Will ACOs Shift Costs to Private Insurers?

The Medicare pay-for-performance program for qualified Accountable Care Organizations (ACO) is designed to reward ACOs for decreasing Medicare fee-for-service costs of their assigned members. If the ACOs meet certain quality benchmarks, then the ACO and Medicare will share in the savings as a sort of “performance bonus.”

In an excellent New York Times article last week, reporter Robert Pear quotes an experience antitrust lawyer, J. Thomas Rosch, as stating that “there will be a real risk that the savings accruing to Medicare will just come at the expense of private insurers.”

Is this really a major risk, though? The answer is … not really, but it depends.

In an article to be published in Milbank Quarterly next month, researcher Austin Frakt, Ph.D. examines the existing literature on cost shifting.  He writes that “cost shifting can and has occurred, but usually at a relatively low rate.” He writes that “it is likely to be at a rate closer to 20 cents on the dollar than the dollar-for-dollar one suggested by industry-funded reports (PWC 2009) and by Cutler’s (1998) estimate using data from the 1985-1990 period.”

While ACO Shared Savings programs may lead to some cost shifting, the effect should not be over stated. Other factors are important in the evaluation of cost-shifting, such as the hospitals’ ability to cut costs, public/private payer mix, hospital competition, and health plan market power.

Dr. Frakt states that the debate about cost shifting amongst policymakers “provides a false impression that cost shifting is a large and pervasive phenomenon.” This conventional wisdom should be “taken with a grain of salt.” Good stuff ... check out his blog, the Incidental Economist.

The Theory of Healthcare P4P

The challenge for healthcare regulators, such as U.S. federal government’s Centers for Medicare and Medicaid Services (CMS), is to create efficient contracts, payment methodologies and incentive systems that reward improved health outcomes. Agency theory provides theoretical support for assessment of such contracts. The theory was developed separately in the early 1970s by Stephen A. Ross for economics and Barry M. Mitnick for political science and extended by Kathleen M. Eisenhardt to organizational research in the late 1980s.

 Agency theory pertains to difficult contracting or regulatory conditions where the goals between principal and agent are incongruent (Eisenhardt, 1989), the outcomes are uncertain (Ross, 1973), the agent is self-interested and risk-averse (Eisenhardt, 1989), and the principal maintains a formal oversight relationship to the agent (Mitnick, 1982).  These theoretical attributes, manifested in a negative sense as the “agency problem,” and the conditions needed to control them, such as incentives, are at the heart of this healthcare pay-for-performance contracts.

Recent healthcare research predominantly applies the theory to physicians or hospitals as agents (Cangialose, Cary, Hoffman, & Ballard, 1997; Schneider & Mathios, 2006). For care management organizations (CMOs), such as HMOs and the like, Jacob Glazer and Thomas G. McGuire (2002) argued that capitation payment made to CMOs can be manipulated “to induce the profit maximizing plan (the agent) to provide the efficient quality (the regulator’s goal).”

A regulator contracts with CMOs to obtain for improved health outcomes for members, and the CMO is expected to perform services at an agreed upon rate. But how does the regulator know that the CMOs are performing as required?

Under agency theory, an efficient contract should minimize “the principal’s monitoring and enforcement activities” (Mitnick, 1973). High cost to the regulator when conducting audits, collecting information on performance, and devising regulations and communicating performance programs is a major problem in regulatory oversight. Since it is expensive for regulators to oversee the implementation of the required programs, incentive programs can be used to try to control the behaviors of CMOs (Maio, Goldfarb, C. Carter, & Nash, 2003). A typical incentive system retrospectively pay CMOs through bonuses, fines or tiered differential payments based on population-based performance. There is little formal research on the results of these P4P schemes for CMOs.

Do CMOs affect healthcare quality independent of direct healthcare providers, such as hospitals and doctors? The preliminary answer is yes. Researchers found that increased quality of care (QOC) indicators, such as medication adherence, cancer screening, and diabetes care management, were associated with CMOs independent from the direct care given by provider groups.

An example of a successfully implemented Medicaid MCO incentive program is the New York State Quality Assurance Reporting Requirement (QARR) and Quality Incentive (QI) programs.  According to the report, evidence of QI program effectiveness includes improvement in quality of care process measure scores, the exit of poorly performing plans from the Medicaid managed care program, and improved performance scores (e.g., immunizations, well-child visits, and diabetes control) compared to Medicaid fee-for-service.

However, according to Rosenthal et al. (2005), the evidence is mixed on provider-focused P4P in terms of creating relative improvements, and the impact on their long-term effects. Rosenthal et al. (2006) argue that the small size of the bonuses account for the small effect sizes in P4P studies. Also, unintended consequences schemes may dampen the enthusiasm for P4P. For example, one study showed that the proportion of African-Americans patients treated by a hospital was inversely associated with performance for certain process-related performance measures.

