The Summer of Sequels

I have seen this film before. Folks get all excited about the potential for vertical integration to save our healthcare system, and then the facts emerge.

The results of the first major ACO demonstration project are in and unless there is some hidden meaning behind all the data, it looks like ACOs may not be the magic bullet that the Obama administration had hoped. The demonstration began under President Bush and the specific payment structure and quality incentive differ somewhat from the ACO rules under the Affordable Care Act, but the main features are the same – give an integrated provider organization a share of the savings if it can hold down Medicare spending while also offering some quality bonuses.

Despite the fact that the participants included ten of the nation’s best known physician-led integrated organizations, less than half were able to lower Medicare costs by the final year of the project and only two demonstrated consistent cost savings. And the methods used to achieve savings – nurse call centers and telephone health checkups – are the sorts of thing that don’t exactly require vertical integration.

There are going to be excuses – the ACOs need to be run by hospitals, they need more time to develop their information technologies, the performance incentives need to be strengthened. But that is the kind of ex post rationalizing one hears any time an experiment fails to support a theory. Maybe the theory (that vertical integration is the panacea for our ailing system) is wrong.

There remains a deep divide in both academia and amongst practitioners about the merits of vertical integration. Supporters of the ACA will continue to pin their hopes for Medicare savings on ACOs, the new evidence be damned. I have blogged that we need less top down direction about how to organize care delivery and I am sorry in a way to see the data bear me out. (Sorry because I am fresh out of magic bullets.) If the government is to play a role in the future of the health system, then it should either go all in on regulation (i.e., single payer) or fix the problems that are limiting the effectiveness of the free market (e.g., subsidize and standardize integrated health information systems; double down on antitrust enforcement.) Will these ideas work? I don’t know. But at least there isn’t a strong theoretical case to be made that they will fail.

Let’s stop this love affair with vertical integration. How many times do we have to keep seeing this bad movie?

P.S. I am currently reading The Quantum Story which is about the evolution of quantum physics. I barely understand much of it. But this much I do understand. When physicists perform experiments and the results do not confirm their theory, they reject the theory.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.”

32 replies »

  1. I realize this thread is pretty dead at the moment, but I just wanted to note that I have a 9C737 Touch that I got from Amazon, which arrived with the 1.1.1 update pre-installed, and, while not as bad as some images I’ve seen, it still exhibited slight “negative black” issue with video and pictures.

  2. So before we have a proven alternative to FFS we should rush head long into anything else?

    We know the current system, its flaws, and could easily improve it considerably with some minor tweaks. But throwing that all away and implementing a new system designed by politicians who have never designed a successful model would be more adventagous, I just don’t see that.

    Politiically it would be the ideal solution, it would give those pushing it another 20 years to say we just fixed the system give us a chance to show you. We knew Medicare wouldn’t work within 7 years of it passing and have spent the next 35 years watching promised solution after soluton fail.

    ACOs and dumping FFS sound like a desperate con man’s last grasp to hold up the ponzi scheme. “just give me one more chance and I will double your money, I swear”

  3. pcp: before you dismiss medical homes out of hand, I’d suggest you talk to the folks in North Carolina who scaled up their medical home model to the state level for the state’s Medicaid program and are finding it saves the state $120-140 M a year AND docs actually report liking it. They key here is that the program (Community Care of North Carolina) engaged docs as they were building the program, and encorporated their desires and suggestions into the structure. The other key is that the care management piece (i.e. nurses and MSWs to do care coordination) are paid for by the payor – NC Medicaid. So the docs aren’t subject to an ‘intolerable’ level of paperwork…

    disclaimer, I’m a reporter in NC and have written on CCNC

  4. Sigh, it is like the same old story, repackaged by time and different players, but in the end it’s still the same. I guess, one can only hope that in the nearest future, we can actually have some positive actualization for everyone’s benefit

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  6. I have heard ACOs called a lot of things – accountable control organizations, capitation and HMO revisited, AWA (Another Weird Arrangement), monstrosities, moneystrosities, integrosities, but never hermaphrodites . The common theme seems to be – mixing public and private affairs produces strange organizational creatures.

