment Act may have played a role. Among all hospitals—for-profit, not-for-profit and safety-net—few experienced closure or merger between 2006 and 2011; safety nets were the most likely to close.

“Ongoing financial struggles may also compromise a hospital's ability to address new management challenges, such as those created by value-based purchasing initiatives and growing expectations for delivery system reform,” wrote authors Gloria Bazzoli of Virginia Commonwealth University, Naleef Fareed or Pennsylvania State University and Teresa Waters of the University of Tennessee Health Science Center.

Uncompensated care

Hospitals' total cost for uncompensated care last year hit $44.6 billion, according to a newly published estimate in Heath Affairs. The cost of uncompensated care to office-based physicians totaled $10.5 billion and community compensated care costs totaled another $19.8 billion. The researchers estimated that government payments offset roughly 65% of the $74.9 billion in combined uncompensated care costs.

Follow Melanie Evans on Twitter: @MHmevans

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