We recently used machine learning techniques to understand key drivers of Medicare Shared Savings Program (MSSP) financial performance. Of the 190 plus objective accountable care organization (ACO) features reviewed, ACO baseline efficiency proved to be the most important financial performance driver we identified. Another way of putting it is that MSSP rewarded inefficient ACOs more than ACOs that have attained efficiency.
You may be asking, “How did you measure baseline efficiency?” The chart below tells an interesting story.
We analyzed ACO baseline efficiency by reviewing ACO baseline expenditures that were unadjusted, risk-adjusted, and geographic-risk-adjusted. Risk-adjusted per capita expenditures were adjusted to account for each ACO’s average risk score and mix of entitlement categories. Geographic risk-adjusted per capita expenditures were adjusted to account for Medicare reimbursement levels in each ACO’s area.
Below are a few interesting notes:
1. Despite adjusting for risk levels, mix of entitlement categories, and reimbursement levels, there is still significant variation in baseline per capita expenditures. See the third column above for this wide range of variation.
2. Centers for Medicare and Medicaid Services (CMS) has already made MSSP rule changes that balance the rewards between ACOs at different levels of starting efficiencies. Past financial performance in MSSP agreement period 1 may not be a strong indicator of performance in agreement period 2. ACOs should understand how these rule changes affect them.
Beyond baseline efficiency, we found that several other features were strongly associated with gross savings:
1. National fee-for-service (FFS) trends higher than local market trends
2. Location in the Southeast and south central regions
3. Low performance year expenditures for short-term inpatient admissions
4. High baseline per capita expenditures, unadjusted
5. High CMS-hierarchical condition category (HCC) risk scores
However, we also found that these features still explained less than half of the variation in gross savings across ACOs. This may indicate that ACO care management efforts may be accounting for some of the remaining variation.
The full report is posted at Milliman Insight and includes a deeper dive into research conducted by Jill Herbold, Cory Gusland, and myself.
There are many reliable research statistics from the private sector and the federal agencies that support the evidence that medical costs are rising and the current pace is unsustainable. Medical cost trend has two primary components, the number of services provided to patients (utilization) and the cost of each of those services (unit cost). While utilization management can be important for achieving cost savings, some employers are now giving further attention to the significant price variation in unit cost. Chart 1 below provides an example of the price variation using the average reimbursement as a percentage of Medicare in Buffalo, New York; Indianapolis, Indiana; Ventura, California; and nationwide. As shown, going from Buffalo to Indianapolis reflects an 80% increase in cost, based on unit price alone.
We regularly encounter employers who don’t fully understand the impact of provider reimbursement variation on their medical plans’ financial performances. This comes as no surprise, given the limited transparency and complexity of current provider reimbursements.
Limited transparency of provider reimbursement (allowed charges)
For employers, the industry standard technique of benchmarking commercial allowable charges has historically been traditional discount analyses, which compare discounts to billed charges. However, these approaches do not provide the required rigor and precision to understand medical service reimbursement analysis—both across markets and within a given market. This is because billed charges are not standardized across providers or different services. As a result, the exact same discount could mean very different things, depending on the provider and service—in some cases, price differences of over 300%. In addition, providers often optimize their billed charges to enhance reimbursement on contracts based on billed charges.
Employers generally have had a difficult time measuring unit cost, which is solely due to the complexity of various medical procedures. There is a large amount of price variation within each inpatient diagnosis-related group (DRG) and outpatient type of service. Chart 2 below provides a powerful illustration of how reimbursement can vary significantly across even a single inpatient DRG or outpatient service category. The chart compares the commercial reimbursement for inpatient joint replacement and an outpatient MRI in three different metropolitan areas with what the government would pay under Medicare allowable. The variation in inpatient joint replacements, a large bundle of complicated services, is much lower than outpatient MRIs, which reflects a specific service that generally has little variation in intensity compared with a joint replacement.
The Department of Health and Human Services (HHS) is striving to link 50% of Medicare payments to alternative payment models by 2018. One of the primary alternative payment models offered to Medicare providers is the Next Generation Accountable Care Organization (NGACO). Due to the potential large risk exposure for organizations considering this model, they should work with an actuary to understand the critical elements driving financial success (or failure). In this article, Milliman’s Charlie Mills, Cory Gusland, and Noah Champagne identify five key financial considerations that all ACOs should review before committing to the program. The considerations are ranked by the authors’ perceived importance, with one being the most important.
5. ACO’s CY2014 experience is the baseline for the first three performance years
4. Risk score changes are capped at 3% from the baseline year to each performance year
3. First dollar savings and losses
2. The 2016 benchmark trends are likely understated
1. In order to achieve savings, participants must outperform trended baseline less discount