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ACOs fail their math test

August 20, 2020

Topics: Quote of the Day

McKinsey & Company, August 19, 2020

This article is a collaboration by Nikhil R. Sahni, a partner in McKinsey’s Boston office; Rachel Groh, a consultant in the Boston office; David Nuzum, a senior partner in the New York office; and Michael Chernew, a professor at Harvard Medical School and the Chair of Medicare Payment Advisory Commission (MedPAC).

From the Introduction

Broad consensus has long existed among public- and private-sector leaders in US healthcare that improvements in healthcare affordability will require, among other changes, a shift away from fee-for-service (FFS) payments to alternative payment models that reward quality and efficiency. The alternative payment model that has gained broadest adoption over the past ten years is the accountable care organization (ACO), in which physicians and/or hospitals assume responsibility for the total cost of care for a population of patients.

On the whole, ACOs in the Medicare Shared Savings Program (MSSP) have delivered high-quality care, with an average composite score of 93.4 percent for quality metrics. However, cost savings achieved by the program have been limited: ACOs that entered MSSP during the period from January 1, 2012 to December 31, 2014, were estimated to have reduced cumulative Medicare FFS spending by $704M by 2015; after bonuses were accounted for, net savings to the Medicare program were estimated to be $144M. Put another way, in aggregate, savings from Medicare ACOs in 2015 represented only 0.02 percent of total Medicare spending. The savings achieved were largely concentrated among physician-led ACOs (rather than hospital-led ACOs). In fact, after accounting for bonuses, hospital-led ACOs actually had higher total Medicare spending by $112M on average over three years.

While savings from MSSP have been relatively limited, in aggregate, numerous examples exist of ACOs that have achieved meaningful savings—in some cases in excess of 5 percent of total cost of care—with significant rewards to both themselves as well as sponsoring payers (for example, Millennium, Palm Beach, BCBSMA AQC). The wide disparity of performance among ACOs (and across Medicare, Medicaid, and Commercial ACO programs) raises the question of whether certain provider organizations are better suited than others to succeed under total cost of care arrangements, and whether success is dictated more by ACO model design or by structural characteristics of participating providers.


Based on ACO results published to date, physician-led ACOs generally do better and are more profitable than their hospital counterparts. Thus, the real question we aimed to unpack is how can hospital-led ACOs adapt to be more profitable? We created a series of scenarios in an attempt to represent most hospitals in the United States and found four common themes:

  • Know the implications of your structure: As our results show, hospitals that commit to ACOs—high savings rate from taking on two-sided risk and a large number of lives—will find it easier for the math to work. But making the commitment itself is not enough: A hard look needs to be taken at the internal and external structure, both of the hospital and affiliated network, as well as the local market, to understand the probability of success. A hospital can take certain broad actions, such as having the right organizational structure or owning the right assets, to increase the probability of success. However, certain factors are unchangeable but important to account for, such as geographic isolation.
  • Take a multi-year view: When a hospital fully commits to becoming an ACO, it is essential to take a multi-year view. This view applies to major contract terms, such as aligning on the re-baselining methodology, as well as investments in programs to manage the concepts of “demand destruction” and to improve physician satisfaction.
  • Operationalize locally: As hospitals develop new programs, they must avoid using “blunt” instruments and instead take a nuanced and personalized approach. While vendors of population health programs may offer off-the-shelf solutions, those capabilities need to be tailored to manage the profile of the covered lives under the ACO. Furthermore, pulling the same levers (for example, post-acute care) may be common place for all ACOs, but how it is done (for example, network optimization, owning assets) may differ based on the local market. Accounting for the local market will be important to effectively manage spillover effects, which our results show can be a critical difference between profitability and unprofitability.
  • Be smart about economies of scale when building infrastructure: No one doubts the additional operating expenses involved in becoming an ACO. Yet it is important to be strategic about what to build versus what to buy. Many of the needed capabilities, such as analytics, have been developed and can be leveraged off-the-shelf through partnerships, vendor arrangements, and the like. Accessing these services can lessen the burden of high fixed costs to aid hospitals when they first decide to participate in an ACO.

The above themes help determine why it is important to “know who you are.” Without access to all of these value levers and the ability to adjust each variable in the math equation, the success rate for a hospital-led ACO narrows significantly. Thus, not all hospitals are set up for success as an ACO, given the way ACOs currently operate. Completing a checklist of readiness that also contemplates timing of implementation is important to assess impact and the likelihood of success.

Likewise, for private and public payers, these findings should help identify potential modifications in ACO designs that will likely both increase the number of hospitals that could be successful and decrease the margin of error for a participating hospital to make programs more attractive. ACOs are important vehicles that can help the United States realize its healthcare spending goals, but they require further refinement to increase adoption and success.



By Don McCanne, M.D.

Although this paper was produced by McKinsey & Company, consultants to the health care industry, it provides an important overview of the math of accountable care organizations because a principal co-author is Michael Chernew, a noted professor at Harvard Medical School and the Chair of Medicare Payment Advisory Commission (MedPAC). Acknowledging the bias in favor of ACOs, the reservations about the ACO model expressed in this report should command our strict attention.

Supposedly ACOs and other alternative payment models improve quality and reduce costs by shifting away from fee-for-service payments to payments based on value. Although that has become gospel, there is very little evidence supporting that dogma.

To determine quality, only a few parameters are measured, and the ACOs are informed in advance what will be measured – a form of teaching to the test. Of all of the great multitude of factors that go into the quality of health care that is being provided, only a minuscule fraction is measured. Under this system, all organizations should have high quality scores, and so their quality ratings are worthless. Well over 99 percent of quality factors are ignored.

Regarding producing savings, many comments that appear in this report indicate that the net savings are almost negligible. If there are any savings, they are often offset by the additional costs of complying with the administrative requirements of the ACO, not to mention the offset of any bonuses that might be paid out.

What this paper adds to our understanding is that there are many features that vary between the different organizations that can have a significant impact on the success or failure in cost savings, and many of these features are unchangeable no matter how efficient management is. Operating costs can be fixed or variable, but both are subtracted in the ACO math equation. Particularly relevant is “demand destruction” which is “loss of revenue due to reduced utilization from ACO population and spillover effects from non-ACO patients.” (Read the report to understand this.) Other factors include baseline costs, trend rates, benchmark for total cost of care, system leakage, shared savings rate, minimum savings/loss rates, risk corridors, frequency of rebasing, benchmark haircuts, and the like.

So how successful have the ACOs been? Repeating the quote from this report, “In aggregate, savings from Medicare ACOs in 2015 represented only 0.02 percent of total Medicare spending. The savings achieved were largely concentrated among physician-led ACOs (rather than hospital-led ACOs). In fact, after accounting for bonuses, hospital-led ACOs actually had higher total Medicare spending by $112M on average over three years.”

Tweaking won’t fix the math. The ACO experiment has failed. Yet the wish that ACOs would work has served as a distraction that has prevented us from moving to a model that really would work, as already proven in other nations: single payer Medicare for All.

Why do we keep playing this game when people are suffering and dying?

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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