The Newsletter of the Massachusetts-Rhode Island Chapter Volume XXXIX • Number 5The Newsletter of Newsletter of Newsletter the of the of Massachusetts-Rhode Island Chapter Volume XXXIX • Number 5

MASS MEDIAENTERPRISE PERFORMANCE MANAGEMENT

• AcceleratingEffortstoMonitor andManagePerformance• EnterprisePerformance ManagementProgram

• 3StepstoAnalyzeYour Organization’sACOOpportunity

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Beacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCBeacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCMarcam Associates • MedAptus, Inc. • Meridian Leasing Corporation • NCO Healthcare ServicesMarcam Associates • MedAptus, Inc. • Meridian Leasing Corporation • NCO Healthcare Services

PowerHealth OnDemand • ProMedical, LLC • PV Kent & Associates • WiPowerHealth OnDemand • ProMedical, LLC • PV Kent & Associates • Withum Smith + Brown, CPAsthum Smith + Brown, CPAs

Ropes & Gray LRopes & Gray LLP • The Outsource GroupLP • The Outsource Group

SILVERSILVERArcadia SolutionsArcadia Solutions • ClaimAssist • CliftonLarsonAllen, LLP • Craneware InSight • • ClaimAssist • CliftonLarsonAllen, LLP • Craneware InSight • Dell SeDell Servicesrvices

Gragil Associates, Inc. • Healthcare Financial, Inc. • Health Management Associates, Inc.Gragil Associates, Inc. • Healthcare Financial, Inc. • Health Management Associates, Inc.Information Builders • KPMG, LLP • MDS (Medical Data Systems, Inc.) • Medical Bureau/ROI Information Builders • KPMG, LLP • MDS (Medical Data Systems, Inc.) • Medical Bureau/ROI

Phillips DiPisa • Public Financial Management • TriNPhillips DiPisa • Public Financial Management • TriNet Healthcare Consultants, Inc. • Ziegler Capital Marketset Healthcare Consultants, Inc. • Ziegler Capital Markets

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Beacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCBeacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLC

THE MASSACHUSETTS - RHODE ISLAND CHAPTER OF HFMAGRATEFULLY ACKNOWLEDGES THE 2011-2012 CORPORATE SPONSORS

PLATINUMPLATINUMAmerican Express • Bank of American Express • Bank of America Merrill Lynch • Beecher Carlson HealthcareAmerica Merrill Lynch • Beecher Carlson HealthcareBESLER Consulting • Deloitte • Dubraski & Associates Insurance Services, LLCBESLER Consulting • Deloitte • Dubraski & Associates Insurance Services, LLC

Feeley & Driscoll P.C. • HBCS • MPV/SearchAmerica/Experian • PricewaterhouseCoopers LLPFeeley & Driscoll P.C. • HBCS • MPV/SearchAmerica/Experian • PricewaterhouseCoopers LLP Siemens Medica Siemens Medical Solutions, USA, Inc. • TD Bank, N.A.l Solutions, USA, Inc. • TD Bank, N.A. Siemens Medica Siemens Medical Solutions, USA, Inc. • TD Bank, N.A.l Solutions, USA, Inc. • TD Bank, N.A.

GOLDGOLDAccelerated ReceivablAccelerated Receivables Management Solutions, LLC • es Management Solutions, LLC • EmdeonEmdeon

Ropes & Gray LRopes & Gray LLP • The Outsource GroupLP • The Outsource Group

THETHE MASSACHUSETTS MASSACHUSETTS - - RHODE RHODE ISLAND ISLAND CHAPTER CHAPTER OF OF CHAPTER CHAPTER OF CHAPTER CHAPTER HFMA HFMAGRATEFULLYGRATEFULLY ACKNOWLEDGES ACKNOWLEDGES THE THE 2011-2012 2011-2012 CORPORATE CORPORATE SPONSORS SPONSORS

2 Mass Media

AMEX 11

Arcadia Solutions 20

ARMS, LLC 31

Bank of America Merrill Lynch 7

Beecher Carlson Healthcare 14

BESLER Consulting 8

ClaimAssist 20

Deloitte 6

Dubraski & Associates Ins. Serv., LLC 18

Emdeon 21

Feeley & Driscoll, P.C. 19

HBCS 10

Healthcare Financial, Inc. 13

InformationBuilders 31

Medical Present Value (MPV) 23

PricewaterhouseCoopers LLP 16

Ropes & Gray, LLP 13

Siemens Medical Solutions, USA, Inc. 17

TD Bank 12

The Outsource Group 21

TriNet Healthcare Consultants, Inc. 22

Ziegler Capital Markets 22

On the Cover

Enterprise Performance Management Committee: (Left to Right) Rosemary Rotty, UMass Memorial Health Care, Inc. Roger Price, Siemens Health-Care, Krista Katsapetses, Solucient, Jim Barry, McKesson, Phil Moriarty, UMass Memorial Health Care, Anne Farmer, TriNet Healthcare Consultants, Karen Hart, Winchester Hospital, Steve Saudek, Kaufman Hall

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I’d like to start by welcoming the new HFMA Massachusetts-Rhode Island Chap-ter President, Roberta Zysman! I am writing my final letter to the MA-RI Chapter as its President while in attendance at ANI in Las Vegas. I am fortunate indeed to be able to attend this annual Conference. The keynote speakers have been inspirational. HFMA’s current Chair, Ralph Lawson, opened with a stirring speech outlining the theme for his tenure as 2013 HFMA Chair of “Leadership Matters.” Captain ‘Sully’ Sullenberger mesmerized the attendees with a presentation on leadership and the lessons learned from his years of flying including, most

notably, his remarkable landing of a US Airways flight in the Hudson River saving 155 lives. He stressed the value of teamwork noting that while he has received the lion’s share of the notoriety after the event, its amazingly suc-cessful outcome resulted from all members of the flight crew performing optimally under tremendous pressure and time constraints. David Walker, former Comptroller of United States, was passionate in his opinions about Wash-ington’s dysfunction and the deficit. He also proposed solutions to our financial issues. Much of the rest of the talk at the Conference centers on the pending Supreme Court ruling on the Affordable Care Act as well as the seemingly inexorable transition to both public and private value -based purchasing models of reimbursement and how organiza-tions are preparing for it.

Local leadership was certainly in abundance at our Chapter’s Enterprise Performance Management meeting held on February 17th, as well as at the Region One Conference. Co-chairs, Steve Saudek from Kaufman Hall and Roger Price from Siemens Healthcare ably assisted by Rose Rotty from UMMC, Board liaison, organized a memorable En-terprise Performance Management program titled: “Transparency, Turmoil, and Transitions!” The seminars focused on how different healthcare organizations measure success amid a constantly-changing healthcare business land-scape. With an able assist from our Region One executive, Marvin Berkowitz, the Region One Conference was again a resounding success. Ken Kaufman from Kaufman Hall delivered a memorable keynote. Greg Adams, 2012 HFMA Chair, also made the trip to Connecticut to personally address the Region One attendees.

Our annual Awards Banquet, which was held this year on May 24th, has truly become a signature event for the MA-RI Chapter. Many thanks to Garrett Gillespie from CVS/Caremark and Roger Boucher from Bank of America/ Mer-rill Lynch for organizing yet another memorable evening. Congratulations to all of the award winners.

I would also like to formally thank all the volunteers who have spent countless hours planning the value-added programs that have become the hallmark of MA-RI HFMA. Without your commitment of time, energy and exper-tise, MA-RI HFMA could not continue its core mission of providing timely education of the highest quality for the healthcare financial managers in our geography.

I have been honored to serve this Chapter as its President. I thank the Board of Directors and CAMI who have always been fully-engaged in the overall success of the Chapter. It has been a joy to work with all of them. I also thank my employer, Cape Cod Healthcare, for the support that allowed me to pursue the leadership track in the Chapter.

At this year’s Annual Meeting, I picked up awards on behalf of the Chapter for membership retention and for increases in educational hours. When I reflect on my tenure as President, I will not only think of these accomplish-ments, but also of the many lasting friendships, both old and new, that I have made through my association with the Chapter. These truly are the real rewards for participating in HFMA.

Best Regards,

Jeffrey Dykens, CPAChapter President

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2 0 1 1 - 2 0 1 2

OFFICERS & DIRECTORS

PresidentJeffrey Dykens, CPA

President ElectRoberta Zysman

SecretaryRoger Boucher

TreasurerDeborah Wilson, CPA

Immediate Past PresidentMichael Connelly, CPA

DirectorsKaren Bowden, RHIA

Paul Breslin David Dillon, FHFMA, CPA

Garrett Gillespie Linda Guerra, MBA

Timothy Hogan, FHFMA James Kelly, CPAJohn Minichiello

Gerald O’Neill, FHFMA Beth O’Toole

John Reardon, FHFMARosemary Rotty, FHFMA

Richard Wichmann

Ex OfficioAnne Farmer

Marc Proto, FHFMA, MBAJeanne Schuster

MASS MEDIA is a publication of the Massachusetts - Rhode Island Chapter of the Healthcare Financial Management Association devoted to keeping membership current on national & local healthcare financial topics. Opinions and views expressed in the articles and features of the publication are those of the author(s) and do not necessarily reflect the position of the Massachusetts-Rhode Island Chapter or The National Chapter of Healthcare Financial Management Association. Articles submitted are subject to editorial changes made by the committee. Article submissions, comments and requests for fur-ther information and advertising rates may be forwarded to: Anne Farmer and Jean Schuster, HFMA Massachusetts-Rhode Island Chapter, 411 Waverley Oaks Road, Suite 331B, Waltham, MA 02452, admin@ma-ri-hfma.org

MASS MEDIAHEALTHCARE FINANCIAL MANAGEMENT ASSOCIATION

ContentsVolume XXXIX Number 5

N e w s l e t t e r C o m m i t t e e

Jeanne Schuster, Executive Director, Ernst & Young, LLPRosemary Rotty, FHFMA, Director of Service Line Finance, Umass Memorial Health Care, Inc.

President’sMessageI by: Jeff DykensWhen I reflect on my tenure as President, I will not only think of these accomplishments, but also of the many lasting friendships, both old and new, that I have made

through my association with the Chapter. These truly are the real rewards for partici-pating in HFMA.

EnterprisePerformanceManagementProgram“Transparency,TurmoilandTransitions!MeasuringSuccessUnderChangingBusinessModels”

The EPM program was a great success, attracting over 160 attendees from across the region.

AcceleratingEffortstoMonitorandManagePerformanceI by: Kenneth Kaufman Jason Sussman Debra Miller To succeed under the new value-focused business model, hospitals and health systems will need high-quality tools and technology that support monitoring and management of performance under chang-ing financial arrangements.

3StepstoAnalyzeYourOrganization’sACOOpportunitiesI by: John Harris Idette Elizondo Molly JohnsonDeciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hospital or health system’s market, the competitive landscape, and the organization’s position on the shift toward accountable care. It also requires a robust financial model.

NewMembersNew Massachusetts-Rhode Island Chapter Members April 1, 2012 - May 31, 2012

3

30

511

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The annual HFMA Massachusetts-Rhode Island Chapter hosted its Enterprise Performance Management meeting on Friday February 17, 2012 in Westborough, Massachusetts.

