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Health Care Reform
September 2014

Controlling Costs by Expanding the Medicare Acute Care Episode Demonstration

Author Affiliations
  • 1Center for American Progress, Washington, DC
  • 2Office of the Vice Provost, Department of Medical Ethics and Health Policy, University of Pennsylvania, Philadelphia
JAMA Intern Med. 2014;174(9):1438-1439. doi:10.1001/jamainternmed.2014.2981

Medicare’s Acute Care Episode (ACE) demonstration bundled hospital and physician payments for 37 inpatient cardiac and orthopedic procedures. This payment structure improved coordination between physicians and hospitals and motivated hospitals to negotiate lower prices with device manufacturers, in most instances saving money without evidence of stinting on care. The program should be expanded.

The ACE Demonstration

Under the 3-year ACE demonstration, which began in 2009, Medicare paid the 5 participating organizations a global budget for high-margin procedures, including cardiac valve surgery, coronary artery bypass grafts, defibrillator implantation, cardiac pacemaker placement, and knee and hip replacements.1 The hospital sites were Baptist Health System in San Antonio, Texas; Oklahoma Heart Hospital and Hillcrest Medical Center in Tulsa; Lovelace Health System in Albuquerque, New Mexico; and Exempla Saint Joseph Hospital in Denver, Colorado. The Centers for Medicare & Medicaid Services posited that with the economies of scale physicians and participants could reduce costs and improve quality.

Each site negotiated its own discounts from Medicare’s usual payment. For instance, Baptist Health System discounted hospital payments for cardiovascular stays by 8.25%; physicians continued to receive full Medicare payments. At Hillcrest Medical Center, physicians and the hospital received 4.4% less than the usual payment. The ACE demonstration further aligned hospital and physician interests by allowing both to share savings, although it capped physicians’ gain sharing at 25% of the fee schedule payment. To share savings, participants had to meet quality reporting and monitoring requirements.

Predictably, these changes transformed behavior. Generally, hospitals and physicians coordinated care on a case-by-case basis, adopted standardized order sets based on clinical evidence, and held regular meetings to discuss quality of care. Hospitals also provided more information about quality and costs. They issued reports so that physicians knew their performance on quality metrics and their spending, “which led to some peer pressure…to achieve quality goals,” according to the evaluation report.1(p4) The demonstration also “served as a catalyst…to monitor the cost of materials,” particularly costly orthopedic devices.1(p4) Administrators and physicians identified devices that they considered to be high quality and cost-effective, allowing hospitals to negotiate reduced prices. Evaluators found that these innovations, as well as early involvement of physicians in the design and implementation of the program, were most critical to success.1

Results of the ACE Demonstration

The ACE demonstration saved Medicare $319 per episode of care for a total of approximately $4 million in net savings for 12 501 episodes of care.1 The mean savings of $585 per episode from the combined Medicare Part A and B expected payments were offset in part by increases in the cost of post–acute care services, particularly for patients undergoing percutaneous coronary interventions.1 The savings were modest, however, compared with the overall costs to Medicare of the cardiac and orthopedic procedures and varied by procedure and hospital. The largest aggregate savings were for orthopedic procedures, and the smallest savings per episode were for percutaneous coronary interventions (cost savings of $71).1 Hospitals also saved money, although the amount varied by hospital and episode of care. These savings largely resulted from negotiating lower prices for medical devices.

The effect of the demonstration on quality of care, resource use, and case mix was evaluated by tracking 22 measures. There was “little evidence of a demonstration effect on most of the process and outcome measures,” and quality of care levels seemed to be maintained, suggesting that the savings did not come from skimping on care or taking other harmful shortcuts.1(p7) The evaluation found no evidence that hospitals were “deliberately” choosing “to provide services to healthier, less financially risky patients” and no evidence of increased transfers of patients or increased admissions to post–acute care settings.1(p7) Evaluators also described a variety of quality improvement efforts by physicians and hospitals.

