Private ACO Plans Show Promise for Payment Reform

Wednesday, February 18, 2015
Zirui Song, MD, PhD
Department of Medicine, Massachusetts General Hospital
Dave A. Chokshi, MD, MSc
New York City Health and Hospitals Corporation
Summary and Key Findings: 

A new report from the Journal of the American Medical Association, The Role of Private Payers in Payment Reform, explored the way ACOs might improve the health care system through mutual price control, clinical coordination and narrower referral networks. The report explores the shift away from the fee-for-service model, citing key motivating factors for the transition.

  • Private health care spending for non-Medicare patients is growing at 4%, after a pause during the recession.
  • Private ACOs – like their Medicare ACO counterparts – seek to control costs by incentivizing physicians to eliminate unnecessary spending.
  • Private ACOs differ in important ways from Medicare ACOs, including different budgeting risks and more flexibility to save costs through referrals to less expensive hospitals or clinics.


Why move away from fee-for-service?

During the recession, health care spending growth slowed after years of accelerating, but recently that fast-pace growth has returned. Private spending for non-Medicare patients is growing at 4% again, and all of the new patients covered through provisions of the Affordable Care Act could further quicken cost growth.

The report details the way private insurers are increasingly mimicking Medicare programs by forming Accountable Care Organization (ACO) arrangements that give hospitals and physicians a budget and quality incentives to care for a set population of patients. This is a major shift away from the traditional fee-for-service model, but roughly 12 million Americans are already covered by an ACO.

ACOs receive a set budget to care for certain groups of patients, giving them an incentive to eliminate any wasteful or unnecessary spending that doesn’t measurably improve quality. When the organizations save money, the providers may share in those savings, further increasing their incentive to find efficiencies in their practice. 

Private ACO contracts still differ greatly from Medicare ACOs

The report names three important differences:

  1. Private arrangements involve more risk. If claims end up exceeding the budget, hospitals or physicians are not entitled to full reimbursement, as is often the case for Medicare ACOs.
  2. While the population of enrollees in Medicare ACOs is often assigned “retrospectively,” enrollees in private ACOs are set before the contract begins. Providers know exactly for whose care they are responsible. 
  3. Private ACO contracts allow for unique cost-saving “levers.” They can save money by referring patients to more affordable physicians or hospitals; Medicare prices are standardized, leaving no opportunity for shopping around. And with average private insurance patients in their 30s, providers are able to find savings through behavior change and preventive care that Medicare can’t with its more elderly population.

Challenges for the future

As the model spreads across the country, reformers look to states like Massachusetts, where many big private payers shifted from fee-for-service within a few years of each other, for examples. Quality incentives there led to rapid savings, which the report credits to significant behavior changes. 

However, setting a fair and effective budget each year remains a challenge. With hospitals and physicians increasingly integrated (today only 40% of physicians practice independently), those delivery systems can use their market power to bargain with payers for higher spending targets, which could remove the incentives necessary to change behavior and lower costs. At the other extreme, too small a budget could demand too much too fast from clinicians tasked with finding the costs savings to meet it.

Most Americans with insurance are privately insured, and as more previously uninsured Americans enroll in private plans through the ACA exchanges, payment reform for this sector will be increasingly important.  ACOs, like Anthem Blue Cross’s new venture in California, still have challenges ahead, but are showing promise as care delivery models that can improve the quality, affordability and sustainability of our health care system.


Stay Connected!

Sign up here to get ThinkAnthem’s latest insights and event invitations directly to your inbox.