Enterprise Performance Management Program

“Transparency, Turmoil and Transitions! Measuring Success Under

Changing Business Models”February 17, 2012

By:Rose Rotty

FHFMA, UMass Memorial Health Care, Inc.

(continued on page 28)

The EPM program was a great success, attracting over 160 attendees from across the region.

This year’s program, “Transparency, Turmoil and Transitions- Measuring Success under Changing Business Models,” focused on the ongoing payment models that are being discussed by providers and

payers such as ACO’s and Bundled payments, and the change in the annual budget process with Rolling Forecasts and Metrics. Other topics included Provider side quality and

modeling, and the Cape Cod Health system financial turnaround.

The morning session was kicked off by a presentation from Bob Kelley, Senior Vice President, Center for Healthcare Analytics, Thomson Reuters who provided an overview of the healthcare industry challenges and the appropriate solutions in the use of decision support applications. Michael K. Lauf, President and Chief Executive Officer of Cape Cod Healthcare discussed the steps that their organization put into place to improve the financial and operational turnaround. Michael was followed by Kathyrn Burke and John Hickman from Mount Auburn Hospital whose

Michael K. Lauf discusses the steps taken that led to Cape Cod Healthcare being named one of the top health systems in the country. Michael K.Michael K.Michael Lauf discusses Lauf discusses Lauf the steps the steps the taken that led that led that to led to led Cape Cod Cape Cod Cape Healthcare Cod Healthcare Cod

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To succeed under the new value-focused business model, hospitals and health systems will need high-quality tools and technology that support monitoring and management of performance under changing financial arrangements.

Hospital and health system executives should be focusing attention on positioning their organizations for success under a fundamentally different business model, with a payment system altered by healthcare reform and evolution of the insurance market. Reform legislation notwithstanding, provider payment based on best-practice levels of value—defined as desired patient health outcomes per dollar spent—has received extensive attention.

Bundled payments across episodes of care—with hospi-tals, physicians, home health agencies, rehab facilities, nursing facilities, and potentially other organizations sharing one payment—have been raised as the key mechanism to achieve such value. Major reductions in hospital readmission rates will be required of acute care providers, under any payment-revision scenario, and quality incentive payments are likely to be used to spur these and other improvements.

The quality and cost dimensions of payment based on value shift the focus of healthcare delivery organiza-tions from a service to an outcome orientation. Hospi-

(continued on page 7)

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ENTERPRISEPERFORMANCEMANAGEMENT

Accelerating Efforts to Monitor and Manage Performance

By: Kenneth Kaufman, Jason Sussman, and Debra Miller

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(continued on page 8)

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Issue 5 7

tal leaders need to thoroughly understand the require-ments for success under such a business model and organize to work with physicians, patients, payers, and other constituents in very different ways.

Requirements for SuccessThe strategic/operating requirements for hospital success under a new business model include:

• Highly integrated arrangements with physicians(hospitals and physicians aligned both clinically and financially)

• SophisticatedITsystems

• Extensive care management infrastructure andcapabilities

• Efficientservicedistribution

• Commandandcontrolofthecaredeliveryprocessfrom start to finish

In the clinical-IT domain, an electronic health record (EHR) must link hospitals, physicians, and other provid-

ers to ensure the presence of the information backbone critical to effective preventive care and disease manage-ment programs. The EHR will provide vital information as care systems are reengineered to maximize hospital performance.

Business requirements for success under the new model will focus on accountability to governmental and commercial payers and patients alike for deliver-ing best-practice levels of care. Best practice will be defined and measured through specific financial, qual-ity, and outcomes indicators. During the next few years, the Centers for Medicare and Medicaid Services and commercial payers will be testing numerous payment mechanisms and metrics to determine the most effec-tive means of getting high value for each dollar spent on patient care.

Finally, hospitals and health systems will need power-ful, practical, and effective IT systems and technology to integrate data from multiple sources. Such systems will be able to integrate financial planning, accounting, budgeting, cost management, operations control, and

ENTERPRISEPERFORMANCEMANAGEMENT

(continued from page 6)

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8 Mass Media

management reporting data and functions, as well as clinical data from the EHR.

Activities RequiredTo achieve value and accountability, provider organi-zations must be able to plan, monitor, and report on the outcomes and costs of care delivery. The systems that healthcare organizations need for such budgeting and operations control must be both nimble and flex-ible, enabling management to make necessary decisions related to the best level of operational effectiveness, find inefficiencies quickly, and optimize value-based payments as the payment system evolves.

Revenue management. Under a bundled-payment arrangement, hospitals are likely to be the party “orchestrating” the apportionment of payments, chiefly due to their ability to organize this effort. Information on how such payments are to be divided has not yet been clearly defined. But, whether based upon net revenue, gross revenue, or cost plus markup,

revenue and expenses will need to be closely projected, tracked, and monitored to ensure correct apportion-ing of payments to the hospital, physicians, and other participating providers.

Cost management. An entirely new and different look at costs will be required to complete the value equation under the new business model. Hospitals and health systems must be able to determine if they are delivering services at the lowest possible cost, in accordance with target benchmarks. Those with the technology and systems to accomplish integrated cost management will be well positioned to meet these challenges. Such hospitals and health systems will closely manage the budgeting, tracking, and reporting of expenses related to services in all organizational entities.

Use of human capital. Because labor costs typically comprise more than 50 percent of operating expenses, hospitals will be required to make highly effective and efficient use of staff under the new business model.

ENTERPRISEPERFORMANCEMANAGEMENT

(continued on page 9)

(continued from page 7)

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Through effective productivity management, success-ful hospitals will ensure the right level of staffing to meet quality, outcomes, and cost benchmark targets—not too much and not too little. Managers must be able to “identify, diagnose, and treat” variances in budget-to-actual performance.

Physician revenue/compensation modeling and budgeting. As hospitals invest in physician strategies, the management of revenue, productivity, and costs related to integrated physician practices and employed physicians will be mandatory. Alignment of physician and hospital economic incentives is key to reducing costs and improving value.

Management reporting. Senior executives, trustees, physicians, and other clinicians should both receive and understand comprehensive data and analysis

related to organizational performance. The uninformed cannot accomplish the changes that will be required for success under the new business model.

For both planning and monitoring purposes, execu-tives will need to be able to dissect performance by key business segments, analyzing departmental and hospi-talwide “roll up” reports (see Figure 1). Sophisticated systems and tools that routinely generate such reports and analyses—and push them out to key managers—will enable high-quality decision making and give hospitals and health systems the “proof of performance” required for accountability.

Management ExpertiseTo deliver higher-quality care—with better outcomes, at lower costs—transformational change will be

(continued on page 10)

Issue 5 9

ENTERPRISEPERFORMANCEMANAGEMENT

(continued from page 8)

Figure 1. Summary Income Statement - Source: Budget Advisor®, Kaufman, Hall & Associates, Inc.

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required of hospitals and health systems. IT systems that span the spectrum of clinical and non-clinical functions will facilitate such change (see Figure 2). But IT won’t provide the whole solution. Management expertise is required. Senior hospital leaders have the responsibility to “raise the financial IQ” of all managers, specifically the knowledge of what drives organizational performance. ❑

Partnering with hospitals to enhance their cash flow for more than 25 years, HBCS continually delivers the results that hospital executives and business offices require. HBCS provides the right people, the right processes, and the most comprehensive account follow-up and patient contact center technology in the industry. Our customers know firsthand that HBCS delivers a positive impact to their bottom line.

For more information about HBSC please contact:

Kathleen Maher, Regional Account Executive e-mail: maherkj@hbcs.orgPhone: 302-552-2000

10 Mass Media

ENTERPRISEPERFORMANCEMANAGEMENT

Kenneth Kaufman is CEO, Kaufman, Hall & Associ-ates, Inc., Skokie, Ill. (kkaufman@kaufmanhall.com).

Jason Sussman is a managing director, Kaufman, Hall & Associates, Inc., and a member of HFMA’s First Illinois chapter (jsussman@kaufmanhall.com).

Debra Miller is vice president, Kaufman, Hall & Associates, Inc., and a member of HFMA’s Wisconsin chapter (dmiller@kaufmanhall.com).

About the Author

Figure 2. IT System Requirements - Source: Kaufman, Hall & Associates, Inc.

(continued from page 9)

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Deciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hospital or health system’s market, the competitive landscape, and the organization’s position on the shift toward accountable care. It also requires a robust financial model.

This analysis builds on an article published in the Janu-ary 2012 issue of hfm, “A Better Outlook for ACOs?,” which considers the key strategic questions surround-

ing whether to establish an accountable care organiza-tion (ACO). Here, emphasis is placed on understand-ing the size of the financial opportunity and implica-tions on the hospital and physician partners using a baseline financial model. Working with this baseline model, the analysis illustrates the importance of hitting the required minimum savings rate (MSR) and quality reporting targets.

To understand this opportunity, we consider the finan-cial impact in three steps:

(continued on page 12)

Issue 5 11

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3 Steps to Analyze YourOrganization’s ACO Opportunity

By:John Harris

Idette ElizondoMolly Johnson

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•Step1:AssesstheImpactofCMS’scalculationofACO shared savings

•Step2:AssessfactorsdeterminingtheACOreve-nue statement

•Step3:Assessthenetimpactonhospitalrevenuestatement

(continued on page 13)

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ENTERPRISEPERFORMANCEMANAGEMENT

(continued from page 11)

hfma.org JANUARY 2012 1

WEB EXTRA

3 steps to analyze your organization’s ACO opportunityDeciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hos-

pital or health system’s market, the competitive landscape, and the organization’s

position on the shift toward accountable care. It also requires a robust financial

model.

This analysis builds on an article published in the January 2012 issue of hfm, “A Better

Outlook for ACOs?,” which considers the key strategic questions surrounding

whether to establish an accountable care organization (ACO). Here, emphasis is

placed on understanding the size of the financial opportunity and implications on

the hospital and physician partners using a baseline financial model. Working with

this baseline model, the analysis illustrates the importance of hitting the required

minimum savings rate (MSR) and quality reporting targets.

To understand this opportunity, we consider the financial impact in three steps:

> Step 1: Assess the Impact of CMS’s calculation of ACO shared savings

> Step 2: Assess factors determining the ACO revenue statement

> Step 3: Assess the net impact on hospital revenue statement

John HarrisIdette ElizondoMolly Johnson

THREE-STEP ACO IMPACT ASSESSMENT

CMS Calculation of ACO Shared Savings

ACO Revenue Statement

Net Impact on Hospital Revenue Statement

Revenue “Revenue” = Medicare benchmark spending for

ACO population

Shared savings Patient servicesplus

share of ACO surplus/deficit

Expense “Expense” = Total spending for ACO

population (hospital/physician/other)

ACO operations Hospital operations

Surplus/Deficit Shared savings ACO surplus/deficit

Hospital surplus/deficit

PhysiciansCMS

$ $

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Baseline ModelFor our baseline model, we assumed that a 30,000-member ACO, starting in July 2012 has opted to participate in Track 1 to avoid taking on risk for the first agreement period. We also assumed that the shared savings generated by the ACO are to be divided 50/50 between the physician participants and a hospital part-ner, after ACO operating costs have been covered. This approach allowed us to assess the impact on the hospital in the equation. Note, however, that a physi-cian-only ACO could operate without shared savings accruing to the hospital.