Agency theory supports the use of incentive-based contracts in difficult agent-principal relations in political science, economics, and organizational research. However, the jury is still out on the effectiveness of P4P in healthcare. Certainly, the relationship of principal and agent is complicated and the oversight to ensure contract compliance is extensive. Yet, there are many extenuating issues that make the application of agency theory to healthcare P4P complicated. More investigation into the application agency theory in healthcare incentive-based contracts is required.

ACOs Impact on Nursing

As we await CMS proposed regulations on Accountable Care Organizations (ACOs), hospitals grapple with the many issues of pay-for-performance programs. I’ve posted about concerns regarding the ACO membership and quality measures. Also, I made an observation I called the ACO Paradox.

To add another issue to the list, a recent article by Kurtzman et al. (2011) in Health Affairs raises concerns about pay-for-performance (P4P) programs’ effect on the nursing workforce. The authors write that these incentive programs “increase both the burden and the blame for nurses without corresponding improvements in staffing levels, work environment, salaries, or turnover.” In addition to the Medicare hospital-acquired conditions policy and hospital inpatient value-based purchasing program, the impending ACO payment policies may add to nurse workload.

Especially for nursing-sensitive indicators (e.g., pressure ulcers, patient falls, catheter-associated infections), improved quality may be directly related to increased nurse staffing. This brings to mind two questions regarding ACOs and nurses.

First, under the health reform law, ACOs must meet certain quality thresholds to qualify for “shared savings” with Medicare. Can nursing-sensitive quality be achieved while reducing costs? Correlational research links higher nurse-to-patient staffing ratios to improved quality for some measures, including pressure ulcers, falls with injuries, catheter-associated urinary tract infections, and vascular catheter-associated infections. Since nursing can represent 40% of hospitals’ direct care budgets, achieving high marks for these types of measures may contribute to the ACO Paradox: What if improved healthcare quality is accompanied by increased costs?

Second, how should ACOs distribute potential Medicare “shared savings” bonuses among nursing staff? The Kurtzman et al. (2011) article makes the point that “performance incentives are typically paid to physicians, hospitals, and other providers, rather than directly to staff nurses—individually or collectively.” Complexity of nurse staffing at hospitals is the primary reason incentives are not paid to nurses. But should they be? Does it makes sense to reward nurses for quality?

As ACOs create legal entities to meet the CMS requirements, nurse incentives will need to be addressed.

The ACO Paradox

As of today, we are still awaiting the CMS regulations on Health Reform’s Accountable Care Organizations. I’ve made a couple of postings on ACOs in the past. I reiterated the importance of process measures in pay-for-performance schemes, and I scoffed at investor-owned hospitals’ proposal of cherry-picking patients for ACO membership. Here, I’d like to discuss what I’ll call the ACO Paradox.

There are two main components of the Medicare pay-for-performance program (Sec. 3022) for qualified Accountable Care Organizations (ACO), according to the Health Reform Law. First, the Medicare Shared Savings program is designed to reward ACOs for decreasing Medicare fee-for-service costs of their assigned members. If the ACO’s adjusted costs for Medicare parts A & B in the measurement year are less than the benchmark (a 3 year per-beneficiary average), then the ACO and Medicare will share in that cost difference. Second, to qualify for Shared Savings bonus, the ACO must meet quality performance standards (soon to be proposed by CMS).

It makes sense for Medicare to join the costs savings with improved quality. Both are key aims of Health Reform (expanded coverage being another). However, will the ACOs be able to achieve both cost savings and improved quality simultaneously in the measurement year?

The conventional wisdom in healthcare states that increased quality of care will save money in the short-term by reducing high-cost services, such as inpatient care. However, some QOC measures have been shown to be statistically related to increased near-term healthcare costs. For example, a recent study found that improved adherence to antiretroviral regimens used to fight HIV was associated with an increase in total medical costs. Riegal et al. (2000) have posited that the positive relationship of QOC measures to increased near-term future costs is probably due to improved access to needed services.

This isn’t to say that cost savings are not possible with improved quality. It may be that some measures do actually save in the short-term, while others do not. Or maybe it is that some (or all) quality measures save money in the long-term – 5, 10 or 20 years in the future.

So, what if the quality measures that CMS chooses are actually related to increased costs in the measurement period? What if some quality measures are not worth the investment for ACOs? In other words, will there be any Medicare cost savings to be shared in the short-term? Is there an ACO Paradox?

Perhaps Medicare should consider extending the ACO quality measurement and shared savings period to reflect the near-term investment required to produce decreased healthcare cost in the long-term.