The HMO in Your Future

I have not been able to determine how you pronounce the acronym for Accountable Care Organization (ACO). Is it ā´ ko? Or ā´ so? Or ăh so´, as in Charlie Chan movies? What about ĕ´ ko, as in a canyon? Or simply ick, with a silent o?

Anyway, this is not a trivial matter because you are likely to be in an ACO at some point in the future and it’s probably going to happen sooner than you think.

In Massachusetts, stakeholders are already meeting to develop a plan to push everyone with commercial insurance into an ACO. [Can you guess who doesn’t count as a “stakeholder?” If you live in Massachusetts and you weren’t invited to the meeting, that’s a clue.] Nationwide, Medicare will start paying fees to ACOs, beginning next year. Eventually, the Obama administration would like to see everyone in an ACO.

But if no one had any previous interest in forming ACOs, let alone joining them, what is going to cause us all to change our minds? Money. Insurers won’t be able to get premium increases unless they adopt ACO plans. Doctors and hospitals will be paid less if they don’t join. Eventually doctors will find they are ineligible to treat Medicare patients or patients insured in the newly-created health insurance exchanges if they are not practicing in ACOs. As for the patients, there won’t be any plans to join other than ACO plans.

Oh, and did I forget to mention it? Eventually ACOs will almost certainly have global budgets — a fixed sum of money, used to meet enrollees’ medical needs. If all needs can’t be met with that sum, they will have to be prioritized. At this blog we don’t shy away from the “R” word (rationing). We do tend to avoid the “D_____ P_____” term, however. We call it “end-of-life counseling.”

I don’t know any advocates of ACOs who are not also advocates of global budgets. See if your experience is the same as mine. Why is that important to know? Because that is the most important thing ACOs are about.

ACOs are sometimes said to be the brain child of Elliott Fisher, who heads the Dartmouth Atlas Project. But as Uwe Reinhardt pointed out the other day, the idea is actually an old idea. It’s called Kaiser Permanente.

ACOs have been called “HMOs on steroids.” They will have capitated payments and, like the traditional HMO, the ACO will get to keep any money it doesn’t spend. But the organization will also incorporate all the latest fads in health policy: electronic medical records (EMRs), pay-for-performance (P4P) incentives, quality report cards, etc.

The results from the few demonstration projects with ACOs are lackluster and mixed. But that doesn’t seem to matter to the Obama administration. Medicare will start contracting with ACOs beginning next year.

If that doesn’t strike you as strange, you need to know that “evidence-based medicine” is one of the buzz words among policy wonks these days and is supposed to be the foundation for ACO management. But if that’s a good idea for doctors, isn’t it equally good for policymakers? If we abided by evidence-based policy, would we put all of our marbles in the ACO basket? Basically no.

The latest comprehensive review of all the studies of report cards and other quality-measuring-and-reporting techniques finds they don’t work and may do more harm than good. Just as teachers will “teach to the test” if test results are how they are graded and rewarded, doctors will tend to “practice medicine to the test” if that is how they are paid. If you’re the patient, that may not be good for you. The latest comprehensive review of all the studies of electronic medical records finds they do not live up to their promises. And the most recent study of pay-for-performance from Britain finds that it doesn’t work either.

What about Kaiser? Its integrated medical records system is impressive and Kaiser is also promoting e-mail and telephone consultations. On the other hand, Harvard Business School professor Regina Herzlinger has taken the organization to task for letting people die.

But let’s give Kaiser the benefit of the doubt for the moment. The real question is not: how well does Kaiser perform? There are lots of centers of excellence around the country: Cleveland Clinic, Mayo Clinic, Intermountain Healthcare. The real question is: can the performance be replicated?

There is no law against ACOs (other than Stark restrictions that limit flexibility). So if ACOs can reduce costs and raise quality, why don’t we see them everywhere?

As it turns out, when Kaiser tried to replicate in Dallas what it does in Palo Alto, it failed. This isn’t surprising. If high-quality, low-cost medicine were easy to replicate we wouldn’t be having all the problems we are having.

