NEJM: Go ACO, go local (at first)
At the outset, using local growth factors to set spending targets may better align savings for ACOs with savings for Medicare and reduce the financial uncertainty involved in participation, according to a perspective paper published April 25 in the New England Journal of Medicine.

“Because of geographic variation in spending growth, Medicare's use of national growth factors to set targets could cause ACOs in any hospital-referral region (HRR) to gain or lose financially without altering their delivery of care,”  J. Michael McWilliams, MD, PhD, and Zirui Song, BA, from the department of health care policy at Harvard Medical School, Boston, wrote. “Because local spending levels and growth rates don't correlate with one another, the payment methods may widen differences in Medicare spending between HRRs with low spending and high growth (where spending targets will tend to reduce spending) and those with high spending and low growth (where they'll tend to increase spending).”

They explored the issue using Dartmouth Atlas estimates of age-, sex- and race-adjusted fee-for-service Medicare spending per beneficiary in different HRRs. For each HRR and each service area of the 32 organizations participating in the Pioneer ACO program, they determined the extent to which differences between local and national Medicare spending growth would financially favor or disadvantage ACOs under the Pioneer payment arrangement in a hypothetical performance year.

Treating 2008 as the hypothetical performance year, they compared actual local 2008 spending with local spending targets calculated according to the Pioneer methods, using 2005 through 2007 as the baseline period.

Differences between local and national spending growth would have favored Pioneer participation most in low-spending, low-growth areas and put ACOs in high-spending, high-growth areas at a disadvantage, McWilliams and Song found. “Moreover, the range of favorability indicated that ACOs in many HRRs could have gained or lost substantially, as much as 14 percent in either direction. The range was narrower for Pioneer ACO service areas—typically collections of HRRs—but favorability still ranged from -4.6 to 3.5 percent.”

In eight of the 32 areas local spending growth would have favored Pioneer participation in 2008. “Pioneer ACOs will probably face more variable favorability than our results suggest, because they will be subject to greater random changes in population health care needs. Specifically, we used Dartmouth estimates determined from 20 percent samples of Medicare beneficiaries, but Pioneer ACOs typically care for less than 20 percent of beneficiaries in their service areas.”

Additionally, they also assessed the stability of HRR spending growth over time to determine how well ACOs could predict the favorability of the Pioneer payment model on the basis of local baseline-spending trends. For example, only 44 percent of HRRs had either high or low average annual growth rates in both the period from 2003 to 2006 and the period from 2006 to 2008; the correlation between these growth rates was 0.18, a figure similar to correlations between earlier periods.

“Thus, when deciding whether to participate in the Pioneer program, organizations probably could not predict on the basis of past spending growth whether local spending growth for performance years 2012 through 2014 would be favorable,” McWilliams and Song wrote.

“Our findings suggest initial evaluations of these programs should compare ACOs' performance not only with programmatic targets but also with the performance of local control groups, by using quasi-experimental designs,” the authors concluded. “As ACO programs expand, however, it will become difficult in markets dominated by ACOs to make reliable estimates of local spending growth for Medicare beneficiaries not assigned to an ACO. Setting spending targets in such areas on the basis of local growth rates—which would then be entirely determined by the average spending performance of local ACOs—might foster healthy competition. But it might also diminish the incentives provided by the opportunity for savings, since ACOs would be rewarded only if they outperformed competitors in slowing spending growth. It might therefore be reasonable to consider some blend of local and national growth rates as ACO programs expand.”