New Study Points to Opportunity for Cost Savings by Accountable Care Organizations

Society of Actuaries Report Examined Application of Risk Adjustment within Health Episodes as a Tool for Evaluating ACO Cost Efficiency

Dec 16, 2013, 09:00 ET from Society of Actuaries

SCHAUMBURG, Ill., Dec. 16, 2013 /PRNewswire/ -- A new study from the Society of Actuaries (SOA) released today finds that risk adjustment, a statistical method used to explain differences in medical costs between patients, can be an effective tool to help evaluate how effectively Accountable Care Organizations (ACOs) manage factors not related to patient health, such as physician practice patterns and patient preferences. "Evaluating ACO Efficiency: Risk Adjustment within Episodes" is the third in a series of SOA-commissioned studies that examine specific aspects of reform under the Affordable Care Act (ACA).  

"The SOA has been working to provide insight and assistance to health actuaries during this time of unprecedented transformation in the U.S. healthcare market," says Rina Vertes, chair of the Project Oversight Group for the study. "The ACO strategy, an important component of the ACA designed to improve both care coordination and health system affordability, will be effective when opportunities to reduce healthcare costs are taken while maintaining or improving quality and patient outcomes."

According to Bill O'Brien, one of the authors of the report, "Our study found that after taking into account factors relating to patient health through risk adjustment techniques, an ACO can be evaluated on how well it manages other important factors that affect costs for certain specific episodes of care. Just as important, we found that for certain episodes of care, patient health does not play a significant role in determining episode cost. This study provides an approach for insurers, states and federal regulators to evaluate the cost effectiveness of ACOs for certain patient types."

Specifically, the study analyzed the application of risk adjustment within health episodes, which are defined periods of connected, health conditions or acute events. This approach helped the authors determine if risk adjustment could separate out the effects of patient health status on the variation of costs among ACOs. Controlling for variations in patient health enables ACOs to be fairly evaluated by how effectively they are able to control other factors that contribute to overall healthcare costs, such as their own physician practice patterns. 

"The study's findings indicate that there is an opportunity for cost savings among ACOs that are able to manage factors that are within their own span of control," says O'Brien. "But, it is important to note that risk adjustment must be used judiciously in assessing ACO success, because patient health status does not seem to play a decisive role in affecting costs for certain types of episodes."

The report findings, which shed light on the efficacy of risk adjustment within episodes to control patient health status, may help actuaries and insurers develop fairer provider payment models, therefore supporting the success of critical elements addressing healthcare affordability within the ACA. The conclusions may also help regulators make sense of changing cost structures resulting from new provider reimbursement methods.

About the Report
Episodes of Care
The SOA sought to provide benchmarks for some key episode types that ACOs will focus efforts upon, and remove health-status-related variations in episode cost and utilization so that financial outcomes could be compared to each other on a risk-neutral basis. An episode of care focuses on a health condition from its inception through evaluation and treatment as a means of measuring both the quality of care received and the efficiency of the care provided. The authors applied risk adjustment to episodes and cost, and utilization metrics within an episode, using data from all sites of service on patients who had the episodes.

Risk Adjustment
There are several ways risk adjustment is used in the healthcare industry. As a policy tool, risk adjustment determines payment rates and funds transfers in public and private programs such as Medicare Advantage and Part D, as well as a dozen states' Medicaid managed care programs, and risk-based contracts between commercial insurers and provider and physician organizations. As a payment tool, risk adjustment factors are used to adjust a population-based average payment per person to an amount that represents the average expected costs for a patient or a population with the reported medical conditions and risks. As a research methodology, risk adjustment assesses health status and estimates healthcare resource use at the individual or group level.

The report's authors used a random sample of three million members from the 2009 and 2010 Truven MarketScan Commercial Claims Database. The claims were then grouped into clinical episodes using Optum Symmetry Episode Treatment Groups software, and categorized into claim types using the Milliman Health Cost Guidelines grouping approach. Finally, the researchers identified ten different types of episodes that were of interest, and then developed risk adjustment factors within these episode types and studied the variation in episode cost within each episode type.

You can find a copy of the full report here. For more information about the Society of Actuaries, go to

About Actuaries
Actuaries bring a complex future into focus by applying unique insight to risk and opportunity. Known for their comprehensive approach, actuaries enable smart, more confident decisions.

About the Society of Actuaries

The Society of Actuaries is an educational, research and professional organization dedicated to serving the public, its members and candidates. The SOA's mission is to advance actuarial knowledge and to enhance the ability of actuaries to provide expert advice and relevant solutions for financial, business and societal problems. The SOA's vision is for actuaries to be the leading professionals in the measurement and management of risk.


Patrick Gould

The Society of Actuaries


Sarah Kossek



SOURCE Society of Actuaries