Medicare ACOs: Risk Adjusted Reimbursement’s Mathematical Impossibility (Part 5)

So far in this five-part series on Medicare ACOs, we’ve explored the basics of the concept, the patients’ participation, the fundamentals of reimbursement as well as the provider’s role and incentives.  Recall that we explained in an earlier section that our fictional MSO (that has risk contracts with MA plans) receives a monthly payment that is risk adjusted based on the health status of the member.  This means that the MSO’s PCPs report all of the member’s medical diagnoses at the highest level of specificity.  The MSO has no constraints on the number of diagnoses it can submit after each visit with the member, so if the member has 14 chronic conditions being managed by the PCP, the provider will document and submit information to the MA Plan (and ultimately, to CMS) on all of the medical conditions.  This results in an accurate health profile for the patient. However, this payment methodology has not come to the MSO without growing pains and setbacks.

The monthly payments to MA plans and our MSO were fully risk adjusted in 2007.  During the phase-in period, our MSO realized that its practitioners’ documentation of medical conditions was very sparse and lacked the specificity and links to co-morbidities that truly reflected the health risk and associated costs of the members’ care.  Of course, the physicians were treating the conditions appropriately, but because their payments had not been based on specificity of the diagnoses, they were lax in their charting and coding.  In essence, they were underpaid relative to the true costs of the members’ health care which they continued to deliver and for which they were at financial risk.  In essence, the checkbook became overdrawn for many MSOs.

Over the last five years, MSOs have embraced this payment system and physicians have improved their operations accordingly, resulting in more accurate reimbursement that covers the medical resources used by the member.  MSOs with a large concentration of MA patients don’t usually have the Medicare FFS patients needed to be an ACO.  In contrast, the physicians joining and forming ACOs are not generally well-versed in risk adjusted reimbursement and the proper documentation and coding required.   Why is this an important and alarming point?

The ACO benchmark is based on this same type of risk adjustment methodology.  The diagnostic information from provider claims for the fee-for-service (FFS) beneficiary is analyzed through the CMS-HCC model used for MA plans to yield a level of expenditure for an individual with a particular health and demographic profile.   So let’s consider the example of a diabetic female, aged 75 years in Broward County and only at the PCP who has treated the individual.

The MSO’s physician has reported the member’s diabetic condition and associated co-morbidities at the highest level of specificity.  The annual cost of providing all of the care this member needs is estimated to be $39,259.68.

Our Medicare physicians in the ACO have never been educated on the proper documentation and linking of co-morbidities in our diabetic female as his MSO counterparts. Our ACO physician has identified a few conditions associated to the beneficiary’s DM, but has not documented or coded them properly.  His payment has historically been based on the services rendered to the patient, which are largely independent of the number and gravity of the medical conditions. Assuming that none of the providers treating this patient have made the proper diagnostic associations and coded them (which, in our experience, happens less than 10% of the time in the FFS Medicare environment), the annual benchmark for this beneficiary is estimated to be $23,533.92, or 40% lower.

Remember that the ACO’s goal is to reduce healthcare costs by two percent from the established benchmark in order to benefit from any bonuses from CMS.  If the MSO member’s benchmark is 60% higher and arguably, the MSO has operated successfully under the managed care principles of cost-efficient, quality care, and generated savings to pool against more costly members with unpredictable and catastrophic conditions, how will the ACO do it with a lower benchmark?

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