ACOs: We’re NOT There Yet

Last week veteran analyst Vince Kuraitis reviewed a report from the consulting firm Oliver Wyman (OW), arguing that the trend toward reconfiguring health systems to deliver more accountable care is more widespread than any of us suspect.

“The healthcare world has only gotten serious about accountable care organizations in the past two years, but it is already clear that they are well positioned to provide a serious competitive threat to traditional fee-for-service medicine. In “The ACO Surprise,” our analysis finds that 25 to 31 million Americans already receive their care through ACOs-and roughly 45 percent of the population live in regions served by at least one ACO.”

OW provides a well-reasoned analysis and conclusions, but I’m skeptical. In discussions with health system executives around the country, I hear some movement toward change, but relatively few organizations are materially turning their operations in a different direction. The specter of policy change is looming, but it is still abstract. As I’ve described before, market forces are intensifying, but they’re mostly still scattered and immature.

Fee-for-service remains the prevailing paradigm, and there is no palpable threat to the health care excess that is business-as-usual. Several health system CFOs have told me: “Why should we take less money until we have to?”

There’s no question that Medicare’s ACO programs have the bulls-eye on reimbursement for health systems, which are a convergence point for a large percentage of appropriate and inappropriate health care costs. But there is a silver lining. American health care is so replete with waste – on the order of half or more of all health care expenditures – that any system that tries could deliver dramatically lower costs and improved outcomes.

Health systems that drop costs say, 20 percent, while maintaining or improving quality would bask in immediate market recognition and gain significant market share. In the economic purgatory in which these organizations now live – reduced procedural volumes, impending Medicare and commercial plan cuts – this path seems like a no-brainer, especially if it can also create the discipline that propels the organization successfully into the next paradigm.

I discussed this with Steve Blumberg, a senior health system executive at AtlantiCare in New Jersey and a particularly astute observer. Here’s his take:

“When it comes to preparing for the inevitable change away from fee for service reimbursement and toward risk and value, I think there are four kinds of health systems. The first few are going through the agony now of laying in the tools and trying to shift the culture so they can change utilization and cost patterns. They’re focused on weathering the transition and being here for the long term.”

“The second understand the problem intellectually, but haven’t wholeheartedly embraced the problems and their solutions. To show they’re doing something, they’re focusing on changing things at the margins, and are stashing away cash as fast as they can. They expect that, as time passes, they’ll be more easily able to buy their way into a capable future.”

“The third are waiting. They’re holding on to the present, and can’t see any real advantage in undertaking expensive restructuring that can only result in lower volumes and per patient revenues.”

“The fourth believe the game’s over, and they’re busy trying to get acquired.”

This is an alternative interpretation to the OW report. The vast majority of health systems are either making only nominal changes, keeping their powder dry until they’re forced to act, hoping against hope that nothing will really change, or trying to get out and make it someone else’s problem. Most ACOs are, at this point, accountable in name only. It is difficult to identify concrete examples of systems delivering the substantially better performance that we know is possible.

Getting real change will require something else, incentives with teeth, and that means changing how we pay for care. It is unreasonable to expect health systems to voluntarily shift away from a payment model that is currently in their economic interests. It is more reasonable to change payment to one that is fair to the health care industry, but that serves the rest of our interests by driving appropriateness rather than waste. Health systems will change in the ways we need them to if we give them a reason to follow the money in a different direction.

Even so, it is hard to imagine that those changes can emerge in direct opposition to the health industry’s tremendous lobbying influence. But when someone as connected and careful as former VA turnaround artist Ken Kizer, MD stands up in front of a national conference, as he did at last week’s ASCO meeting, and says, “Payment reform is inevitable. Fee for service is dead,” it raises the possibility that he knows something the rest of us don’t.

Brian Klepper, PhD is an independent health care analyst and Chief Development Officer for WeCare TLC Onsite Clinics. His website, Replace the RUC, provides extensive background on the role that the AMA’s RVS Update Committee has had on America’s health care cost crisis. This essay originally was published in Medscape Connect Care and Cost Blog.

