Research

Participation and Spending Choices in the Medicare Shared Savings Program (Job Market Paper)

Incentive payment programs and pay-for-performance contracts are increasingly popular forms of government regulation aimed at improving the efficiency and quality of healthcare delivery. The Medicare Shared Savings Program (MSSP) is a voluntary incentive payment contract designed to encourage providers to form integrated healthcare organizations, known as Accountable Care Organizations (ACOs), to reduce unnecessary healthcare services through improved care coordination. Under this program, ACOs are rewarded for keeping average per- capita spending below a benchmark based on historical spending by ACO providers under the fee-for-service (FFS) system. In this paper, I investigate how the benchmarking methodology affects ACOs’ incentives to participate in the MSSP and their efforts to reduce spending. I provide evidence that the voluntary nature of this program, combined with the benchmark re- gionalization, induces adverse selection (“selection on levels”) allowing some ACOs to receive rewards from Medicare without reducing their spending relative to the FFS level. Additionally, I discuss how the benchmark rebasement, which recalculates the ACO benchmark based on the previous three years’ average spending, incentivizes ACOs to delay spending reductions (“ratchet effect”) to avoid lowering future benchmarks. I develop and estimate a structural model of ACO participation and performance in the MSSP. Counterfactual simulations reveal that the ratchet effect and selection on levels negatively impact both participation and the sav- ings generated by the program. While removing benchmark regionalization slightly reduces participation, it has a net positive effect on Medicare savings. In the absence of benchmark rebasement, participation increases, and savings are higher in the initial years following entry before leveling off, providing evidence of the ratchet effect.