The Impact of Next Generation Accountable Care Organizations on Medicare Costs
September 2024
Medicare, the U.S. government health insurance program for people 65 and older, has always been looking for ways to provide better care while controlling costs.
Traditional Medicare operates on a fee-for-service model, which can lead to fragmented and wasteful care and rising costs due to its emphasis on volume of services over value.
This is where alternative payment models like Accountable Care Organization models (ACO) come in—they try to improve value by incentivizing coordinated, high-quality care that focuses on patient outcomes rather than on the number of services provided. The concept behind these efforts is that, because providers largely guide their patients’ care, they could be incentivized to eliminate wasteful low-value care, improve quality, and lower costs.
A recently concluded approach in this direction was the Next Generation Accountable Care Organization (NGACO) model, launched by the Center for Medicare and Medicaid Innovation (CMMI) at the Centers for Medicare & Medicaid Services (CMS).
What did this model look like, and did it make a difference? Let’s delve into the details.
What Is an Accountable Care Organization (ACO)?
An ACO is a group of clinicians, hospitals, and other health care providers that voluntarily agree to be accountable for managing the entirety of care for their population of patients during a year. The goal is to ensure that patients receive the right care at the right time, avoiding unnecessary duplication of services and closing any gaps in care, through coordinated population health and care management approaches.
Because an ACO is responsible for all of their patient population’s spending and quality outcomes, its providers aim to deliver care that is more patient-centric across various care settings improving overall care quality and value, ultimately reducing health care costs. In Medicare, ACOs that reduce spending while maintaining or improving the quality of care their patients receive can share in those savings.
ACOs have been included in the Medicare program since 2012 through the Patient Protection and Affordable Care Act (often referred to as the “ACA”). Half of traditional Medicare patients are in some type of accountable care arrangement today, with the goal of having all patients under accountable care by 2030.
The Next Generation ACO Model
The Next Generation ACO (NGACO) model built upon the traditional ACO framework described above. Its ACOs had more to gain if they saved Medicare money and met quality standards, but they also had more to lose if they didn’t. ACOs in this model had more experience, better infrastructure, more providers with a history of collaboration, and served more patients than traditional Medicare ACOs. Key features of the NGACO model included:
- High Financial Risk and Reward: ACOs could choose to take on 80 percent to 100 percent of the financial risk. If they reduced Medicare spending below their benchmark while also improving or at least maintaining quality of care, they got most of these savings back. However, if they exceeded this set spending amount, they had to cover the extra costs themselves. This structure aimed to encourage ACOs to manage care more efficiently and effectively.
- Flexible Payments: ACOs could choose how they would be paid, whether in the form of monthly capitation-like payments or a one-time advance payment and fee-for-service payments, thereby providing more predictable cash flow to invest in care improvements. This flexibility allowed them to tailor the payment models to their specific needs and strategies.
- Care Delivery Flexibility: ACOs also had certain traditional Medicare service rules waived so that they could improve care for their patients, such as availability of telehealth, home visits, and having a hospitalization of at least three days before entering a skilled-nursing facility. This flexibility enabled innovative approaches to patient care and better patient engagement. They could also partner with more providers to expand their capacity to deliver accountable care to their patient population.
NORC’s NGACO Evaluation
NORC conducted a mixed-methods evaluation to understand the impact of the NGACO model. We combined quantitative data analysis with insights from surveys of ACO leadership, qualitative interviews, and case studies, providing a well-rounded view of how these ACOs performed. Our evaluation highlighted both the successes of the model and the challenges faced by some ACOs, offering valuable lessons for future accountable care models.
Did It Work?
Our study analyzed data from 62 ACOs involving over 4.2 million Medicare beneficiaries to assess impacts relative to what would have been expected had the model not been implemented using a comparison group of non-ACO providers’ beneficiaries. We found that:
- Although the NGACO model reduced Medicare spending by 2 percent, there were no net savings after accounting for incentives paid to ACOs. The NGACO model was associated with a reduction in gross Medicare spending of about $270 per beneficiary each year, totaling approximately $1.7 billion in gross savings. However, after accounting for Medicare’s payments to the ACOs, Medicare’s net spending actually increased slightly by $56 per beneficiary per year, or by around $96.7 million overall. In other words, we found no overall savings to Medicare from this model.
- The annual gross spending declines grew larger in every year of the model, reflecting the exit of poorer-performing ACOs from the model, improvements by the ACOs that remained in the model, and larger declines during the years that coincided with the COVID-19 public health emergency.
Factors Influencing the Results
- Type of ACO: ACOs that were organized around physician practices reduced Medicare spending more than ACOs organized around hospitals or integrated delivery systems, as the former had more opportunities to cut spending without potentially affecting their own revenues. ACOs that elected greater financial risk and those whose providers were also paid according to value-based care principles generally had larger spending reductions. Our comparative study of different types of ACOs—with different resources and organizational capacities and operating in varying markets—showed that ACOs employed population health approaches that suited their own contexts to achieve cost reductions.
- Experience and Performance: ACOs that remained in the program tended to improve over time, especially as poorer-performing ACOs exited. ACOs worked to build their providers’ capacity to address the needs of patients, especially those with complex conditions, through data analytics and support for care coordination and management. Such care transformation took time to implement, and its impacts took time to play out. The majority of the twenty-seven ACOs that exited highlighted financial uncertainty from participating in the model as their main reason for leaving it.
- Impact of COVID-19: The pandemic significantly influenced health care delivery and costs during the later years of the model. It disrupted normal operations and required rapid adaptation to new care delivery methods, such as telehealth. Spending reductions and quality improvements from the model were larger during the COVID-19 years, suggesting that ACOs providers may have better adapted than non-ACO providers during the pandemic.
Conclusion
The NGACO model demonstrated promising results for experienced ACOs in reducing overall Medicare spending while providing high-quality care. However, when considering the payments made to ACOs in return for the savings they achieved, the net cost to Medicare increased slightly. This model highlights the potential and challenges of using strong financial incentives to drive improvements in health care delivery and efficiency. It also clarifies that care transformation, and its impacts take time to be realized.
What's Next?
The insights gained from the NGACO model can help shape future health care policies and accountable care models aiming to strike the right balance between cost savings and quality care. One such example is the ACO REACH (Realizing Equity, Access, and Community Health) model, which focuses on improving health equity and reducing disparities in the care provided to specific vulnerable subpopulations. By prioritizing underserved communities and incorporating social determinants of health into care strategies, ACO REACH aims to ensure that high-quality care is accessible to all, regardless of socioeconomic status. As the health care system continues to evolve, these lessons will be crucial in creating sustainable, high-quality care for everyone.
Suggested Citation
Parashuram, S., Lowell, K. and Torres, G. (2024, September 3). The Impact of Next Generation Accountable Care Organizations on Medicare Costs. NORC at the University of Chicago. Retrieved from https://www.norc.org.
