Medicare Shared Savings – What Is the Opportunity?

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Despite all the political rhetoric surrounding the Affordable Care Act (ACA), the initial unpopularity of the Medicare Shared Savings Program (MSSP) in the provider community, and the complexity of the requirements for participation in the MSSP, a sizable number of organizations are considering participation. CMS currently counts 65 organizations as participants in shared savings arrangements, including the Pioneer Accountable Care Organization (ACO) members, Cohort I of the MSSP, and the Physician Group Practice Transition Demonstration participants. In addition, CMS reportedly received over 150 applications for the July 1, 2012, program start date, and the interest level appears to be high for the recently announced January 1, 2013, commencement.

What opportunity do these organizations see in the MSSP, otherwise known as the Medicare ACO? Do they expect to make money over current fee-for-service (FFS) reimbursement levels? Or position themselves for future reimbursement changes? Or experiment with care models on a fairly defined and less mobile population? The answer is yes, for all of these reasons and others. This article explores the mechanics behind this reimbursement model and the reasons why organizations are considering participation, regardless of what happens on the national regulatory front.

Key Program Mechanics

On November 2, 2011, CMS published a final rule that included significant changes from the proposed rule for ACOs but which preserved its fundamental payment methodology.1 CMS recently made a January 1, 2013, start date available, which follows program cohorts commencing on April 1, 2012, and July 1, 2012. Details on how the parameters may change for the January 1, 2013, cohort have not been released as of this publication date. Key ACO program provisions include:2

  • A shared savings methodology as the main financial incentive, which is aimed at reducing the annual spending amount per Medicare beneficiary.
  • Two tracks: one that is no risk/incentive only and a second that includes downside risk.
  • A minimum of 5,000 attributed Medicare FFS beneficiaries.
  • Preliminary prospective attribution, which entails CMS providing the organizations with their attributed populations at the beginning of the performance period and reconciling retroactively. 3
  • A benchmark cost threshold that is relative to the historical spending trend for the attributed population. ACO responsibility for the total spending associated with the attributed beneficiaries, regardless of whether the services were rendered by the ACO’s providers.
  • Performance across 33 quality metrics, which impacts shared savings earning potential and mitigates shared losses under Track 2.

Financial Implications

A provider organization that includes a hospital cannot produce sufficient shared savings under this arrangement to make up for decreases in FFS revenue that are caused by reduced utilization. However, independent medical groups may be able to derive positive financial returns by realizing utilization decreases in the hospital and emergency department (ED) settings and thereby accrue savings that would have otherwise gone to those facilities in reimbursement.

Although estimating financial performance under the MSSP is challenging due to the complexity of the calculations and the difficulty of projecting utilization decreases, it is important for an organization considering participation to have a sense of what kind of utilization reduction is necessary to meet its financial targets. As such, we recommend that a financial analysis be conducted in concert with the process of evaluating participation. Key financial assumptions to consider when evaluating the opportunity under the Medicare ACO include:

  • Number of Attributed Beneficiaries – Methodologies to estimate this include reviewing professional fee billing data to determine the number of Medicare FFS beneficiaries with three or more visits over a 3-year period, which serves as a proxy for patients that are likely to be attributed to the organization.
  • Baseline Spending – Resources are available from CMS to estimate the Medicare spending per beneficiary in each hospital referral region. In addition, after acceptance into the program, CMS will provide the ACO with the actual baseline spending for its attributed beneficiaries.
  • Utilization-Level Influence – For organizations with Medicare Advantage (MA) experience, benchmarking key utilization metrics (e.g., ED visits per 1,000 members, admissions per 1,000 members) against industry measures is a key step in ascertaining potential performance under the MSSP. The important factor is to determine how much the Medicare FFS population differs from MA experience and what the ACO’s utilization goals are.
  • National Medical Care Expense Utilization Increases – The medical expense inflation amount used to adjust the annual spending benchmark will be based on the projected absolute amount of growth in national per capita expenditures for Medicare Part A and B services. Since price is dictated by CMS, determining how well the organization manages utilization compared to the national trends in utilization increases is paramount.
  • Quality Measure Performance – Evaluating the ability to report on the published list of 33 pre-identified quality metrics and how well the organization performs relative to regional trends should inform assumptions about shared savings earnings.
  • Infrastructure Costs – The organization should detail the incremental cost of coordinating the care for the attributed beneficiaries and net it against the shared savings potential. These costs should include care management staff and benefits, both in the hospital and ambulatory environments, and incremental IT investments.

