Medicare ACOs: The Basics of Financing (Part 3)

In the first two parts of this five-part series, we looked at some background information on ACOs as well as the assignment of Medicare beneficiaries and the limitations on their choices.  In essence, there are no limitations on provider choice for Medicare beneficiaries, whether enrolled in an ACO or in the traditional Medicare program.  As long as the provider is participating with Medicare, the beneficiary can see him or her with no gatekeeping.

Before we jump into ACO financing, let’s recall the way in which reimbursement occurs in the Medicare program.  The Centers for Medicare and Medicaid Services (CMS) pays practitioners based on the services they provide to the beneficiary.  The provider submits codes for the services it performed and receives 80% of the fee that CMS has pre-determined for those codes. There is no oversight of the services paid by CMS, although there is increasing, retroactive scrutiny of the documented medical necessity and recoupment of funds paid for services deemed to have been ‘unnecessary.’  It is important to point out that the fee-for-service (FFS) Medicare system has sickness at its core.  Providers are paid when the beneficiary seeks care because of medical necessity (which means he or she is sick.)  Practitioners will not be paid if the beneficiary is healthy and has no medical necessity for health services. In the last few years, Medicare has added a small number of wellness and prevention services as covered services, but the overall ‘sick care’ philosophy still rules the Medicare program.  It is important to understand that ACO providers will continue to be paid under the current FFS methodology.

Because the ACO’s goal is to meet Medicare’s quality targets and receive a bonus each year, it must show a savings to the Medicare program by reducing the cost of the beneficiary’s care.  To set the benchmark, CMS analyzes three years of historical claims for Medicare beneficiaries in the area of the ACO, although not necessarily those beneficiaries assigned to the particular ACO.  The ACO’s cost of delivering care to its beneficiaries must be two percent less than the benchmark.  After saving Medicare two percent, the ACO will share in the savings at a rate of 50% to 60%, depending on the ACO’s model.  The benchmark, however, is risk adjusted which we will address in a moment.

Now let’s contrast the ACO with our fictional MSO; because the MSO has managed care contracts where it shares in the financial risk of the member’s care, it is paid a lump sum each month to manage the health care needs of the member.  Consider the MSO to be a checkbook; for every specialty consultation, hospitalization and medication the member receives, the MSO, in essence, writes a check for part or all of the cost. Because the MSO has a responsibility to finance all the care needed and/or received by the member, it must do so in a cost-efficient manner. If the MSO spends less than it was paid, it realizes a ‘profit;’ if the cost of the member’s care exceeds the monthly payment, there is no additional payment to the MSO.  It pools its revenue for all members assigned to its care and globally covers the cost of everyone’s health care services.

The Medicare program is similarly at risk for the cost of a beneficiary’s health services, and one could say that it’s also a giant checkbook.  However, when the cost of the care received by Medicare beneficiaries exceeds the government’s projections, the checkbook is overdrawn and inflates the country’s deficit.

We’ll come back to our discussion of the benchmark in a moment.  In part four of the five-part series, let’s consider the next link in the ACO chain: the providers.

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