SAVING RURAL HOSPITALS
6. Problems with ACOs, Shared Savings, and Global Payments
Most small rural hospitals are unlikely to benefit from forming an Accountable Care Organization (ACO) or participating in shared savings programs. Under the Medicare Shared Savings Program, the only way a hospital can receive more money is by reducing Medicare spending by a sufficient amount, and over one-third of the ACOs in the program have been unable to do that. It is particularly difficult for small rural ACOs to receive shared savings bonuses because they have to achieve a bigger percentage reduction in spending to qualify for a bonus than larger ACOs, and the rates of service utilization are generally lower in small rural communities so there are fewer opportunities to generate savings.
Many small rural hospitals could be harmed financially by participation in shared savings programs. If a hospital hires additional staff or consultants to help it succeed in the shared savings program, it will increase its costs with no guarantee of receiving any additional payments to offset the higher expenses. If the hospital reduces the number of services it delivers to patients, it will create savings for payers but it will also reduce its own revenues by more than any shared savings bonus it would receive.
Small rural hospitals could be particularly harmed if they accept “downside risk.” In the future, ACOs will be required to pay penalties if total healthcare spending for their patients increases. Small rural hospitals do not deliver and cannot control many of the most expensive services their residents may need, and a requirement that the rural hospital pay penalties when rural residents need expensive services at urban hospitals would worsen the rural hospitals’ financial problems. There are also serious problems with the methodologies used for risk adjustment and setting of spending targets that could particularly harm small ACOs in rural areas.
Residents of rural communities could be harmed by the incentives in shared savings and downside risk programs. The primary goal of these incentive programs is to reduce spending for payers, not to improve the quality of care for patients. Bonuses and penalties based on changes in payer spending create a financial incentive for ACO participants to withhold services that patients need, to discourage patients from receiving high-cost services, and to avoid providing care to patients who have serious health problems. The limited number of quality measures in shared savings programs cannot prevent this from occurring.
Many small rural hospitals have been told that their best and perhaps only path to sustainability is to form or join an “Accountable Care Organization” (ACO), because of the potential to receive higher payments for delivering high-quality, efficient care than they can receive under standard fee-for-service or cost-based payment systems.
The Affordable Care Act defined an ACO as a group of providers that work together to manage and coordinate care for their patients and that are willing to be accountable for the quality, cost, and overall care of those patients.1 It might seem that a small rural hospital that operates one or more Rural Health Clinics would be ideally suited to serve as an ACO, since it delivers primary care and the most commonly-used outpatient services to the residents of its community, as well as inpatient and post-acute care for common medical conditions and chronic diseases. Moreover, if participation in the ACO could result in higher payments for the rural hospital, it could improve the hospital’s financial status, helping it to continue delivering existing services to the community and potentially even to improve and expand those services.
The problem is that the “shared savings” and “two-sided risk” payment systems used by Medicare and other payers to pay ACOs can actually make a small rural hospital worse off financially than it would be under current payment systems. Although it is possible that a small rural hospital could improve its financial margin by forming or joining an ACO that is paid in these ways, it is more likely that the hospital will receive no financial benefit at all or even be penalized financially for being part of the ACO. Moreover, because current ACO programs have failed to generate significant savings for payers, the payment methodologies are being changed in ways that will make it even more difficult for rural hospitals to benefit in the future and more likely that they will be financially harmed.
A number of large physician practices, independent practice associations, and health systems have withdrawn from the Medicare Shared Savings Program or have refused to participate at all because of the problematic structure of the program and the fact that it makes no actual changes in the way healthcare providers are paid for services. They have called for Medicare to pay ACOs using a “global payment” or “population-based payment” instead. Many of these organizations already have capitation contracts with Medicare Advantage plans and commercial HMO plans that pay them in similar ways.
In response, CMS has created a new demonstration program called “Direct Contracting” in which entities called “Direct Contracting Entities (DCEs)” can take financial risk for the total Medicare spending on a group of assigned beneficiaries and receive capitation payments instead of fees for some or all of the services they provide.13
Whether one calls this “global payment,” “population-based payment,” “capitation,” or “direct contracting,” and whether one calls the entity receiving the payment a DCE, ACO, or something else, the basic concept is the same:
a group of healthcare providers (the DCE/ACO) receives a monthly payment for each Medicare beneficiary who is assigned to the group;
the providers in the DCE/ACO no longer receive separate fees for the individual services they deliver to the assigned beneficiaries;
if a provider who is not a member of the DCE/ACO delivers a service to one of the beneficiaries who is assigned to the DCE/ACO, that provider is paid a fee for that service by Medicare, but the monthly payments to the DCE/ACO are reduced by the amount of that fee.
as a result, the total amount that Medicare spends on the assigned beneficiaries is equal to the monthly payments to the DCE/ACO to which those beneficiaries are assigned.
This arrangement provides far more flexible payment for the providers in the DCE/ACO than they receive under the Shared Savings Program, since the monthly payments are not tied to how many or what types of services are delivered. However, it also creates greater financial risk for the providers in the DCE/ACO than under the shared savings program. This risk is manageable for a large physician organization or health system that orders and delivers most of the services that the assigned beneficiary receives, but it is not manageable for a small rural hospital and clinic that only order and deliver a fraction of those services.
Moreover, a global payment system not only retains many of the same problems as the shared savings program for both patients and hospitals, it also has some of the same kinds of problems associated with hospital global budgets. Perhaps most importantly, there is no assurance that the global payment amounts will be sufficient to cover the cost of delivering high-quality care to patients either when the program first begins or over time, nor is there any assurance that even if the payments are adequate, patients will actually receive the services they need. Capitation payment systems were widely used in the 1980s but then discontinued in most communities because of these problems.
The risks and problems associated with global payments far outweigh any benefits for small provider organizations. Consequently, global payments are not a solution for the problems facing rural hospitals and their communities.
Section 1899 of the Social Security Act (42 U.S.C. 1395jjj).↩︎
Centers for Medicare and Medicaid Services. Medicare Shared Savings Program: Shared Savings and Losses and Assignment Methodology. (August 2020).↩︎
Centers for Medicare and Medicaid Services. CMS Finalizes “Pathways to Success,” an Overhaul of Medicare’s National ACO Program, December 21, 2018.↩︎
Under the Medicare Shared Savings Program, a hospital this small would likely have to reduce spending by more than 2% in order to qualify for a shared savings bonus, but for simplicity, the minimum savings rate is assumed here.↩︎
For simplicity, it is assumed here that there is no adjustment in the bonuses or penalties based on quality measures.↩︎
The Medicare Shared Savings Program only applies to Medicare beneficiaries in “Original Medicare,” not to those who have enrolled in a Medicare Advantage plan, so the number of beneficiaries who could be potentially be assigned to an ACO will often be 20-40% smaller than the total number of Medicare beneficiaries living in the county.↩︎
Centers for Medicare and Medicaid Services. Shared Savings Program Accountable Care Organization Public-Use Files.↩︎
Kosar CM et al. “Association of Diagnosis Coding With Differences in Risk-Adjusted Short-Term Mortality Between Critical Access and Non-Critical Access Hospitals.” JAMA 324(5): 481-487 (2020).↩︎
Average spending per Medicare beneficiary is about $10,000 per year, so with 5,000 assigned beneficiaries, the total spending attributed to the ACO would be about $50 million.↩︎
This would happen even in a Critical Access Hospital receiving cost-based payment if the reduction in rehabilitation services occurs primarily among Medicare beneficiaries.↩︎