When health policy experts associated with the Brookings Institution studied the “best” hospital regions around the country, they found few objective (replicable) characteristics. Some had doctors on staff. Some paid fee-for-service. Some had electronic medical records. Some did not. A separate study of high-performing doctor groups found much the same thing.

Evidence-based policy would admit ignorance about what works and why, and would let a thousand flowers bloom. It would pay more for low-cost, high-quality care, regardless of how it is achieved. We have previously suggested ways of doing that.

By contrast, the non-evidence based approach of the Obama administration will force everybody into the same model. As Scott Gottlieb has pointed out, this approach not only will stifle innovation and entrepreneurship, it is already causing venture capital to leave the health care market completely.

So how do we explain the administration’s commitment to ACOs? Whether they raise or lower costs, whether they raise or lower quality, there is one thing that ACOs will indisputably accomplish. They will drive doctors into organizations where their behavior can be controlled. For the first time in our history, both the practice of medicine and the way money is spent on medical care will fall under federal control.

ACOs are the portal through which we will all march toward a truly nationalized health care system.

This post first appeared at Health Policy Blog.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

12 replies »

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  2. Mr. Goodman cites “fads” such as the Electronic Medical Record. As one of the executive sponsors of the first fully scaled up E.MR in the nation [at Marshfield Clinic in Wisconsin], I can assure you…this is no fad. Oh, and my son is a PG1 IM resident who has used an E.MR since his first year of med school. Decades of use by hundreds of Clinic physicians, and years of use by med students and residents is producing a sea change in medical practice that takes us forward. Imagine,….the paper record ??? No way.

  3. Nice exposition!

    The vexing thing about healthcare policy is the innate assumption that there is an 80-20 rule — make one major stab and a major issue and you’ll solve the problem and dramatically reduce the growth of healthcare spending while improving quality. In healthcare policy, however, the 80-20 rule is that 80% of the time there is no 80-20 rule. ACOs are a perfect example. They may indeed have a minor positive impact especially on EOL care, but little else should be expected of them. Seems like a lot of administrative burden for a very small return.

  4. ACO is pronounced Aitch….Em…..Oh….., a.k.a. Managed Care. If you liked them in the nineties, you will love them now.

    Will they save us money? I don’t know. Does Kaiser have cheaper premiums?
    Better care? Maybe. Kaiser says that they do provide better care.
    Better than nothing? Sure.

  5. “So how do we explain the administration’s commitment to ACOs?”

    Its the same commitment the left has been showing since 1973 and the HMO act, even before then. Congress always loved the idea of HMOs because they solved all their problems.

    1. Regualting thousands of insurance companis and tens of thousands of self funded plans is impossible. Regualting a few hundred federally licenses HMOs/ACOs is pretty easy. Let them consolidate to a few dozen even better.

    2. No one wants to ration care, don’t take that to mean they don’t want care rationed Congress just doesn’t want their name on it, upsets the voters and all. The intent with HMOs was congress would control their funding, if you needed to cut cost you would just reduce the captitated fee giving them HMO less which would force the HMO to ration care. Congress had all the control none of the blow back, or so they envisioned.

    3. The HMO Act of 1973 required plans by law to offer HMOs, even if they didn’t want to. How long till people are required to select an ACO?

    Compare what Ted Kennedy said them to what we are hearing about the wonders of ACOs now;

    “”In fact, many medical experts argue that the peer review built into group practice in the HMO setting promotes a quality of care superior to that found in the traditional health care system…. “In our enthusiasm to see HMOs proliferate throughout this country we should not lose sight of the need to guarantee the quality and integrity of the prepaid plans we create.”

    ”We need legislation which reorganizes the system to guarantee a sufficient volume of high quality medical care, distributed equitably across the country and available at reasonable cost to every American. It is going to take a drastic overhaul of our entire way of doing business in the health-care field in order to solve the financing and organizational aspects of our health crisis. One aspect of that solution is the creation of comprehensive systems of health-care delivery.”