13 replies »

  1. Brian, I’m not sure I understand. When you say pass-through, operational costs, does this mean costs of actual care? If so, wouldn’t you client expect that you minimize those operational costs in return for the PMPM management fee?
    So it’s not an exact amount, like capitation and you’re not at risk for a certain number of dollars, but unless you are able to drive the cost of care down to your client’s expectation, you will loose the contract, right? Or may be there are certain performance levels specified in the contract?
    If so, how is this “care neutral”?
    I guess, if you employ the docs, you can try hard to manage your operational costs down through increased efficiency, up to a certain point, but sooner or later, and since I don’t believe you own hospitals, wouldn’t you have to make your docs deny some care? I know we all “hope” it won’t come to that, but unless hospitals, which are the big ticket items, are willing to cut their unit price (bundled or not), I don’t see a systematic way to guarantee reductions in costs….

    Regarding bundling, and considering other industries, I have no idea how we can project lower prices. Risk costs money, and usually it costs more, just ask BestBuy and all peddlers of product warranties.

  2. Just read the report. Whenever I hear the term “movement” to describe ACO’s, I know we’re in Kool-Aid country. With respect to Marsh McLennan, this is a sales document. The last paragraph unintentionally says so: “The shift to accountable care is a massive opportunity, and many providers, payers and enablemenet companies have already invested millions of dollars in transforming, beaching, incentivizing and supporting ACOs.”

    It’s actually hundreds of millions of dollars, the most lucrative consulting franchise I’ve seen in my thirty plus years of consulting. And to what end?
    AW admits that only 5 of the 89 Medicare ACO’s have any downside risk.
    Managed care without the risk . . .

    And many of the commercial ACO’s basically grandfather in dominant provider system rate structures, much like classic Blue Cross, and provide a guaranteed secular trend to businesses. What the providers want to avoid is damaging their rate structures, and having anyone notice they are charging $3500 for CT scans that are available across the street for $700 (read by the same radiologists).

    From the patient point of view, because the populations are statistically attributed, not enrolled by choice, the ACO is something being done to them, rather than with them or for them. The populations “covered” by ACO’s are statistical artifacts, not sentient beings actively collaborating to reduce their own costs. And if there are any savings, the portion not shared with ACO providers go back to employers or the federal government

    This “movement” is a massive waste of scarce resources.

  3. Vince, it is important, I think, for me to loop back and note that I am NOT saying that ACOs can’t work. What I’m saying, and this agrees with tcoyote, that until the financial incentives transition away from FFS to risk, there is no real reason for the rank and file of health systems to want to embrace population-level health management. That’s not a statement of anecdote (though I certainly have lots of anecdotes that support it), but a statement based on an understanding of structure.

    My organization is all about positively influencing care and cost within a reimbursement model that is outside FFS. We are paid based on a zero-margin pass-through of operational costs – staffing, drugs, labs, supplies, utiliities, insurance – plus a per employee (or member) per month management fee that covers our enterprise costs and a margin. Because we do not make more if we deliver more care, and because our clients judge us on how effectively we manage care and cost, our primary financial incentive is to implement mechanisms that drive appropriateness, both in our clinics and downstream, throughout the continuum.

    Margalit, moving away from FFS doesn’t necessarily change the unit pricing of a product/service (though it might, if there have been no competitive market pressures on a price). Instead, it removes the financial incentive to unbundle services and to deliver unnecessary services. It dramatically changes care utilization patterns toward appropriateness.

    Just as FFS incents unnecessary utilization, capitation incents the denial of necessary services. What we want, instead, is “care-neutral” payment structures, by which I mean payment that does not inherently influence the choices of which care services are delivered.

    The health systems that we’re working with understand these principles well, and are seeking more market share, based on transparent performance, not from health systems, from local employers who will steer to their system, either directly or within the confines of their health plans’ network. Leverage over health plan behaviors will accrue from this approach, and they know it.

    Hope this helps.

  4. What’s the health of healthcare systems? How concrete is the idea of policy change? Discuss, deliberate and dwell over this important issue on Social Number- world’s first ever anonymous social channel. http://bit.ly/SdsthC

  5. To the skeptics:

    “In God we trust, all others must bring data.”

    Give the Oliver Wyman folks credit — they laid out their assumptions and their supporting data.

    Those saying “I talked to a bunch of hospital CFOs and they don’t like the idea of ACOs” — that’s anecdotes, not data.

  6. What Brian reports is consistent with what I’m seeing. There is a really deep skepticism in most places I visit about the viability of the ACO model, let alone the ROI for hospital systems getting involved in it. The more the health system knows about managed care, the less interest. Managed care without the risk (e.g. upside risk only) is a game not worth the candle. What we need are more authentic, full risk health plan options sponsored by providers, particularly docs, to alleviate some of the near monopoly situations on the payor side.

