Capitation payment of ACO REACH plans will sabotage

 “Realizing Equity, Access, and  Community Health.” 

By Stephen Kemble and One Payer States Policy Work Group 

August 10, 2022 

ACO REACH (Realizing Equity, Access, and Community Health) is the latest effort by Centers for Medicare and Medicaid Services (CMS) to “move away from fee-for-service” and toward  “value-based payment,” shifting insurance risk onto doctors and hospitals with an eventual goal of pre-payment with capitation.1 Capitation means paying on a per-capita (per-person, per enrollee, per assignee) basis, requiring defined members. It is attractive to payers such as  CMS because it pre-pays for care of a defined population, enabling a set budget without the inconvenience of variability in the cost of claims year-to-year with fee-for-service. Pre-payment via capitation was also intended to be a form of budgeting for cost control, despite its recent history in Medicare Advantage of substantially increasing costs compared with traditional fee-for-service Medicare.2 

All capitated entities accept insurance risk, covering the unpredictable year-to-year variation in healthcare costs. This includes all health insurance plans, Health Maintenance Organizations  (HMOs), Accountable Care Organizations (ACOs), Direct Contracting Entities (DCEs), and  ACO REACH plans. Some of these, including DCEs and ACO REACH plans in particular, shift insurance risk onto direct providers of care: doctors and hospitals, and especially primary care doctors. Along with risk, capitation also means the opportunity to profit from paying for or delivering less care. 

A significant problem with capitation is that the smaller the capitated entity, the more vulnerable it is to financial devastation by unexpected high-cost cases, and with a smaller size, the advantages of risk pooling are diminished. Risk can be buffered with insurance reserves and reinsurance or shared with a larger entity via risk corridors, especially for smaller capitated entities such as primary care practices.  

Another major problem is the significant variation in the cost of care within a population. Unadjusted capitation based on average cost would grossly overpay for the healthy and even more grossly underpay for the sick. Capitation, therefore, requires risk adjustment and quality incentives to mitigate its inherent incentives to worsen disparities in care. Risk adjustment and quality incentives in turn, require detailed data on diagnoses and treatment, adding administrative costs and burdens that exceed those required by fee-for-service (FFS). 

This push toward capitation is justified by the common assertion that FFS incentivizes excessive  “volume” (over-use) of care and that this can be corrected by shifting insurance risk onto providers of care. However, the four key assumptions – that there is widespread overuse of care due to FFS that capitation carries improved incentives compared to FFS, that risk adjustment can be made accurately, and that the overhead cost of capitation is worth it to achieve more cost-sensitive care – are all contradicted by the evidence. There is very little evidence for the claim  that “the volume” of services with FFS payment, as opposed to their price, explains the high cost of 

Health care in the US.3,4,5 The demonization of FFS in health policy is mainly a rationale promoted by the insurance industry to justify a central role for themselves in health care because, unlike FFS, capitation requires their capacity to handle the data demands of risk management. However, the overhead required for capitation far exceeds savings from the incentive to reduce care, so patients get less care, Medicare pays more, and intermediary insurers take home large profits. 

Problems with risk adjustment: 

Beneficiaries are enrolled or assigned to capitated plans as individuals and risk adjustment is applied to individuals, but risk adjustment is based on demographic and diagnostic categories.6 

The most accurate way to predict future risk would be to base it on prior year healthcare spending for each individual. Still, the use of prior year spending for risk adjustment would ultimately defeat the goal of using capitation as a cost control strategy since the more that was spent on care in one year the higher the capitation payment would be the following year. Any other method of capturing all the variables needed to approximate future risk at the individual level without using prior year spending would be complex and expensive. 

Difficulties with individual-level risk adjustment have necessitated using a category-based risk adjuster. Reasonable accuracy at predicting cost for an individual requires that categories be closely related to healthcare costs and have little variability in cost within each category.  Demographic categories were tried first, but they included too much variability and could predict only 1% of the variability in cost. Diagnostic categories (Hierarchical Condition  Categories, or HCC) were added by CMS in 2004 to improve risk adjustment accuracy for  Medicare Advantage. However, there is still large variability in the cost of care within almost all diagnostic categories. Risk adjustment based on diagnostic categories correlates poorly with individual risk and remains demonstrably vulnerable to substantial gaming through diagnostic upcoding and risk selection. 

