CBO Finds Factors that Contribute to – or Limit – Cost Savings in ACOs

The Congressional Budget Office (CBO) recently released a report, “Medicare Accountable Care Organizations: Past Performance and Future Directions.” This report summarizes findings about Medicare accountable care organizations (ACOs) and the facts that contribute to – or limit – their ability to achieve net budgetary savings for the Medicare program.

According to the report, certain types of ACOs result in greater savings, particularly those led by independent physician groups, those with a larger proportion of primary care providers (PCPs), and those whose initial baseline spending was higher than the regional average. The report also found that some factors limit the savings from Medicare ACOs, including weak incentives for ACOs to reduce spending, a lack of resources necessary for providers to participate in ACO models, and providers’ ability to selectively enter and exit the program on the basis of the financial benefits or losses they anticipate from participating.

In conducting the review, CBO reviewed research literature, with a focus on studies from peer-reviewed journals, official evaluations of Medicare ACOs, and reports from think tanks and other research organizations. CBO also consulted with outside experts from eight different organizations, including industry executives, professors, former government officials, a leader of an ACO, and representatives from a philanthropic organization. The reviews and discussions focused around the Medicare Shared Savings Program (MSSP) – the largest ACO program in the Medicare fee-for-service (FFS) program – which had about 11 million beneficiaries in performance year 2023.

CBO found that ACOs led by independent physician groups “generated substantially larger savings than ACOs led by hospitals,” and came up with two possible explanations. First, independent physician groups have clear financial incentives to reduce hospital care and generate shared savings, while hospital-led ACOs have conflicting incentives. The report notes that hospitals have larger fixed costs when compared to physician groups and if hospitals were to reduce admissions, they would earn less revenue to cover their fixed costs. The second possibility is that hospitals have less direct control over which types of services they provide to patients when compared to physician groups. Hospitals have to work to align the behavior of front-line providers with the hospital’s objectives while physician groups have more direct control by prescribing medications to their patients and handling referrals for ancillary services and specialty care.

Medicare ACOs with a greater proportion of PCPs, advanced primary care practices, or patient-centered medical homes were more likely to generate larger savings. This is likely due to the PCP’s role in redirecting patients from higher-cost settings to lower-cost settings.

CBO found that ACOs that lower their spending tend to be penalized with lower subsequent benchmarks, either explicitly (when ACOs renew their contract in the MSSP) or implicitly (when ACOs switch to a different ACO model). Explicit reductions significantly weakens the ACOs’ incentives to reduce their spending.

Another limitation is the start-up cost involved with program set up, which can be steep and serve as a barrier to participation. While CMS has taken steps to alleviate those burdens, including APM incentive payments, there are still limitations. For example, APM incentive payments tend to vary in size in absolute dollar terms and proportionally increase with clinicians’ revenue. Therefore, the size of the incentive payment is much smaller for lower-revenue providers than higher-revenue providers.

CBO provided several policy approaches that may help to increase the net budgetary savings by ACOs for Medicare, including some concepts that would increase provider incentives to participate in ACOs, some that would increase providers’ incentives to decrease spending, and some that would increase the awareness and engagement of beneficiaries.