We further assumed that inpatient utilization could be decreased by 10 percent over the contract period and that the ACO would achieve strong quality reporting (90 percent) and meet required benchmark perfor-mance on most measures (75 percent). Finally, we created a breakeven scenario for the hospital, in which any losses in utilization would be offset by a combi-

nation of gains in the share of ACO admissions that occur at the sponsoring hospital and shared savings from the ACO.

Step 1: Assess the Impact of CMS’s Calculation Of ACO Shared SavingsThe Center for Medicare & Medicaid Services (CMS) benefits when an ACO effectively reduces its annual expenditures relative to past expenditures. If an ACO does not meet its MSR, CMS retains all of the savings. However, if the ACO meets its MSR, CMS shares some of the savings with the ACO. In our baseline model, we assumed that the ACO surpasses its MSR, prompt-ing CMS to share savings. The following discussion outlines each step in the shared savings calculation.

Revenue. To estimate benchmark spending, we multi-plied the average annual Medicare payment per benefi-ciary by the number of members in the ACO. This

(continued on page 14)

Issue 5 13

ENTERPRISEPERFORMANCEMANAGEMENT

(continued from page 12)

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calculation points to benchmark spending of over $250 million annually (see exhibit above).

Expense. Next, we determined how much CMS spends on our 30,000 members during a performance year. Expenses for CMS will be less if the ACO can effectively reduce utilization. The likeliest way for an ACO to generate savings is through reduced inpa-tient utilization as a result of increased care coordina-

tion. Other factors, such as decreases in ancillary and specialist visits and increases in primary care visits, are important, but may be offset by increases in some of these services, possibly creating a net neutral effect. Therefore, for our baseline case, we estimated CMS would pay about $10 million less on hospital expenses each year, assuming a benchmark of 10,380 inpa-tient admissions among the ACO’s members and a 10

(continued on page 15)

(continued from page 13)

14 Mass Media

ENTERPRISEPERFORMANCEMANAGEMENT

2 JANUARY 2012 healthcare financial management

Baseline ModelFor our baseline model, we assumed that a

30,000-member ACO, starting in July 2012 has

opted to participate in Track 1 to avoid taking on risk

for the first agreement period. We also assumed that

the shared savings generated by the ACO are to be

divided 50/50 between the physician participants

and a hospital partner, after ACO operating costs

have been covered. This approach allowed us to as-

sess the impact on the hospital in the equation. Note,

however, that a physician-only ACO could operate

without shared savings accruing to the hospital.

We further assumed that inpatient utilization could be

decreased by 10 percent over the contract period and

that the ACO would achieve strong quality report-

ing (90 percent) and meet required benchmark

performance on most measures (75 percent). Finally,

we created a breakeven scenario for the hospital,

in which any losses in utilization would be offset by a

combination of gains in the share of ACO admissions

that occur at the sponsoring hospital and shared

savings from the ACO.

Step 1: Assess the Impact of CMS’s Calculation Of ACO Shared Savings The Center for Medicare & Medicaid Services

(CMS) benefits when an ACO effectively reduces

its annual expenditures relative to past expenditures.

If an ACO does not meet its MSR, CMS retains all

of the savings. However, if the ACO meets its MSR,

CMS shares some of the savings with the ACO. In our

baseline model, we assumed that the ACO surpasses

its MSR, prompting CMS to share savings. The follow-

ing discussion outlines each step in the shared savings

calculation.

ACO BENCHMARK EXPENDITURES

2012* 2013 2014 2015 2012-2015

Average annual Medicare payment per beneficiary

$8,400 $8,600 $8,900 $9,200

ACO Members 30,000 30,000 30,000 30,000

Benchmark expenditures (millions) $126 $259 $267 $275 $927

* Amount for 2012 represents only six months of benchmark expenditures, given the ACO’s July 2012 start.

Revenue. To estimate benchmark spending, we

multiplied the average annual Medicare payment per

beneficiary by the number of members in the ACO.

This calculation points to benchmark spending of over

$250 million annually (see exhibit below).

Expense. Next, we determined how much CMS

spends on our 30,000 members during a perfor-

mance year. Expenses for CMS will be less if the ACO

can effectively reduce utilization. The likeliest way

for an ACO to generate savings is through reduced

inpatient utilization as a result of increased care coor-

dination. Other factors, such as decreases in ancillary

and specialist visits and increases in primary care

visits, are important, but may be offset by increases in

some of these services, possibly creating a net neutral

effect. Therefore, for our baseline case, we estimated

CMS would pay about $10 million less on hospital

expenses each year, assuming a benchmark of 10,380

inpatient admissions among the ACO’s members

and a 10 percent reduction in inpatient admissions

relative to the benchmark. Based on this estimate, for

example, payments for inpatient care would decrease

from about $113 million to roughly $102 million in

2014 (see exhibit at top of page 3).

Surplus/deficit. By reducing payments for inpatient

admissions, a surplus is created. Under our baseline

scenario, savings generated by the ACO total $33.8

million over the 3.5-year contract period (see upper

exhibit at bottom of page 3).

The ACO starts in July 2012; 2012 therefore repre-

sents just six months of savings generated. Therefore,

for the remainder of this analysis, the ACO’s results

for 2012 will be summed with those of 2013, so that

WEB EXTRA

MM ISSUE 5.cs5.5.indd 14 7/10/12 2:01 PM

Issue 5

percent reduction in inpatient admissions relative to the benchmark. Based on this estimate, for example, payments for inpatient care would decrease from about $113 million to roughly $102 million in 2014 (see exhibit above).

Surplus/deficit. By reducing payments for inpatient admissions, a surplus is created. Under our baseline scenario, savings generated by the ACO total $33.8 million over the 3.5-year contract period (see upper exhibit at bottom of page).

The ACO starts in July 2012; 2012 therefore repre-sents just six months of savings generated. Therefore, for the remainder of this analysis, the ACO’s results for 2012 will be summed with those of 2013, so thatthe first performance period represents the ACO’s first 18 months. The total estimated savings for this period, therefore, is $10.9 million ($2.7 million + $8.2 million).

Any year that an ACO is able to generate a surplus, CMS will benefit by keeping at least 50 percent of the savings. In this case, CMS keeps at least $17 million over the contract period.

Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are its sole revenue source. In the case of our baseline scenario, the ACO is eligible for up to $17 million in revenues. However, the revenues are dependent on two things:

•TheACO’sabilitytomeettheMSR

•The ACO’s ability to successfully report and/orachieve quality measures

If an ACO does not meet the MSR and/or does not achieve required levels for quality reporting and/or performance, then CMS retains this additional share of the savings.

Ability to meet the MSR. An ACO that does not meet the MSR will not be eligible to sharing in savings in that performance year. Therefore, to share in any of the savings generated, the ACO must meet or surpass its MSR. Depending on an organization’s size, the MSR varies between 2.0 percent to 3.9 percent. Larger

(continued on page 16)

(continued from page 14)

15

ENTERPRISEPERFORMANCEMANAGEMENT

hfma.org JANUARY 2012 3

WEB EXTRA

CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014

Benchmark Target Change

Admissions per 1,000 346 311 (35)

ACO members 30,000 30,000

Inpatient admissions for ACO members 10,380 9,342 (1,038)

Average Medicare payment per admission $10,879 $10,879

Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)

the first performance period represents the ACO’s

first 18 months. The total estimated savings for this

period, therefore, is $10.9 million ($2.7 million + $8.2

million).

Any year that an ACO is able to generate a surplus,

CMS will benefit by keeping at least 50 percent of the

savings. In this case, CMS keeps at least $17 million

over the contract period.

Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are

its sole revenue source. In the case of our baseline

scenario, the ACO is eligible for up to $17 million in

revenues. However, the revenues are dependent on

two things:

> The ACO’s ability to meet the MSR

> The ACO’s ability to successfully report and/or

achieve quality measures

SAVINGS GENERATED BY ACO

2012 2013 2014 2015 2012-2015

Reduction in inpatient admissionscompared to benchmark

5.0% 7.5% 10.0% 10.0%

Estimated savings generated by ACO (millions)*

$2.7 $8.2 $11.3 $11.6 $33.8

* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.

If an ACO does not meet the MSR and/or does not

achieve required levels for quality reporting and/or

performance, then CMS retains this additional share

of the savings.

Ability to meet the MSR. An ACO that does not meet

the MSR will not be eligible to sharing in savings in

that performance year. Therefore, to share in any

of the savings generated, the ACO must meet or

surpass its MSR. Depending on an organization’s size,

the MSR varies between 2.0 percent to 3.9 percent.

Larger ACOs have lower MSRs and, thus, can more

easily generate revenue.

With 30,000 members, the ACO for the baseline

model has an MSR of 2.4 percent. Based on our

assumptions regarding the ACO’s benchmark expen-

ditures, we can identify the actual savings dollars that

the ACO must generate to meet the MSR—i.e., about

$6 million annually (see exhibit at bottom of page).

CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS

2012-2013* 2014 2015

Benchmark expenditures (millions) $385 $267 $275

Minimum savings rate 2.40% 2.40% 2.40%

Minimum savings required (millions) $9.2 $6.4 $6.6

* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).

hfma.org JANUARY 2012 3

WEB EXTRA

CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014

Benchmark Target Change

Admissions per 1,000 346 311 (35)

ACO members 30,000 30,000

Inpatient admissions for ACO members 10,380 9,342 (1,038)

Average Medicare payment per admission $10,879 $10,879

Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)

the first performance period represents the ACO’s

first 18 months. The total estimated savings for this

period, therefore, is $10.9 million ($2.7 million + $8.2

million).

Any year that an ACO is able to generate a surplus,

CMS will benefit by keeping at least 50 percent of the

savings. In this case, CMS keeps at least $17 million

over the contract period.

Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are

its sole revenue source. In the case of our baseline

scenario, the ACO is eligible for up to $17 million in

revenues. However, the revenues are dependent on

two things:

> The ACO’s ability to meet the MSR

> The ACO’s ability to successfully report and/or

achieve quality measures

SAVINGS GENERATED BY ACO

2012 2013 2014 2015 2012-2015

Reduction in inpatient admissionscompared to benchmark

5.0% 7.5% 10.0% 10.0%

Estimated savings generated by ACO (millions)*

$2.7 $8.2 $11.3 $11.6 $33.8

* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.

If an ACO does not meet the MSR and/or does not

achieve required levels for quality reporting and/or

performance, then CMS retains this additional share

of the savings.

Ability to meet the MSR. An ACO that does not meet

the MSR will not be eligible to sharing in savings in

that performance year. Therefore, to share in any

of the savings generated, the ACO must meet or

surpass its MSR. Depending on an organization’s size,

the MSR varies between 2.0 percent to 3.9 percent.

Larger ACOs have lower MSRs and, thus, can more

easily generate revenue.

With 30,000 members, the ACO for the baseline

model has an MSR of 2.4 percent. Based on our

assumptions regarding the ACO’s benchmark expen-

ditures, we can identify the actual savings dollars that

the ACO must generate to meet the MSR—i.e., about

$6 million annually (see exhibit at bottom of page).

CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS

2012-2013* 2014 2015

Benchmark expenditures (millions) $385 $267 $275

Minimum savings rate 2.40% 2.40% 2.40%

Minimum savings required (millions) $9.2 $6.4 $6.6

* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).

MM ISSUE 5.cs5.5.indd 15 7/10/12 2:01 PM

16 Mass Media

ACOs have lower MSRs and, thus, can more easily generate revenue.

With 30,000 members, the ACO for the baseline model has an MSR of 2.4 percent. Based on our assumptions regarding the ACO’s benchmark expenditures, we can identify the actual savings dollars that the ACO must generate to meet the MSR—i.e., about $6 million annually (see exhibit above).

Ability to successfully report and/or achieve quality measures. After the ACO meets its MSR, it shares up to a maximum of 50 percent (Track 1) of all savings generated with CMS from the first dollar.The actual amount of shared savings can be lower than 50 percent, depending on quality reporting(2012-15) and performance (2014 and 2015).

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(continued from page 15)

ENTERPRISEPERFORMANCEMANAGEMENT

(continued on page 17)

hfma.org JANUARY 2012 3

WEB EXTRA

CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014

Benchmark Target Change

Admissions per 1,000 346 311 (35)

ACO members 30,000 30,000

Inpatient admissions for ACO members 10,380 9,342 (1,038)

Average Medicare payment per admission $10,879 $10,879

Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)

the first performance period represents the ACO’s

first 18 months. The total estimated savings for this

period, therefore, is $10.9 million ($2.7 million + $8.2

million).

Any year that an ACO is able to generate a surplus,

CMS will benefit by keeping at least 50 percent of the

savings. In this case, CMS keeps at least $17 million

over the contract period.

Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are

its sole revenue source. In the case of our baseline

scenario, the ACO is eligible for up to $17 million in

revenues. However, the revenues are dependent on

two things:

> The ACO’s ability to meet the MSR

> The ACO’s ability to successfully report and/or

achieve quality measures

SAVINGS GENERATED BY ACO

2012 2013 2014 2015 2012-2015

Reduction in inpatient admissionscompared to benchmark

5.0% 7.5% 10.0% 10.0%

Estimated savings generated by ACO (millions)*

$2.7 $8.2 $11.3 $11.6 $33.8

* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.

If an ACO does not meet the MSR and/or does not

achieve required levels for quality reporting and/or

performance, then CMS retains this additional share

of the savings.

Ability to meet the MSR. An ACO that does not meet

the MSR will not be eligible to sharing in savings in

that performance year. Therefore, to share in any

of the savings generated, the ACO must meet or

surpass its MSR. Depending on an organization’s size,

the MSR varies between 2.0 percent to 3.9 percent.

Larger ACOs have lower MSRs and, thus, can more

easily generate revenue.

With 30,000 members, the ACO for the baseline

model has an MSR of 2.4 percent. Based on our

assumptions regarding the ACO’s benchmark expen-

ditures, we can identify the actual savings dollars that

the ACO must generate to meet the MSR—i.e., about

$6 million annually (see exhibit at bottom of page).

CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS

2012-2013* 2014 2015

Benchmark expenditures (millions) $385 $267 $275

Minimum savings rate 2.40% 2.40% 2.40%

Minimum savings required (millions) $9.2 $6.4 $6.6

* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).

MM ISSUE 5.cs5.5.indd 16 7/10/12 2:01 PM

Issue 5

CMS will phase in the measures scored on reporting and quality over time (see exhibit at right).

In our baseline model, we assumed less than perfect reporting (90 percent) and performance (75 percent) scores. As a result, the ACO would receive $13.5 million of its $17 million, or about 80 percent of the savings it would have been eligible to receive (see exhibit on page 18).

The remaining $3.4 million of shared savings isretained by CMS. Adding this amount to the $17 million that CMS has already retained, CMS would benefit by saving about $20 million on this 30,000-member ACO, or about $680 per member over the contract period. In summary, in the baseline model, CMS retains approximately 60 percent of the savings generated and the ACO gets about 40 percent of the savings generated to use as its revenues (see exhibit at the top of the page).

Operating expense. Operating expenses required to ensure an ACO’s success can be significant. They include medical management and administrative staff, incentive payments for physicians, and IT investments for analytics and data sharing capabilities. These costs will vary depending on the hospital’s current popula-tion health capabilities and its level of IT sophistica-

(continued on page 18)

17

ENTERPRISEPERFORMANCEMANAGEMENT

(continued from page 16)

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4 JANUARY 2012 healthcare financial management

ACO QUALITY SCORING METHODOLOGY: PHASE-IN SUMMARY

Basis for shared savings:

2012-2013 2014 2015

Reporting 33 8 1

Performance 0 25 32

Total 33 33 33

Ability to successfully report and/or achieve quality

measures. After the ACO meets its MSR, it shares

up to a maximum of 50 percent (Track 1) of all

savings generated with CMS from the first dollar.

The actual amount of shared savings can be lower

than 50 percent, depending on quality reporting

(2012-15) and performance (2014 and 2015).

CMS will phase in the measures scored on reporting

and quality over time (see exhibit at right).

In our baseline model, we assumed less than per-

fect reporting (90 percent) and performance (75

percent) scores. As a result, the ACO would receive

$13.5 million of its $17 million, or about 80 percent of

the savings it would have been eligible to receive (see

upper exhibit below).

The remaining $3.4 million of shared savings is

retained by CMS. Adding this amount to the $17 million

that CMS has already retained, CMS would benefit by

saving about $20 million on this 30,000-member ACO,

or about $680 per member over the contract period. In

summary, in the baseline model, CMS retains approxi-

mately 60 percent of the savings generated and the

ACO gets about 40 percent of the savings generated to

use as its revenues (see exhibit at bottom of page).

Operating expense. Operating expenses required

to ensure an ACO’s success can be significant. They

include medical management and administrative staff,

incentive payments for physicians, and IT investments

for analytics and data sharing capabilities. These costs

will vary depending on the hospital’s current popula-

tion health capabilities and its level of IT sophistica-

tion. Estimates of the costs to set up and operate an

ACO vary considerably (see exhibit at top of page 5).

We have used a moderate estimate for the baseline

model (i.e., $1.1 million in start-up costs and $2.6

million in annual operating costs), assuming that the

hospital has some existing capabilities to leverage for

the ACO. Unlike the estimates by the American

Hospital Association, our estimates do not include

certain costs such as physician practice acquisition

and EHR implementation, as these activities may

CALCULATION OF SAVINGS RECEIVED BY THE ACO (MILLIONS)

2012 2013 2014 2015 2012-2015

Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8

Sharing rate 50% 50% 50% 50%

Estimated shared savings to ACO — before quality

$1.3 $4.1 $5.6 $5.8 $16.9

Estimated quality score 90% 90% 75% 75%

Estimated shared savings to ACO — after quality adjustment

$1.2 $3.7 $4.2 $4.4 $13.5

CALCULATION OF GENERATED SAVINGS THAT ACCRUE TO CMS

2012 2013 2014 2015 2012-2015

Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8

Dollars to CMS due to sharing rate $1.3 $4.1 $5.6 $5.8 $16.9

Dollars to CMS due to imperfect quality score

$0.1 $0.4 $1.4 $1.5 $3.4

Total dollars accruing to CMS $1.5 $4.5 $7.1 $7.3 $20.3

Percentage of savings that accrue to CMS

55% 55% 63% 63% 60%

WEB EXTRA

MM ISSUE 5.cs5.5.indd 17 7/10/12 2:01 PM

18 Mass Media

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ENTERPRISEPERFORMANCEMANAGEMENT(continued from page 17)

4 JANUARY 2012 healthcare financial management

ACO QUALITY SCORING METHODOLOGY: PHASE-IN SUMMARY

Basis for shared savings:

2012-2013 2014 2015

Reporting 33 8 1

Performance 0 25 32

Total 33 33 33

Ability to successfully report and/or achieve quality

measures. After the ACO meets its MSR, it shares

up to a maximum of 50 percent (Track 1) of all

savings generated with CMS from the first dollar.

The actual amount of shared savings can be lower

than 50 percent, depending on quality reporting

(2012-15) and performance (2014 and 2015).

CMS will phase in the measures scored on reporting

and quality over time (see exhibit at right).

In our baseline model, we assumed less than per-

fect reporting (90 percent) and performance (75

percent) scores. As a result, the ACO would receive

$13.5 million of its $17 million, or about 80 percent of

the savings it would have been eligible to receive (see

upper exhibit below).

The remaining $3.4 million of shared savings is

retained by CMS. Adding this amount to the $17 million

that CMS has already retained, CMS would benefit by

saving about $20 million on this 30,000-member ACO,

or about $680 per member over the contract period. In

summary, in the baseline model, CMS retains approxi-

mately 60 percent of the savings generated and the

ACO gets about 40 percent of the savings generated to

use as its revenues (see exhibit at bottom of page).

Operating expense. Operating expenses required

to ensure an ACO’s success can be significant. They

include medical management and administrative staff,

incentive payments for physicians, and IT investments

for analytics and data sharing capabilities. These costs

will vary depending on the hospital’s current popula-

tion health capabilities and its level of IT sophistica-

tion. Estimates of the costs to set up and operate an

ACO vary considerably (see exhibit at top of page 5).

We have used a moderate estimate for the baseline

model (i.e., $1.1 million in start-up costs and $2.6

million in annual operating costs), assuming that the

hospital has some existing capabilities to leverage for

the ACO. Unlike the estimates by the American

Hospital Association, our estimates do not include

certain costs such as physician practice acquisition

and EHR implementation, as these activities may

CALCULATION OF SAVINGS RECEIVED BY THE ACO (MILLIONS)

2012 2013 2014 2015 2012-2015

Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8

Sharing rate 50% 50% 50% 50%

Estimated shared savings to ACO — before quality

$1.3 $4.1 $5.6 $5.8 $16.9

Estimated quality score 90% 90% 75% 75%

Estimated shared savings to ACO — after quality adjustment

$1.2 $3.7 $4.2 $4.4 $13.5

CALCULATION OF GENERATED SAVINGS THAT ACCRUE TO CMS

2012 2013 2014 2015 2012-2015

Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8

Dollars to CMS due to sharing rate $1.3 $4.1 $5.6 $5.8 $16.9

Dollars to CMS due to imperfect quality score

$0.1 $0.4 $1.4 $1.5 $3.4

Total dollars accruing to CMS $1.5 $4.5 $7.1 $7.3 $20.3

Percentage of savings that accrue to CMS

55% 55% 63% 63% 60%

WEB EXTRA

(continued on page 19)

MM ISSUE 5.cs5.5.indd 18 7/10/12 2:01 PM

Issue 5

tion. Estimates of the costs to set up and operate an ACO vary considerably (see exhibit below).

We have used a moderate estimate for the baseline model (i.e., $1.1 million in start-up costs and $2.6 million in annual operating costs), assuming that the hospital has some existing capabilities to leverage for

the ACO. Unlike the estimates by the AmericanHospital Association, our estimates do not include certain costs such as physician practice acquisition and EHR implementation, as these activities may already be covered under other hospital/health system initia-tives. As a result, the baseline model includes approxi-

(continued from page 18)

(continued on page 20)

19

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ENTERPRISEPERFORMANCEMANAGEMENT

hfma.org JANUARY 2012 5

ACO COST ESTIMATES (MILLIONS)

CMS* AHA† DGA

Start-up costs $0.6 $5.3 $1.1

Annual operating costs $1.3 $6.3 $2.6

Total over the contract period $5.0 $27.4 $10.2

* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).

