THCB

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.”

Livongo’s Post Ad Banner 728*90

32
Leave a Reply

24 Comment threads
8 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
21 Comment authors
Yesenia DavinDavid HarlowRose Hoban, RN, MPHLauren @ MRSBody Tonic Tea Recent comment authors
newest oldest most voted
Yesenia Davin
Guest
Yesenia Davin

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.

Nate Ogden
Guest
Nate Ogden

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… Read more »

David Harlow
Guest

See my reaction to this post (grew to be longer than a comment): Don’t Kick a Unicorn When it’s Down (HealthBlawg) http://j.mp/jVwM7e

Lauren @ MRS
Guest

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

Body Tonic Tea
Guest

Here at Body Tonic Tea, our goal is to improve the quality of life, and the overall well-being and enjoyment of people who live everyday lives. We do this by providing quality healing herbs to keep the body purified of toxins. We also provide rare, gourmet teas from different parts of the world. Drink Body Tonic Tea after each meal and the herbs will detoxify your body. You can keep your current eating habit and drink this tea to remove the harmful properties of the food. It is highly recommended that we change our eating habits into more healthy diets… Read more »

Richard L. Reece, MD
Guest

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.

Al Lewis
Guest

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.

Nate Ogden
Guest
Nate Ogden

” 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… Read more »

Richard L. Reece, MD
Guest

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… Read more »

Barry Carol
Guest
Barry Carol

“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… Read more »

Nate Ogden
Guest
Nate Ogden

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… Read more »

botetourt
Guest
botetourt

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.

Dr. Mike
Guest
Dr. Mike

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,… Read more »

Steve Allen
Guest
Steve Allen

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… Read more »

David Dranove
Guest
David Dranove

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… Read more »

Joe Flower
Guest

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.… Read more »

Stephen Motew
Guest
Stephen Motew

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.