  7. The problem with ACOs is that the risk and reward are very low and the amount (and as was pointed out, expense) of micromanagement so high relative to the possible reward that you end up with a product halfway in between a provider and an insurer. Sometimes being halfway in between is a good thing. Other times you end up with a hermaphrodite. ACOs sound like they could be the hermaphrodites of the health care industry.

  8. ” Why would hospitals and physicians join together to form an organization that requires… that is designed, even guaranteed, to decrease reimbursements of hospitals and doctors;”

    If they did a better job of collecting data and using it, it would be a natural extension of this roll to replace insurance companies in a number of their duties. If your going to be accountable for outcomes then take the risk, and reward, of that accountability. The potential profits from that roll would more then cover the cost. This would work well in Metro areas with two or more competing ACOs, something else would need to be done in one system markets.

  9. Why Accountable Care Organizations are destined to fail, and may not even get off the ground, is no mystery to me. Why would hospitals and physicians join together to form an organization that requires $11 million $26 million to form (AHA estimate); that demands an inordinate amount of time, trouble, and grief to negotiate; that is designed, even guaranteed, to decrease reimbursements of hospitals and doctors; that hands over the reins of dispensing “savings” to your competitors and the government; that CMS may choose to reduce in the future; that subjects you to the risk of being sued by the Department of Justice for monopoly behavior; that requires you to be accountable financially for the behavior and complications of populations of patients before, during, and after hospitalization over whom you have little control; that 94% of members of the Medical Group Association of 400 integrated health organizations, supposedly ideal candidates for ACOs, have said they will choose not to join. Hospitals, doctors, and leaders of integrated health organizations are not dimwitted lemmings anxious to jump off the ACO cliff into an unknown abyss.

  10. Depends on the school, Metro schools with strong unions tend to still demand the cadilliac plans and don’t think there is a cost problem, they are also very distrusting of any ideas to save money. Smaller schools or those in more rural areas tend to be more in touch with the problem and realize something needs to change, their budger woes seem to have hit home a lot sooner. Being small town they usually also have a better relationship with administration and are open to ideas.

    More educated and professional work forces are tolerant of high deductibles but want more choice. If they want to see doctor X they want the ability to see them no matter the cost. Entry level labor is more cost concerned and willing to trade broad access for lower cost, You also need to focus more on first dollar expenses for those living paycheck to paycheck. Free generics for example or access to primary care to treat common ailments. With lower wage workers we usually aren’t as concered about an excess of utilization as much as we are under utilization, we need them seeking more care. Nursing homes are polar opposite, I wish we could attach shock collars to them and give them a jolt every time they went near a provider. We have found people around drugs tend to use a heck of a lof of drugs.

    Unfortunetly PPACA really killed employers abaility to design health plans that worked for their employees. Time will tell the consiquences.

  11. “In the employer market what we propose for a school district is considerably different then what we propose for a technology firm which is different then what we propose for manufacturing firm.”

    Nate –

    I would be interested in getting a little more color on this. Are you talking about high deductible vs. low deductible plans, limited or narrow networks vs. broad networks, tiering of providers, variance in drug formularies, mandatory mail for maintenance drugs, or are there other variables as well? Are the school district employees in particular responsive to cost differences or do they still prefer the Cadillac plans even if it means a lower raise or none at all?

  12. Steve,

    It is the economics of ACOs that I am most concerned about. Well not ACOs per se, but vertical integration. The economic theory of the firm identifies very specific conditions under which vertical integration can reduce costs and the empirical literature is largely supportive of the theory. Health care executives rarely cite these conditions when giving their rationales for VI (Rob Burns and Mark Pauly at Wharton published an excellent article about this in Health Affairs about ten years ago.) Not surprisingly, their VI efforts do not meet expectations.

    I confess I would have a bit more hope for these complex business models if I had more confidence in the abilities of healthcare executives.