ACO PROFIT & LOSS STATEMENT (MILLIONS)

2012 2013 2014 2015 2012-2015

Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5

Operating expenses 2.3 2.6 2.6 2.7 10.2

ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3

ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)

2012 2013 2014 2015 Close-Out

Receipt of prior-year ACO share of savings*

$0.0 $3.0 $1.9 $4.2 $4.4

ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0

Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4

Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3

* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.

already be covered under other hospital/health

system initiatives. As a result, the baseline model

includes approximately 18 additional FTEs, most of

whom are medical management staff, along with

several administrative staff and a medical director,

as well as some costs for IT and other expenses.

ACO surplus/deficit. Under our scenario, a look at

the baseline ACO’s operating statement by year

discloses that the ACO generates a surplus in most

years (see upper exhibit below).

At times, however, the ACO will be face cash flow

challenges. Shared savings will be paid out the year

following each performance period. CMS has indicat-

ed that it will offer ACOs an interim payment to allevi-

ate significant cash flow issues that they would face for

the first 18 months of operations. Our baseline ACO

opts for this interim payment, with the assumption that

the ACO would receive the first 12 months of shared

savings (July 2012 to June 2013) at the end of 2013.

The payment received in 2014, therefore, represents

the latter six months of performance in 2013.

The delay in the receipt of shared savings can

cause the ACO to experience cash deficits across

the contract period—a situation that can be challeng-

ing for many organizations (see exhibit at bottom

of page).

The ACO’s net income is shared equally between

the hospital and physician participants in the baseline

ACO. Although physicians would receive some

incentive payments along the way for meeting certain

performance targets, we assumed that neither party

would receive its shared savings payout until the ACO

has achieved a positive cumulative cash surplus, which

does not occur until 2016.

Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing

inpatient admissions of ACO members. Ultimately,

however, achieving this result adversely affects the

hospital. The portion of ACO shared savings accruing

to the hospital is not enough to make up for the lost

revenue due to this decrease in utilization. Before

identifying ways to offset this effect on the hospital,

it is necessary to quantify it.

WEB EXTRA

MM ISSUE 5.cs5.5.indd 19 7/10/12 2:01 PM

20 Mass Media

mately 18 additional FTEs, most of whom are medical management staff, along with several administrative staff and a medical director, as well as some costs for IT and other expenses.

ACO surplus/deficit. Under our scenario, a look at the baseline ACO’s operating statement by year discloses that the ACO generates a surplus in most

years (see exhibit at the top of the page).

At times, however, the ACO will be face cash flow challenges. Shared savings will be paid out the year following each performance period. CMS has indi-cated that it will offer ACOs an interim payment to alleviate significant cash flow issues that they would

(continued on page 21)

(continued from page 19)

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hfma.org JANUARY 2012 5

ACO COST ESTIMATES (MILLIONS)

CMS* AHA† DGA

Start-up costs $0.6 $5.3 $1.1

Annual operating costs $1.3 $6.3 $2.6

Total over the contract period $5.0 $27.4 $10.2

* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).

ACO PROFIT & LOSS STATEMENT (MILLIONS)

2012 2013 2014 2015 2012-2015

Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5

Operating expenses 2.3 2.6 2.6 2.7 10.2

ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3

ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)

2012 2013 2014 2015 Close-Out

Receipt of prior-year ACO share of savings*

$0.0 $3.0 $1.9 $4.2 $4.4

ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0

Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4

Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3

* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.

already be covered under other hospital/health

system initiatives. As a result, the baseline model

includes approximately 18 additional FTEs, most of

whom are medical management staff, along with

several administrative staff and a medical director,

as well as some costs for IT and other expenses.

ACO surplus/deficit. Under our scenario, a look at

the baseline ACO’s operating statement by year

discloses that the ACO generates a surplus in most

years (see upper exhibit below).

At times, however, the ACO will be face cash flow

challenges. Shared savings will be paid out the year

following each performance period. CMS has indicat-

ed that it will offer ACOs an interim payment to allevi-

ate significant cash flow issues that they would face for

the first 18 months of operations. Our baseline ACO

opts for this interim payment, with the assumption that

the ACO would receive the first 12 months of shared

savings (July 2012 to June 2013) at the end of 2013.

The payment received in 2014, therefore, represents

the latter six months of performance in 2013.

The delay in the receipt of shared savings can

cause the ACO to experience cash deficits across

the contract period—a situation that can be challeng-

ing for many organizations (see exhibit at bottom

of page).

The ACO’s net income is shared equally between

the hospital and physician participants in the baseline

ACO. Although physicians would receive some

incentive payments along the way for meeting certain

performance targets, we assumed that neither party

would receive its shared savings payout until the ACO

has achieved a positive cumulative cash surplus, which

does not occur until 2016.

Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing

inpatient admissions of ACO members. Ultimately,

however, achieving this result adversely affects the

hospital. The portion of ACO shared savings accruing

to the hospital is not enough to make up for the lost

revenue due to this decrease in utilization. Before

identifying ways to offset this effect on the hospital,

it is necessary to quantify it.

WEB EXTRA

MM ISSUE 5.cs5.5.indd 20 7/10/12 2:01 PM

Issue 5

face for the first 18 months of operations. Our baseline ACO opts for this interim payment, with the assump-tion that the ACO would receive the first 12 months of shared savings (July 2012 to June 2013) at the end of 2013. The payment received in 2014, therefore, repre-sents the latter six months of performance in 2013.

The delay in the receipt of shared savings cancause the ACO to experience cash deficits acrossthe contract period—a situation that can be challeng-ing for many organizations (see exhibit below).

(continued on page 22)

21

(continued from page 20)

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hfma.org JANUARY 2012 5

ACO COST ESTIMATES (MILLIONS)

CMS* AHA† DGA

Start-up costs $0.6 $5.3 $1.1

Annual operating costs $1.3 $6.3 $2.6

Total over the contract period $5.0 $27.4 $10.2

* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).

ACO PROFIT & LOSS STATEMENT (MILLIONS)

2012 2013 2014 2015 2012-2015

Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5

Operating expenses 2.3 2.6 2.6 2.7 10.2

ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3

ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)

2012 2013 2014 2015 Close-Out

Receipt of prior-year ACO share of savings*

$0.0 $3.0 $1.9 $4.2 $4.4

ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0

Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4

Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3

* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.

already be covered under other hospital/health

system initiatives. As a result, the baseline model

includes approximately 18 additional FTEs, most of

whom are medical management staff, along with

several administrative staff and a medical director,

as well as some costs for IT and other expenses.

ACO surplus/deficit. Under our scenario, a look at

the baseline ACO’s operating statement by year

discloses that the ACO generates a surplus in most

years (see upper exhibit below).

At times, however, the ACO will be face cash flow

challenges. Shared savings will be paid out the year

following each performance period. CMS has indicat-

ed that it will offer ACOs an interim payment to allevi-

ate significant cash flow issues that they would face for

the first 18 months of operations. Our baseline ACO

opts for this interim payment, with the assumption that

the ACO would receive the first 12 months of shared

savings (July 2012 to June 2013) at the end of 2013.

The payment received in 2014, therefore, represents

the latter six months of performance in 2013.

The delay in the receipt of shared savings can

cause the ACO to experience cash deficits across

the contract period—a situation that can be challeng-

ing for many organizations (see exhibit at bottom

of page).

The ACO’s net income is shared equally between

the hospital and physician participants in the baseline

ACO. Although physicians would receive some

incentive payments along the way for meeting certain

performance targets, we assumed that neither party

would receive its shared savings payout until the ACO

has achieved a positive cumulative cash surplus, which

does not occur until 2016.

Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing

inpatient admissions of ACO members. Ultimately,

however, achieving this result adversely affects the

hospital. The portion of ACO shared savings accruing

to the hospital is not enough to make up for the lost

revenue due to this decrease in utilization. Before

identifying ways to offset this effect on the hospital,

it is necessary to quantify it.

WEB EXTRA

MM ISSUE 5.cs5.5.indd 21 7/10/12 2:01 PM

22 Mass Media

The ACO’s net income is shared equally between the hospital and physician participants in the base-line ACO. Although physicians would receive some incentive payments along the way for meeting certain performance targets, we assumed that neither party would receive its shared savings payout until the ACO has achieved a positive cumulative cash surplus, which does not occur until 2016.

Step 3: Assess the Net Impact on the Hospital Revenue StatementAn ACO generates savings primarily by reducing inpatient admissions of ACO members. Ultimately, however, achieving this result adversely affects the hospital. The portion of ACO shared savings accru-ing to the hospital is not enough to make up for the lost revenue due to this decrease in utilization. Before identifying ways to offset this effect on the hospital,it is necessary to quantify it.

Revenue. To estimate the ACO’s impact on hospitalrevenue (patient services plus shared savings fromACO), we analyzed the expected change in hospitaladmissions. Although the ACO will likely reduce theoverall number of admissions among ACO members,it may also increase the share of member admissionsgoing to the sponsor hospital through improved carecoordination and enhanced integration of providers.For our scenario, we assumed the hospital would seean increase in its market share from ACO memberadmissions from 72 percent in 2012 to 77 percent in2014 and 2015 (see upper exhibit on page 23).

The net result of decreases in inpatient admissionsamong ACO members with increases in the hospital’sshare of ACO member admissions is more moderaterevenue losses for the hospital (see bottom exhibit on page 23).

(continued on page 23)

(continued from page 21)

ENTERPRISEPERFORMANCEMANAGEMENT

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MM ISSUE 5.cs5.5.indd 22 7/10/12 2:01 PM

Issue 5

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23

(continued from page 22)

ENTERPRISEPERFORMANCEMANAGEMENT

6 JANUARY 2012 healthcare financial management

Revenue. To estimate the ACO’s impact on hospital

revenue (patient services plus shared savings from

ACO), we analyzed the expected change in hospital

admissions. Although the ACO will likely reduce the

overall number of admissions among ACO members,

it may also increase the share of member admissions

going to the sponsor hospital through improved care

coordination and enhanced integration of providers.

For our scenario, we assumed the hospital would see

an increase in its market share from ACO member

admissions from 72 percent in 2012 to 77 percent in

2014 and 2015 (see upper exhibit below).

The net result of decreases in inpatient admissions

among ACO members with increases in the hospital’s

share of ACO member admissions is more moderate

revenue losses for the hospital (see exhibit at bottom

of page).

Under our scenario, the hospital’s share of the shared

savings generated by the ACO is about $1.7 million

(see top exhibit, page 7).

Hospital operations. Due to the high fixed costs of hos-

pitals, we assumed that inpatient revenue decreases

due to ACO operations would not be offset by variable

cost reductions, resulting in a decline in hospital

operating income of roughly $1.6 million before shared

savings (see middle exhibit, page 7).

Hospital surplus/deficit. Despite the hospital’s experi-

ence the aforementioned decline in its operating

income resulting from the ACO, we also determined

under our scenario that the hospital would receive

$1.7 million as its portion of shared savings from

the ACO (see bottom exhibit, page 7).

