What ACOs and Charlie Brown Have in Common

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Foreword

You should read this article if any of the following conditions apply to you:

  • You are participating in an Accountable Care Organization (ACO) as a manager or as a clinical provider
  • Your ACO depends on earning Shared Savings to fund its continued operations
  • You are a Center for Medicare and Medicaid (CMS) official wondering about the long-term future of Shared Risk arrangements
  • You are curious what ACOs and Charlie Brown have in common

The Promise of MSSPs / Track 1 ACOs 

Many of us participating in ACOs began our journeys in so-called “Pioneer ACOs” under a Medicare Shared Savings Program (MSSP) called Track 1.

The premise was straightforward: if ACO Providers reduce per-member spending on their Medicare beneficiaries below a certain threshold, they earn eligibility to receive up to half of the money they save as compensation, referred to as “Shared Savings.”

At its inception, it certainly sounded like a good deal for us clinicians in the trenches!

The threshold for earning Shared Savings was typically 2% below a spending threshold set by CMS which varies year to year.

There are basically 3 spending scenarios one sees in Track 1 ACOs (see Figure 1A, in which the Diamond Symbol ◊ indicates the ACO annual per-member spending in each scenario):

Scenario 1 (spending in the red zone): The ACO per-member spending at the end of the year exceeds the Government’s target savings threshold. Here, the government fails to save money, and the provider (having no risk) does not lose any money.

Scenario 2 (spending in the yellow zone): The ACO successfully reduces per-member spending below the Government Savings Threshold but fails to achieve the target for earning shared savings. In this situation, the government saves money, but no money is distributed to the ACO.

Scenario 3 (spending in the green zone): The ACO manages to spend below the cutoff for Shared Savings, and everyone wins! The Government saves money, and the ACO receives shared savings which it can apply to its operations and/or distribute to members.

Obviously, everyone wants their ACO to achieve Scenario 3, right?

If, however, you find yourself in Scenario 1 or 2 in which your ACO fails to earn Shared Savings, you can at least take consolation in the fact that you don’t have to pay the government a penalty if you accidentally spend more than the government’s threshold.

Do such penalties exist?

Yes – such an arrangement is called “Shared Risk,” and we will talk about that next.

Shared Risk / Track 1+, 2, 3, NextGen

CMS is now steering ACOs in Track 1 (a shared savings model) into new “Shared Risk” models in which participating providers will be on the hook to pay back money if they exceed a certain spending threshold.

Such Shared Risk models are more perilous for physicians to participate in because the payback for exceeding the threshold can be considerable – such penalties are referred to as “Shared Losses.”

To illustrate this more clearly, consider Figure 1B which depicts how two different ACO “overspend” scenarios in Shared Risk Models play out:

Scenario 1 (pink zone): The Government fails to save/loses money, but the ACO loses nothing. This is a so-called “risk corridor” that insulates ACOs from losses slightly above the threshold.

Scenario 2 (dark red zone): The ACO has to pay money back to CMS as a “shared losses” penalty for spending considerably above the threshold.

Sure, in Shared Risk Models, providers could still earn shared savings if they hit 2% below the target, but considering many factors are out of your control (smoking cessation of your beneficiaries, for example), how would you like to work hard and end up having to pay money back to the government despite your best efforts?

For me, that would be the day that I stop taking Medicare – and that day may come sooner rather than later.

Now, ladies and gentlemen of the jury, I will present evidence that Shared Risk models are a poison pill for ACOs – and we will get to the real reason that ACOs are like Charlie Brown.

How Shared Savings becomes a Zero-sum Game in the Long Run

Hypothetically, assuming the providers in your ACO are actively trying to save money, your ACO spending over time should look like the Charlie Brown ACO in Figure 2:

Two important things are important to note about Figure 2:

  • The biggest drops in ACO per-member spending (depicted by the blue line) occur in the first three years of participation when managers find out ways to cut wasteful spending and more appropriately manage healthcare expenses.
  • As time passes, note that ACO spending tends to level off and hover about around an equilibrium level (the purple line on the graph). This equilibrium level will be above the lowest theoretical minimum spending possible assuming operations go perfectly.
  • Also notice that the equilibrium point is reached relatively quickly (by Year 5 or so).

Why does this matter?

Look at Figure 3, and I think you will understand:

At year 4, several important things happen if you are a Track 1 ACO that will affect your profitability:

  • You will be herded into a Shared Risk Track in which you could be penalized for spending that exceeds a certain level above the government’s threshold. Therefore, note that at Year 4 and beyond, the red line depicting the threshold for Shared Risk appears on the graph. Spending above this red line means that your ACO will have to pay money back to CMS.
  • The target spending threshold starting in year 4 becomes an average of your spending in the prior 3 years.

This means that the benchmark for Shared Savings will drop each year until it eventually becomes impossible to achieve.

It also means that you cannot do something on the sly like spending way more on your beneficiaries in order to intentionally move your benchmark upward for future years – doing so would put you above the red Shared Risk (payback) line!

It’s sort of like that game Limbo: if you make it under the threshold, the bar gets lower the next year. Eventually, you hit a point where you cannot squeeze your body under the bar no matter how good you are, and that’s when you stop achieving shared savings.

The implication is that if your ACO depends on earning Shared Savings to fund its operations, your ACO will ultimately become financially insolvent. In other words, the quest for Shared Savings becomes a Zero-Sum Game in the long run.

One might liken the scenario to CMS (Lucy) holding the football for you as if you can achieve Shared Savings, and when your ACO (Charlie Brown) runs toward it and tries to kick it, CMS pulls the football out of the way as you whiff and end up on your back in pain.

So, is that what I meant when I said that ACOs are like Charlie Brown?

No – but it is one similarity, I suppose.

The more important reason I think ACOs have something in common with Charlie Brown is the pattern they share.

Look at Years 7-10 of ACO Spending (Figure 4):

Notice the zigzag pattern?

Now, remember Charlie Brown’s shirt?

OK! So that’s it – that is how ACOs and Charlie Brown are alike. The ACO zigzag pattern about the equilibrium reminds me of Charlie Brown’s shirt!

For the record, I want credit for coining the phrase “Charlie Brown-ing” that describes the long-term spending pattern that ACOs get into.

(Underwhelmed by the analogy? Sorry.)

Actually, my partner Will Sherwood, MD, thought that the ACO pattern was more fittingly compared to V fib:

Props to Will for that, since it makes an even more fittingly ominous analogy!

Anyway, if you have an interest in ACOs, what does this mean for your future?

  • If you are managing an ACO which depends on Shared Savings for ongoing operations, you will eventually become insolvent because participating in Shared Risk ultimately becomes a zero-sum game. You must find other income to supplement operations.

I personally have some good ideas on how to do that, but each organization must find its own way.

  • If you are a Provider in such an ACO, realize that you must decide on whether the benefit of staying in the ACO is worth it – assuming that you will never again get an income distribution from Shared Savings after a certain point.
  • If you are a CMS policy maker, and you think the ACO model is beneficial, you should assume that many ACO managers will be knocking on your door about going bankrupt in the near future if you do not find a way to continue subsidizing the operations of ACOs. After all, few people are willing to work for nothing.

That is our lesson for today, everyone. I hope you enjoyed it!

Steve Cooper, MD MBA