Distribution Based on Contribution: The Merit-Based ACO Shared Savings Distribution Model

Julian D. "Bo" Bobbitt, Jr.

Our nation is in the midst of an inexorable shift in health care delivery from "pay for volume" to "pay for value." It is well documented that our current largely fee-for-service system is unsustainable and a dramatic incentive shift must occur. Every provider needs to be committed to providing the highest quality at the lowest cost. This is the fundamental goal of the pay-for-value system.

If quality and patient satisfaction criteria are met and providers working together in an accountable care organization or similar entity create savings for a defined patient population, then the ACO usually gets a portion of the savings, commonly 50%. Unlike capitated arrangements, shared savings arrangements can avoid or limit downside financial risk and therefore can serve as stepping-stones toward fuller accountability and incentives. They are quite appropriate for start-up and smaller ACOs.

The ACO gets the savings, if there are any. But what the ACO does with them is crucial to the success and sustainability of the organization. "ACOs must offer a realistic and achievable opportunity for providers to share in the savings created from delivering higher-value care. The incentive system must reward providers for delivering efficient care as opposed to the current volume-driven system" (The ACO Toolkit; the Dartmouth Institute, p. 9, Jan. 2011).

If providers or hospital stakeholders feel that their efforts to drive value are not being fairly recognized, they will no longer participate meaningfully, the goals of value-based medicine will be thwarted, and savings will not occur in the long-run. Before signing a participation contract, physicians should scrutinize how each ACO plans to distribute the savings it receives.

The Centers for Medicare and Medicaid Services administers the Medicare Shared Savings Program (MSSP). The fact that CMS’s regulations concerning MSSP are not prescriptive about a given savings distribution formula gives ACOs flexibility in this area. But the regulations are specific about the ultimate purpose of distributions: "As part of its application, an ACO must describe the following: (1) how it plans to use shared savings payments, including the criteria it plans to employ for distributing shared savings among its ACO participants and ACO providers/suppliers, ... and (3) how the proposed plan will achieve the general aims of better care for individuals, better health for populations, and lower growth in expenditures" (42 CFR 425.204(d), 76 Fed. Reg. 6798 [Nov. 2, 2011]).

Fatal flaw?

Some ACOs, however, have lost sight of the fact that failure to have a fair shared savings distribution formula (linking relative distributions to relative contributions) will be fatal to its sustainability. Some view them as "profits" to go to the owners or shareholders. Some simply lock in a fixed allocation similar to fee-for-service payment ratios, without regard to who generated the savings. Some employers of physicians have contracted to compensate only on a work production basis with zero performance incentive payments at all. Other ACOs are putting off the issue because it is sensitive culturally. As health care moves more and more to value-based compensation, the distribution of savings must be viewed primarily as the providers’ professional remuneration and not corporate "profit." Payments for administrative services and debt service must, of course, come out of the savings distribution to "keep the pump primed," but they should be carefully managed. The bulk must be distributed in proportion to contribution toward quality and cost-effective care.

One physician stated, "No physician is going to join an ACO when someone else is telling them what they are worth unless they know that the savings distribution formula is impeccably fair." To those putting off design of a fair merit-based compensation system until there is more physician buy-in, we respectfully submit that you cannot get buy-in without one.

A need for honed metrics

Yes, this concept is pretty basic when you think about it. But though it may be easy to understand, it can be complex to implement, especially when multiple specialists and facilities are involved in an ACO’s care coordination. One not only needs to determine the relative potential and actual value contribution for each provider, but also the clinically valid metrics by which to measure them. Under fee for service, metrics for success were usually transactional and objective (in other words, volume of procedure times rate). An ACO’s success metrics may be neither. Success may come from things not happening (that is, fewer ED visits, avoidable admissions, and reduced readmissions). At the same time, the distribution model needs to be clear, practical, and capable of being understood by all.

But there can be a replicable framework for any ACO to use to create a fair and sustainable shared savings distribution model. There are necessary subjective judgments – at this time, many metrics are imprecise or nonexistent – and the sophistication of the distribution process must parallel the sophistication of the ACO’s infrastructure. But, if the right people are involved and apply the ACO’s guiding principles on savings allocation, participants will be appropriately incentivized. The precision of distribution application will grow over time. Don’t let the perfect be the enemy of the good.