    HMOs have proven themselves again and again to be effective and efficient mechanisms for delivering health care of the highest quality. HMOs cut hospital utilization by an average of 20 to 25 percent compared to the fee-for-service sector. They cut the total cost of health care by anywhere from 10 to 30 percent. And they accomplish these savings without compromising the quality of care they provide their members.”

    Subsitute ACO for HMO and you would have no idea this was all said almost 40 years ago.

  6. Mr. Goodman is good at pervert incentives investigation, so I am disappointed his article did not investigate same in ACOs.

    ACO’s are good concept but we need to know incentive structure and upper limits and controls to determine how it will behave.

  7. Well, Matthew, it’s rather easy to take issue with some of it, e.g., his neat-o SCOTUS-reminiscent “definition-of-obscenity” take on clinical “quality” –

    “Evidence-based policy would admit ignorance about what works and why”

    “what works” = “quality.” Hel-LO?

    “let a thousand flowers bloom. It would pay more for low-cost, high-quality care”

    Oh, OK, I guess we’ll “know it when we see it.”

    But, ONLY if it comes out of the free-market for-profit sector.

    Now, of course, part of the problem has been the proprietary silo’ing of outcomes data. How do we change that? We are rather running out of time.

    We’re not talking about “flowers,” the issue is peoples’ lives and health. This ain’t about cool iPad apps and all manner cheap-chic stuff at Target

    I really tire of Perfectionism Fallacy, Scary ACO Straw Men, tangential ad hominem attacks (Death Panels) etc.

  8. Hard to disagree with John on this. The only issue is that his vision of the ACO/HMO nightmare will be a massive improvement on what we have now–not to mention better for most patients and the economy than his HSA fantasy alternate.

    But that’s because what we have now sucks! Or as Paul Grundy said at a recent IOM meeting I was at “the system has been selling us shit”

  9. None of this is exactly news…


    A few pertinent snips from the lengthy “Allocating Health Care Morally” –

    Health Law policy suffers from an identifiable pathology. The pathology is not that it employs four different paradigms for how decisions to allocate resources should be made: the market paradigm, the professional paradigm, the moral paradigm, and the political paradigm. The pathology is that, rather than coordinate these decision-making paradigms, health law policy and employs them inconsistently, such that the combination operates at cross purposes.

    This inconsistency results in part because, intellectually, healthcare law borrows haphazardly from other fields of law, each of which has its own internally coherent conceptual logic, but which in combination results in an incoherent legal framework and perverse incentive structures. In other words, health care law has not – at least not yet – established its self to be a field a law with its own coherent conceptual logic, as opposed to a collection of issues and cases from other legal fields connected only by the happenstance that they all involve patients and healthcare providers. [pg 1452]

    …To ground my analysis let me assert upfront a concrete proposal, one toward which I believe the national healthcare systems of the world are (from different directions) slowly converging. The analysis of the moral paradigm offered here supports, when coupled with the strengths and weaknesses of the other paradigms, and health-care system having the following elements.

    1. A politically set annual health-care budget with an associated tax not linked to employment.

    2. Free access for all individuals to a care allocating plan.

    3. Individual choice about which plan they wish to join for some significant period. (I suggest three years).

    4. Competition among care allocating plants that each receive a share of the government budget based on the number of individuals they enroll, adjusted for each person’s health risk, and that cannot retain profits from their budget (other than a possible bonus linked to total number of enrollees) but must instead spend it on those enrollees. Plans must accept all who wish to enroll.

    5. Management of those care allocating plans by professionals who have a range of diagnostic expertise to evaluate the healthcare needs of plan enrollees, who have salaries unaffected by spending decisions (other then a possible bonus for an role he), and who have a duty to decide how to allocate each plans budget to purchase those health services that maximize health benefit for the unit’s enrollees. Their sole incentive should thus be to do a good enough job at ration Inc. to keep and attract enrollees.

