For years, the fundamental problem with our healthcare system has been the perverse incentives. Doctors and hospitals are paid when patients are sick, and they are paid based on how much they do.
In response, health plans and Medicare are signing new outcome-based contracts with an ever-increasing number of physicians where they share in the savings if they work together to keep patients healthy and out of the hospital.
But a fundamental question is whether the doctors and hospitals need to have "skin in the game"—should they be on the hook to share in losses if costs increase in spite of their efforts?
This question has come to a head with comments made last week by CMS Administrator Seema Verma that affirmed the Trump administration's commitment to alternative payment models, praised Medicare accountable care organizations that accept downside risk, and strongly advocated for limiting how long ACOs can remain in one-sided contracts (those in which providers are not on the hook for losses).
Let me get my biases out in the open: I believe that having skin in the game has an incredible focusing effect. I started a company, Aledade, that takes risk for the total cost of care. We have chosen not to sell our software or our consulting services. Instead, we partner with independent physician practices. If together we don't create value, we don't get paid.
As you would expect, we gladly accept greater risk for greater rewards: our first ACOs to complete their three-year contract period moved immediately to the highest-risk/highest-reward Medicare Shared Savings Program track in 2018. But here's an alarming statistic: Only one out of the other 63 ACOs in our cohort took that level of risk. In fact, 57 of them chose to avoid any downside altogether.
Some of that is "tourism"—groups rolling the dice at no risk to themselves (and at no great expense). One-sided risk allows ACOs to benefit from randomness without paying the consequences. For every hospital ACO that exceeded the statistical threshold for savings, another hospital ACO had statistically higher costs; those with "savings" got paid, those with "losses" were held harmless. That sort of arrangement makes actuaries very nervous and does nothing to produce better health outcomes at lower cost.
Even more concerning, some groups may actually be using ACOs to entrench themselves in fee-for-service. "ACO squatters" lock out competitors and use Stark and anti-kickback program waivers and claims data to consolidate local market power.
But most of the ACOs that stayed in Track 1 are doing great work; they are improving quality, saving patients from having to be hospitalized, and reducing waste in Medicare. Although just 13% of physician-only ACOs would have been penalized if they had been in two-sided models, a much greater number (including many in the 45% that earned savings) would leave the program rather than move to the downside models currently available. This would be throwing out the baby with the bathwater.
If Medicare and other payers want to push downside risk, they must substantially improve two-sided models, ideally in ways that align with Medicare Advantage.
First, they should provide greater savings for those that take downside risk.
Second, payers should increase the ability of two-sided ACOs to generate savings. There are many beneficiary incentives and services (such as home-based care or telemedicine) widely used in Medicare Advantage but not available to ACO providers due to concerns around overutilization when providers don't have skin in the game.
Third, they need to make any program fairer. The Medicare ACO program, for instance, is systematically tilted against rural areas and those with rising long-term cost trends, and underestimates the true savings generated.
Finally, payers need to increase predictability. Our current "budgets" are an ever-moving target that are finalized months after the end of the performance period, and require massive analytic sophistication to understand, much less replicate. It is no wonder that smaller independent groups find it difficult to obtain capital reserves to backstop two-sided risk models.
This path forward is not without risk and will not be easy. But "skin in the game"—and a fairer game—will help physician practices deeply engage in fixing our broken healthcare system.