  13. Agree completely. The entire concept of the “medical home” is based on taking the core strengths of primary care and then applying an intolerable level of administrative and bureaucratic busywork. Most practices are finding that it’s lots more work for no improvement in finances.

  14. Thanks, Mr. Flowers: (“You can’t keep paying people to do more X and expect them to do less X.”). This is at the core of our problem– the proposed ACO model offers an opportunity to earn back a few scraps after you have reduced your revenues substantially–and by the way when your physicians accomplish this for Medicare patients, they will have reduced revenues from fee-for-service payors as well. The sad part of this is that they will be producing better and more efficient care-but the proposed model doesn’t provide proper rewards.

  15. This may be simplistic to many of you, but I see an analogy in the autobody business.
    In the autobody business there are two prices for repair of an “injured” vehicle – the private party price and the insured party price. Both of these models are “fee for service” but they are obviously not the same thing. Calling our failing system “fee for service” is misleading at best. ACOs and most other health care savings ideas fail at controlling costs for the same reason that autobody shops can charge more for insured automobiles. If there was only one auto insurer, they could exert significant pressure on the autobody shops, but then they would have to fight a never ending battle of quality control as the shops found increasingly inventive ways to cut corners to make up for the lost revenue. ACOs are very similar except that in this case the autobody shops get together and voluntarily reduce costs to the single party insurer, hoping to find savings somewhere through increased efficiency and by limiting repair options. The insurer, however, does not trust the shops to produce a quality product and so shoulders the shops with the cost of proving compliance with quality measures, thus eating into the profit (savings) of the ACO (Autobody Co-Op).

  16. Instead of creating homes for government programs, which will almost certainly over regulate them, they can focus on the employer market which is waiting to embrace them without all the red tape.

    I would think initially there would be considerably more money available in the private market and quicker as well.

  17. “I wonder if different strategies might be required to control healthcare costs for three distinct populations”

    I would suugest strategies for considerably more then three populations. In the employer market what we propose for a school district is considerably different then what we propose for a technology firm which is different then what we propose for manufacturing firm.

    There are definable differences and needs in various populations and to maximize the management of each of those populations you need to treat them as different populations.

  18. David,
    Your post is disappointing for you let your politics interfere with your economics. The jury is still out on ACOs. The study you cite is not a real demonstration of the full ACO concept. The full ACO could fail too, but let’s wait for that study, as opposed to claiming victory the way politicians are apt to do.

    As for your point on vertical integration: again, try to be an economist first. More vertical integration will raise prices, but in theory, the ACO can reduce quantities. Which effect will dominate: lower Q’s or higher P’s, I don’t know, but neither do you.

    I was fortunate to learn from you many years ago. But you have really disappointed me on this board.


  19. Jeff is right, the ACO structure is flawed at its core, and the onerous rule set makes them highly unattractive. But deeper than that, the ACO is unattractive because it is not a business model. It does not produce a revenue stream. In a fee-for-service system, it offers the provider who finds lots of ways to lose money a little bit of the lost profit back — and even that is limited.

    It’s the fee-for-service part that is the fundamental flaw in healthcare economics. The system is not giving us what we want because we are not paying it to. Yes, there are problems with other structures as well, not least that full capitation is often seen as an invitation simply to deny service whenever possible. And Jeff is right, you can’t force everyone to become Kaiser. But if a large healthcare system starts to get any significant part of its revenues from partial non-fee-for-service business models (such as capitated primary care, mini-caps for chronic conditions, bundles, or running in-house clinics for employers), its whole internal economic dynamic starts to shift to a much more results-oriented basis.

    You can’t keep paying people to do more X and expect them to do less X. Doesn’t work, no matter how many little bonuses you give them. You have to figure out how to characterize exactly what it is you want them to deliver, and pay them to deliver that. And since you (we, as taxpayers, or employers, or other payers) want different things for different populations, and have different ways of paying for it, the business models and payment regimes have to be many and varied, not all one.

  20. The risk is that “quality” reporting, technological and structural requirements overwhelm potential participants in a medical home model and eat up most of the additional compensation to physicians in administrative overhead and documentation time requirements.
    This “overdetermined” approach was what rendered the ACO regs so unattractive to participants.