    We’re not going to transition to “fee for value” any time soon; what we’re going to have instead is “no fee for bad value” and a lot of the unfortunate upside volume incentives we have now. The whole physician consolidation thing is really about grabbing more fee for service business, just like the article Matthew cites. . .

  7. “Why should we take less money until we have to?”

    The prevailing attitude in health care. This is another example of the fallacy of consumer directed health care.

    “Health systems that drop costs say, 20 percent, while maintaining or improving quality would bask in immediate market recognition and gain significant market share.”

    Market share from who, insurance companies? And how much “market share” would those health organizations be able to absorb?

    “health industry’s tremendous lobbying influence.”

    This why nothing significant will happen to lower costs except that the cost reductions will come from forcing measures on patients while keeping revenue tracking the same.

  8. What southern do said, and maybe someone can explain how eliminating fee-for-service is supposed to reduce prices…

    If I were negotiating bundled payments and capitations and all that, I would negotiate based not on the cheapest possibility, but on some weighted average of perfect to disaster. So in aggregate, how does this add up to less? I can see how I have an incentive now to improve quality, or deny care, to keep even more profits than before, but how does this translate into lower expenditures?
    And now that I am an ACO and own half the market or more, who is going to stop me?
    More about this with an emphasis on the technology aspect here: http://onhealthtech.blogspot.com/2012/12/the-arithmetic-of-health-care.html

  9. “So what is the difference?”

    By getting the hospitals, docs, and other providers all under one roof, real or virtual, ACOs are looking at price gouging to a degree that HMOs could only dream of.

  10. I think you’re mostly right…they’re very much similar. They both:
    – have an organized delivery system
    – have contractual responsibility for providing a range of health care services to a population of members
    – receive some “FFS-alternative” payments in return for the obligation
    – assume some risk for the quality and cost of contracted services

    The technical differences, IMO, are subtle and at the fringes:
    – HMO entities can exist outside the provider organizations. ACOs, it appears, must have the providers as part of the entity (probably more like the staff-model HMO or wholly-owned managed care org)
    – in most of the early ACO models, ACO patients aren’t bound to the network like they were in HMOs (although there were some POS HMOs and, of course, PPOs that would be more like ACO)
    – you assert the financial basis (capitation) is the same, but global capitation is not, yet, front and center with ACOs

    The main difference I sense, which is based on my experience working with health care organizations who have played in the managed care space for decades and are now wading into ACOs, is at this point aspirational – that ACOs seek to be more proactive/predictive about health and care engagement with their members than HMOs/MCOs were. They’re clearly hampered by today’s business models and the associated time horizons – hence my “aspirational” qualifier. But, nonetheless, these organizations who live (or have lived) in HMO and ACO world do perceive a difference in the models.

    I guess time will tell…

  11. Can someone explain to me the difference between an HMO and a ACO (other than an EMR)?

    The financial basis of both is the same – capitation.

    Both make money by providing less care and/or keeping their patients healthier (to the degree that is possible)

    So what is the difference?

  12. Catching up on my reading I notice the NYTimes has noticed that hospital consolidation in Boise Idaho (and 60 Minutes expose on HMS, and the NYT earlier expose on HCA) show that the first rule of consolidation is to jack up FFS prices as much as possible and sock away as much cash as possible.

    That’s some way between #2 & #3 on the “Blumberg scale” and moreover WHEN the ACO world arrives, the base pricing will be much higher than it should have been. That’s the experience in Boston where Partners ramped up the prices it charged to BCBS and others, and ensured that they HAD to exceed the prices BCBS paid other providers (see Paul Levy’s blog “Not Running a Hospital for lots more on that).

    The joke is that we’ve seen this movie many times, and insterad of shutting it down we just make its producer Governor of Florida (or as I call him “amazingly not a convicted felon Rick Scott”).

    Here’s the NYTimes article on Boise

  13. “It is difficult to identify concrete examples of systems delivering the substantially better performance that we know is possible.”

    I think it’s way too early to know that.

    Good post.

    “Payment reform is inevitable. Fee for service is dead,” it raises the possibility that he knows something the rest of us don’t..

    Let’s hope we don’t waste another ten years putting in place “ACOs” that will be little more than HMOs.