Health Reform Supply of Medical Services

Three Tiers of Accountable Care Organizations

The Healthcare Economist has previously reviewed different forms of Accountable Care Organizations (ACOs).  Implementing ACOs in practice, however, may prove more difficult.  How could the government or private insurers incentivize providers to provide integrated care?  How can they incentivize providers do perform fewer services and, thus, make less money?

An article by Shortell and Casalino (2010) takes a tiered approach.  ACOs would be classified into one of 3 tiers.

  • Level  I: ACOs bear no financial risk, but simply receive a share of savings and bonuses for hitting quality targets.  This payment structure is similar to the Medicare Group Practice Demonstration.  The organizations would have to establish a legal practice entity that would be able to provide performance measures.  A minimum number of PCPs would also be required.
  • Level II: ACOs in this level would be eligible for a larger share of savings gains, but would also be liable to penalties if costs rise above predetermined targets.  Level II ACO’s would also be required to meet a wider scope of performance metrics.  Further, these ACOs would receive more bundled payments and episode of care payments as well.
  • Level III: The most “advanced” ACOs could be paid through full or partial capitation.  These ACOs would also be required to have public reporting of a comprehensive set of performance measures and electronic health records.

The Level I and Level II ACOs likely will only have a marginal impact on physician behavior.  For instance, assume that the cost per patient is $100 per year and ACOs in level II must pay 25% of any additional costs above $100.  If an ACO has $200 of charges per patient, even after the $25 penalty, they will still make $175, which is greater than what they would have made by reducing volume.  [This example does not take into account that performing more services also increases the cost for the physician.]

There is little doubt that paying physicians in Level III ACOs via capitation will decrease cost.  Physicians will not have an incentive to provide excessive services since they will not receive additional revenue.  The question is will quality remain the same?  Policymakers may claim that it will because of all the necessary quality metrics.  Nevertheless, most healthcare outcomes are difficult to measure and measuring some outcomes may cause physicians to transfer their efforts from improving more important, unmeasured outcomes to less important but measured outcomes.

Currently, Medicare is a fee-for-service system with the exception of the Medicare Advantage system.  Instituting a capitation-based system may meet much resistance from physician and hospital organizations such as the AMA and AHA.  It might be easier to simply transfer all Medicare beneficiaries to managed care rather than create ACOs.  Regardless, implementing ACOs in the U.S. will not be as easy as it seems.


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