A YEAR OF THE PIONEERS

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1 CLIENT BRIEFING AUGUST 2013 A YEAR OF THE PIONEERS CMS s report on the early results of the Pioneer ACO program contains important information. But to understand it correctly you have to remember what the program aims to achieve and how. Authors Dan Shellenbarger Niyum Gandhi When the Centers for Medicare & Medicaid Services recently reported first-year results of a key Medicare program, CMS and a number of supporters understandably claimed victory, while critics cast the program as a failure. In a familiar pattern, the discussion fizzled having shed almost no real light. That is unfortunate, because the program in question, CMS s Pioneer Accountable Care Organization Model, is a significant effort to support high-quality, cost-effective value-based healthcare. It deserves public attention, not just as part of the Affordable Care Act and federal healthcare reform, but as a major first step toward aligning incentives for valuebased healthcare. Unfortunately, the data CMS published is neither simple nor complete. It needs to be interpreted in light of what Pioneer is designed to accomplish and how ACOs achieve results. With that in mind, let s look at CMS s data, not to argue for or against Pioneer, but to convey a sense of what the key indicators really mean and what they don t.

2 Some Pioneer ACOs hit their savings targets. Some generated losses. Which ones are doing better? You can t really tell. Did the Pioneers save enough? At the core of CMS s announcement is what looks like a simple set of facts: Thirteen of the 32 Pioneer ACOs met or exceeded their target savings levels and received a total of $76 million in shared savings payments from CMS. Another 17 achieved savings, but not enough to qualify for the payments. Two generated shared losses of $4 million. Overall, CMS saved $88 million and the Medicare Trust Fund $33 million. Savings are usually good. But are these good enough? That turns out to be an extremely complicated question. Here are a few of the issues that have to be considered: No ACO fully pays off in one year. Value-based healthcare providers tend to achieve savings in three stages. In the first, the organization harvests low-hanging fruit: It eliminates hospital readmissions, engages patients to make better decisions about elective procedures; and educates them about where and how to consume certain types of care. These steps will produce modest savings. Next come models targeting the sickest five percent of patients. These models require a more mature organization with well-thought-out transformative care models and the kind of access to data that many healthcare providers don t yet have and they produce dramatic improvements. Finally, over time, quality measures such as better control of blood pressure, blood sugar, and cholesterol pay off in slower progressions of acute diseases and lower utilization of emergency rooms and hospitals. Where are the Pioneer ACOs? Mostly in the first stage, producing exactly the kind of results we would have predicted. The numbers aren t comparable. When ACO one beats its savings targets, ACO two produces savings but not enough to win a bonus, and ACO three generates losses, it s natural to assume that one is more successful than two, and two more successful than three. In the Pioneer program, that is not necessarily the case. The savings targets were set not by some risk-adjusted regional benchmark for how much things should cost but rather by the individual ACO s historic costs and a market-wide trend. If your organization was bloated and wasteful, you got a target that could be met with low-hanging fruit: reducing hospital readmissions. If you d already taken steps toward reform, your target was more difficult to achieve arguably too hard in some cases. That doesn t mean the most successful ACOs in Pioneer all got there the easy way. Nor does it mean that we should feel bad for higher-performing ACOs that failed to earn their bonuses. (We ve talked with several, and they re mostly happy with the progress they made, regardless of short-term incentives.) What it does mean is that based on currently available data, we can t really tell who did well and who didn t. The averages are irrelevant. To a degree, ACOs are like unicorns. We all know what they re supposed to look like, but no one has actually seen one. With this in mind, it is important to note that the Pioneer program enables the transition to an accountable care model, but it does not prescribe the solution. Rather, it leaves each ACO to discern its own path to value. And an enormous amount of work still needs to be done to turn the model into a sustainable form of healthcare that Copyright 2013 Oliver Wyman 2

