This report originally appeared in the May 2011 issue of DOTmed Business News

By Keith C. Kosel

Nine years ago, the Centers for Medicare and Medicaid Services embarked on a journey to test a new payment methodology aimed at improving coordination of care, incenting higher quality of care and enhancing the efficient use of resources. This initiative, the Physician Group Practice (PGP) Demonstration, started in 2002 with completion of the design framework that detailed recommendations for how to implement and evaluate the PGP demonstration, which eventually ran from 2005 to 2010. Now, nearly a decade later, this demonstration is about to form the basis for the proposed rule behind Medicare’s Shared Savings Program, which arose as part of last year’s Patient Protection and Affordable Care Act and has caused a ground swell of interest in forming a new type of health care entity called an accountable care organization.

The Shared Savings Program begins Jan. 1, 2012 and incents groups of health care providers (i.e., physician groups, hospitals, ancillary providers, etc.) that normally wouldn’t work together to join forces by becoming an ACO, to manage the care of a defined population of Medicare fee-for-service beneficiaries. In return, organizations successful in both meeting certain quality targets and in reducing health care expenditures for Medicare beneficiaries under their care are eligible to share in a portion of the savings. While the intent of the Shared Savings program is laudable, the available research from the PGP demonstration raises many questions about the likely success of this experiment.



Only five of the 10 PGP demonstration sites were able to achieve their cost-savings targets and hence share in savings by the end of the third year of the demonstration. This is especially troubling given that the organizations that participated were large, well-established provider entities (at least 200 physicians and at least 15,000 Medicare beneficiaries) competitively selected by CMS to ensure they had the administrative, clinical and IT capabilities necessary to respond to the demonstration’s new incentives.

Many of the provider organizations contemplating becoming ACOs in order to participate in the Shared Savings Program are not nearly as well-positioned from a size or experience perspective as the initial demonstration participants were. What does that say about their prospects for success?

The data from the PGP demonstration also suggests differences in regional cost trends played a substantial role in determining which organizations did and did not receive shared savings. The four participants that received shared savings during the first two years of the demonstration had substantially higher levels of health care expenditures than the six participants that did not receive shared savings. Health care practices in relatively inexpensive regions of the country may find it more difficult to reduce health care expenditures in comparison to their counterparts in more expensive regions. This means that where you practice is as important as how you practice.

Finally, the PGP demonstration provided little in the way of evidence around how best to handle the issue of patient attribution and the financial risk that poses for participating providers. In the demonstration, Medicare beneficiaries were “assigned” to demonstration participants using a retrospective attribution model based on the patient’s prior usage of primary care physicians. Patients were unaware of their assignment to a demonstration site and retained freedom of provider choice. With no incentives to choose high-quality or efficient providers, or to restrain their use of services, demonstration participants were faced with managing (the cost of) a patient population over which they had minimal control.

While the PGP demonstration proved successful in achieving various ambulatory and chronic care quality targets, the broader implications of the demonstration, particularly in the areas of achieving cost-savings and sharing savings with participating health care organizations, are less clear. Since the participants in the demonstration faced no financial risk if they missed their targets, it begs the question of whether the financial incentives as currently envisioned in the CMS ACO model will be strong enough to change providers’ behavior. If we have learned anything from the PGP demonstration, it is that we have much more to learn about how to simultaneously achieve the overarching goals of access, quality and cost in today’s health care system.
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Keith C. Kosel is senior director, Research, Social Sciences Practices Group at VHA Inc. Prior to coming to VHA he designed and lead disease management programs for Ford, General Motors and Daimler-Chrysler at Blue Cross Blue Shield of Michigan. He holds a PhD in medical sciences from the University of Iowa College of Medicine, a MHSA in medical care organization from the University of Michigan and a MBA in finance from the University of Detroit-Mercy.