What Healthcare Tech Startups Should Know About ACOs
Every week I speak to a healthcare entrepreneur who is building a technology company that will “enhance value-based care” and “improve care coordination”. Shortly after this initial description, the founder typically mentions Accountable Care Organizations (ACOs) as a primary target for their sales strategy. Having worked around ACOs for the past 6 years I’ve always found this particular stakeholder to be an interesting first choice for startups looking for product-market fit. However, these startups are not alone. When I type the phrase, “Care Management” into the business information site Crunchbase, I see 711 results of companies who use that exact terminology in their summary description. “Population Health” has 449 companies and “ACO” has 87 companies. So… instead of having many more calls with founders looking for general advice on how to penetrate the ACO market, I figured I’d just write out some of my thoughts here.
Basics of Accountable Care Organizations (ACOs)
Let’s begin with “what is an ACO”? At a high-level, ACOs are networks of physicians who in the spirit of improving quality and lowering cost, pool resources together to better manage a patient population. They must meet specific criteria such as physician governance and financially aligned incentives to promote high quality. They can be established by hospitals with large numbers of employed physicians, groups of independent physicians, or become a hybrid. The original concept was created by a group of researchers (Elliott Fisher, Douglas Staiger, Julie Bynum, and Daniel Gottlieb) at Dartmouth who published their work in a Health Affairs article back in December 2006. This concept has since proliferated across the healthcare ecosystem in different flavors for Medicare, Medicaid, and Commercial insurance.
Without getting into too much minutiae, the real value of the ACO is twofold: (1) Providing anti-trust and anti-kickback waivers to align physician reimbursement, services, and technology towards improving outcomes and lowering cost; and (2) Providing anti-trust and anti-kickback waivers to negotiate higher commercial rates for a group of independent physicians. Lets table point number 2 for another blog, which basically means a larger group of physicians can request higher rates from health plans than an independent physician practice could achieve on their own. Therefore, if we’re focused on driving improved patient outcomes and care coordination through aligned incentives, we need to understand how healthcare startups fit in the equation.
To explore the world of ACOs, let’s keep our attention on the largest and most well-known types: (1) Medicare Shared Savings Program (MSSP); and (2) Next Generation ACO. Both of these programs were created and administered by the Centers for Medicare and Medicaid Services Innovation (CMMI) and combine to cover 11.5 million Medicare fee-for-service (FFS) beneficiaries in 2018. For context, there are 38.7 million total Medicare FFS beneficiaries as of December 2019, so we’re talking about ~30% of the total FFS population was attributed to an ACO.
The most straightforward way that ACOs make money is by reducing medical spend below the projected spend, based on historical data, risk adjustment, regional characteristics, quality outcomes, and a couple other factors. The projected spend is oftentimes referred to as the prospectively created “benchmark”. This is the target that ACOs performance will be measured against. Other important things to consider are the mechanics of calculating a shared savings payment (benchmark minus actual spend), including minimum savings rates, savings and losses caps, and % of shared savings kept by CMS. This all depends on the “track” your ACO is categorized as, all the way from Track 1, Track 1+, Track 2, Track 3, to the Next Generation ACO track. Recently, the CMS ACO tracks have switched nomenclature into Basic and Enhanced tracks, as well as the Direct Provider Contracting (DPC) model. They crosswalk mostly into the same previous tracks, with a glidepath into downside risk over time. If I have completely loss you already in this blog, please go back and read CMS’ Pathways to Success announcement because understanding the economic funds flow per each track is critical for success.
Understanding the Medicare ACO Landscape
Assuming ya’ll better understand the Medicare ACO landscape, let’s talk about market opportunity for the aforementioned startups. First, you must take the total Medicare spend under management of the ACO and then estimate a reasonable shared savings % based on ability to control costs and improve quality. Both cost and quality are important, because reducing spend that results in awful quality scores will significantly reduce the portion of earned shared savings actually distributed to the ACO. In 2018, there were 548 MSSP ACOs and 50 Next Generation ACOs (i.e., most advanced Medicare ACO). The MSSP’s aggregate Medicare benchmark spend was $109.8 billion, while the Next Generation ACOs aggregate spend was $16.8 billion. To get this number, you first estimate the cost per capita for each attributed Medicare beneficiary multiplied by the number of beneficiaries attributed to physicians in the ACO network. In 2018, a total of $126.6 billion of Medicare spending was flowing through 598 different types of ACOs.
