Just a few years ago, the accountable care organization (ACO) concept was compared to a mythical unicorn. Now, with burgeoning Medicare and commercial models to build upon, Medicaid ACO programs are relatively well-known phenomena, with operational programs existing in 10 states and at least 11 others developing their own ACO approaches. Of the 10 states with active Medicaid ACO programs, six have used or currently use a shared savings payment model — Massachusetts, Maine, Minnesota, Rhode Island, New Jersey, and Vermont — and many are looking at ways to refine their shared savings strategies.


ACO Shared Savings 101

As background, shared savings is a payment model commonly used in ACOs. Under this approach, an ACO can receive an additional payment if spending for attributed patients is lower than a cost target, often referred to as the total cost of care (TCoC) benchmark. The TCoC benchmark in Medicaid typically reflects average spending under a wide-range of health services and settings, including inpatient, outpatient, laboratory, radiology, and pharmaceuticals. This projected cost estimate is then compared to an ACO’s actual spending to assess whether an ACO has generated savings or incurred losses during the performance year. When an ACO achieves a certain level of savings, an ACO can “share” in the savings with its payer, whether it be Medicare, Medicaid, and/or a commercial insurer. Shared savings payouts are generally contingent upon quality performance to ensure that ACOs are not withholding needed services in order to retain savings.

Medicaid ACO 2.0 Payment Models

Unlike Medicare ACOs, which are guided by federal laws and regulations that outline program requirements, states have substantial flexibility in designing Medicaid ACO programs. Despite this flexibility, many state officials with Medicaid shared savings programs initially relied on the same payment methodology that CMS established for Medicare ACOs. However, with Medicaid ACO programs now venturing into “2.0” versions, Medicaid agencies are starting to refine their ACO payment methodologies:

  • Rhode Island, one of the states currently participating in CHCS’ Medicaid ACO Learning Collaborative, is pursuing opportunities to adjust its shared savings payment methodology to address concerns about ACO program sustainability and to help keep savings “in the health care delivery system.” For example, Rhode Island is considering upward adjustments to the TCoC benchmark for historically efficient ACOs, to help ensure that they have an opportunity for savings.

One general issue with shared savings payment arrangements is that they typically use a TCoC benchmark that is based at least in part on an ACO’s historical spending, which means that health systems with higher costs and more inefficiencies may be more likely to share in savings than more efficient providers. A related concern is that savings could be more difficult to obtain as an ACO program progresses, since successful ACOs would be graded against their continually improving benchmark (i.e., if an ACO saves money in one performance year, the target benchmark for the next performance year could be lower). Further, as ACOs successfully achieve cost savings, there may be a looming threat of payment cuts down the road for both ACOs and payers (including state Medicaid agencies and/or health plans), given that payment rates are typically set based on historic costs and utilization.

A final concern, particularly for safety net providers, is finding the capital needed to become an ACO. CMS estimated in its June 2015 final rule that upfront investments for ACO formation under the Medicare Shared Savings Program (MSSP) — including health information technology, process development, staffing, population management, care coordination, quality reporting, and patient education — would be approximately $580,000. CMS’ estimated annual costs to manage day-to-day operations under an MSSP ACO were even higher, at $860,000 per year.

Guidance for Developing Shared Savings Approaches

CHCS recently released two technical assistance tools, made possible by The Commonwealth Fund, to assist states, health plans, or other stakeholders interested in refining shared savings payment models for Medicaid ACO programs. The Shared Savings for Medicaid Accountable Care Organizations: Design Considerations technical assistance brief details shared savings payment arrangements used in Medicaid ACO programs, including key design decisions made by state policymakers, such as:

  • Minimum population size. The minimum number of patients that need to be assigned to the ACO to manage the total cost of care under a shared savings/shared risk model;
  • Minimum savings rate. The minimum amount of savings an ACO must generate to be eligible for a shared savings payouts — a calculation designed to ensure ACOs are rewarded for true cost savings not for normal fluctuation in expenditures;
  • Sharing rates for savings. The maximum percentage of savings that ACOs may be eligible to share in; and
  • Risk transitions. The extent to which states opted for a phased-in approach allowing ACOs to take on increasing levels of risk in later years of operation.

A second technical assistance brief — Medicaid Accountable Care Organization Shared Savings Programs: Options for Maximizing Provider Participation and Program Sustainability — details opportunities for adjusting shared savings payment methodologies to ensure Medicaid ACO program sustainability and to keep savings “in the system.” These options include:

Overcoming Challenges in Pursuing Shared Savings

Developing effective shared savings payment methodologies does not come without complications. First, these payment methodologies can be complex to design and hard to explain to stakeholders. For that reason, it is important to involve actuaries or others with claims data and payment expertise who can help forecast the impact of different approaches on provider participation, quality, and cost. Second, adjusting benchmarks can lead to concerns about the legitimacy of the results and muddle the true impact of the program on cost reduction. For example, Medicare MSSP benchmarks have been adjusted to help accomplish policy objectives, such as increasing provider participation. Starting in 2017, Medicare will be integrating regional adjustments to rebased benchmarks for MSSP ACOs; this means that cost benchmarks may be adjusted upwards for historically efficient ACOs to provide more opportunities for savings. As a result, adjusted MSSP benchmarks can no longer be used to accurately estimate what spending would be without the ACO.

Finally, as CMS noted in the June 2016 MSSP Final Rule, it is important to monitor TCoC benchmarks to ensure that they are not becoming overly inflated “to the point where ACOs need to do little to maintain or change their care practices to generate savings.” States must weigh the desire to adjust benchmarks to help increase (or at least maintain) provider participation in ACO programs with potential downsides. These include more complexity in how payments are structured plus potentially paying for “savings” that do not truly reflect decreased costs (i.e., savings that are generated from artificially high TCoC benchmarks, rather than from keeping patients out of the hospital or providing more efficient care).

Moving Forward

Even with the uncertainties surrounding potential Medicaid policy changes at the national level, states have continued to pursue Medicaid payment and delivery innovations, including ACOs. Ongoing concern about the high-cost and poor outcomes of health care in the U.S. creates an impetus for states to seek ways to do more with less. Promising reforms such as Medicaid ACOs — offering demonstrated success in bending the cost curve while maintaining or improving quality of care — are more appealing than ever before.

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Michael Costa
6 years ago

This is an interesting, useful, and timely post. I would just note that it somewhat mischaracterizes the state of Vermont Medicaid program. Vermont ended its Medicaid Shared Savings Program in 2016. It started the Vermont Next Generation ACO program in 2017, based on the Medicare Next Generation program. The program makes risk-based all-inclusive population-based payments, and the ACO is taking on downside risk. This all validates the author’s main points that it is a really exciting time to work with ACOs and Medicaid is innovating too.

Rachael Matulis, CHCS
6 years ago
Reply to  Michael Costa

Yes, thank you for the information on Vermont’s Next Generation ACO program and for the positive feedback! We aimed to make this distinction by noting that six states either “have used or currently use” a shared savings payment model. Both Vermont and Massachusetts had exclusively used shared savings approaches for their initial Medicaid ACO programs and have since evolved their payment models. As you noted, it is an exciting time to work with Medicaid and ACOs, and we at CHCS will be sure to keep our eyes on Vermont’s new ACO model.