    If we aren’t careful, the costs of becoming a medical home could wash out the vitally necessary significant increase in primary care comp per hour that is needed to avert a catastrophic shortfall of practitioners. If that happens, the medical home will neither save primary care practice nor provide patients the enhanced service they are looking for.

    The most cogent statement of the risks were contained in Bob Berenson’s excellent Health Affairs article from Sept/Oct 2008,
    “A House is Not a Home: Keeping Patients at the Center of Practice Redesign” http://content.healthaffairs.org/content/27/5/1219.abstract

    If the “core measures” crowd does the same thing to the medical home pilots and demos as they did to the Shared Savings Program (65 core measures, eight criteria for patient centeredness, etc.), the practice community will ultimately turn the same cold shoulder to this idea that they did to the ACO and our search for silver bullets will continue. . .

  21. How many PGP demonstration projects sites are excited about pursuing an ACO under the current rules? My guess….for many of the reasons stated above…..very few.

  22. I wonder if different strategies might be required to control healthcare costs for three distinct populations – the employed 18-64 age group, Medicaid and Medicare.

    Employer efforts, including financial incentives, to engage employees to complete health risk assessments, stop smoking, lose weight, control blood pressure and cholesterol and to use on site clinics may indeed reduce healthcare costs sufficiently to more than pay for the clinics and the financial incentives.

    With the Medicaid population, their poverty and chaotic lives often produce depression and make compliance with medical advice difficult. Indeed, smoking and eating comfort foods may be among their few pleasures in life even if they know intellectually that both are likely to shorten their lifespan. The best healthcare cost control strategy for this group might be to provide an adequate supply of community clinics that can address many of their medical issues at far less cost than the hospital ER.

    For the Medicare group, we are often dealing with people who have three, four or more co-morbidities. Previous experiments with disease management and care coordination have not saved money, at least for the most part. The best cost control strategy here may be to develop a more sensible approach to end of life care and to narrow regional differences in practice patterns. In both Medicare and Medicaid, more aggressive effort and greater investment in fraud mitigation could be helpful as well. I’m not sure, though, if the much greater coding granularity that will come with the implementation of ICD-10 in 2013 will be a net plus or minus. It could create even more opportunity for upcoding. Couldn’t it?

  23. The same Milliman that “found” $300-million in savings for Illinois Medicaid’s DM program? I have some other laughable examples of their so-called audits, but they are not publicly disclosable.

    Answer to your question: These clinics were outsourced to a clinic vendor that presumably had the expertise.

    Maybe workplace clinics save money in some cases, like Jerry’s, but please don’t impugn my care management outcomes analysis becasue it didn’t come up with the answer you wanted: It is the best in the business, which is (1) why people come to me in droves to be tested for certification in care management outcomes analysis (no actuary has ever passed, by the way) and (2) why the DM Industry Annual Report called me “the leader in care management outcomes measurement.”

    The reason mine is the best in the business is specifically what you say: I don’t just look for a savings, like an actuary does. I look for the “nexus” between the savings and the program: Did the costs decline in the areas in which one would expect declines due to the specific “structural mechanisms” employed? That’s how I was able to blow up the Mercer report on North Carolina — they said costs fell in neonates (where there wasn’t a new intervention), and had a special emphasis on diabetes and asthma, where inpatient utilization turned out to have increased.

    In the case of the clinics, the nexus never became an issue because costs simply didn’t decline enough to warrant asking whether the decline was centered in the categories of savings

  24. Jeff,
    Would you, please, expound on this statement: “You can sort of see the same forces massing to destroy the Patient Centered Medical Home before we figure out how to make that work”? What’s going on there? Thanks.

  25. Al,

    So you have an n of 2, and probably legacy firms at that, that have catered to jumbo firms that haven’t expected ROIs, so they never needed to develop the medical management expertise. I can certainly understand why a negative pronouncement on the genre is warranted. Goodness knows you wouldn’t want to have to look deep into the structural mechanisms that were either capable or incapable of producing the kinds of impacts I described.

