The Commonwealth Fund Blog

Expanding the Options for Accountable Care Organizations: The Pioneer Model, Part I

October 12, 2011

Tags: payment reform accountable care organizations Medicare

Mark Zezza SXG 75 X 75By Mark Zezza and Stuart Guterman

Health care providers are gearing up for the release this fall of the Centers for Medicare and Medicaid Services (CMS) final rule on accountable care organizations (ACOs). The Affordable Care Act's Medicare Shared Savings Program for accountable care organizations, scheduled to begin in January 2012, is intended to encourage providers to more effectively and efficiently work together to manage and coordinate care for Medicare fee-for-service beneficiaries by sharing in any savings achieved.

The proposed rule for the Medicare Shared Savings Program was met by fairly strong criticism from the provider community (the final rule is expected to be released by Nov. 1). In what was seen as a response to some of those criticisms, CMS issued a request for applications for the Pioneer ACO Model last May. The Pioneer Model is designed for provider organizations experienced in providing coordinated care across settings, providing an opportunity for them to move more rapidly to population-based payment arrangements.

In general, the Pioneer Model gives providers that are able to reduce spending below targeted amounts the opportunity to achieve greater financial rewards than the Medicare Shared Savings Program offers. In addition, there are fewer administrative requirements, as well as more flexibility with regard to which providers can participate and how they can meet the goals of the program. These differences should allow providers ready to participate in a more advanced ACO program to build a better business case for partnering with CMS in a shared-savings contract.

In this two-part blog post, we'll highlight aspects of the Pioneer Model and how it differs from the Shared Savings Program. Below, we look at shared-savings payments.

Shared-Savings Payments. While the details of the shared-savings payment model still need to be finalized, the Pioneer Model gives providers more choice in determining their own risk/reward potential. CMS will offer the opportunity to share in greater savings, as well as face greater risk for excess costs relative to a target spending amount, than under the Shared Savings Program.

While participants in the Shared Savings Program can choose not to be at risk for excess costs in the first and second years, if they do so they can only receive a maximum of 50 percent of the savings they achieve. Alternatively, ACOs can receive up to 60 percent of shared savings in the first two years if they also accept risk for 60 percent of their excess costs. By the third year all ACOs in the Shared Savings Program must accept two-sided risk. In contrast, Pioneer ACOs must be at risk for excess costs from the outset, receiving up to 60 percent of shared savings (and being liable for 60 percent of excess costs) in the first year, with the percentage of shared savings and costs rising up to 70 percent in the second year.

If the Pioneer ACO meets its quality standards and achieves savings above minimum-required amounts in the first two periods, it will be eligible to begin receiving a large portion of its payments on a fixed upfront basis and will still receive up to 70 percent of any shared savings. That is, each month, CMS will send a per capita payment to the ACO for each assigned beneficiary based on 50 percent of the Pioneer ACO's projected fee-for-service revenues. Pioneer ACOs will also be paid 50 percent of their fee-for-service payment rates for all services to assigned beneficiaries during the period. At the end of the year, the sum of the prospective payments and fee-for-service payments for the Pioneer ACO will be compared against its spending targets to determine eligibility for shared savings (or liability for excess costs).

Many provider groups see upfront payment as facilitating their ability to become ACOs; such payments, which are not linked to the number of services delivered, reward efficiency while also supporting the upfront investments necessary to improve quality and coordinate care. By contrast, having underlying payments linked to fee-for-service systems, as under the Shared Savings Program, limits the ability of providers to free up funds for value-enhancing services that are typically not reimbursed under the fee-for-service system, and, in fact, lower revenue for providers that reduce utilization.

CMS is seeking comments from providers about additional alternative payment arrangements and plans to synthesize the comments into a second option that will be available as an alternative to Pioneer ACOs.

Another key design element under the Pioneer Model is a flat 1 percent minimum savings (or excess costs) threshold, which is the minimum amount of savings (or excess costs) that a provider must achieve before becoming eligible for shared savings (or liable for a share of excess costs). The intent of the threshold is to ensure that providers are rewarded for intended—rather than random—improvements in performance, as it is normal to have slight random fluctuations in year-to-year spending. The proposed thresholds in the Shared Savings Program range from 2 percent to 3.9 percent; these higher thresholds concerned many providers in terms of their ability to obtain shared-savings payments.

There is also no mention of a "withhold" in the Pioneer Model. Under the Shared Savings Program, CMS has proposed that a significant portion of any earned shared savings (at least 25 percent) be withheld to ensure that the ACO has a minimum amount of reserve to pay off potential future shared losses and to further incentivize continued participation throughout the contract period (as the ACO would lose the withhold otherwise). The Pioneer Model appears to give the ACO more flexibility to develop enforceable assurances that they can pay shared losses. Many providers considered the large withhold in the Shared Savings Program a barrier to investing in clinical innovations and infrastructure to improve care, as ACOs would have to wait longer to obtain their shared-savings payments.

In our next post , we will examine patient assignment, provider participation, the contract period, the governing board, and mutlipayer alignment.