The Opportunity of Oncology ACOs – Strategic Considerations & Challenges – A Return to the Elusive Promise of Capitation

The Opportunity of Oncology ACOs – Strategic Considerations & Challenges – A Return to the Elusive Promise of Capitation

The Opportunity of Oncology ACOs

Strategic Considerations & Challenges:

A Return to the Elusive Promise of Capitation


January 24, 2013

Wes Chapman

The Imperative for Strategic Change

         Bobby Fischer & Boris Spassky

Fischer Beats Spassky (again) in their Rematch



An Oncology ACO


Accountable care organizations sprang into the popular parlance in 2006, introduced by Dr. Elliot Fischer of the Dartmouth Institute as a provider driven organization to anchor the push for the “Triple Aim” originally espoused by Dr. Don Berwick;

  1. Better patient care,
  2. Better population health, and
  3. Reduced costs.

ACOs differed from the HMOs from which they were seemingly born by three important characteristics:

1) The organizations were grounded in improved primary care – not just “gatekeepers,”

2) Patient choice was putatively retained, and

3) Continuously improved care – as demonstrated by transparent quality metrics – would drive down costs even as care improved.


What was, in fact, clever and demonstrably different about ACOs was the payment mechanism for goods and services. The payment mechanism currently in use allows for a gradual shift: 1) from fee-for-service (FFS) payments, to 2) FFS based payments with risk sharing models and some type of shared savings, and finally to 3) capitated payments based on populations, with significant premiums and penalties for attainment of quality goals. It is important to note that all ACOs models to date use historical costs (provider revenues) – in some fashion – as the baseline for the evaluation of payments in the future; typically for periods of 3-5 years. It is important to note that all ACOs formed to date by Medicare (CMS) are quite idiosyncratic in design, and all are focused on primary care. There have been a few oncology ACOs formed to date – all by private payers and providers.


As a result of this payment model, clinical areas which can effectively reduce costs – actual cost from a provider’s perspective, not just utilization – while simultaneously improving care (based on established metrics) can benefit enormously from ACO payment reform. For a variety of reasons, oncology care – particularly medical oncology – is structurally well positioned to benefit financially from the ACO model.


There are two major catches in the ACO payment system from a provider perspective: 1) prospective payments always involve some form of a discount from historical levels, and 2) adherence to and attainment of quality metric goals may be difficult or impossible to achieve, and if achieved may not reduce costs or actually improve clinical outcomes.


As with any new payment model, ACOs were designed to offer financial incentives for providers to adopt new organization structures and clinical innovations to achieve the Practical Triple Aim: 1) improve patient satisfaction, 2) reduce payer’s outlays, and 3) improve provider financial performance.


The high variable cost structure of medical oncology, combined with the care innovation afforded by the emerging areas of palliative care, patient education and informed patient choice (see Palliative Care) offer a unique opportunity for successful ACO formation.


Costs, sharing savings, coordinating care, medical homes and dealing with complexity


From a practical perspective, oncology care is delivered by numerous clinical specialties – including medical oncology, radiation oncology, surgical oncology, radiology, pathology, primary care and palliation – all too frequently operating without any central care plan or even effective care coordination (see Oncology Care). Based on our work in several different environments, a population of over 250,000 people incurs cancer at a rate of just less than 1%, with a typical cost per patient between $80,000-120,000. Costs for such a population typically are incurred (based on payment) along the following lines:


Cost Element

% of Total

Potential Savings

Medical Oncology



Radiation Oncology



Surgical Intervention



Radiology and Diagnostic








17.5- 32.5%


In order to coordinate care and reduce total costs, it is critical to include total patient care in an oncology ACO. As further highlighted below, the cost structure of each of these areas is very different, and simple reduction of utilization may not accomplish actual cost reduction from a provider’s perspective.


Cost Element

Description of cost structure

Medical Oncology

Medical   oncology has some of the highest variable costs found in medicine (40-50%).   Capitated payments correspond directly to greater profits because of the   elimination of purchased drugs. The use of clinical pathways and bundles is   becoming widespread – reducing variability and cost. This is also the area of   greatest risk due to high priced medications. This area also has the greatest   level of pathways, process metrics and patient reported outcomes ( Pathways and   metrics,   Patient   reported outcomes)   to ensure quality and best practice adherence.

Radiation Oncology

Radiation   oncology is a very high fixed cost business, and has been under constant   assault from pricing. Extremely expensive equipment and specialized   facilities require high utilization for payback and profit.

Surgical Intervention

Surgical   costs combine the relatively high fixed costs of hospitals, together with the   professional fees, which may be fixed or variable based on employment model.

Radiology and Diagnostic

Radiology   and diagnostic testing is an area of high fixed costs, and dramatic   over-utilization in many circumstances. Over utilization results from poor   care coordination, poor IT systems and patient preference.

Other Costs

Up   to half of other costs are clearly identified as unnecessary care for   therapies which neither extend nor improve life. This is the single easiest   area to target savings, as it does not impact revenue anywhere in the   provider system.


The   ability to translate lower utilization into lower actual incurred cost varies   tremendously by therapy. Lower utilization is necessary, but not sufficient   to achieve cost reduction at the provider level – it will also require   facilities rationalization for capacity requirements.

