The Next Generation ACO…evolution at work?

The Business of Medicine

CMS just announced the “Next Generation ACO” model. The question is, did evolution eliminate traits that threaten the survival of the ACO concept? Two traits of the existing model that have so far caused great concern to providers are the benchmark spending targets set by CMS and controlling where Medicare beneficiaries receive their care. Both of these traits directly impact the financial risk borne by the providers who sign up for the CMS ACO program. It is the attractiveness of the financial risk/reward feature that will ultimately dictate the fate of CMS’ model, which makes the Next Generation ACO an important development. So how much prettier is the new baby?

In terms of setting a benchmark spending target, there is improvement from the provider’s perspective. CMS will put less emphasis on the provider’s historical claims data to establish the “over/under” benchmark dollar value. This helps providers who have historically managed costs better than their peers (because the old model only offered a bonus payment when their efficiency improved, not on their absolute level of efficiency). Less efficient providers may be hurt slightly by this change, but since they probably still have a better chance of sharing in the savings by becoming more efficient, they will probably not be turned off by the Next Gen model.

Controlling where beneficiaries get their care is important because costs incurred through any provider get attributed to the ACO in which that patient is “allocated”. Therefore, ACO providers might be losing money when a cancer patient elects to get expensive proton therapy on the west side of town even if the ACO oncologist in the east side of town did not prescribe it. CMS is addressing this issue by having beneficiaries actively enroll in an ACO in order to receive lower co-pays. If this makes the beneficiary stay within the walls of the ACO, then the ACO can better control costs.


The change in the way benchmark spending targets are calculated illustrates what could be considered a fundamental flaw of the CMS ACO model. The Affordable Care Act was written to give the Secretary of Health and Human Services “discretion” in setting the benchmark spending targets that dictate whether providers share in any savings. Thus, the Secretary can giveth and taketh away at her discretion. This is not a sound business environment on which to stake the success of an entire hospital system and its employees, never mind their beneficiaries.

Changing the benefit design of Medicare through lower co-pays is a bold option for CMS to pursue. This tactic may prove to effectively motivate patients in a way that helps providers succeed in controlling costs. However, if this strategy were to be applied for all beneficiaries in a future world led by ACOs, the future costs of the Medicare program would rise. This should be an important consideration when recognizing that the point of the ACO model is to control costs, not increase them.

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