Now remember, most of the $126.6 billion is going directly into the pockets of Medicare doctors and hospitals. Therefore, your market opportunity is much smaller as a startup. You next need to think about how much cost the ACO is willing to spend in administrative spend, in order to deliver the shared savings that can be distributed to providers and CMS. Also remember the portion of money earmarked for the physicians, particularly the independent primary care providers (PCPs) who provide scale to the ACO and are responsible for Medicare beneficiary attribution. Lastly, understand that each type of MSSP Track has different economic models that define the potential shared savings. For example, the most common MSSP type is Track 1 or Basic, which accounted for 8.1 million of the Medicare ACO beneficiaries in 2018. This particular ACO requires a minimum savings rate of 2.9% to 3.9% depending on the size of the ACO, caps the total payments to the ACO at 10%, and caps the amount split between CMS and the ACO at 50%. Therefore, if the ACO only saves 1%, it doesn’t get any shared savings because it failed to meet the minimum savings threshold. If the ACO saves 5% with the highest quality metrics, it will still only receive 2.5% of the total savings generated (remaining 2.5% goes back to CMS).
In addition, there is a time-value of money component that must be taken into account. The MSSP program is notorious for having a long-time gap between the date you begin a performance period and the time when CMS cuts you a shared savings check. This final process is called “annual reconciliation” that takes into account time for claims runout and analysis of actual spend versus benchmark. If your startup charges an upfront fee or monthly per member per month (PMPM), you are guaranteeing costs to the ACO during a period of time where they do not generate any significant cash flow. And, your vendor costs will be in addition to any labor, services, and technology costs already incurred by the ACO.
Fitting into the Medicare ACO World
Now let’s assume we get all that. We understand Medicare spend. We understand payment methodology of ACO tracks. We understand that the ACO has other costs. And we know that the reconciliation payment delay creates a cash flow issue for many ACOs. Next we need to think about reasonable savings estimates that can be achieved with the help of your startup. This is highly dependent on your product. Is your product a technology solution or tech-enabled services platform? Does it focus on data integration, risk stratification, workflow management, risk adjustment, or another aspect of population health? Do you have a clinical program that can recommend clinically-nuanced decision making or is that up to the physician, based on the Medicare beneficiaries’ medical, behavioral, and social determinants of health? Are you targeting health systems with multiple facilities? Or physician-led ACOs? How big is the ACO? What has been the historical performance of the ACO prior to your services and why did it not yield the desired results (if applicable)? All of that matters before estimating the return on investment (ROI) of your product and services. It’s very easy for startups to overestimate, under deliver, and then get terminated shortly after.
In 2018, the 548 MSSP ACOs generated $966.4 million in earned shared savings, after taking into factors like quality metrics and risk arrangement. The Next Generation ACOs delivered $220.9 million in total shared savings off $16.8 billion in total Medicare benchmark expenditures, or what the attributed Medicaid lives were estimated to spend in 2018. That is an average of 0.88% for the MSSP ACOs and 1.32% for the Next Generation ACOs. Both of which don’t leave a ton of room for your 60%+ gross margin technology stack that is unproven and has not direct patient care component. Data is helpful, but actually using the insights to deliver better care delivery is what actually drives savings and higher quality.
Let’s take a Track 1 ACO with 10,000 lives as an example. The average Medicare beneficiary should have $800 PMPM spend. Using these assumptions, the ACO would have $96 million in total Medicare benchmark spend. Even at 4% or $3.8 million in total savings for a given year (which is considerably higher than average), the ACO only gets to keep half of that amount or $1.9 million given the Track 1 program details. Now think about the PCPs delivering the patient care, who already make six-figure salaries and need to be compensated with enough value to keep them interested. If each PCP attributes 500 Medicare FFS patients to the ACO, that means your ACO has 20 PCPs in the network. If each of them gets $50,000 quality bonus to encourage them to stay in the program, there goes $1 million of your $1.9 million total off the bat. Then the ACO must pay for all the other stuff, including your startups fees. For example, nurses are not cheap. Obviously these numbers are made up above and highly dependent on the particular ACO you’re targeting, but you get the point.
My blog is already too long, so I will stop here. I didn’t even get into offering downside risk protection, Advanced APM bonuses, implementation fees, and non-Medicare ACO opportunities like Commercial ACOs. Obviously, the goal of any health technology startup would be to gain adoption across multiple lines of business while the ACO expands their primary care network to add additional lives to your platform. Just remember, ACOs are not always cash cows, so be strategic how you position your company’s value-drivers when focusing all your eggs in this basket. And perhaps diversify your business development target list to include other paying stakeholders who have a financial incentive to use technology to better manage population health.