Most industry leaders believe that, in the near future, fee-for-service payment will be replaced by “population-based payment,” intended to reduce incentives to over-treat patients and to encourage prevention. However laudable these goals, we believe the expected shift to population-based payment is unlikely to materialize.
We take population-based payment to mean time-limited fixed per-capita payment for a defined population of covered lives. Much of the inevitability of the trend toward population health is attributed to the Medicare ACO/Shared Savings programs created by the Affordable Care Act. The accountable care organization has been touted as the eventual successor to DRG and Part B payments in regular Medicare. Medicare's ACO programs now cover about 8 million of its beneficiaries (compared to 17 million in Medicare Advantage).
While advocates in the CMS claim hundreds of millions in savings (in an overall program spending more than $600 billion a year), the Pioneer ACO program and its much larger younger sister, the Medicare Shared Savings program, have struggled to gain industry acceptance. Medicare ACOs have so far had minimal impact in reducing costs. (PDF) Managed-care veterans (hospital- and physician-based) that have succeeded in Medicare Advantage or commercial HMO markets have largely failed with ACOs.
After a decade of experimentation, the pattern in these ACO programs is that a small fraction of ACOs generate most of the bonuses, and that excessively high prior Medicare spending, rather than excellent infrastructure and clinical discipline, may be the real reason for those successes. For the majority of ACOs, the return on investment for setting up and operating them is negative and likely to remain so. The recently issued ACO regulations did not materially improve the ROI calculus. In our view, it is extremely unlikely that ACOs will evolve into a “total replacement” for regular Medicare's current payment model.