Health plans are typically paid an administrative fee for their ASO clients, and do not see direct profits from cost reductions. Some have even suggested that rising healthcare costs are good for health plans’ top line ASO revenue (“medical trend is your friend”). They do not have “skin in the game” for total cost of care for their ASO customers.
But more fundamentally, employers typically view end of year shared savings payments as unexpected additional “non-claims” expenses. This lack of understanding and alignment is worsened when provider contracts are negotiated by a “host plan” contracted with a national employer’s “home plan.” Attempts to address this misalignment by health plan contracting staff can lead to ACO contract terms like annual full rebasing (“naked ratchet”) and caps on total savings that are non-sustainable and inequitable to provider partners. For these reasons, many health plans give up on employers and promote value-based contracts for their fully-insured lives, but explicitly carve out ASO or host plan lives from the arrangements.
The focus of employers and health plans on network “discounts” to list prices, versus management of total cost of care, leads to inflated chargemaster prices (and inflated discounts), and raw exercise of market power with pernicious effects. The largest and “must-have” providers demand higher absolute prices regardless of quality, while the smaller and independent practices face pressure to accept substantially lower payment, which encourages provider consolidation, and a vicious cycle of increasing costs.
ACO contracts are constructed by determining which patients are included in a provider’s risk pool, establishing a benchmark for those patients, and attributing the subsequent gains (or losses) to the ACO. To establish actuarial reliability, most ACO contracts require a minimum number of lives in the risk pool (e.g., 5,000). Even the largest national employers will constitute a small part of a health plan’s lives, and an ACO contract with any given provider group would include lives from many different self-insured employers. If an ACO were successful in reducing costs for its total pool of lives, how should the savings be charged back to each employer? What if costs actually went up for the small number of their employees that were in that ACO?
Some employers have experimented with direct value-based contracting, but the need for sufficient overlap has meant that their only option is to contract with the local health systems, while it is often the smaller independent practices that offer higher value care, and are completely aligned in seeking to reduce expensive hospitalizations and specialist procedures.
Payment Mechanism and Operations
ACO arrangements typically involve a baseline (lookback) period for setting historical benchmarks, a performance year, and after claims run-out and actuarial analysis, a shared savings payment in the summer or fall of the subsequent year. For employers, this would involve a large, irregular payment that occurs months after the close of the year, for employees who may have left the company over a year ago. In some cases, the entire ASO contract may have been renegotiated or terminated before the payment is due.
Some plans have tried to convert these lump sum value-based payments into a per-member-per-month fee in subsequent periods to make them more predictable (or more opaque) for their ASO clients. But this exacerbates the member churn problem for employers, and leads to even long lags (and weaker feedback loops) between performance and payment for providers.
A Path Forward
Employers are eager to participate in value-based arrangements, but structural problems limit the ability to include ASO lives in their ACO contracts. When the plans do group them together, providers chafe at unfavorable and unsustainable contract terms without understanding the roots of the problem.
Employers must move away from “volume discounts” toward “value.” They should restrain from demanding customized value contracts and be willing to pool their lives with other employers in more standardized and generalizable ACO contracts modelled after the Medicare shared savings programs. And most critically, they must act with urgency and with a long-term horizon.