Oct 2011

Despite Decreased Regulatory Burdens and Increased Financial Incentives, ACOs Still Face Large Start-Up Costs and Uncertain Savings In Final CMS Rules

Under final rules issued by the Centers for Medicare and Medicaid Services (CMS), Accountable Care Organizations (ACOs) will continue to face large start-up costs and uncertain savings, despite a decreased regulatory scheme and increased financial incentives.

ACOs are organizations of health care providers that agree to be accountable for cost, quality and the overall care of Medicare beneficiaries. Responding to over 1300 public comments filed in response to earlier draft regulations, CMS made a number of modifications that result in greater flexibility of ACO operations, increased financial incentives for ACO participants and simpler, more streamlined quality performance standards. Nonetheless, the modifications are unlikely to change the cost-benefit analysis that healthcare providers will face when deciding whether to participate in the ACO program.

In an implicit acknowledgement that healthcare providers will be slow to warm to the idea of ACOs, CMS lowered its range of anticipated ACOs to between 50 and 270, a drastic decrease from the 300 to 800 potential ACOs it estimated in its draft regulations. However, CMS maintains that start-up and ongoing annual operating costs will remain at approximately $1.7 million per ACO, despite a widely-publicized American Hospital Association study that estimated such costs to be in the range of $11.6 million to $26.1 million, depending on the size of the ACO.1 CMS also maintains that the median estimated savings shared with ACO participants to be $1.3 billion over a four-year period. Due to the lower number of anticipated ACO participants, CMS estimates that ACOs will enjoy a benefit-cost ratio of 2.9. However, if the AHA estimates of start-up and operating costs are correct, ACOs will not achieve any savings and will face enormous losses.

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Michael Silhol