The Truven Health Blog

The latest healthcare topics from a trusted, proven, and unbiased source.

By Truven Staff

Illustrating How ACOs Could Save $380 Million in First Year

Mike Taylor imageA recent article in USA Today, “New Care Organizations Save $380 Million in First Year,” stated that Affordable Care Organizations (ACOs) saved approximately $380M in their first year of operation, exceeding Centers for Medicare & Medicaid Services (CMS) expectations. ACOs were conceived as part of the Affordable Care Act passed in 2010, and there are currently 114 Medicare ACOs in existence. Interestingly, the ACOs mentioned in the article are reporting lower costs than Medicare as a whole. ACOs also outperformed traditional Medicare on quality measures that evaluate the quality of care received. This is encouraging news, and I hope the number is confirmed.

The promise of an ACO is to provide healthcare in a fundamentally different way from traditional fee-for-service (FFS) Medicare. I believe the most fundamental reason healthcare is so expensive in the U.S. is the FFS payment model, in which doctors and hospitals are paid based on the volume of services delivered. ACOs are completely disruptive to the FFS model. ACOs are centered on the patient, not the provider – meaning the ACO receives a certain payment per patient, and payments increase when the quality of care is demonstrably improved over certain benchmarks. There are a variety of payment models in ACOs, but a common characteristic is the payment is linked to the outcome, not the volume of services delivered. This payment method encourages use of medical treatments that have been proven to work, discourages unnecessary medical care, and incentivizes for higher quality care.

Consider the traditional way care has been delivered: an elderly patient falls at home, developing severe hip pain. An ambulance takes the patient to an emergency department (ED). The physician examines the patient, orders and x-ray. The radiologist reads the film showing a fracture, and communicates back to the ED physician. The patient’s primary care doctor (or a hospitalist) is notified, the patient is admitted. An orthopedist is consulted, repairs the fracture under anesthesia delivered by an anesthesiologist and sends the patient to an inpatient bed. Physical therapy is ordered, medications are given and after a few days, the patient is transferred to a skilled nursing facility (SNF) for more rehabilitation. After two weeks there, the patient is not able to return home, so the patient is admitted to a nursing home.

In this example, think about all the care transitions as the patient goes through the system – there were at least nine transitions, and seven physicians were involved along the way. Every transition is an opportunity for an error to occur, or a miscommunication to happen – and they do happen. If any error leads to a complication, the medical costs increase. There is no coordination of care, and the payment has no bearing on the quality of care delivered.

In the ACO model, the ACO physician provider organization receives a certain dollar amount to care for this patient. Now, the physician thinks differently about the case, in a much more patient-centered approach. The physician brings together a clinical team to care for the population, and the team develops a home assessment process for all the high-risk elderly patients for whom they are giving care. The electronic health record data are leveraged to study the population. There is now an incentive to analyze patient data to predict who has a high risk of falling.  A case worker is given the patient name, does a home safety assessment, removing all loose floor rugs and looking for other safety hazards. The case worker finds the patient has poor balance, so he orders home physical therapy under the direction of the physician, who has evidence-based guidelines informing what type of therapy has been shown to reduce falls in the elderly. The patient gets stronger, never falls and continues to live at home. All the costs and pain derived from the fall never develop. Medicare paid the physician a pre-determined amount – much less than the cost of the hip fracture.

Which outcome do you want for you and your family? The point of the example is that ACOs have the potential (and financial incentive) to provide this high level of service; in a FFS world, the physician is not paid until an event occurs. Physicians desire to give the highest level of care to their patients, but our FFS system assures their failure. In a FFS model, physicians may provide excellent care to the patients they see, but they have no infrastructure or incentive to care for their population. There is no money set aside to encourage this type of preventive approach to a population. In an ACO environment, physicians and hospitals are paid based on how well they care for the population. Multiply this case for all the Medicare patients, and it’s easy to see how $380M might be saved.

Michael L. Taylor, MD, FACP
Chief Medical Officer
Categories: Research