The one “negative impact” on an outcome measure was for the use of internal mammary artery grafts in patients undergoing coronary artery bypass graft surgery.1(p7) The evaluation noted, “Under the incentive to reduce cost (or operating room time), surgeons may have moved away from a technically more complex approach, but one that has been shown to improve outcomes.”1(p8)

Expanding the ACE Demonstration

The Patient Protection and Affordable Care Act gives the secretary of the US Department of Health and Human Services the authority, without additional legislation, to expand certain successful demonstrations to the rest of Medicare “to the extent [the secretary] determine[s] appropriate.”2 An expansion must be expected to “reduce spending...without reducing the quality of care” or “improve the quality of patient care without increasing spending,” and it may not limit any Medicare benefits.2

The ACE demonstration could be expanded in a number of ways. The most extensive approach would expand the program to all hospitals paid under the inpatient prospective payment system that are not participating in Medicare’s bundled payments for care improvement initiative or a Medicare-approved accountable care organization. Smaller rural hospitals should also be excluded.

Alternatively, the secretary could phase in expansion by focusing on the orthopedic bundles. Because these bundles produced greater savings than the cardiac procedures and there were no questions about their quality measures or post–acute care spending, expanding the orthopedic part of the demonstration would be the easiest first step.

Another option would be to expand the ACE demonstration regionally, starting with hospitals in Texas, Oklahoma, New Mexico, and Colorado, the states where the hospitals in the program were located. Next, the program could expand to hospitals in Louisiana to Florida, states with high Medicare per-beneficiary spending, as well as Alabama and Mississippi to connect all participating states. Subsequent rounds of expansion could prioritize states with higher Medicare spending.

Medicare should set the bundled payment as a discount for hospital and physician payments, perhaps 4%. Hospitals and physicians should be eligible to retain 50% of any savings if they meet quality standards.

Next Steps

The ACE demonstration was important but limited because it did not include post–acute care services. As a report from the Institute of Medicine has demonstrated, more than 70% of the variation in the costs of care under Medicare results from variation in the use of post–acute care services.3 Thus, the Centers for Medicare & Medicaid Services should consider evaluating an ACE demonstration wrap-around with additional components. First, the wrap-around should include all services related to the patient’s initial diagnosis for up to 60 days after discharge. Second, physicians and hospitals should agree, for 180 days, to cover the cost of any infections, revisions of procedures, or other complications. Third, the wrap-around should encourage shared decision making with patients using decision aids (written, video, or computer based) that outline care options and explain the proposed treatment’s benefits and risks. In general, the receipt of shared savings by physicians should require documentation of the patient’s use of a decision aid. Many procedures in the ACE demonstration, including knee and hip replacements, were elective, with therapeutically equivalent, less invasive alternatives, ranging from physical therapy and medication to arthroscopic surgery. Before a patient reaches a decision about whether to have a knee or hip replacement or many other elective procedures, desirable clinical practice is shared decision making using decision aids.4


Any expansion of the ACE demonstration would be an incremental yet profound change for Medicare. If Medicare acts, private insurers may be more likely to implement similar approaches to payment. Controlling health care costs while maintaining the quality and value of care is challenging; the approach tested in the ACE demonstration could make a difference.

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Article Information

Accepted for Publication: May 14, 2014.

Corresponding Author: Maura Calsyn, JD, Center for American Progress, 1333 H Street NW, Washington, DC 20005 (mcalsyn@americanprogress.org).

Published Online: July 7, 2014. doi:10.1001/jamainternmed.2014.2981.

Conflict of Interest Disclosures: Dr Emanuel reported receiving payment for speaking engagements unrelated to this work. No other disclosures were reported.

Funding/Support: This work was made possible in part by a grant from the Peter G. Peterson Foundation to the Center for American Progress.

Role of the Sponsor: The funding source had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and the decision to submit the manuscript for publication.

IMPAQ International. Evaluation of the Medicare Acute Care Episode (ACE) Demonstration: Final Evaluation Report. Columbia, MD: IMPAQ International; May 2013. http://downloads.cms.gov/files/cmmi/ACE-EvaluationReport-Final-5-2-14.pdf. Accessed June 2, 2014.
Patient Protection and Affordable Care Act §3021, adding §115A to the Social Security Act, Pub L No. 111-148, 124 Stat 119 (March 23, 2010).
Institute of Medicine. Geographic Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: Institute of Medicine of the National Academies; July 2013. http://www.iom.edu/~/media/Files/Report%20Files/2013/Geographic-Variation2/geovariation_rb.pdf. Accessed June 2, 2014.
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