The Problem with Over-simplifying Shared Savings Distribution

Historical & Forecasted Shared Savings
DISTRIBUTION STRATEGY

The Problem with Over-simplifying Shared Savings Distribution

Historically, many ACOs have compensated their participant providers 1 based on assigned lives, allowed charges, or qualitative criteria. While this approach is understandable from a simplicity perspective, it is an increasingly risky policy in the long term.

Most ACOs have a subset of their providers who drive the majority of their shared savings. But providers have a growing range of value-based programs to choose from. And with performance data becoming more available, these providers are desirable acquisition targets. Without the ability to reward them based on their true contribution to shared savings, it is becoming increasingly difficult to retain them.

To illustrate the point, this figure shows the impact on an ACO of a high performing participant (Participant C) defecting in 2020, having realized that they are being unfairly compensated. Losing a single participant has an outsized impact on shared savings, causing a previously successful ACO to incur losses.

It also results in the remaining high performing participants (Participant B) to lose the compensation they were anticipating. This, in turn, causes the spiral of defection to continue into subsequent years.

Alternative Approaches to Calculating Shared Savings Contribution/Distribution

Here is an actual example that demonstrates $1.3M in total misallocation of distribution on $2.0M of shared savings across nine physicians from one medical practice by using different distribution methodologies.

There are two distribution methodologies demonstrated:

  • The first one is the commonly used “Volume” method. Here the savings are distributed to the physicians based on their panel size. Every physician receives a payment regardless of if they contributed positively or negatively to shared savings. The misallocation amounts under this method were calculated by taking the absolute difference in distribution between the two methods.
  • The second one is the “Shared Saving Contribution” method. It distributes shared savings as if each practice was under its own contract with CMS. Here each practice is judged against its contribution to the ACO’s overall benchmark versus performance year expenditures. The practice-level benchmark is risk-adjusted (and where applicable, regionally-adjusted), capped, truncated, trended and otherwise calculated in the same method as CMS calculates the overall benchmark.

With the Shared Savings Contribution approach, the financial impact of practices that implemented care management workflows (versus those that did not) becomes evident, with the more engaged practices rewarded accordingly. The positive contributing physicians subsidized those who lowered the shared savings of the ACO. In order to prevent contractual and fiscal complications with physicians who negatively contributed, the distribution method can be designed so that they simply do not get a payout, rather than owing money to the ACO.

Beyond Historical & Forecasted Shared Savings by Provider

Besides weighing the historical and forecasted shared savings contribution by provider, an ACO benefits from an ability to calculate a handful of “supplemental metrics”. These metrics are described below and can be generated at the participant TIN and other meaningful provider network levels. In addition to performance incentives, they can guide strategic financial decisions, such as track and program entry, downside risk hedging, attribution methodology, participant selection and optimization of risk adjustment.

Regional Impact: Regional adjustment may provide an opportunity to take advantage of region-specific arbitrage. A negative regional adjustment sticks with the participant for the full agreement period and cannot be modified. Regional update factor by participant can lead to uneven benchmark contribution depending on how each participant’s region is trending.

Upside Potential of Risk Coding: Assess the upside “opportunity” of closing known HCC gaps for each participant. While there are many gap suspecting options, at minimum chronic conditions need to be re-coded annually. It is possible to estimate the “lift” to the benchmark for closing the gaps for each participant.

Contribution to Revenue Status & Risk Loss Limit: Each participant contributes to loss exposure proportionately to their revenue, making this an important metric for risk management. Additionally it’s possible to change the ACO’s revenue status by modifying the participant mix, such that its revenue capture dips under the 35% threshold. This impacts its track glide paths and the resulting loss exposure.

Attributed Lives: There’s a need to ensure that removing a participant would not risk dipping the ACO below the minimum bene requirement under Pathways. This may be especially important for smaller ACOs who are planning to switch from retrospective to prospective assignment.

Prospective vs Retrospective: The assignment methodology can impact the number of attributed lives, as well as how much control an ACO has to proactively manage patients. While the assignment methodology is made at the ACO level, it’s possible to assess which participants would be positively affected by the selection.

Quality Scores: Quality scores have a multiplicative effect on realizing a shared savings payout, making it important to estimate their breakout at the participant level.

Utilization Metrics: While utilization metrics don’t fully drive shared savings, the ability to break them out by participant has multiple benefits. It helps determine whether there are clear utilization outliers that would indicate possible modifiability of financial performance.

Recommendations for Optimizing your Distribution Strategy

The example cases demonstrate the potential far-reaching consequences of the distribution strategy on the long term sustainability of an ACO. Without having clear transparency into each participant’s contribution, it may not be possible to proactively retain your top performers. Augmenting this data with the described supplemental provider-level metrics further drives both participant selection and strategic financial decisions.

When planning a sustainable shared savings distribution strategy there are some factors to consider:

  1. ACOs should reproduce CMS’s shared savings calculation methodology at the participant level. This exercise is not trivial, since it involves risk score recalculation, regional and national trend adjustments, capping, and other contract-specific elements. Many of these adjustments depend on figures CMS does not make available in a timely manner.
  2. Compensation can be a sensitive issue and participants are often surprised by the calculations. ACOs find that having a third party certify the accuracy of distribution amounts reduces disputes.
  3. Changing distribution methodology can be disruptive. So it is important to start messaging your intention to do so as far in advance as possible so that participants understand the goals and implications of the new approach.
1. While ACO participant selection is done at the TIN level, even single-TIN ACOs can benefit from this approach, since they may have the ability to impact the performance and participation of individual practices and departments.