Shared savings is a financial incentive model, primarily used in healthcare finance, where healthcare providers are rewarded for reducing costs while maintaining or improving the quality of care. This approach encourages efficiency and better patient outcomes by allowing providers to share in the "savings" generated when actual spending falls below a predetermined target or benchmark. The core idea behind shared savings is to shift away from traditional fee-for-service models, which can incentivize higher volume regardless of necessity, towards a system that rewards value.
History and Origin
The concept of shared savings gained significant traction in the United States with the passage of the Affordable Care Act (ACA) in 2010. A key component of this legislation was the establishment of the Medicare Shared Savings Program (MSSP) by the Centers for Medicare & Medicaid Services (CMS). Launched in 2012, the MSSP was designed to promote the formation of Accountable Care Organizations (ACOs), which are groups of doctors, hospitals, and other healthcare providers who come together voluntarily to provide coordinated, high-quality care to Medicare beneficiaries. The MSSP built upon concepts tested in earlier initiatives, such as the Physician Group Practice Demonstration that operated from 2005 to 2010.14, 15 By tying financial rewards to cost reduction and quality improvements, shared savings programs aim to encourage healthcare providers to invest in infrastructure and redesigned care processes that lead to more efficient and higher-value service delivery.12, 13
Key Takeaways
- Shared savings programs incentivize healthcare providers to reduce healthcare costs while maintaining or enhancing care quality.
- Providers receive a portion of the savings if actual spending is below a set benchmark, provided quality targets are met.
- The Medicare Shared Savings Program (MSSP) is a prominent example, established by the Affordable Care Act.
- These programs aim to shift the focus from volume-based care to value-based care, encouraging coordination and efficiency.
- Success often hinges on robust data analysis and effective care coordination strategies.
Formula and Calculation
While shared savings doesn't have a single universal formula like a financial ratio, its calculation involves a multi-step process. The primary components are:
- Establishing a Benchmark: A historical spending baseline is set for a defined patient population attributed to a group of healthcare providers (e.g., an ACO). This benchmark represents the expected cost of care for that population over a specific period, adjusted for factors like patient demographics and regional trends.
- Measuring Actual Spending: At the end of the performance period, the total actual healthcare spending for the attributed patient population is calculated.
- Determining Gross Savings: If the actual spending is below the established benchmark, gross savings are achieved.
- Applying Quality Adjustments: To ensure that cost reduction does not come at the expense of patient well-being, quality performance is measured using various quality metrics. Providers must meet predefined quality standards to be eligible for shared savings. The percentage of savings they can retain may be adjusted based on their quality score.
- Calculating Shared Savings Payment: The gross savings (if positive and quality thresholds are met) are then split between the payer (e.g., Medicare) and the providers according to a predetermined sharing rate. This rate varies by program and risk arrangement. For example, a 50% sharing rate means the providers receive 50% of the net savings.
This model incentivizes cost reduction and efficient use of resources.
Interpreting Shared Savings
Interpreting shared savings involves more than just looking at the final financial reward; it also requires evaluating the underlying performance. A successful shared savings outcome indicates that a healthcare organization not only managed to lower overall medical expenses for its patient population but also achieved or exceeded specific benchmarks for performance measurement. This suggests effective care coordination, appropriate utilization of services, and a focus on preventive care.
Conversely, a lack of shared savings, or even shared losses in some models, could indicate that the organization's spending exceeded its benchmark, or it failed to meet the necessary quality targets. This would prompt a review of operations, care pathways, and population health management strategies to identify areas for improvement in future performance periods. The financial implications are often secondary to the ultimate goal of improving patient health and healthcare system efficiency.
Hypothetical Example
Consider "Wellness Integrated Health," an Accountable Care Organization (ACO) participating in a shared savings program. For the year, the ACO is responsible for a patient population with a benchmark spending target of $50 million, determined by historical utilization and risk adjustment. The program has a 50% shared savings rate, assuming quality thresholds are met.
Throughout the year, Wellness Integrated Health focuses on enhanced care coordination, preventive screenings, and reducing unnecessary hospital readmissions. At the end of the performance year, the actual healthcare spending for their attributed patients totals $47 million.
- Calculate Gross Savings:
- Verify Quality: Assume Wellness Integrated Health meets all required quality metrics set by the program.
- Calculate Shared Savings Payment:
In this scenario, Wellness Integrated Health earns a shared savings payment of $1.5 million, demonstrating their ability to deliver more efficient care while maintaining quality. The remaining $1.5 million in savings benefits the payer (e.g., Medicare).