The six guiding principles for shared savings distribution

Though application will vary widely because of differing circumstances and types of initiatives, chances for success will increase if every activity can be judged by whether it is consistent with a set of guiding principles viewed as fair by the ACO members. You may want to consider a savings distribution formula with the following principles:

  • Eyes on the prize: Triple Aim. It offers incentives for the delivery of high-quality and cost-effective care to achieve the Triple Aim – better care for individuals, better health for populations, and lower per capita costs.
  • Broad provider input. It is the result of input from a diverse spectrum of knowledgeable providers who understand what drives patient population value.
  • Fairness. It is fair to all in that it links relative distribution to relative contribution to the organization’s total savings and quality performance, and adheres to measurable clinically valid metrics.
  • Transparency. It is clear, transparent, practical to implement and replicable.
  • Constant evolution. It adapts and improves as the capabilities and experience as the ACO grows.
  • Maximized incentive to drive value by all participants. After prudently meeting overhead costs, it allows gradual transition as well as commercially reasonable return on capital investment or debt service. It makes the most of ongoing incentive programs for all to deliver value by distributing as much of the savings surplus as possible to those who generate them.

Weighting: How to assign relative percentage among providers

As mentioned, it is important that design of a fair distribution formula be the product of collaboration among informed and committed clinicians who understand patient population management. Like virtually all organization compensation formulas, the determination of relative contributions of the different providers in a given ACO, or care initiative within the ACO, will involve a certain amount of inherent subjectivity but will be guided by weighted criteria applied in good faith.

Step 1: Break down each initiative into its value-adding elements and assign provider responsibility for each. The ACO will have a number of different care management initiatives. Some, like outpatient diabetes management, may be completely the responsibility of one provider specialty, (that is, primary care). Others may involve coordination across multiple settings for patients with multiple conditions involving multiple specialties. Each initiative was chosen for a reason – to drive value. In setting relative potential distribution percentages, envision the perfect implementation of each initiative. Next, look at what tasks or best practices are needed to drive success, and then who is assigned responsibility for each.

Step 2: Assign relative percentages to each specialty relative to its potential to realize savings. For a pure primary care prevention initiative, they would get 100% in all categories. For multispecialty initiatives, the percentage is tied to the proportion of those savings predicted to flow from that provider class.

N.B.: Historically, cost centers are not necessarily the cost savers. A mature ACO will be able to allocate savings to each initiative and the relative savings distribution within each. But for a start-up ACO, because it is so apparently logical and fits the traditional fee-for-service mindset, it is tempting to look at claims differences in the various service categories, such as inpatient, outpatient, primary care, specialists, drugs, and ancillaries, and attribute savings to the provider historically billing for same (that is, hospitals get "credit" for reduced hospital costs). However, a successful wellness, prevention, or lifestyle counseling program in a medical home may be the reason those patients never go to the hospital. The radiologist embedded in the medical home diagnostic team may have helped make an informed image analysis confirming a negative result and avoided those admissions. But, do use those service categories to set cost targets.

Step 3: Individual attribution. We now know every provider group’s potential savings, but how do we determine the actual distribution based on actual results? Select metrics that are accurately associated with the desired individual and collective conduct of that provider class. They should cover both quality and efficiency. In the value-based reimbursement world, even if the performance is superb, if it is not measured appropriately, it will not be rewarded.

Once the proper metrics are selected, each provider’s performance is measured.

Keep it simple and open

Pick a few of the very best quality and efficiency metrics and have them and the data collection process thoroughly vetted by the providers. Following the guiding principles, the distribution model will be a success if: (1) everyone understands that this is the best practical approach, (2) the process has been open, and (3) everyone is acting in good faith to have as fair a shared savings distribution process as the current sophistication level of the ACO’s infrastructure allows. It cannot be viewed as coming from a "black box." For a young ACO, it will be crude, at best, in the beginning.


Even at this dawning of the movement to value-based reimbursement in health care, a framework for a fair merit-based shared savings distribution is available to all ACOs. As ACOs gain actual performance data, their health information technology capabilities improve, and refined quality and efficiency metrics emerge, the process will evolve from an open and good-faith application of the guiding principles with limited tools, to more and more refined determinations of the sources of the ACO’s quality and savings results. The path will get easier over time, but the destination is always clear – distribution in proportion to contribution.

This article appears courtesy of Internal Medicine NewsBo Bobbitt is the author of Internal Medicine News "ACO Insider" column.

Bo has many years of experience assisting physicians form integrated delivery systems. He has spoken and written nationally to primary care physicians on the strategies and practicalities of forming or joining ACOs. This article is meant to be educational and does not constitute legal advice. For additional information, please contact Bo Bobbitt.



Jump to Page

This website uses cookies to enhance your browsing experience and improve functionality. To learn more, you may view our Privacy Policy. By continuing to browse Smith Anderson's website, you are accepting our use of cookies in accordance with our privacy policy.