Health Expenditures and Quality Health Services: The Efficiency Analysis of Differential Risk Structures of Medicare Accountable Care Organizations (ACOs)

Medicare Accountable Care Organizations (ACOs) represent the nation’s largest initiative of Medicare alternative payment models toward value and health outcomes. The Centers for Medicare & Medicaid Services (CMS) have tested various ACO models with differential risk structures, and have issued a final rule to accelerate the ACOs to assume greater financial risks. In response, this research investigates whether superiority exists among various ACO models and determines their potential cost reductions. The results indicate that in minimizing health expenditures given quality services, or maximizing quality services given health expenditures, one-sided ACOs are more efficient than two-sided ACOs, so it might not be advisable to mandate the transition of ACOs from one-sided to two-sided. This research also shows that Medicare ACOs should be able to reduce expenditures significantly through efficiency improvement, without switching to two-sided tracks. Another finding is that the benchmark expenditures for a significant number of Medicare ACOs are below the efficient expenditures and should be adjusted upward.