In short, under our assumptions, an increase in the

share of ACO member admissions paired with the

shared savings received by the hospital would pro-

duce a neutral impact on the hospital. To achieve this

result, it is necessary to increase the share of ACO

member admissions occurring at the sponsoring hos-

pital from 70 percent to 77 percent over the contract

period. The hospital’s ability to achieve this increase in

market share will depend on several factors, including

the current level of leakage and the degree of splitting

among participating physicians. The willingness of

ACO IMPACT OF REDUCED UTILIZATION AND INCREASED SHARE OF ADMISSIONS ON HOSPITAL, 2014

Current Under ACO Change

Inpatient admissions for ACO members 10,380 9,342 (1,038)

Sponsor hospital market share of ACO member admissions

70% 77%

ACO member admissions at sponsor hospital 7,266 7,193 (73)

Average Medicare payment per admission $10,879 $10,879

Hospital revenue for ACO member admissions (millions)

$79.0 $78.3 ($0.8)

WEB EXTRA

According to our baseline scenario, an ACO that generates $34 million in savings leaves $20 million in CMS’s hands and receives $14 million from CMS, operating at a profit of $3 million.

IMPACT ON HOSPITAL INPATIENT REVENUE FROM ACO MEMBERS (MILLIONS)

2012 2013 2014 2015 2012-2015*

Sponsor hospital market share of ACO member admissions 72% 75% 77% 77%

Change in hospital admissions due to ACO (83) (65) (73) (35) (256)

Change in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)

* Numbers do not precisely add up to the total for 2012-15 due to rounding.(continued on page 24)

MM ISSUE 5.cs5.5.indd 23 7/10/12 2:01 PM

24 Mass Media

ENTERPRISEPERFORMANCEMANAGEMENT

Under our scenario, the hospital’s share of the sharedsavings generated by the ACO is about $1.7 million(see top exhibit above).

Hospital operations. Due to the high fixed costs of hospitals,we assumed that inpatient revenue decreasesdue to ACO operations would not be offset by variablecost reductions, resulting in a decline in hospital oper-ating income of roughly $1.6 million before shared

savings (see bottom exhibit above).

Hospital surplus/deficit. Despite the hospital’s expe-rience the aforementioned decline in its operating income resulting from the ACO, we also determined under our scenario that the hospital would receive $1.7 million as its portion of shared savings from the ACO (see exhibit below).

hfma.org JANUARY 2012 7

ACO beneficiaries to seek care within the ACO will

also have to be considered.

However, if the ACO fails to increase market share

incrementally, the hospital will experience significant

losses—up to $15 million in our sensitivity analysis. For

this reason, as a critical strategic consideration, the

hospital will require the ACO’s assistance in backfill-

ing for decreased utilization.

In sum, according to our baseline scenario, an

ACO that generates $34 million in savings leaves

$20 million in CMS’s hands and receives $14 million

from CMS, operating at a profit of $3 million. The

affiliated hospital can break even only if its share of

ACO admissions is increased significantly.

It should be noted, however, that a deeper analysis

of this financial model might well yield more positive

results for the hospital. In particular, the types of

admissions that the ACO initiative would likely

help to avoid would most likely be medical

admissions associated with better management

of chronic conditions. Such admissions tend to

have significantly lower profitability for hospitals,

so losing them would not as harmful as losing the

average admission, as we assumed in our baseline

scenario.

Analysis of ScenariosIn addition, the scenario described previously, it is

useful to consider a variety of other scenarios using

this baseline ACO to assess the impact of various

factors on the hospital, such as the size of the ACO,

amount of savings generated, ACO operating costs,

quality scores, hospital share of ACO admissions, and

selection of Track 2 instead of Track 1.

If, for example, the ACO has 40,000 members

(one-third more than our baseline), ACO net income

and, therefore, the savings to distribute nearly double.

However, under such a scenario, hospital operations

would be more severely affected, as managing the

care of a larger population would further reduce

hospital utilization.

The size of the ACO also determines the MSR; more

members mean a lower MSR, down to a minimum of

2 percent for ACOs of 60,000 members or more.

For ACOs that generate savings that just meet or fail

HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)

2012 2013 2014 2015 Close-Out

Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3

ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3

ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7

OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)

2012 2013 2014 2015 Close-Out 2012-Close-Out

Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)

Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7

Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0

WEB EXTRA

IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)

2012 2013 2014 2015 2012-2015*

Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)

Variable costs for ACO member admissions (40% of revenues)

$0.3 $0.3 $0.3 $0.2 $1.1

Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)

* Numbers do not precisely add up to the total for 2012-15 due to rounding.

hfma.org JANUARY 2012 7

ACO beneficiaries to seek care within the ACO will

also have to be considered.

However, if the ACO fails to increase market share

incrementally, the hospital will experience significant

losses—up to $15 million in our sensitivity analysis. For

this reason, as a critical strategic consideration, the

hospital will require the ACO’s assistance in backfill-

ing for decreased utilization.

In sum, according to our baseline scenario, an

ACO that generates $34 million in savings leaves

$20 million in CMS’s hands and receives $14 million

from CMS, operating at a profit of $3 million. The

affiliated hospital can break even only if its share of

ACO admissions is increased significantly.

It should be noted, however, that a deeper analysis

of this financial model might well yield more positive

results for the hospital. In particular, the types of

admissions that the ACO initiative would likely

help to avoid would most likely be medical

admissions associated with better management

of chronic conditions. Such admissions tend to

have significantly lower profitability for hospitals,

so losing them would not as harmful as losing the

average admission, as we assumed in our baseline

scenario.

Analysis of ScenariosIn addition, the scenario described previously, it is

useful to consider a variety of other scenarios using

this baseline ACO to assess the impact of various

factors on the hospital, such as the size of the ACO,

amount of savings generated, ACO operating costs,

quality scores, hospital share of ACO admissions, and

selection of Track 2 instead of Track 1.

If, for example, the ACO has 40,000 members

(one-third more than our baseline), ACO net income

and, therefore, the savings to distribute nearly double.

However, under such a scenario, hospital operations

would be more severely affected, as managing the

care of a larger population would further reduce

hospital utilization.

The size of the ACO also determines the MSR; more

members mean a lower MSR, down to a minimum of

2 percent for ACOs of 60,000 members or more.

For ACOs that generate savings that just meet or fail

HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)

2012 2013 2014 2015 Close-Out

Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3

ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3

ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7

OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)

2012 2013 2014 2015 Close-Out 2012-Close-Out

Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)

Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7

Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0

WEB EXTRA

IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)

2012 2013 2014 2015 2012-2015*

Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)

Variable costs for ACO member admissions (40% of revenues)

$0.3 $0.3 $0.3 $0.2 $1.1

Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)

* Numbers do not precisely add up to the total for 2012-15 due to rounding.

(continued from page 23)

(continued on page 25)

hfma.org JANUARY 2012 7

ACO beneficiaries to seek care within the ACO will

also have to be considered.

However, if the ACO fails to increase market share

incrementally, the hospital will experience significant

losses—up to $15 million in our sensitivity analysis. For

this reason, as a critical strategic consideration, the

hospital will require the ACO’s assistance in backfill-

ing for decreased utilization.

In sum, according to our baseline scenario, an

ACO that generates $34 million in savings leaves

$20 million in CMS’s hands and receives $14 million

from CMS, operating at a profit of $3 million. The

affiliated hospital can break even only if its share of

ACO admissions is increased significantly.

It should be noted, however, that a deeper analysis

of this financial model might well yield more positive

results for the hospital. In particular, the types of

admissions that the ACO initiative would likely

help to avoid would most likely be medical

admissions associated with better management

of chronic conditions. Such admissions tend to

have significantly lower profitability for hospitals,

so losing them would not as harmful as losing the

average admission, as we assumed in our baseline

scenario.

Analysis of ScenariosIn addition, the scenario described previously, it is

useful to consider a variety of other scenarios using

this baseline ACO to assess the impact of various

factors on the hospital, such as the size of the ACO,

amount of savings generated, ACO operating costs,

quality scores, hospital share of ACO admissions, and

selection of Track 2 instead of Track 1.

If, for example, the ACO has 40,000 members

(one-third more than our baseline), ACO net income

and, therefore, the savings to distribute nearly double.

However, under such a scenario, hospital operations

would be more severely affected, as managing the

care of a larger population would further reduce

hospital utilization.

The size of the ACO also determines the MSR; more

members mean a lower MSR, down to a minimum of

2 percent for ACOs of 60,000 members or more.

For ACOs that generate savings that just meet or fail

HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)

2012 2013 2014 2015 Close-Out

Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3

ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3

ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7

OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)

2012 2013 2014 2015 Close-Out 2012-Close-Out

Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)

Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7

Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0

WEB EXTRA

IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)

2012 2013 2014 2015 2012-2015*

Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)

Variable costs for ACO member admissions (40% of revenues)

$0.3 $0.3 $0.3 $0.2 $1.1

Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)

* Numbers do not precisely add up to the total for 2012-15 due to rounding.

MM ISSUE 5.cs5.5.indd 24 7/10/12 2:01 PM

ENTERPRISEPERFORMANCEMANAGEMENT

Issue 5 25

In short, under our assumptions, an increase in theshare of ACO member admissions paired with theshared savings received by the hospital would producea neutral impact on the hospital. To achieve thisresult, it is necessary to increase the share of ACOmember admissions occurring at the sponsoring hospi-tal from 70 percent to 77 percent over the contractperiod. The hospital’s ability to achieve this increase in market share will depend on several factors, includ-ing the current level of leakage and the degree of split-ting among participating physicians. The willingness of ACO beneficiaries to seek care within the ACO will also have to be considered.

However, if the ACO fails to increase market share incrementally, the hospital will experience significant losses—up to $15 million in our sensitivity analysis. For this reason, as a critical strategic consideration, the hospital will require the ACO’s assistance in backfill-ing for decreased utilization.

In sum, according to our baseline scenario, anACO that generates $34 million in savings leaves$20 million in CMS’s hands and receives $14 million from CMS, operating at a profit of $3 million. The affiliated hospital can break even only if its share of ACO admissions is increased significantly.

It should be noted, however, that a deeper analysisof this financial model might well yield more positiveresults for the hospital. In particular, the types of admissions that the ACO initiative would likely help to avoid would most likely be medical admissions associated with better management of chronic condi-tions. Such admissions tend to have significantly lower profitability for hospitals, so losing them would not as harmful as losing the average admission, as we assumed in our baseline scenario.

Analysis of ScenariosIn addition, the scenario described previously, it isuseful to consider a variety of other scenarios using this baseline ACO to assess the impact of various factors on the hospital, such as the size of the ACO, amount of savings generated, ACO operating costs, quality scores, hospital share of ACO admissions, and selec-tion of Track 2 instead of Track 1.

If, for example, the ACO has 40,000 members (one-third more than our baseline), ACO net income and,

therefore, the savings to distribute nearly double. However, under such a scenario, hospital operations would be more severely affected, as managing the care of a larger population would further reduce hospital utilization.

The size of the ACO also determines the MSR; more members mean a lower MSR, down to a minimum of2 percent for ACOs of 60,000 members or more. For ACOs that generate savings that just meet or fail to

meet the MSR, having a slightly larger membership can mean the difference between sharing in savings with CMS or have no revenue.

