Based on its experience helping physicians and hospitals create and manage Accountable Care Organizations (ACOs), Caravan Health just published an analysis showing how small ACOs are cursed by variation in spending caused by statistical noise rather than their own performance. There is a formula to success under this model of value-based payment.

Our analysis of historical ACO data published in the Health Affairs Blog shows that the key to predictability in ACO performance is scale. It turns out that, for ACOs implementing payment and delivery system reform, bigger is absolutely better.

Health providers often ask us – how much does an ACO have to save in order to actually earn shared savings from CMS? It sounds like a simple question – you might think that any real savings would lead to shared savings. In reality, it is complicated by several factors. First, each ACO is measured against a historical benchmark for their patients. That benchmark is calculated as a weighted average of the organization’s own past spending, adjusted for estimated risk factors, and trended forward by actuarial estimates of Medicare cost growth. If an ACO can beat growth in Medicare fee-for-service costs – usually not an impossible goal – it can “beat its benchmark” and be in the hunt for shared savings.

On top of that, there is a minimum amount of savings beyond the benchmark that the ACO is required to achieve before it becomes eligible for shared savings. This is called the minimum savings rate or MSR. Once an ACO has shown that they can generate savings beyond that MSR, they can receive shared savings from CMS.

The hard part is for the ACO to demonstrate that it met its savings target.

There is some degree of randomness in all health spending data – spending varies widely depending on actual consumption of services. The statistics show that the smaller the ACO, the more difficult it is to show that an ACO’s management of health spending is creating measurable savings.

The answer to the question from health providers is this – to be 95 percent confident that your ACO is going to get shared savings, an ACO with 5,000 lives must save about 10.7 percent from its benchmark- quite a bit higher than the 3.9 percent MSR required by the program. You can see the required savings percentage below for various size ACOs.

Translated into dollars, that 5,000-person ACO, assuming an average of $10,000 in spending per Medicare beneficiary, must save about $1,070 per person. That is about $5.35 million in real savings per year to be 95 percent sure of getting shared savings from CMS. This is all due to the variation in health spending with a smaller pool of beneficiaries.

The numbers improve as the ACO gets bigger.
An ACO with 10,000 lives needs to save 7.75 percent, or $775 per person to be 95 percent sure of savings.  At 50,000 lives, an ACO needs to save only $394 per person, and at 100,000 lives, the requires savings are down to $322. The per person savings decreases dramatically by ACO size, leading to the clear conclusion that larger ACOs make for more predictable results.

If you join a 100,000 life risk-bearing ACO with Caravan Health with a 0.5 percent MSR the ACO needs to generate only 1.72 percent savings to receive a shared savings distribution from CMS.

Learn more by watching our Collaborative ACO Webinar.

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