Where’s the ACO Pay Off for Hospitals?

With the issuance of proposed rules for accountable care organizations (ACOs) just days away (CMS Deputy Director Marilyn Tavenner has been quoted as saying they’ll be out by April 1, 2011), many in the healthcare industry are beginning to wonder how ACOs will pay for themselves. Drs. Trent Haywood and Keith Kosel have predicted that most organizations participating in ACOs will lose money during the first three years. See “The ACO Model- A Three Year Financial Loss?”, New England Journal of Medicine, March 23,2011. As far as anyone knows, there is no money in PPACA to make up for these losses, so it’s up to health care providers to figure out how to balance their books.

Although purely theoretical, there are a number of places hospitals can look for revenue to offset any losses from ACO development and participation:

  1. extension of EMR meaningful use to capture more incentive payments under both public and private plans,
  2. using in-network referrals to ensure cost and data capture,
  3. cost savings from device standardization,
  4. improved efficiencies from shorter LOS and fewer readmissions,
  5. if hospital is self-insured, employee health cost reduction, and
  6. increased revenue from market share gains.

Building the infrastructure of an ACO will inherently cause hospitals to reconsider how they budget for various strategic and operational issues. For example, a hospital with a well-functioning clinical integration model, such as a clinical co-management arrangement with physicians, could forgo the cost of medical practice acquisitions when there are more affordable alternatives that achieve the same purposes.

Deputy Director Tavenner (who is rumoured to be Don Berwick’s successor at CMS) has signaled that the ACO proposed rules will only be the first chapter in this regulatory saga. CMS will be guiding the process of ACO experimentation rather than dictating a “one-size fits all” proposition for achieving the goals and objectives of PPACA. Before the ACO rules are finalized in some future year, the emerging models of ACO organization will need to undergo strict financial scrutiny to ensure their long-term viability and success at bending the cost curve while maintaining or improving quality of care. This is one of the great challenges of the Accountable Care Era.