    I’d offer an objective review ANYTIME. Jerry’s clinic performance was audited by Milliman.

  26. David knows that this is a hangover from the 1980’s, when Alain Enthoven and his colleagues wanted the whole health system to look like Kaiser. It isn’t going to happen. It’s a seventy year old model. As John Kennedy said,
    “We can do bettah . . . .”.

    What’s scary about the ACO is that it was CLEAR from the results of the PGP demo that this idea was too complex to scale to the whole health system, and yet it had such well placed advocates that the health policy mandarins ploughed ahead anyway and made it a part of the Medicare program. You can sort of see the same forces massing to destroy the Patient Centered Medical Home before we figure out how to make that work . . .

    If the rest of the Innovation Center agenda works this way, it won’t be evidence based policymaking that reshapes the Medicare program, but an unholy alliance between policy entrepreneurs and the consulting community. The ACO was a fiasco (in my view, an idea flawed in its conception), and I hope people seriously devoted to constructive change in Medicare study what happen and resolve not to repeat the experience.

  27. Four observations that naturally, being mine (and if you think these are incendiary wait until you see my next couple of postings) will raise some hackles but that’s why John and Matthew pay me the big bucks:

    (1) No surprise on the ACO results. The ACO is a cut-the-baby-in-half solution with too many mouths to feed to really save money.

    (2) I am never shocked at how seemingly promising ideas end up failing. Bottom line is, if a good or service is heavily subsidized, like housing, gasoline, fast food, or health care, it will be overconsumed. We are condemned to nibble around the edges of the problem if we need national consensus to solve problems (see previous comment about feeding mouths)

    (3) Everyone points to more primary care as the answer but frankly my primary care doctor (in the mecca of medicine, greater Boston) has botched the only three things I’ve ever had that would have benefited (both cost- and quality-wise) from smart medical advice and the only reason I haven’t switched is that someday I expect the law of averages to catch up with her. (I suspect there is a posting in this someday.)

    (4) Jerry may have had a different experience and (still remembering the time he invited me to the Kentucky Derby) I wish him the best of luck, but I’ve done/am doing two worksite clinic reviews, to DMPC specs (which are CMS-tight), and found that while they do reduce costs, the reduction isn’t great enough to pay for the clinics — they ain’t cheap.

  28. There is no magic to driving waste out of health care. You need to move outside FFS at the enterprise level and not just for a portion of your business. You need to let primary care do what it can do. You need to have the right readily-available tools and programs. And you need to have the right incentives, for patients and for the health care system.

    The onsite clinics I’m associated with are consistently driving down total employer health care expenditures by 20% or more. The impact occurs right away, within the first 6 months. Then the trend drops substantially as well, to half of what other businesses in the region experience.

    Jerry Reeves, MD has a similar medical management model working in Vegas, and is getting similar results. This is blocking and tackling, and its real. It’s not impossible.

    To drive out health care waste, all we need to do is meaningfully change the incentives, so that there are no reason to deliver unnecessary care and no reason to deny necessary care.

    But that would require American health policy to break free of the insistence of the industry that they only way it can be done is the same way we’ve done it for the past 50 years.

    Vertical integration will work to the advantage of a system that is responding to incentives properly. All the integration in the world won’t enhance the performance of a system that is incentivized to deliver inappropriate care.

    The question isn’t with whether vertical integration will help or hinder efficiency, but what we’re encouraging with our payment system.

  29. Dranove is right. We either go single-payer or some form of voucher-based system. This is how this end game plays out. Just a question of how long it takes. If we continue to have anemic growth and moderate/high health care inflation, the end game will be here a lot sooner than people think.

  30. While ACOs may not be the magic bullet, I believe that it could help. It’s sad to admit that fixing health care is currently the hardest thing any President has had to solve.

    Presidents have historically tried their best to no avail. Implementing new measures will be the only way to fix it. Hopefully soon one President will say: ‘The others before me failed; they simply didn’t find what worked.’