To quote from a 2012 MedPAC report to Congress, “. . .we examined FFS beneficiaries who were grouped into the HCC for congestive heart failure (CHF) in 2008 and had no other HCCs.  In 2008, the beneficiary at the 95th percentile of costliness had more than $37,000 in Medicare spending, while the beneficiary at the 5th percentile had $115 in Medicare spending.”6 And a 2014 report to Congress on problems with risk adjustment found the HCC accurately predicted the average cost of care for each of 9 common diagnostic categories, yet overpaid for the least costly quintile of beneficiaries by 62% and underpaid for the costliest 5% by 18-29%.7 

Multiple attempts to improve the accuracy of the HCC by adding more detailed diagnostic categories or social determinant categories have failed to improve these results.6,7 This means even after risk adjustment, there remains a strong financial incentive to avoid covering or caring for sicker and socially disadvantaged individuals and to selectively enroll healthier and more advantaged individuals, regardless of diagnosis. The inability of risk adjustment to correct this means any entity paid with risk-adjusted capitation still has a strong incentive to worsen disparities in care.

Risk adjustment of capitation is a “damned if you do, damned if you don’t” proposition. Without it, the incentive to worsen disparities is severe; with risk adjustment based on prior year health spending, the incentive to maximize “volume” of care is worse than with FFS; and risk adjustment based on diagnostic categories cannot predict individual risk well enough to correct the incentive to worsen disparities. 

Gaming of risk pools by Medicare Advantage Plans 

Gaming of risk pools means capturing a population of members or beneficiaries (risk pool) with lower-than-average health risks while getting paid for an average risk pool to profit from the difference. MA plans to use marketing tactics2(including variations in coverage and contracting with employers to enroll newly Medicare-eligible retirees directly) that attract healthier beneficiaries, and they employ multiple tactics to deny care to the sick, including narrow networks, formulary restrictions, and prior authorization. Sicker enrollees, such as in the last year of life, who have been frustrated by denial or delay of services tend to disenroll and return to the traditional Medicare program.8 The effect of both marketing tactics (“cherry-picking”) and disenrollment of sicker beneficiaries (“lemon-dropping”) is to create for Medicare Advantage plans a healthier and less costly than average risk pool.9,10 

Up-coding 

CMS added diagnostic categories to the HCC risk adjustment formula in 2004. This improved its predictive accuracy from 1% to only 12%,7 but linked payment to diagnosis and introduced a major new opportunity for gaming: up-coding. Up-coding means choosing more specific or severe (and more highly paid) diagnosis codes than would be required for purely patient care purposes and fraudulently adding irrelevant or non-existent diagnoses. Medicare Advantage has extensively exploited up-coding plans since soon after diagnoses were added to the  HCC, apparently often to the point of fraud11,12. According to one expert estimate, the cost to  Medicare of aggressive diagnostic coding by Medicare Advantage plans and the failure of CMS  to correct for it will reach several hundred billion dollars in coming years.13 

ACOs, DCEs, and ACO REACH plans 

Accountable Care Organizations (ACOs), Direct Contracting Entities (DCEs), and ACO REACH  plans (Realizing Equity, Access, and Community Health) were introduced within Traditional  Medicare in 2012 and are paid by Medicare with capitation. Earlier versions of ACOs shared any savings from reduced Medicare claims with providers and used pay-for-performance bonuses, but Medicare still paid direct care providers with fee-for-service. DCEs and ACO  REACH plans may also pay physician practices with full or partial capitation. With DCEs and  REACH, expanded use of capitation invites expanded ownership and investment by private equity investors and for-profit insurance companies, who will expect a return on their investment.  Increasing ownership of physician practices by for-profit corporations has also accelerated the involvement of profiteers in DCE and ACO REACH plans. 

Unlike Medicare Advantage plans, with ACOs, DCEs, and ACO REACH plans, individuals do not choose to be members in the plan. Still, they are attributed or “aligned” according to which primary care doctor they saw most often over a 2-year “lookback” period, or by the individual filling out a form to designate a particular practitioner as their primary care provider. “Alignment” enables  Medicare to pay the plan with capitation (per-member), as with Medicare Advantage, but  “aligned” members are still free to see any Medicare participating doctor, as with traditional  Medicare. ACOs, DCEs, and REACH plans are within Traditional Medicare and are expected to follow Medicare policies on covered benefits and medical necessity.  

Some of the capitation payment flowing to these plans goes to administration and profit. With  ACO REACH, one hundred percent of the first 25% in savings from reduced Medicare claims  stays with the REACH plan (not to CMS), who may share those savings with providers.  Payment from the REACH plan goes to participating primary care practices as payment in full,  and to preferred non-primary care specialists and institutional providers with varying degrees of  partial payment. Medicare reduces FFS fees in proportion to the degree of payment via the ACO,  putting pressure on doctors to earn the reduction back from their share of the ACO’s capitated  budget. Payment to providers via the ACO includes shared savings or losses and bonuses and  penalties tied to utilization, quality metrics, and cost of care.14 Thus, doctors have “skin in the  game” – if they reduce care, they stand to profit personally. 

