Consensus is emerging on the need for greater integration and coordination within the delivery system and on the importance of shifting the payment system from a focus on volume and intensity to a focus on value and performance.
The results of our empirical analyses show that most physicians already practice within natural referral networks that provide a substantial amount of care for at least 5,000 Medicare beneficiaries. Under the current payment system, providers get no financial support (and may face losses) if they coordinate care or provide care more efficiently. The results of the simulations show that it is feasible to provide clear and specific spending benchmarks for provider groups willing to integrate, that the potential shared savings payments to ACOs that perform well could be sizable, and that real savings to the Medicare program would occur within five years with only modest changes in providers' spending behavior. The analyses also suggest limited downside risk arising from the potential for large “windfalls” paid to ACOs because of random (or planned) drops in spending that might have occurred even in the absence of the program.
Our analyses have several limitations. First, we are uncertain about how much participating providers would actually change their behavior and reduce spending growth. On the one hand, evidence suggests that augmenting existing FFS health care delivery with care management programs unrelated to physicians' practices has not led to consistent savings. On the other hand, specific interventions to improve care coordination, particularly those focused on reducing hospital readmissions, have achieved significant savings, and evidence that organized systems can provide care at lower cost is growing.14
Examples include HealthCare Partners' expansion from Southern California and Tampa, Florida, into Nevada, where physician management was able to achieve substantial savings within the first eighteen months, and the PGP demonstration, which documented increasing savings to the Medicare program over the first two years.15
A second limitation of our analysis is that we were unable to estimate the longer-term fiscal impact of the program. Any savings achieved by reducing either the level of or annual growth rates in spending—even modestly—would have their greatest impact through the effects of compounding over time. Indeed, ten-year simulations (not reported) suggest that there might be substantial long-term savings for the Medicare program under the assumption that the behavioral effects during the first few years are maintained even modestly. Even greater savings would be likely to occur if ACOs responded with more substantial organizational changes, such as reductions in acute care capacity.
“Our proposal offers a path toward the integration widely acknowledged to be important to improving the quality of care.”
Political and social challenges
We do not underestimate the complexity of the political and social challenges that remain. Most physicians still practice in small group settings, hospital and physician relationships are often more competitive than collaborative, and the size of the financial rewards from ACO membership for physician groups might not be sufficient in some settings. Also, both providers and the public could have concerns about moving to value-based payment. Providers might fear the reporting burdens related to quality measures; difficulties in coordinating care across small, independent practices; and ensuring performance measures that adequately adjust for differences in health status across patients. Patients may of course worry about the withholding of truly valuable care.
But other approaches to reducing the growth of health care spending and fostering integration face serious constraints and even stronger resistance. The political opposition to requiring all beneficiaries to join capitated health plans would likely be fierce. Bundled payments reinforce the principle of shared accountability and encourage collaboration and coordination among providers but are unlikely to have much impact on the overall costs of care.16
Bundled payments will not discourage the provision of unnecessary services outside the context of the episode; nor do they necessarily reduce the provision of unnecessary or questionable episodes of care. And cuts in payment rates will be vigorously opposed as threats to providers' ability to provide care to Medicare beneficiaries. The tensions that have to be managed include the difficult physician-hospital relationships pervading some markets, the increasing need to slow spending growth, and the widely held perception that cost containment requires income loss for some providers.
A promising middle ground
In this difficult environment, we believe that a voluntary payment reform designed around ACOs and shared savings offers an incremental and promising middle ground that could meet the interests of providers, beneficiaries, and taxpayers better than the competing alternatives. And interest in the approach is growing.17
Because it can be built on the current FFS payment system, early implementation is possible. Because it would be a voluntary program, providers could choose to wait and learn from early adopters' experience. Because there is no need to lock in beneficiaries, they would have less to fear. For the first time, the approach offers a mechanism to support providers' efforts to slow overall spending growth while allowing their incomes to be preserved (through the shared savings payments). Finally, our proposal offers a path toward the integration widely acknowledged to be important to improving the quality of care and, as noted by David Mechanic, to realigning care with core professional values.18
Barriers to implementation
Several practical barriers to implementation of the ACO approach deserve consideration. The specific design features of an ACO program will need to be refined through further empirical work and further evaluation of regulatory and legal barriers to the kinds of shared savings that we propose.19
Numerous other Medicare and private-sector reforms are being considered or implemented that share the goals of improving integration and accountability for quality and costs, including pay-for-performance (P4P) programs, payment updates tied to the adoption of health IT (such as registries or electronic prescribing), and pilots to evaluate payments to support “medical homes.” And payers and providers are engaged in so many different, often competing initiatives that successful implementation or evaluation of any single reform is increasingly challenging.
All of these obstacles could best be addressed by aligning current and proposed reform initiatives with the long-term goals of accountability, high-leverage performance measurement, and better value for our money. The key is to ensure that any interim reforms are well aligned with those long-term goals. provides a hypothetical example for how such a “road map” could help restructure and realign performance measurement and payment reform toward integration, accountability, and efficiency. For example, if consensus were established that providers should, within five years, adopt electronic health records (EHRs) that are interoperable across the providers within their local referral network, then interim policy steps, payment updates, and performance measures could be aligned with that goal. Similarly, instead of having P4P programs continue to focus on a narrow set of physician- or group-specific process measures, providers could be expected to develop registries for specific conditions (such as diabetes or heart failure) that would support more effective care management. Knowing that registries would soon be required would encourage developers of EHRs to incorporate them (improving provider efficiency). Also, aligning the medical home model with reforms intended to strengthen local physician-hospital networks could improve the effectiveness of each approach to reform.20
Hypothetical Road Map For Payment Updates, Performance Measures, And Shared Savings
As part of this process, implementation of ACO reforms could proceed through an initial pilot phase that would have little risk of increasing Medicare costs (given the results of the simulations) but that would provide further evidence on how to implement shared savings reforms effectively on a larger scale. If incorporated into such a comprehensive framework, providers would be supported and encouraged to form the local integrated delivery systems required for the ACO model to succeed. And, if broadly implemented, such a shared savings program appears to offer a feasible path toward achieving higher-quality, more efficient care that meets the interests of payers, patients, and providers.