Current healthcare literature is replete with recommendations for providers who are interested in pursuing participation in accountable care organizations. These articles typically focus on aligning payment incentives, developing care models, designing information systems to report quality measures and identify potential high-cost patients and describing the dire consequences that will befall hospitals that don’t participate in ACOs.
Less frequent are articles that describe the financial planning that providers should undertake to understand the financial effects on their organizations of participating in ACOs. These types of analyses will be critical to ensure that provider organizations will be able to withstand the losses in revenue and cash flow that can occur if the ACOs are successful in creating savings.
Why revenue losses occurs
A Medicare ACO that receives (for example) $100,000 in “shared savings” payment must have first reduced utilization in a way that decreased payments to providers by more than $200,000.[1] A Medicare ACO organized by a hospital is likely to incur significant reductions in its own Medicare revenue because reductions in hospital admissions and readmissions are frequent targets of care management programs. These hospitals, along with specialist physicians, should project the effects of these revenue decreases as part of their preparation and due diligence for participation in the ACO.
It’s difficult to determine exactly when these revenue reductions occur, since they are related to the absence of the service rather than the occurrence of a service. They occur, however, whenever a patient seeks care from a primary care physician rather than going to an emergency room, when a COPD patient remains on her medications and thereby avoids an admission, when a post-discharge infection that would create a readmission doesn’t occur, and in numerous other cases where the ACO’s clinical initiatives are successful.
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Revenue loss from avoided admissions
ACO clinical initiatives encompass many different areas, but this article will focus on avoided admissions, in which the lost revenue is relatively easy to quantify. The graph below shows the average Medicare payments to hospitals and physicians for several of the most common Medicare DRGs. The red bars show the average payment to the hospital, while the blue bars indicate payments to physicians and other Part B providers such as therapists ambulance services, and others. The amounts shown represent the lost revenue for each of those provider groups for each avoided admission in the indicated DRG.