California ACO Withdraws From Medicare's Pioneer Program

By Christine Kern, contributing writer

California ACO’s departure raises questions about the Pioneer Program’s long-term sustainability.

Another Medicare Pioneer accountable care organization has left the program, renewing questions about its long-term sustainability. Sharp HealthCare, in its third-quarter financial statement, announced it will not continue to participate in the Pioneer ACO program for Performance Year 3 and that it had notified the CMS and in June.

Last summer, nine other Pioneers said they were leaving, several of them switching to Medicare's less financially risky Shared Savings Program. A total of only 22 Pioneer ACOs remain from the original 32.

Sharp's ACO, which covers 28,000 Medicare beneficiaries, is transitioning those patients to other care-management programs. The limited liability company that encapsulates the ACO will also be unwound.

The Pioneer ACO Model, developed and administered by the CMS Innovation Center, has been one of the government's most widely watched efforts to reform healthcare payment and delivery under the mantle of the ACA. The Innovation Center chose 32 organizations across the country to participate because they were deemed ahead of the curve on the infrastructure and experience required to coordinate care and manage financial risk.

It is also being closely studied since the successful deployment of Medicaid ACOs will be dependent upon looking to the Medicare ACO programs underway for guidance, while still need to be flexible in creating the new delivery systems, according to staff analysts from the Center for Strategic Health Studies. Under the ACO contracts, they could be held responsible financially by CMS if they don't meet quality benchmarks and reduce costs.

That risk turned out to be too high for Sharp, which concluded the program's payment methodology is flawed. “Because the Pioneer financial model is based on national financial trend factors that are not adjusted for specific conditions that an ACO is facing in a particular region (e.g., San Diego), the model was financially detrimental to Sharp ACO despite favorable underlying utilization and quality performance,” Sharp's disclosure states.

This is perhaps not unexpected as just over half of the 114 organizations that joined a Medicare accountable care effort in 2012 failed to reduce health spending below targets during their first 12 months trying to do so, CMS data shows.

Although Sharp's ACO essentially broke even in the first two performance years as it reduced readmission rates and utilization while improving its performance on quality metrics, the organization was in danger of having to pay back to Medicare this year. Two main factors came into play.

The CMS' financial benchmarking model for the Pioneer program is based on national measures and does not incorporate regional payment rates. For example, Pioneers don't receive higher or lower Medicare payments based on the area wage index, which the government calculates every year. From 2012 through 2014, San Diego's area wage index went up 8.2 percent – but the Pioneer methodology does not account for that, leaving systems without those enhanced regional payments.
Sharp officials felt they were negatively affected by the way the Pioneer program calculates Medicare disproportionate-share hospital payments to reflect the financial burden of large numbers of Medicaid patients. California hospitals have seen much higher rates of Medicaid patients thanks to expanded eligibility under the Affordable Care Act.

With Sharp's exit, the attention shifts to the 22 Pioneers still enrolled. Unless the CMS changes its benchmarking, it is likely to see more dropouts in the future.

In the first nine months of Sharp's fiscal year, ended June 30, the system's operating surplus increased 2.2 percent to $178.4 million. Sharp's total surplus, which factors in investment income, rose more than 25 percent to $264.9 million. Revenue inched upward to about $1.99 billion, giving Sharp a 9 percent operating margin—the same as the nine-month period in 2013.