Many states that have successfully launched Medicaid accountable care organization (ACO) programs in recent years have adopted a shared savings payment model. A general issue with shared savings programs is that they typically use a total cost of care (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 waste may be more likely to share in savings than more efficient providers. A related concern is that as ACOs achieve cost savings, there may be a threat of payment cuts down the road, given that payment rates are often based on historic costs and use.

This technical assistance brief, made possible by The Commonwealth Fund, explores strategies for adjusting shared savings payment methodologies — including approaches to TCoC benchmark setting — that could help states address concerns about program sustainability and keep savings in the health care system. It outlines theoretical examples based on different approaches used by the Medicare Shared Savings Program (MSSP), selected state Medicaid ACO programs, and suggestions from other research organizations. It also offers a suggested payment calculation that factors in startup costs paid by providers to form new ACOs.