Practical Applications
Shared savings models are predominantly seen in the healthcare sector, particularly within government-funded programs and increasingly in private insurance arrangements. The Centers for Medicare & Medicaid Services (CMS) actively uses the Medicare Shared Savings Program (MSSP) as a cornerstone of its strategy to transition from volume-based to value-based care. As of early 2024, the MSSP included a significant number of Accountable Care Organizations (ACOs) serving millions of Medicare beneficiaries, generating substantial net savings for Medicare.10, 11
Beyond Medicare, private health insurers and large health systems are also adopting shared savings agreements. These commercial applications typically involve similar principles: setting spending benchmarks for a defined patient population and then rewarding healthcare providers for achieving cost reduction while maintaining quality. This widespread adoption reflects a broader industry push for financial incentives that align the financial success of providers with the delivery of efficient, high-quality care.9 The goal is to improve the overall return on investment in healthcare by fostering better coordination and preventive strategies.
Limitations and Criticisms
Despite their promise, shared savings programs face several limitations and criticisms. One significant challenge lies in the methodology for setting financial benchmarks. If benchmarks are too high, organizations might achieve savings easily without truly improving efficiency, leading to "windfall" payments. Conversely, if benchmarks are set too low or are constantly "ratcheted down" based on prior savings, it can become increasingly difficult for high-performing organizations to continue generating shared savings, potentially discouraging participation.6, 7, 8 Some studies have indicated that the program's success might be influenced by factors like the non-random exit of high-cost clinicians or beneficiaries.5
Another critique centers on the administrative burden and initial investment required for healthcare providers to participate effectively, especially for smaller practices that may lack the resources for robust data analysis or sophisticated care coordination.4 There are also concerns about potential unintended consequences, such as providers withholding necessary services to meet cost targets, although quality metrics are designed to mitigate this risk.3 Finally, the impact on hospital financial performance and the program's ability to consistently reduce overall healthcare spending have been subjects of ongoing debate and research.1, 2
Shared Savings vs. Pay-for-Performance
Shared savings and pay-for-performance (P4P) are both models of financial incentives in healthcare that aim to improve quality and efficiency, but they differ in their primary mechanism.
Shared Savings focuses on rewarding providers for reducing the overall cost of care for a defined patient population below a predetermined benchmark, while maintaining or improving quality. The incentive is a percentage of the money saved. It encourages comprehensive cost reduction across a continuum of care and often involves Accountable Care Organizations (ACOs) taking on some level of financial risk sharing.
Pay-for-Performance (P4P), on the other hand, typically rewards providers for achieving specific, discrete quality targets or outcomes, regardless of whether overall costs are reduced. For example, a P4P program might offer bonuses for high rates of preventive screenings, good control of chronic conditions, or patient satisfaction scores. While P4P can encourage improvements in specific areas of care quality, it doesn't always directly incentivize broader medical expenses reduction across an entire patient population. Shared savings is often considered a more holistic approach to value-based care, whereas P4P can be more targeted to particular services or processes.
FAQs
What is the primary goal of shared savings programs?
The primary goal is to encourage healthcare providers to deliver more efficient, high-quality care, thereby reducing overall healthcare costs, and then sharing a portion of those realized savings back with the providers as a financial incentive.
How are savings calculated in a shared savings model?
Savings are typically calculated by comparing the actual cost of care for a group of patients against a predefined historical benchmark or target spending amount. If actual costs are lower than the benchmark, and certain quality metrics are met, savings are generated.
Is shared savings only applicable to Medicare?
No, while the Medicare Shared Savings Program (MSSP) is a prominent example, the concept of shared savings is also adopted by private health insurers and other healthcare payment models, including certain bundled payments and commercial arrangements.
Do shared savings programs guarantee lower costs for patients?
Shared savings programs aim to reduce overall system spending, which can indirectly lead to more sustainable medical expenses in the long run. However, they do not directly guarantee lower out-of-pocket costs for individual patients, as patient cost-sharing (deductibles, copayments) is determined by their specific insurance plan, not directly by the shared savings arrangement.
What are Accountable Care Organizations (ACOs) in relation to shared savings?
Accountable Care Organizations (ACOs) are groups of doctors, hospitals, and other healthcare professionals who come together voluntarily to provide coordinated high-quality care to their patients. They are the primary entities that participate in shared savings programs like the Medicare Shared Savings Program, taking collective responsibility for the cost and quality of care for a defined patient population.