This financial modeling is critically important because it will help the organization determine: (1) order-of-magnitude financial results, (2) the infrastructure investment required, and (3) its ACO utilization goals.

Operational and Care Model Implications

Organizations that have performed well under MA and other similarly funded, capitation-like programs have been successful in reducing costly services such as inpatient and emergency care through more tightly controlled care coordination and monitoring of patients. These organizations may not have as significant an opportunity for additional reductions, depending on how much Medicare FFS patients have been tangentially affected by these care programs. For example:

  • Organizations with low levels of bed days per 1,000 (less than 850) for the Medicare FFS population may have difficulty further reducing these rates, especially given the lack of reinforcement in the patient benefit design.
  • While a reduction in length of stay can improve the organization’s margin on Medicare patients, the MS-DRG reimbursement methodology does not translate to per beneficiary savings under the program (i.e., the DRG is largely fixed, regardless of length of stay).

Achieving the desired utilization decreases requires a robust infrastructure, which can be a costly investment if not already in place. The key elements of an operational care model with the potential for such utilization reduction include:

  • A fully functioning EMR with reporting capabilities to identify and monitor high-cost and at-risk patients. This typically means building IT capabilities that are in addition to what an out-of-the-box EMR provides.
  • A comprehensive and reliable disease registry.
  • An established patient-centered medical home (PCMH) model.
  • Creation of a patient support infrastructure that includes case managers (inpatient), nurse navigators (outpatient), dieticians, social workers, and pharmacists to manage patient care.
  • Adoption of the care coordination protocols by aligned physicians, hospitals, and other facilities.
  • Ability to deliver on patient experience such that patients “stick” to the organization; that patients choose it and its affiliates for as much of the care continuum as possible.
  • The development and alignment of physician incentives for achieving the desired level of utilization, savings, outcomes, and quality.

Strategic Implications

Although the MSSP may result in a negative financial impact when compared to the peak of FFS reimbursement, and despite the fact that it requires significant operational and cultural change, organizations that have chosen to apply are evaluating the program from a strategic as well as financial perspective.

  • Many systems are already pursuing patient care management initiatives because it is “the right thing to do.” Therefore, some organizations see it as a way to derive at least moderate financial benefit for these efforts.
  • Similarly, forming a Medicare ACO can act as a catalyst to facilitate the implementation of the operational or clinical changes that are desired in a system or outlined in the strategic plan.
  • Achieving utilization reduction requires working with physicians through one or more approaches (e.g., employment, comanagement, PCMH) and may serve as an impetus to foster greater physician alignment. Federal regulations have been relaxed for financial relationships between hospitals and physicians who are participating in an ACO.
  • If successful, the Medicare ACO reimbursement methodology will likely serve as a precursor to future (required) reimbursement mechanisms. Those who have experience operating in this model will obviously be better positioned for that reality.
  • The organizational competencies gained and lessons learned about this defined population may position an organization for other value-based reimbursement opportunities with commercial payors, as well as for risk-based contracting in the future.


Given the sheer number of programs and pilots introduced over the last 2 years by CMS and the Center for Medicare and Medicaid Innovation, organizations now need to define a Medicare strategy that is similar to what they might do with other payors. Evaluation of the MSSP in isolation is complex and must be considered in light of the organization’s readiness to implement care models that affect utilization and other payor strategies. Making the decision to participate in a Medicare ACO represents a significant step for many organizations on the road toward value-based care delivery, as well as a reasonable foray into managing the total cost and quality of care for FFS patients in an environment that preserves patient choice and ultimately holds the provider responsible for all of the care delivered.

Even for organizations that are unlikely to generate positive returns from the program over current FFS reimbursement, participating in the MSSP represents a prime opportunity to achieve an array of goals, such as the following:

  • Propel an organization to become integrated across the spectrum of care.
  • Serve as an impetus to develop the competency and infrastructure needed for care coordination.
  • Improve a system’s readiness for commercial value- based and risk contracting.

Ultimately the decision depends on whether the organization fundamentally believes that the current healthcare cost and delivery mechanisms are unsustainable. Regardless of what happens at the national reform level, we are betting that cost containment, quality improvement, and value-based care delivery are here to stay.