NCPA - National Center for Policy Analysis

Financial Viability of Accountable Care Organizations

March 30, 2011

While experts are trying to clarify the pros and cons of the accountable care organization (ACO) model, many health care executives and physician practices are deciding whether to move forward with becoming ACOs.  Yet they may be unaware that the limited data suggest that most organizations will lose money in the first three years under the ACO model, say Trent T. Haywood, M.D., J.D., and Keith C. Kosel, Ph.D., M.B.A., M.H.S.A.

Using data from the Physician Group Practice (PGP) Demonstration of the Centers for Medicare and Medicaid Services along with information contained in the 2008 report of the Government Accountability Office (GAO) and the 2009 Health and Human Services Report to Congress, Haywood and Kosel examined the financial characteristics of 10 participating organizations to evaluate what their experiences might mean for physicians and providers contemplating pursuing qualification as an ACO.

  • With a 5-year time horizon and the mean investment per PGP provider ($737), the required margin to break even is 13 percent.
  • However, the current Medicare Shared Savings Program anticipates a minimum performance period of only 3 years.
  • According analysis of the data from the PGP Demonstration, an ACO making the mean initial investment of $1.7 million will require the unlikely margin of 20 percent for the three-year period envisioned by the Centers for Medicare and Medicaid Services.

The available data indicate:

  • Eight of the 10 PGPs in the demonstration did not receive any shared savings payments in year one.
  • In the second year, six of the 10 practices did not receive such payments, and in the third year, half the participants were still not eligible for any shared savings to offset their initial investment.

Given that the percentage of shared savings in the first three years was so low for experienced, integrated physician practices, it seems highly unlikely that newly established, independent practices would be able to average the necessary 20 percent return on their investment, say Haywood and Kosel.

Source: Trent T. Haywood and Keith C. Kosel, "The ACO Model -- A Three-Year Financial Loss?" New England Journal of Medicine, March 23, 2011.

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