Since DCE and ACO REACH plans don’t process Medicare FFS claims, they can’t use prior  authorizations or denial of claims payment to restrict care. They also cannot prevent self-referral  to any qualified Medicare provider. And since they don’t enroll subscribers, they can’t use  marketing as a cherry-picking tactic. 

How REACH ACOs game risk pools, upcode, and skimp on care 

However, REACH ACOs do control physician payment and incentives. They can accomplish the  same kind of risk pool gaming as with Medicare Advantage by using annual “wellness” visits to  capture more healthy people in their “aligned” beneficiary pool, and they can use financial  incentives to encourage their doctors and institutional providers to restrict care and avoid  referrals. The incentives inherent in capitated payment encourage doctors to avoid high risk/high-cost patients and populations.  

The addition of investor money enables DCE and REACH plans to offer higher pay to primary  care doctors up front to induce them to join, while glossing over the strategies they intend to use  to extract return on investment down the road. ACO REACH plans can withhold bonuses from doctors whose patients self-refer to non-participating ACO specialists or emergency rooms too  often, or they can drop such doctors from the plan to improve the ACO’s risk pool.15 They can  use financial incentives to push doctors and hospitals to up-code diagnoses as much as possible.  These perverse incentives are magnified by for-profit investors expecting return on investment.  In other words, they can use financial carrots and sticks to induce doctors to serve corporate  financial goals, even when they conflict with the best interests of their patients.  

Doctors evicted from ACO plans because they don’t adequately cater to corporate goals are  forced back to fee-for-service Traditional Medicare, where they are subject to the onerous data  reporting and staffing requirements imposed by the MACRA law and MIPS16, with escalating  fee reductions for failure to comply. This is a strong incentive for primary care practices to  submit to the corporate pressures of ACOs and ACO REACH plans.

There is already evidence that ACOs have engaged in risk pool gaming (cherry picking and  lemon dropping).17,18 And skilled nursing facilities participating in ACO plans have been shown  to arbitrarily deny or refuse care more often compared to before they joined the ACO19.  

Although the acronym REACH stands for “Realizing Equity, Access, and Community Health,”  payment via capitation undermines the goals suggested by the acronym. CMS apparently  believes these problems can be corrected with risk adjustment (which we know is gamed in  practice), restrictions on up-coding, and incentives added on to encourage serving underserved  populations and to discourage cherry picking and lemon dropping of patients. CMS believes  these counter-measures or “guardrails” will assure “equity.” 

Medicare Advantage plans have achieved profitability largely by gaming their risk pools, up coding, and blunt restrictions on care, and minimally if at all by improving care.20,21 ACO  REACH plans will use somewhat different gaming strategies than MA plans, but they are highly  motivated to achieve the same goals, encouraged by the impressive profits realized by MA plans and the ability to keep all of the first 25% in savings, and much beyond that. Indeed, the  Financial FAQs for contractors indicate that annual diagnostic upcoding of 3% is permitted.22 

Conclusion 

Payment with capitation requires much higher administrative cost for both payer and provider  compared to FFS in Traditional Medicare. Typical administrative costs for Medicare Advantage  and Medicaid Managed Care Organizations, including profits, have been in the 15-20% range, compared to 2% for Traditional Medicare.23,24 Thus, it does not appear possible for ACO  REACH plans to achieve profitability and also save money for taxpayers purely by improving  care without gaming, and the numbers don’t add up for the scheme to work the way CMS  imagines it should. As far as we can see, either 1) ACOs will find workarounds to game the CMS  “guardrails" and continue to cheat to achieve profitability (as Medicare Advantage plans have  done), or 2) The “guardrails” will work well enough so that ACOs will be unable to cheat  enough to be profitable and they will drop out of the program. Neither of these outcomes will  reduce health inequities or improve access or community health. 

All capitated entities, whether they are commercial insurance plans, Medicaid managed care  plans, Medicare Advantage plans, ACOs, ACO REACH plans, or capitated doctors and  hospitals, will have incentives to restrict care, cherry pick and lemon drop to improve their risk  pools, and upcode to game risk adjustment. Involvement of for-profit investors greatly amplifies these perverse incentives. Patients will be deprived of care, shareholders and executives will  profit, and taxpayers will subsidize the entire sad charade. This is true even with risk adjustment (which is always inaccurate in practice) and “guardrails,” because they cannot neutralize the incentives inherent to capitation to worsen economic and health disparities for the community as  a whole.

References: 

1 Roger Feldman, “The economics of provider payment reform: Are Accountable Care  Organizations the answer?,” Journal of Health Politics, Policy, and Law, 2015; 40(4): 745–760.  

2 Gilfillan R, Berwick DM. Medicare Advantage, Direct Contracting, and The Medicare ‘Money  Machine,’ Part 1: The Risk-Score Game. Health Affairs Blog. Sept. 29, 2021  10.1377/forefront.20210927.6239 

3 Health at a Glance 2019. OECD Indicators: Number of doctor consultations per person. Hospital discharge rates, 2000 and 2017.  

