The more things change…

Much of the buzz among healthcare payers and providers is the advent of the “ACO”, or Accountable Care Organization, an outgrowth of the Affordable Care Act. Without too much of a stretch, it is fair to observe that today’s ACOs bear striking similarities to the group-model HMOs of previous decades, with one key difference: no affiliated insurance entities, as they are comprised only of integrated, comprehensive provider networks.

Provider-based organizations (physicians, hospitals, ancillaries, etc.) are being asked by payers to band together to create care networks that assume financial and clinical risk for a population of insured patients. However, managing that risk is a core, traditional function of government and private insurance that is not necessarily being replicated in the new provider entities. The elephant in the room then becomes by whom, and how within these ACOs is this newfound risk being managed? Most of these ACO networks lack the experience and capability because they have traditionally left that function to payers.

Welcome to the strange actuarial mathematics of ACOs. ACOs are, effectively, mini-insurance plans. More concerning than the lack of a risk management (actuarial) function is the corollary that they are bearing risk for populations that, in the eyes of established insurance companies, are generally too small to offer actuarial stability. With only a few thousand patients in their at-risk populations, these entities are facing potentially catastrophic outcomes that cannot be contained through care management or administrative processes.

Two complementary work streams exist in any risk-bearing healthcare entity to manage outcomes. Currently, the industry is deeply engaged in the clinical work stream: how best to identify and stratify patient risk, and then how best to manage patients at each level of identified risk and within clinical (diagnostic) categories. This is essential, but not enough. Without tight financial and administrative processes, ACOs will remain exposed to a high risk of adverse outcomes. The degree of risk posed by poor financial management is likely to exceed what can be addressed by high-value clinical management processes.

Developing contractual terms between a payer and an ACO entity involves, among other things, setting financial targets, generally expressed as the average total medical expense (TME) per at-risk patient per year. This figure determines the global payment rate the plan will pay the ACO for each patient and therefore dictates the ACO’s ability to provide all required care while meeting financial targets. (ACO engagements typically also involve clinical outcome targets, such as care guidelines and quality metrics, but we will not address that here).

To maintain profitability within these financial parameters requires the ACO to cut the cost of care below levels experienced under the previous fee-for-service regimen. The bulk of these savings, typically on the order of 80-85%, are expected to come from rate concessions and payment management, while clinical care processes are expected to account for the remaining 15-20%. With those ratios, it is surprising that so little relative attention has been paid to helping these entities improve payment accuracy and integrity.

Both fiscal and clinical processes are critical to managing TME. The clinical management element is essential in regard to the highest cost cases, because just a few complex, high-risk patients can break the budget if poorly managed, especially in a small population. Solid clinical care processes such as disease management can also abate costs among diagnosis-specific segments of the covered population by ensuring that these patients adhere to recognized best care practices, potentially avoiding crises and slowing the progression of their conditions.

The financial management element maintains the day-to-day fiscal control and profitability of ACOs. Payment integrity is key to ensuring that providers within ACOs document services delivered in the right manner, that they are paid correctly, and that errors are avoided or rectified quickly and accurately. Through these controls, ACOs can attain many of the efficiencies demanded by the new model.

While ACOs generally receive lump-sum (capitation, global fee) payments for the care of populations, a system of “internal reimbursement” is necessary to compensate individual practitioners and facilities that have provided services for patients. The most typical framework for distributing payments is the traditional fee-for-service (FFS) model, where practitioners document services and procedures they have performed for patients, and ACOs compensate them based on the nature and volume of those services.

Therefore, at the end of the “chain of reimbursement” resides a very familiar model and challenge: how to most equitably value and compensate those services. The challenge has not changed: the right information must be extracted and documented from data generated in the care delivery process, it must bear the right code sets, the right edits must be applied, the right price for the product/service must be determined, and the right payment must be made to the right provider. Errors anywhere in this chain produce waste and conflict. The insurance sector estimates the average cost of re-pricing a claim to be $4-$5 with potential for much larger penalties and fees.

As these provider organizations accept more risk-based contracts, it is essential that they get payment integrity “right.” It provides the greatest opportunities for cost management and offers the most significant potential impacts on financial performance. Ultimately, this will determine which ACOs succeed and which fail.