    6. Maintenance of the vast majority of healthcare providers as private suppliers of procedures, tests, and technologies that compete with each other to sell to the care allocating plans. This should create incentives for cost-effective innovation because suppliers will now face purchasers who have both the knowledge and incentives to trade off the costs and benefits of care.

    7. A politically appointed agency, the members of which are insulated from removal, that has only two tasks: setting risk adjustments and licensing care allocating plans by verifying their diagnostic expertise and fiscal soundness. In particular, this agency would not dictate a uniform schedule of covered services because that would be up to each care allocating plan.
    8. The individual right to purchase additional care outside these plans on the open market. [pg 1453]


    The potential role ascribed to the moral paradigm in this article is large. But it’s far from sufficient to guide all health-care decisions that any system must make. It is, after all, of no help in encouraging productive efficiency or in assessing scientific issues about what benefits (if any) of various treatments have. Nor should it have escaped attention that the moral paradigm has still left us with no answer to the question of how precisely to make trade-offs between health care and other social goods. That matter remains largely “incorrigible to moral reasoning.”

    To address those issues, we must rely on market, professional, and/or political paradigms for making resource allocation decisions. But why should we have any more faith in those decision-making processes, and what role should we ascribe to which process? Clearly, a full justification for the healthcare system I advocate requires more than an assessment of the strengths and weaknesses of the moral paradigm, which is all this article offers. It requires a comparative assessment of the strengths and weaknesses of the other paradigms. The details of a full comparative paradigm analysis will have to await another day, but a sketch of the argument is probably necessary to provide context to this article’s analysis of the moral paradigm.

    As I see it, the strength of the market paradigm are the standard ones: if consumers are knowledgeable, have similar resources, and have incentives to trade off the benefits and costs of each product, then market competition promotes productive efficiency, accommodates varying consumer preferences, and achieves allocative efficiency. The problem of unequal resources is largely external to the market paradigm and potentially remediable through vouchers. But the more fundamental problem of the healthcare market flows from an inherent division between knowledge and incentives. Unlike other markets no decisionmaker exists who has both the knowledge and the incentives to decide when the costs of supplying a particular good or service exceed its social value. Patients lack the knowledge and, even the fact that others (such as insurers or employers) cover much of the social costs, also generally lack the necessary incentives. Physicians and other healthcare providers are knowledgeable about medicine but not about social benefits and costs. Moreover, under current American market systems they either have incentives to provide too much care (if paid on a fee-for-service basis) or incentives to provide too little care (if paid on a capitation basis). Insurance plans generally lack the information to make case-by-case cost than if it decisions and have incentives to provide two little care, or to select for low-risk enrollees unlikely to need much care, because the insurers pay the cost of health care but do not enjoy its benefits…

    … Where markets and self-regulation fail, it is natural to turn to the political process. The main advantages of the political paradigm are (1) that it can make the open-ended trade-offs between healthcare and other social goods that do not lend themselves to objective scientific analysis and (2) that, unlike decision-makers under market and professional paradigms, political decision-makers have incentives to weigh benefits against costs because both are experienced by the polity. The disadvantages are that the political process is inevitably too centralized to effectively trade off the benefits and costs of health care in individual cases, and is susceptible to problems of majoritarian bias, intransitive choices, an interest group politics. These weaknesses counsel for limiting the political process to one global issue: how high to set a national (or state) level of health care spending and associated tax. This avoids the political processes in ability to make operational decisions, and lessens the concern of majoritarian bias because funding levels are more likely to affect everyone equally and decisions about which treatments to fund. This way of framing the political decision is also more likely to produce both “single peaked” preferences resistant to intransitivity problems and, more important, Lowell political information costs that render the process less susceptible to interest group dominance. [pp 1542-4]


  10. “If we abided by evidence-based policy, would we put all of our marbles in the ACO basket? Basically no.”

    Straw Man 101.