Medicare ACO Shared Savings plans: Grading on a curve

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By Kenton J. Roepke, Leigh M. Wachenheim | 13 February 2014

The Medicare Shared Savings Program is a mechanism for providers to create or participate in Accountable Care Organizations (ACOs) that serve Medicare Fee-for-Service (FFS) beneficiaries. The program provides incentives for providers to reduce the trend in healthcare cost increases and improve care. A key incentive for ACOs enrolled in the program is the bonus they can receive if their trend is lower than a calculated benchmark.

There are many factors involved in the bonus calculation, but generally speaking the bonus is based on a benchmark that is calculated using historical cost data for the ACO, with some adjustments for trend. The trend adjustments are based on the increase in medical costs for all Medicare FFS recipients (i.e., not including those enrolled in Medicare Advantage). Because Shared Savings ACOs are counted in this trend, they are to a certain degree being “graded on a curve.” If the program works, trend growth will be driven down. This is good news for medical costs, but it will likely lead to downward pressure on ACO bonuses, all other things being equal. In other words, ACOs will be competing against other ACOs in other service areas to lower trend—a form of competition that is all too familiar in the business world but brand new to most medical providers.