4 Deborah Korenstein et al., “Overuse of health care services in the United States: an  understudied problem,” Archives of Internal Med 2012 doi:10.1001/archinternmed.2011.772).  

5 Katz MH. “Overuse of health care: Where are the data?” 2012;172:178.  doi:10.1001/archinternmed.2011.1253)  

6 Chapter 4: Issues for risk adjustment in Medicare Advantage (June 2012 report). MedPAC June  1, 2012. 

7 June 2014 Report to the Congress: Medicare and the Health Care Delivery System. MedPAC  June 13, 2014. 

8 Meyers DJ, Belanger E, Joyce N, McHugh J, Rahman M, Mor V, “Analysis of drivers of  disenrollment and plan switching among Medicare Advantage beneficiaries,” JAMA Intern  Med. 2019;179(4):524–532. doi:10.1001/jamainternmed.2018.7639 

9 Brown, J., M. Duggan, I. Kuziemko, et al. 2011. How does risk selection respond to risk  adjustment? Evidence from the Medicare Advantage program. NBER working paper 16977.  Cambridge, MA: National Bureau of Economic Research. DOI 10.3386/w16977

10 Neuman P, Jacobson GA, “Medicare Advantage Checkup,” N Engl J Med 2018; 379:2163- 2172 DOI: 10.1056/NEJMhpr1804089 

11 Schulte F. Researcher: Medicare Advantage Plans Costing Billions More Than They Should.  Kaiser Health News. Nov. 11, 2021.  

12 Hiltzik M. The government lawsuit against Kaiser points to a massive fraud problem in  Medicare. Los Angeles Times. August 4, 2021. 

13 Kronick R. Projected Coding Intensity In Medicare Advantage Could Increase Medicare  Spending By $200 Billion Over Ten Years Health Affairs 36, no.2 (2017):320-327 doi:  10.1377/hlthaff.2016.0768

14 ACO Realizing Equity, Access, and Community Health (REACH) Model: Request for  Applications. CMS Feb. 24, 2022. https://innovation.cms.gov/media/document/aco-reach-rfa 

15 Medicare Payment Advisory Committee, Minutes of Public Meeting. April 17, 2022. Page  203, lines 15-18. https://www.medpac.gov/wp 

content/uploads/2021/10/April2022_MedPAC_meeting_transcript_SEC.pdf 

16 MACRA: MIPS and APMs. CMS web site. https://www.cms.gov/Medicare/Quality Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/MACRA-MIPS-and APMs/MACRA-MIPS-and-APMs 

17 Markovitz AA, Hollingsworth JM, Ayanian JZ et. al., “Performance in the Medicare Shared  Savings Program after accounting for nonrandom exit, Ann Intern Med 2019;171:27-36.  doi:10.7326/M18-2539 

18 Markovitz AA, Hollingsworth JM, Ayanian JZ et al., “Risk adjustment in Medicare ACO  program deters coding increases but may lead ACOs to drop high-risk beneficiaries,” Health  Affairs 38 (2) 2019:253-261. doi:10.1377/hlthaff.2018.05407 

19 Tyler D, McHugh JP, Shield RR et al. Challenges and Consequences of Reduced Skilled  Nursing Facility Lengths of Stay. Health Svcs Research 2018; 53(6):4848-4862.  https://doi.org/10.1111/1475-6773.12987 

20 Park S, Jung J. Burke RE et al. Trends in Use of Low-Value Care in Traditional Fee-for Service Medicare and Medicare Advantage. JAMA Network Open. 2021;4(3):e211762.  doi:10.1001/jamanetworkopen.2021.1762 

21 Figueroa JF, Wadhera RK, Frakt AB, et al. Quality of Care and Outcomes Among Medicare  Advantage vs Fee-for-Service Medicare Patients Hospitalized With Heart Failure. JAMA  Cardiol. Published online September 02, 2020. doi:10.1001/jamacardio.2020.3638 

22 ACO Realizing Equity, Access, and Community Health (REACH) Model Finance-Focused  Frequently Asked Questions. CMS.gov April 2022.  

https://innovation.cms.gov/media/document/aco-reach-finfaqs 

23 McDermott D, Stolyar, L, Hinton E, et. al. Health Insurer Financial Performance in 2020.  Kaiser Family Foundation May 3, 2021. https://www.kff.org/private-insurance/issue brief/health-insurer-financial-performance-in-2020/ 

24 Day B, Himmelstein DU, Broder M, Woolhandler S. The Affordable Care Act and Medical  Loss Ratios: No Impact in First Three Years. Int J Health Svcs 2015:45(1);127-131.  http://org.salsalabs.com/o/307/images/JOH45_1_DayArticle(1).pd