Header graphic for print
The Healthcare Investor Insights on Issues & Trends that Impact Investments in Healthcare & Life Science Businesses

Investment Opportunities in ACOs

Posted in Healthcare Services Investing

Accountable Care Organizations (ACOs) have become a catchphrase within today’s healthcare industry. As we have discussed in prior posts, ACOs are intended to be a vehicle for providing physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level. Currently, Medicare habitually reimburses physicians and hospitals more when patients are on the receiving end of more tests and additional procedures, increasing costs. By emphasizing preventative care and monitoring patients with chronic illnesses, the ACO approach is designed such that doctors and their institutions would receive higher reimbursements for keeping their patient population healthy.

Under the new law, which goes into effect January 2012, an individual ACO would manage the health care needs of at least 5,000 Medicare beneficiaries for a minimum of three years. ACOs will, ideally, systematize such components of patient care as hospitals, primary care and specialty physicians, as well as both in-home and institutional long-term health care, ensuring optimal patient care and physician financial benefits. Medical centers, health care practices and insurers across the country are looking to form ACOs that will include privately-insured patients as well as Medicare recipients.

Multispecialty groups have begun establishing ACOs throughout the country, with several initial efforts appearing in California. Large medical centers are buying up practice groups for a variety of reasons, a consolidation trend that now also has the additional benefit to some systems of formation of ACOs that would employ a majority of their providers. With more access to the necessary start-up capital, these institutions will, conceivably, have at least a monetary advantage over many smaller private practice groups. Some of the largest health care insurance providers in the country, such as Cigna, Humana and United Health Care, have also announced plans to form ACOs; these companies already collect a plethora of information on patients, vital for coordinating and reporting healthcare.

Start-up and first year cash costs will typically come from an ACO’s providers, with a CMS estimate of $1.76 million. As with any venture, particularly innovative ones, careful contractual delineation of the parties’ relative rights and responsibilities is paramount for success. For example, if funding obtained via financing, loan documents should be clear as to the extent to which ACO participants are obligated to guarantee such debt (e.g. dollar and time limits on the guarantees relative to the entire ACO investment, etc.). At the conclusion of each year, an ACO will either receive payment from CMS or, conversely, remit funds to the agency. These profits/losses will then be allocated to the participants.   Investors may opt to place finances in escrow or offer bank letters of credit to ensure the availability of funds potentially owing back to CMS should the ACO fail to hit performance targets. Normally, an ACO would issue profits and losses based on a formula that incentivizes providers to meet the organization’s objectives, details of which would be included in negotiations, another aspect of ACO contracts critical in determining investors’ rights as well as risks.
 

We use cookies to enhance your experience of our website. By continuing to use this website, you agree to the use of these cookies. For more information and to learn how you can change your cookie settings, please see our policy.

Agree