Assessing an ACO Prototype — Medicare’s Physician Group Practice Demonstration | Health Policy and Reform

by John K. Iglehart

One of the few major provisions of the Affordable Care Act (ACA) with solid bipartisan support establishes a new delivery model: the accountable care organization (ACO). Congress directed the Department of Health and Human Services (DHHS) to develop an ACO program to improve the quality of care provided to Medicare beneficiaries and reduce its costs while retaining fee-for-service payment. Under this program, medical groups would have to take responsibility for achieving these goals and would share in any savings derived by Medicare.

Despite the burst of interest in ACOs, little attention has been paid to the results of a demonstration project sponsored by the Centers for Medicare and Medicaid Services (CMS) that was the model for the reform law’s ACO provisions. In the Medicare Physician Group Practice (PGP) demonstration, the CMS contracted with 10 large multispecialty groups with diverse organizational structures, including free-standing physician groups, academic faculty practices, integrated delivery systems, and a network of small physician practices.¹

As a share of total Medicare spending, fee-for-service expenditures for physician services have been relatively stable (13% of $491 billion in 2009). However, this payment model has been under attack because of its inherent incentive for increasing the quantity, but not necessarily the quality, of physician-delivered care. But policymakers vividly remember the backlash against managed care, whose capitation payments were seen as an incentive to stint on care, so with no new alternative to fee for service in the offing, Medicare’s physician-payment policy has remained essentially static.²

In 2000, Congress tasked the DHHS with testing incentive-based payment methods for physicians, directing Medicare to encourage care coordination and investment in processes for more efficient service delivery and to reward physicians for improving health care outcomes. In response, the CMS designed the PGP project to examine whether care management initiatives could generate cost savings by reducing avoidable hospital admissions, readmissions, and emergency department visits, while improving quality.¹
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