ACO Bonus Calculation

An ACO gets a bonus payment of up to 50% of the cost savings from Medicare Parts A and B for its patients. (If an ACO is willing to risk losses as well as bonuses (2-sided), they get up to 60% of the savings instead of 50% 42 CFR 425.606.

1. The baseline for savings is past years' spending, "Parts A and B fee-for-service expenditures for beneficiaries that would have been assigned to the ACO in any of the 3 most recent years" (42 CFR 425.602(a)) based on taxpayer numbers of doctors now in the ACO. The 3 years are not averaged equally; the last year gets 60% weight, middle year 30%, first year only 10%. 
2. The exclusion of retired doctors moves the baseline down, by excluding their typically older patients from the baseline.
3. The baseline omits patients who stop getting care from the ACO by choice or by death. (42 CFR 425.602(a)(8)) 
4. Excluding dead patients moves the baseline down again by omitting the typically high costs of the last year of life. Moving the baseline down means deeper cuts in current expenses are needed before the ACO sees savings.
5. The 3 base years stay the same for the entire "agreement period," (42 CFR 425.602(c)) typically 3 years.
6. The fixed baseline is updated by national rises in Medicare costs. (42 CFR 425.602(a))
7. The fixed baseline is adjusted for changes in patient mix. (42 CFR 425.602(a)) The adjustments are slight, explaining only 2% to 12% of the total variation actually caused by patient mix (p.65 table 3-22, "r-squared" of version 21). Adjustments are inherently ineffective, "You can’t get all the right variables on the page" said Berwick, former Medicare Administrator,
8. The comparison is Parts A and B fee-for-service costs for an ACO's patients each year. (42 CFR 425.604)
9. The cost for each patient is limited to the national 99th percentile of patient costs each year, to limit the effect of the most expensive patients (42 CFR 425.602(a)(4)). Doctors expect the limit will be about $100,000 per patient, so patients costing over $100,000 will be averaged as if they cost $100,000.
10. Patients are included in the ACO if they get more primary care from the ACO than from any other ACO or non-ACO sources (42 CFR 425.402). Patients who get no care in a year are not included.

Medicare requires ACOs to have at least 5,000 Medicare patients. With 260 Medicare patients per doctor, this means at least 20 primary care doctors in each ACO. Most ACOs are larger. However 3-8 doctors give better care, because they take more responsibility and have fewer managerial distractions than big practices (Kussin 2011, p.36). With at least 20 doctors, each doctor has little effect on the ACO's bonus, so the ACO needs internal incentives to motivate doctors, such as reviews of doctors, limits on expensive procedures, and rewarding individual doctors for cutting their costs. Much like an HMO.