Another way to consider provider cost rationalization is based on the relative value and efficacy of the care provided – regardless of type of care. A good example is care generally regarded as futile, e.g. any late stage cancer death in the ICU or chemotherapy in the last 24 days of life. Cancer is frequently predictably fatal, and presents cancer patients with certain stark choices regarding tradeoffs of the certain negative impacts of treatment with the possible benefits in terms of marginal extension of life. There are certain operational risks in controlling these costs, as well as a number of key operational considerations as outlined below.


Cost Category

Best Payment Model for Cost Control


Operational Considerations

Overtreatment   Relative to Patient Wishes ACO Limited   risk of reduced access Requires   highly empowered PCP’s, strong medical homes, and excellent data
Pointless   End-of-Life Oncology Care ACO Limited   risk of reduced access Requires   Highly empowered PCP’s, strong medical homes, and excellent data
Pointless   End-of-Life Other Care ACO Limited   risk of reduced access Requires   Highly empowered PCP’s, strong medical homes, and excellent data
High   Variability & “High Price” selection bias in Medical Oncology ACO/Bundles Limited   risk of reduced access Requires   capitation in some form and excellent pathway/bundle definition
Excess   diagnostic testing and radiographic imaging ACO Limited   risk of “under-diagnosis” This   requires excellent IT systems and empowered PCPs


The delivery of clinical care in the US is complicated by our fee for service payment system – economics drive care towards a revenue optimization model which maximizes revenue by maximizing the number of touches and the relative value unit (RVU or payment value) per touch. Oncology care further complicates matters by spreading care over three completely separate clinical specialties – medical, surgical and radiation oncology – with little or no coordination between them being the norm. This results in a wildly inconsistent and complex system, operationally opaque to patients, providers and payers alike.


An effective medical home – particularly an oncology medical home – with an effective primary care physician is a first and necessary step in providing leadership to untangle the “balls of snakes” that is frequently the flow chart of oncology care delivery. From a patient’s perspective, oncology care is their personal Superbowl – a game with very high stakes. An oncology medical home and oncology PCP affords the patient both a game plan and a quarterback – dramatically improving the odds of victory. From a financial perspective, an oncology medical home and PCP – providing the related planning, palliation and patient education functions – are the only methods to ensure that unnecessary, duplicative and futile care can be identified and eliminated; and the financial benefits of the oncology ACO are realized. The oncology medical home and PCP are absolutely essential elements in achieving the patient satisfaction and financial goals of the Practical Triple Aim.


 complex oncology slide

Complex oncology care delivery system – uncoordinated care & uncontrolled costs

Second Slide Simplicity

Planned and coordinated care with rational economic incentives

Critical Management Control Issues in Oncology ACOs

Effective management of a comprehensive oncology ACO requires the integration of 6 fundamental process steps across at least 3 clinical specialties: 1) education of the patient and the determination of patient preferences and goals, 2) planning care for the patient based on best practice pathways, 3) executing the plans with the greatest sharing of resources and diagnostics, 4) integrating palliative care as required, 5) verifying compliance, and 6) updating all of the above as required based on disease condition. There are only a small number of entities in the US capable of managing planned, integrated cancer care in the US, and tiny number capable of effectively managing planned, integrated total patient care including oncology.


Most of the 41 NCI designated comprehensive cancer centers are capable of effective care pathway design and selection – development of an effective individual care plan. Most of these are capable of tracking care plan compliance, and a fairly robust suite of process and efficiency metrics. There is one noteworthy for profit player in the area – Cancer Treatment Centers of America – which has really done a terrific job in driving patient satisfaction based on reported diagnostic and care planning, coupled with documented care plan compliance. Finally, there are three noteworthy rural based health systems that stand head and shoulders above the rest in total care planning and documented compliance – Mayo Clinic, Geisinger Health System and Intermountain Healthcare.


It is important to note that in virtually every case, the existing operating control systems are integrated into revenue cycle management (RCM) software to a large degree (see Inverted System Requirements), dramatically complicating the ability to move swiftly to a capitated system, rewarding savings.


Issues with Shared Savings, Beginnings, Transaction Intensity


Oncology ACOs need to be fairly broad to realize their full benefit, but a medical-oncology-only ACO is a good place to start, and really simplifies the ability to identify and capture savings. Most ACOs to date use fee for service billing with a gross up at the end of the year to reflect savings. In any multimodality ACO, this would encourage disparate provider groups to maximize their own billing, while pushing for reduced service levels and savings in other clinical areas. This “best-of-both-worlds” incentive could only be limited by contentious battles refereed by the PCP, and would be destructive and a waste of time. Furthermore, reductions in utilization of high fixed cost operations such as radiation oncology do nothing to reduce actual costs. In these areas, costs can only be reduced by the elimination of capacity – and that requires that somebody take an economic hit.


Efficient economic formation of oncology ACOs will benefit from multiple transactions of several types (Transaction Types & Motivations) – targeted at goals including control of operating assets, achieving 340B drug pricing, aligning provider incentives, optimizing pre-ACO reimbursement, forming and engaging provider groups, and controlling assets for rationalization based on projected use. To a very large degree, the operating potential of an oncology ACO depends on factors dependant on well structured and targeted transactions combined with operating management, clinical leadership and IT control systems that allow the economic potential of medical oncology ACOs – potentially reaching 10-30% of margin improvement – to be realized.

Wes Chapman
Written by Wes Chapman

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