3 The Pioneer program enables providers to develop ACOs, but it doesn t tell them how to do it. reliably produces significant real-world results. Pioneer was meant to let ACOs accelerate their evolution toward value-based care (by authorizing Medicare, the 900-pound gorilla of U.S. healthcare, to participate) and to catalyze that evolution by providing rewards and penalties. It was always expected that there would be successes and failures successes to emulate, failures to learn from. But it s important to remember that an ACO that missed its first-year savings target isn t necessarily a failure, and one that delivered savings this year isn t necessarily a success. ACO building is a much longer game than that. The Pioneers lacked crucial information. In our experience, one of the most powerful tools in population management is information. This starts with patient attribution, which was slow in developing in year one, and extends to historical claims data. The ACO uses this data, along with predictive modeling, to identify the five or 10 or 15 percent of patients who generate a lion s share of costs and works proactively to keep them healthy and out of emergency rooms and hospitals. When implemented aggressively, segmentation can have a startling impact on clinical and financial performance. The Pioneers all understand the strategy, and a number have a good track record with it. But it is very difficult to segment patients effectively without access to historical claims data. And the first year of Pioneer was almost half gone before participants received the claims data they needed. That s not a surprise; data is the bugbear of building ACOs. But it put real limits on what the Pioneers could achieve in year one. How should we think about the Pioneers? Overall, we re most pleased to see the conviction demonstrated by the Pioneers. While few have generated massive financial rewards in this first year, 30 of 32 appear to remain committed to the shift towards value-based care. To boot, some of the Pioneers did generate savings, and the scale of their achievement seems in line with what we ve observed elsewhere. Further, it was good that the savings came while all of the Pioneer ACOs did well on quality and patient-satisfaction measures. With time and data, the Pioneers including those that are shifting to the Medicare Shared Savings Program should be able to accelerate the pace of transformation. And of course, CMS has built into Pioneer the requirement that participants shift to value with their commercial payers as well, which should amplify the program s impact. But it is crucial to remember how Pioneer is supposed to work. It may look like a topdown administrative program in which participants will achieve results by following an established set of rules. But really, Pioneer was designed with something different and more powerful in mind. In this vision, successful ACOs will create the rules and business model, learn to compete on the basis of cost and quality, thereby driving a value creation cycle that will benefit consumers for years to come. 3 Copyright 2013 Oliver Wyman

4 Today s ACOs have aspirations that go beyond CMS. Most already have valuebased contracts with other populations. In that context, we should be wary of leaping to conclusions. Take the much-talkedabout fact that nine ACOs plan to leave the Pioneer program. (Seven will join the Medicare Saved Savings Program.) This has been interpreted as a failure of the program and of the participants. We see it far otherwise. Pioneer ACO model is definitely aggressive in its goals, calling on ACOs to reach a relatively advanced state of maturity within three years a stiff pace. Some of the Pioneers were unhappy with details of the program and saw a better fit in MSSP, which has the same goals as Pioneer, but a different model for sharing risk. It makes sense for CMS to demand speed after all, the goal is to bring successful models to market as quickly as possible. But it also makes sense for ACOs to opt for a risk model that is more in line with their own conditions and needs. And Pioneer is hardly the whole ball game. While today s ACOs acknowledge that they are in the early stages of their clinical transformation, they have aspirations that extend far beyond Pioneer and other CMS programs. Most of the organizations are already in similar risk-based contracts with other populations, including Medicare Advantage and commercial risk contracts. Some are even pursuing ACO based insurance offerings for the employer and exchange marketplaces The long-term goal, the big aspiration, is unprecedented in scope: a nearly complete remaking of the U.S. healthcare, an industry that accounts for nearly one dollar of every five spent in the United States and has a bearing on the health and welfare of us all. If CMS and the Pioneers, and an array of other innovators succeed in their vision, we will see healthcare reengineered to run on a new economic model, with changed financial incentives, new clinical models, new ways of organizing professionals, and a new sense of innovation, competition, and value. This doesn t mean that Pioneer or other CMS programs should be free of scrutiny far from it. But to know how well these programs are doing, we think it s crucial that we analyze them with a strong sense of how much they hope to accomplish and the tools they have at their disposal. They deserve nothing less. About the authors Dan Shellenbarger is a partner in Oliver Wyman s Health & Life Sciences practice. He focuses on issues of revenue growth and operational effectiveness, working with his clients senior leadership teams on issues ranging from product portfolio strategy to sales effectiveness to strategic and functional business planning. Dan also leads ongoing research focusing on the evolution of benefits distribution, and is a frequent speaker at industry events. He can be reached at Dan.Shellenbarger@oliverywman.com Niyum Gandhi is an associate partner in Oliver Wyman s Health & Life Sciences practice. He focuses on issues of value-based healthcare strategy and transformation for health systems, hospitals, physician groups, and health plans. He advises organizations on strategic direction, the design of value-based models, and the clinical and organizational transformation required to be successful under these new models. He can be reached at niyum.gandhi@oliverwyman.com. Copyright 2013 Oliver Wyman 4

5 About Oliver Wyman Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE : MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in risk and reinsurance intermediary services; and Mercer, a global leader in human resource consulting and related services. Oliver Wyman s Health & Life Sciences practice serves clients in the pharmaceutical, biotechnology, medical devices, provider, and payer sectors with strategic, operational, and organizational advice. Deep healthcare knowledge and capabilities allow the practice to deliver fact-based solutions. For more information, visit Oliver Wyman on Copyright 2013 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.