After several years of experience with alternative payment methodologies, we have learned quite a bit. I have said for a long time now that I am not optimistic about the Accountable Care Organization model for Montana, but I am very bullish on episodic care bundles, even for chronic conditions. This post is about why the shared savings / shared risk models are faulty, from a provider’s perspective. The main message is that this one-size-fits-all ACO model is flawed because it seriously challenges the provider’s ability to benefit financially at all for value created.
Health systems operate with very high fixed costs. Their revenue model has to overcome this which is why volume under the fee-for-service (FFS) model is crucial. Fixed costs keep a hospital open, as the price of admission, so to speak. These are the costs that are unchanged whether a health system sees 100 patients per year or 100,000. Over two thirds of a health system’s expenses are attributed to fixed costs, which need to be paid for by more volume of services, to spread it out. Less utilization of services means higher amount of fixed cost expense attributed to each service. So after the contribution margin pays for the fixed costs, there is less left over for net income. The health system trying to benefit from an ACO model realizes that volume of services will drop (that’s the goal of ACO models, for which the stakeholders receive shared savings), and the system can only then succeed by reducing fixed costs or gaining market share of patients attributed to the system.
Take a look at the flow of funds below. Follow the dollars that flow through the payer (at the top), and then through the provider below it, under FFS vs. ACO model (the 2 columns, before shared savings and after shared savings, respectively). Four important points are as follows. First, if fixed costs are not reduced, losses often ensue. Second, net margins are razor-thin for providers, but much more manageable for payers. Third, payers must rely almost entirely on providers to reduce operational costs, if they want to make care more cost effective beyond just the shared savings. Fourth, the model is plagued with diminishing returns, year over year, due to payment being a percentage of a shrinking savings pie.
The problem will be made even more obvious in communities with smaller populations, like Montana. Therefore, we clearly need new innovations in payment reform, and we need to gain experience with episodic care methodologies, which I have been touting for almost 3 years now. Medicare has recently announced a new bundled payment initiative that is voluntary, but it may be a good idea for us to participate. I’ll tell you more about it next time.