ACOs that do not generate meaningful levels of savings will have negative net incomes, because their operating costs will not be balanced by any substantial revenue in the form of shared savings. An ACO that does not meet the MSR will need to bear the full load of its operating costs. The impact on the hospital of an underperforming ACO may be positive though, asutilization may remain relatively constant and the share of ACO member admissions could increase.

ACOs started by hospitals with limited care manage-ment experience and minimal accountable care infra-structure will have higher start-up costs. These ACOs will, therefore, take longer to generate positive ACO operating results. In the first contract period, there may be no shared savings to distribute to the hospi-tal or physicians. Start-up costs are one-time expenses though and should not be given to much weight in the strategic decision on whether to become an ACO.

A hospital that cannot increase its share of ACO member admissions faces serious losses.

(continued from page 24)

(continued on page 26)

MM ISSUE 5.cs5.5.indd 25 7/10/12 2:01 PM

ENTERPRISEPERFORMANCEMANAGEMENT

26 Mass Media

An ACO that scores lower on quality measures will receive less back from CMS in shared savings. The erosion of shared savings due to the ACO can be signif-icant. This diminished revenue may result in operating an ACO at a loss. The ACO, therefore, may not have shared savings to distribute to the hospital or physi-cians, and the hospital will not be able to mitigate the losses it faces due to decreased utilization.

The overall impact of an ACO on the sponsor hospi-tal is most sensitive to the share of ACO admissions that the hospital captures. If a hospital cannot increase its share of ACO member admissions (e.g., admissions remain constant at about 70 percent), it faces a serious losses; holding all other factors in the baseline model constant, losses would be over $12 million. On the

other hand, a hospital that can boost its share of admis-sions by an additional 3 percent (up to 80 percent

share) would generate $3.5 million in additional reve-nue. These large swings in hospital impact for relatively small variations in share of ACO member admissions underscore the importance of capturing a greater share of ACO member admissions.

The Track 2 opportunity may be attractive to ACOs that are confident they can generate savings. The more generous sharing and MSR set at 2 percent, regardless of ACO size, may outweigh the risk of sharing in losses in any years where expenditures exceed benchmarks. These ACOs would, nonetheless, be wise to reinsure against this risk.

8 JANUARY 2012 healthcare financial management

SUMMARY OF FINANCIAL RESULTS (3.5-YEAR CONTRACT PERIOD)

CMS Calculation of ACO Shared Savings

ACO Revenue Statement

Net Impact on Hospital Revenue Statement

Revenue “Revenue” = Medicare benchmark spending for

ACO population$927 million

Shared savings$13.5 million

Patient services-$2.7 million

plusShare of ACO surplus/deficit$1.7 million

Expense “Expense” = total spending for ACO

population (hospital/physician/other)$893.2 million

ACO operations$10.2 million

Hospital operations$1.1 million

Surplus/Deficit Shared Savings$33.8 million

ACO surplus/deficit$3.3 million

Hospital surplus/deficit

$0

Physicians$1.7 million

CMS$20.3 million

to meet the MSR, having a slightly larger membership

can mean the difference between sharing in savings

with CMS or have no revenue.

ACOs that do not generate meaningful levels of

savings will have negative net incomes, because their

operating costs will not be balanced by any substantial

revenue in the form of shared savings. An ACO that

does not meet the MSR will need to bear the full load

of its operating costs. The impact on the hospital of an

underperforming ACO may be positive though, as

utilization may remain relatively constant and the

share of ACO member admissions could increase.

ACOs started by hospitals with limited care manage-

ment experience and minimal accountable care infra-

structure will have higher start-up costs. These ACOs

will, therefore, take longer to generate positive ACO

operating results. In the first contract period, there

may be no shared savings to distribute to the hospital

or physicians. Start-up costs are one-time expenses

though and should not be given to much weight in the

strategic decision on whether to become an ACO.

An ACO that scores lower on quality measures will

receive less back from CMS in shared savings. The

erosion of shared savings due to the ACO can be

significant. This diminished revenue may result in

operating an ACO at a loss. The ACO, therefore, may

not have shared savings to distribute to the hospital or

physicians, and the hospital will not be able to mitigate

the losses it faces due to decreased utilization.

The overall impact of an ACO on the sponsor hospital

is most sensitive to the share of ACO admissions that

the hospital captures. If a hospital cannot increase its

share of ACO member admissions (e.g., admissions

remain constant at about 70 percent), it faces a serious

losses; holding all other factors in the baseline model

constant, losses would be over $12 million. On the

other hand, a hospital that can boost its share of admis-

sions by an additional 3 percent (up to 80 percent

WEB EXTRA

A hospital that cannot increase its share of ACO member admissions faces serious losses.

(continued from page 25)

(continued on page 27)

MM ISSUE 5.cs5.5.indd 26 7/10/12 2:01 PM

Idette Elizondois a manager, DGA Partners, BalaCynwyd, Pa. (ielizondo@dgapartners.com).

hfma.org JANUARY 2012 9

share) would generate $3.5 million in additional

revenue. These large swings in hospital impact for

relatively small variations in share of ACO member

admissions underscore the importance of capturing

a greater share of ACO member admissions.

The Track 2 opportunity may be attractive to ACOs

that are confident they can generate savings. The

more generous sharing and MSR set at 2 percent,

regardless of ACO size, may outweigh the risk of

sharing in losses in any years where expenditures

exceed benchmarks. These ACOs would,

nonetheless, be wise to reinsure against this risk.

Final ThoughtsGiven the financial picture, the question about

whether to establish an ACO is essentially a strategic

decision. Hospitals that succeed as ACO participants

will reduce inpatient utilization. Shared savings will

not be sufficient to make up for the losses, so it is

essential to build market share. However, if a hospital

does not create an ACO and its competitors do, the

hospital may lose share to those competitors anyway.

If one believes that Medicare will continue to squeeze

fee-for-service payments and reward providers that

manage population health, then forming an ACO may

be a helpful developmental step. A lot will depend on

a hospital’s competitive market, physician relations,

and related strategies with commercial payers and

insurance exchanges.

A hospital that succeeds with an ACO will not make

a lot of money from the ACO directly, but it may

succeed in transforming its organization into a clini-

cally integrated provider of high-quality care with a

strongly aligned medical staff who can provide high-

value, low-cost care not only to governmental but also

to commercial payers.

Remember, however, that the first contract period is

just the beginning. After the initial three- to three-

and-a-half-year contract period, it will be time to

consider renewal. The ACO will need to achieve a

new level of savings to succeed against tighter bench-

marks, and there will be both upside and downside

risk in the renewal period. It is therefore appropriate

to consider related alternative strategies, such as

Medicare Advantage and Medicare Select.

John M. Harris

is a principal, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan Philadelphia Chapter

(jharris@dgapartners.com).

Idette Elizondo

is a manager, DGA Partners, Bala

Cynwyd, Pa. (ielizondo@

dgapartners.com).

Molly Johnson

is a senior associate, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan New York Chapter

(mjohnson@dgapartners.com).

WEB EXTRA

About the authors

If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.

hfma.org JANUARY 2012 9

share) would generate $3.5 million in additional

revenue. These large swings in hospital impact for

relatively small variations in share of ACO member

admissions underscore the importance of capturing

a greater share of ACO member admissions.

The Track 2 opportunity may be attractive to ACOs

that are confident they can generate savings. The

more generous sharing and MSR set at 2 percent,

regardless of ACO size, may outweigh the risk of

sharing in losses in any years where expenditures

exceed benchmarks. These ACOs would,

nonetheless, be wise to reinsure against this risk.

Final ThoughtsGiven the financial picture, the question about

whether to establish an ACO is essentially a strategic

decision. Hospitals that succeed as ACO participants

will reduce inpatient utilization. Shared savings will

not be sufficient to make up for the losses, so it is

essential to build market share. However, if a hospital

does not create an ACO and its competitors do, the

hospital may lose share to those competitors anyway.

If one believes that Medicare will continue to squeeze

fee-for-service payments and reward providers that

manage population health, then forming an ACO may

be a helpful developmental step. A lot will depend on

a hospital’s competitive market, physician relations,

and related strategies with commercial payers and

insurance exchanges.

A hospital that succeeds with an ACO will not make

a lot of money from the ACO directly, but it may

succeed in transforming its organization into a clini-

cally integrated provider of high-quality care with a

strongly aligned medical staff who can provide high-

value, low-cost care not only to governmental but also

to commercial payers.

Remember, however, that the first contract period is

just the beginning. After the initial three- to three-

and-a-half-year contract period, it will be time to

consider renewal. The ACO will need to achieve a

new level of savings to succeed against tighter bench-

marks, and there will be both upside and downside

risk in the renewal period. It is therefore appropriate

to consider related alternative strategies, such as

Medicare Advantage and Medicare Select.

John M. Harris

is a principal, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan Philadelphia Chapter

(jharris@dgapartners.com).

Idette Elizondo

is a manager, DGA Partners, Bala

Cynwyd, Pa. (ielizondo@

dgapartners.com).

Molly Johnson

is a senior associate, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan New York Chapter

(mjohnson@dgapartners.com).

WEB EXTRA

About the authors

If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.

Molly Johnsonis a senior associate, DGA Partners, Bala Cynwyd, Pa., and amember of HFMA’s Metropolitan New York Chapter (mjohnson@dgapartners.com).

John M. Harrisis a principal, DGA Partners, Bala Cynwyd, Pa., and a member of HFMA’s Metropolitan Philadelphia Chapter (jharris@dgapartners.com).

hfma.org JANUARY 2012 9

share) would generate $3.5 million in additional

revenue. These large swings in hospital impact for

relatively small variations in share of ACO member

admissions underscore the importance of capturing

a greater share of ACO member admissions.

The Track 2 opportunity may be attractive to ACOs

that are confident they can generate savings. The

more generous sharing and MSR set at 2 percent,

regardless of ACO size, may outweigh the risk of

sharing in losses in any years where expenditures

exceed benchmarks. These ACOs would,

nonetheless, be wise to reinsure against this risk.

Final ThoughtsGiven the financial picture, the question about

whether to establish an ACO is essentially a strategic

decision. Hospitals that succeed as ACO participants

will reduce inpatient utilization. Shared savings will

not be sufficient to make up for the losses, so it is

essential to build market share. However, if a hospital

does not create an ACO and its competitors do, the

hospital may lose share to those competitors anyway.

If one believes that Medicare will continue to squeeze

fee-for-service payments and reward providers that

manage population health, then forming an ACO may

be a helpful developmental step. A lot will depend on

a hospital’s competitive market, physician relations,

and related strategies with commercial payers and

insurance exchanges.

A hospital that succeeds with an ACO will not make

a lot of money from the ACO directly, but it may

succeed in transforming its organization into a clini-

cally integrated provider of high-quality care with a

strongly aligned medical staff who can provide high-

value, low-cost care not only to governmental but also

to commercial payers.

Remember, however, that the first contract period is

just the beginning. After the initial three- to three-

and-a-half-year contract period, it will be time to

consider renewal. The ACO will need to achieve a

new level of savings to succeed against tighter bench-

marks, and there will be both upside and downside

risk in the renewal period. It is therefore appropriate

to consider related alternative strategies, such as

Medicare Advantage and Medicare Select.

