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Impact of Accountable Care Organizations (ACOs) on Drug Costs

by Josh Gray, VP of athenaResearch

Among the most important changes sweeping across the health care delivery system is the shift of risk from payers to providers through Accountable Care Organizations, or ACOs. Here’s a quick summary of how they work: An ACO is a provider organization formed to assume responsibility for the overall total cost and quality of an assigned population. It always includes primary care physicians, and may or may not include specialists and hospitals. ACOs can pursue contracts with public or private payers, who will reward them for controlling the cost of care, provided that quality metrics are met.

For all the conversation about the potential effectiveness of ACOs in controlling medical expenses, I examine a different angle here, speculating on how accountable care may affect the cost and utilization of pharmaceuticals over time. At the risk of oversimplification, I’ll focus on two important variants of risk-based accountable care contracts, each presenting a different risk-reward profile.

Medicare Shared Savings Program (MSSP)

In 2011, the Centers for Medicare and Medicaid Services (CMS) launched the Medicare Shared Savings Program, or MSSP, a three-year experiment in which provider groups can apply to participate in risk-based population health contracts. If selected by CMS, the ACO attempts to lower the overall cost of patient care through a variety of strategies. If successful, the ACO keeps 50–60% of the savings, depending on the specific contract structure they select.

The MSSP thus rewards providers for cost-effective behavior, a radical departure from the traditional fee-for-service (FFS) system, in which providers profit when they increase service volumes. Currently, there are 221 ACOs participating in the MSSP, covering roughly four million seniors. In Fall of 2013, CMS will announce the selection of a new cohort of ACOs eligible to participate in MSSP.

Interestingly, “Part D” compounds – drugs that patients self-administer – are excluded from the cost base for MSSP, instead covered under separate programs, either the Medicare Prescription Drug Plan or the Medicare Advantage Program. As a result, under MSSP, ACOs have no apparent direct financial incentive to lower the cost of oral and other self-administered pharmaceuticals. In my view, under MSSP, ACOs arguably have an implicit incentive to increase the utilization of Part D drugs. Here’s why:

In addition to measuring whether an ACO lowers costs, CMS also measures ACOs’ performance against a series of 33 quality metrics. If an ACO lowers costs but fails to meet all quality metrics, its share of cost savings is reduced based on the extent of its quality shortfall. Many of these metrics – such as the percentage of patients with diabetes with hemoglobin A1C <8%, blood pressure under 140/90, and LDL <100 — are highly dependent on patient adherence to drug regimens. Thus, ACOs may benefit from higher pharmaceutical utilization, particularly in areas that directly relate to MSSP quality metrics. This focus on drug-dependent outcomes, regardless of the drugs’ costs, may increase providers’ receptiveness to increased collaboration with pharmaceutical firms, particularly around programs to monitor and support patient adherence.

Commercial Risk Contracts

ACOs can also contract with commercial payers to assume risk. These arrangements can be structured to resemble MSSP-like shared savings contracts or various forms of capitation, a model that establishes a set, risk-adjusted rate per covered individual. If the ACO lowers the cost of care, it pockets the savings; if care costs come in above target levels, the ACO is exposed to losses.

In the case of commercial population risk contracts, Part D drugs may be carved out separately (like MSSP) or included in computing the overall cost of care. In Massachusetts, for example, many commercial shared savings contracts place providers at risk for drug costs. In cases where self-administered pharmaceuticals are included in the cost base, providers need to weigh the cost of various drug options against clinical benefits and possibly avoiding costly downstream events, such as hospitalization and emergency department use.

What does all this mean for utilization of pharmaceuticals?

In my opinion, even ACOs at risk for pharmaceutical spending will place their principal focus elsewhere for the next few years. Levers such as reducing out-of-network utilization of competitors’ services; avoiding hospitalization and emergency department use through better chronic disease management; reducing the frequency of unneeded diagnostics and procedures; and referring patients to cost-effective specialists – are all likely to bring savings and command the lion’s share of ACOs’ cost-control efforts for the first few years under risk.

How about beyond that? As ACOs reach maturity, they will gradually take a closer look at drug costs. They will be aggressive about generic substitution and more likely to refine their approach to step therapy. Drug use for patients with multiple chronic conditions will be managed more carefully, often with the involvement of clinical pharmacists. If providers believe they can achieve comparable clinical results at lower cost from a particular drug, they will do so. They will also favor compounds where hard data exists to show lower overall system costs, making it incumbent on pharmaceutical companies to come to the table with compelling pharmaco-economic data.

That’s my theory of how ACOs will affect drug costs. Next month, I’ll share actual data we’ve collected on pharmaceutical costs for 400,000 individuals covered under commercial risk contracts.

Check out Josh Gray's Google+ Profile. Follow @JoshGray_HIT on Twitter.

Josh leads the athenaResearch team's efforts in mining athenahealth network data for insights into physician performance and the US health care system. 

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