The Major Challenge Facing CCO’s


The CCO’s face a major challenge because they don’t directly control the care provided to their Medicaid enrollees.  Doctors and hospitals make the decisions about what care is delivered.  To keep from going broke, the CCO must motivate these independent providers to reduce low-value, unnecessary care and increase prevention and other high-value care.  The best way to motivate providers is to change incentives by eliminating fee-for-service payments and switching to capitated or bundled payments.

Currently, all providers of medical care are still paid using fee-for-service and CCO’s are unlikely to be able to implement “alternative payment” methods because capitated payments require providers to assume risk that they are currently reluctant to accept.  One solution may be to reorganize providers into larger integrated groups.  However, Medicaid is not a large enough program to cause the needed changes.

When the Coordinated Care Organizations (CCO’s) were organized two years ago, they fundamentally changed the way Oregon’s Medicaid program is financed and administered.  The Oregon Health Authority (OHA) now provides each CCO with a fixed yearly amount of money—its “global budget.”  In return, the OHA requires the CCO’s governing board—usually the local medical community partnering with an insurance company—to provide high quality medical care and keep costs from exceeding the CCO’s global budget.

A CCO’s global budget is capitated; i.e., the amount of money the CCO receives each year depends only on the number of Medicaid recipients enrolled.  The switch to capitated payments has two effects.  First, it puts the CCO “at risk.”  If the CCO isn’t able to deliver the required care without exceeding its fixed budget, it will go broke.  Higher costs can no longer be passed on to someone else.  The CCO can buy reinsurance for unexpected high costs in a particular year, but reinsurance won’t continue to supplement the global budget if losses continue.

Second, because the growth rate in capitated payments is scheduled to decline, the CCO’s must quickly eliminate unnecessary, low value care and give greater emphasis to prevention and care coordination. Unless unnecessary care is reduced, financial pressure will build and a CCO’s only option will be to go back to the traditional method of balancing the Medicaid budget—cutting payments to providers.  Further cuts in payments to providers will be seen as a major failure since low payments are already squeezing doctors and hospitals and limiting access.

The CCO’s face a major challenge.  They are responsible for providing health care, but have little direct control over the care that is actually provided.  Few CCO’s own hospitals or directly employ doctors.  They must contract with independent local providers for care.  These doctors and hospitals—not the CCO—make the medical decisions for Medicaid patients. The CCO can influence the amount and type of care delivered only indirectly by changing incentives—mainly through the way doctors and hospitals are paid.

So far, the CCO’s have made almost no progress in changing the way hospitals and doctors are paid.  I recently realized that all the main providers hired by the CCO’s are still paid using fee-for-service.  Primary care doctors are paid a capitated per member per month (PMPM) payment for office visits.  However, they are still allowed to charge for the procedures they do and are not charged for referrals, so the only effect of the PMPM payments is to motivate primary care doctors to discourage unnecessary office visits.  Specialists have part of their payments withheld, but can still increase their income by providing more care.  Local hospitals and pharmacies continue to be paid fee-for-service. The incentives faced by the CCO’s are not being passed down to the providers who actually deliver care.

For a CCO to succeed in the long run, providers must face the same incentives as the CCO faces and be paid in a similar way.  Unfortunately, paying providers using capitated (or bundled) payments requires that providers assume financial risk.  If payments don’t increase when a patient needs more care, the extra care reduces the provider’s income.  So far, providers, especially small providers, have been reluctant to take on this new risk.  The CCO Boards of Directors need to find answers to several important questions.  How can providers be motivated to assume risk?  Does the CCO have any power to force providers to assume risk?  Currently, it seems that the insurance companies decide the method used to pay providers. What role does the CCO’s governing board have in making this key decision?

I’m beginning to worry that the CCO’s may have a serious flaw. Many of the clinics and even hospitals that now provide care are too small to assume the risk that must be shouldered when fee-for-service payments are eliminated.  Getting providers to accept the needed changes may be possible only when the CCO’s are able to contract with large integrated systems of providers that are big enough to assume risk.  Forming these new organizations will be a challenge and the Medicaid population is probably too small to drive the needed reorganization.

One thought on “The Major Challenge Facing CCO’s

  1. You are on the right track Tom. I believe that the only real cost saving function of the CCO’s that I have seen so far is to identify the highest utilizers of the system and find ways to give them the care they need without wasting limited dollars on ineffective or over treatment. We have to start addressing medical costs and the positive result I have seen is that the providers are all at the table discussing how to achieve these goals.

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