John M. Harris

is a principal, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan Philadelphia Chapter

(jharris@dgapartners.com).

Idette Elizondo

is a manager, DGA Partners, Bala

Cynwyd, Pa. (ielizondo@

dgapartners.com).

Molly Johnson

is a senior associate, DGA Partners, Bala

Cynwyd, Pa., and a member of HFMA’s

Metropolitan New York Chapter

(mjohnson@dgapartners.com).

WEB EXTRA

About the authors

If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.

ENTERPRISEPERFORMANCEMANAGEMENT

Issue 5 27

Final ThoughtsGiven the financial picture, the question about whether to establish an ACO is essentially a strategic decision. Hospitals that succeed as ACO participants will reduce inpatient utilization. Shared savings will not be suffi-cient to make up for the losses, so it is essential to build market share. However, if a hospital does not create an ACO and its competitors do, the hospital may lose share to those competitors anyway.

If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step. A lot will depend on a hospital’s competitive market, physician relations, and related strategies with commercial payers and insur-ance exchanges.

A hospital that succeeds with an ACO will not make a lot of money from the ACO directly, but it may succeed in transforming its organization into a clini-cally integrated provider of high-quality care with a strongly aligned medical staff who can provide high-value, low-cost care not only to governmental but also to commercial payers.

Remember, however, that the first contract period is just the beginning. After the initial three- to three-and-a-half-year contract period, it will be time to consider renewal. The ACO will need to achieve a new

level of savings to succeed against tighter benchmarks, and there will be both upside and downside risk in the renewal period. It is therefore appropriate to consider related alternative strategies, such as Medicare Advan-tage and Medicare Select. ❑

If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.

About the authors

(continued from page 26)

MM ISSUE 5.cs5.5.indd 27 7/10/12 2:01 PM

presentation focused on managing and monitoring progress with risk based contracts and how to translate this into finance statements and budgeting. A presentation on orthopedic procedures and bundled payments was led by David C. Ayers, MD, Chair of Orthopedics and Physical Rehabilitation at UMass Memorial Medical Center. Joining Dr. Ayers was Paul Lofrumento, Sr. Director of MSK, Jeanne Shirshac, Director of Government Payers and Phil Moriarty, Sr. Director of Decision Support -all from UMass Memorial Medical Center.

Following a luncheon, Karen Wartenberg,

Panelists Phil Moriarty, Paul Lofrumento, David C. Ayers, MD, and Jeanne Shirshac discuss the work the MSK (Musculoskeletal) Center of Excellence has done regarding bundled payments along with the assistance of Navigant.

(continued on page 29)

Panelists Phil Moriarty, Phil Moriarty, Phil Paul Lofrumento, Paul Lofrumento, Paul David C. David C. David Ayers, MD, and Jeanne and Jeanne and Shirshac Jeanne Shirshac Jeanne discuss Shirshac discuss Shirshac the work the work the the MSK the MSK the

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(continued from page 5)

Director of Financial Analysis and Budget from H. Lee Moffitt Cancer Center in Tampa Florida and Debra Miller, Vice President at Kaufman Hall presented rolling forecasts and making the transition away from a traditional budget process and some of the pros and cons of this change.

The end of the day was rounded out by a panel discussion on the changes health reform is having on the industry. This panel was comprised of James L. Heffernan, Chief Financial Officer and Treasurer at Massachusetts General

MM ISSUE 5.cs5.5.indd 28 7/10/12 2:01 PM

Over 160 attendees gathered for the day’s presentations.

(continued from page 28)

Over 160Over 160Over attendees 160 attendees 160 gathered for gathered for gathered the for the for day’s the day’s the presentations.

Physicians Organization, Charlene Underwood, Senior Director of Government and Industry Affairs with Siemens Healthcare and Todd Whitecross, Director of Commerical Contracting, Tufts Health Plan.

A special thanks to the EPM program coordinators, Roger Price and Steve Saudek, Board Liaison, Rose Rotty, and all of the dedicated EPM members that worked so diligently in putting together this annual meeting.

Speakers Todd Whitecross, Tufts Health Plan, and Phil Moriarty, Umass Memorial Medical Center (UMMMC). Speakers Todd Whitecross, Todd Whitecross, Todd Tufts Health Plan, and Phil and Phil and Moriarty, Phil Moriarty, Phil Umass

MM ISSUE 5.cs5.5.indd 29 7/10/12 2:01 PM

The following members recently joined the Massachusetts-Rhode Island Chapter of HFMA. We welcome you to the Chapter and encourage you to take advantage of the many professional development, networking and information resources available to you at HFMA. Other HFMA members are a terrific resource for your everyday professional challenges – we encourage all members, current and new, to get involved with HFMA committees and social activities. And… use the Membership Directory – it’s a great resource! We value your membership, so please send us feedback or questions on your HFMA experiences to admin@ma-ri-hfma.org.

New Massachusetts-Rhode Island Chapter Members April 1, 2012 – May 31, 2012

Lisa AdamczykMiriam Hospital

Brian W. AndersonSouth County Hospital

Michael A. BeaulieuSouth County Hospital

Diane Carroll Partners HealthCare System Inc.

Paula CommendatoreCare New England

Carlos W. CubiaCovidien

Elisabeth L. Daley

Clifford T. DesmondShriners Hospital for Children

Neeta DhawanPricewaterhouseCoopers

Michael Feinberg

Brenda M. FoleyCape Cod Healthcare

Michael GelbwachsExperian Healthcare

Timothy HallCBCS – Credit Bureau Collection Services

Erin HerbstObjective Health, A McKinsey Solution

Ellen JanosMintz Levin

John P. KirkLease Portfolio Recover Services, LLC

Richard LangeBeth Israel Deaconess Physician Org., LLC

Elizabeth LymanOptumInsight

Marcia J. MoranReliant Medical Group

30 Mass Media

(continued on page 31)

Welcome New Members!

MM ISSUE 5.cs5.5.indd 30 7/11/12 1:26 PM

(continued from page 30)

Issue 5 31

Robert MuszynskiCDMI, LLC

Mark NovotnyCooley Dickinson Hospital

Mark L. PattiPartners Healthcare

Steve PicaSurgi-Care

Eileen Reid-MccuskerDana-Farber Cancer Institute

Frederick RomanoHealth Management Associates, Inc.

Mark A. RukavinaCommunity Health Advisors, LLC

Mark SiegelThe Outsource Group

Pam TaylorFTI Consulting

Susan ThibeaultPartners Healthcare System, Inc.

Peter UnderhillPartners Healthcare System, Inc.

Jenny YanPartners Healthcare System, Inc.

Welcome New Members! (continued from page 30)

Better fi nancial performance. Better patient care. Better results.

� Online budget information � Revenue cycle management � Payer mix analysis � Clinical and financial dashboards � Planning and forecasting

informationbuilders.com

We help healthcare organizations make evidence-based decisions about fi nancial performance so they can focus on improving care and the bottom line.

We’re here to help you get better.

Better fi nancial performance.

MM ISSUE 5.cs5.5.indd 31 7/10/12 2:01 PM

Date Event Location Coordinator(s)

08-09-2012 Annual Golf Tournament Juniper Hills Tony Slabacheski Golf Coursel 09-14-2012 New to Health Simmons College Judy Johnson & Care Seminar Boston, MA Karen Hart

10-19-2012 Accounting & Regulatory Sheraton Ferncroft Update Framingham, MA Sheila Harrington

12-07-2012 Compliance Update Doubletree Hotel Christophe Gingras, CHFP Westborough, MA and Matthew Putvinski

01-18-2013 Revenue Cycle Meeting Gillette Stadium Angela Confoey, Amy Ryba, & Foxboro, MA William Wyman, FHFMA

02-15-2013 Enterprise Performance Doubletree Hote Roger Price & Westborough, MA Stephen Saudek

03-15-2013 Physician Practice Management/ Doubletree Hote Nan Jones & Ambulatory Care Meeting Westborough, MAs Deb Schoenthaler

05-15-2013 – Region 1 Conference Mohegan Sun Region 105-17-2013 Uncasville, CT

06-07-2013 Managed Care Programt Doubletree Hotel James Donohue, MBA, Westborough, MA Karen Rosania, CHFP & Dan Willi

HFMA Massachusetts- Rhode Island Chapter 411 Waverley Oaks Road, Suite 331B Waltham, MA 02452

MASS COMMUNICATIONS, INC. VARIOUS INDICIA’S / PERMIT IMPRINTS

USE THIS INDICIA FOR INTERNATIONAL MAIL

USE THIS INDICIA FOR STRAIGHT FIRST CLASS MAIL – FULL RATE

USE THIS INDICIA FOR PRESORT FIRST CLASS MAIL

USE THIS INDICIA FOR PRESORT STANDARD BULK

USE THIS INDICIA FOR NON-PROFIT

USE THIS INDICIA FOR PRESORT BOUND PRINTED MATTER

OR THIS INDICIA CAN BE USED FOR PRESORT BOUND PRINTED MATTER INSTEAD…EITHER ONE IS ACCEPTABLE BY THE USPS.

FIRST-CLASS MAIL INTERNATIONAL U.S. POSTAGE

PAIDLEOMINSTER, MA

PERMIT NO. 17

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PAIDLEOMINSTER, MA

PERMIT NO. 17

PRESORTEDFIRST-CLASS MAIL

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Date Event Location Coordinator(s)Coordinator(s)

08-09-2012 Annual Golf Tournament Juniper Hills Tony SlabacheskiGolf Coursel

09-14-2012 New to Health Simmons College Judy Johnson &Care Seminar Boston, MA Karen Hart

10-19-2012 Accounting & Regulatory Sheraton FerncroftUpdate Framingham, MA Sheila Harrington

12-07-2012 Compliance Update Doubletree Hotel Christophe Gingras, CHFPWestborough, MA and Matthew Putvinski

01-18-2013 Revenue Cycle Meeting Gillette Stadium Angela Confoey, Amy Ryba, &Foxboro, MA William Wyman, FHFMA

02-15-2013 Enterprise Performance Doubletree Hote Roger Price &Westborough, MA Stephen Saudek

03-15-2013 Physician Practice Management/ Doubletree Hote Nan Jones &Ambulatory Care Meeting Westborough, MAs Deb Schoenthaler

05-15-2013 – Region 1 Conference Mohegan Sun Region 105-17-2013 Uncasville, CT

06-07-2013 Managed Care Programt Doubletree Hotel James Donohue, MBA,Westborough, MA Karen Rosania, CHFP

& Dan Willi

E d u c a t i o n / P r og r a m A d m i n i s t r a t i o n C o m m i t t e e , C o - C h a i rs : C a t h e r i n e Ro b i n s o n - S k e e n , c a t hy. s k e e n @ ki n d r e d h e a l t h c a r e. c o m & Roge r B o u ch e r, r oge r. c. b o u ch e r @ b a m l . c o m

NOTE: Please keep in mind that the themes listed for the programs are general. The programs themselves address current issues pertaining to these themes.

P r o g r a m & S p e c i a l E v e n t S c h e d u l e

2011

-201

2

MM ISSUE 5.cs5.5.indd 32 7/11/12 1:26 PM