We recently participated in a program at Columbia Business School’s Healthcare Program on whether ACOs (Accountable Care Organizations) will fail. For those of you that don’t know, ACOs are one of the structures promulgated by PPACA (aka Obamacare) designed to encourage better cost control and quality improvement in the healthcare system.
The current zeitgeist among the commentariat is that ACOs will fail (examples: here and here). We think the reason for the one-sided nature of the question is that those of us who lived through the healthcare upheaval in the early and mid “90s” saw first hand the failure of PHOs, PPMs and IDNs (and all of the other acronyms now relegated to the dustbin of history). When ACOs are touted as a saving grace for the system, you can almost hear the collective groan of the industry veterans.
Ever the contrarian, however, we took the side of the debate that said ACOs will NOT fail. The premise of our argument was that since we already have a good idea of why the structure will fail, we can, a priori, fix the shortcomings, and though likely, ACO failure is not inevitable.
There is an extensive list of why list of why ACOs will fail. We put them into four general buckets.
Infrastructure: The system has mis-allocated resources so we have too many of some things and not enough of others leading to inefficiencies.
Technological/telecommunication: For a number reasons the healthcare system has not adopted technology as fast as other industries.
Cultural: Providers are habituated to fee-for-service payment mechanisms and patients aren’t likely to change their own healthcare behaviors.
Inertia: The well known system problems (e.g. asymmetry of information, the Pareto nature of patient demand, unexplained variation of care, counterproductive incentives) have been around forever and are difficult to overcome.
Because we spend most of our time identifying private healthcare companies with investment potential, we often get a view into what is happening in the entrepreneurial space under the punditry radar.
One approach that we think has a lot of merit in terms of correcting the healthcare system’s deficiencies, is re-purposing the existing healthcare infrastructure. We are working with companies to raise capital to take older facilities/systems and update them to more accurately reflect demand in the market place. More efficient utilization of the existing asset base demands far less capital than building entirely new operations. And, for those who have optimally configured operations we are providing a growth capital option to expand. Interestingly, we are also observing the repurposing of therapeutics as well. It turns out that if we apply new technology to older drugs/devices it can represent a less expensive, but equally efficacious alternative.
In terms of technology, we are seeing a number of innovative solutions utilizing inexpensive mobile devices to transmit information to appropriate locations. Maybe because of the ubiquity of devices in almost all other walks of life, it appears that there is greater receptivity (than we would have expected) on the part of virtually all the stakeholders to increased technology interaction. For providers we have encountered companies providing superior analytics to prior generations of IT, which allow for better real-time financial and strategic decision making leading to a better handle on utilization and costs.
Culturally, providers, for lifestyle reasons, seem to want to move away from small group settings and team up with larger employers. In terms of patients we are seeing companies use techniques borrowed from behavioral finance to move patients to more health behaviors. On the business side, systems are becoming better at identifying “frequent fliers” allowing for more intense interventions which in the long run saves money and also provides better care.
In terms of inertia we are a bit stuck. We hope that some of the carrots and sticks in PPACA will be effective. However, in our judgment what will eventually move the needle is transparency of data. However, we think measurement (we know about the shortcomings) is a good thing and it is the only way to hold everyone “accountable.”
We are not suggesting there is a magic bullet. And, in fact we would not be surprised to see abundant failure in ACOs (don’t even get us started on insurance exchanges). However, until someone proposes a better mousetrap it looks like we are going to have to make do with this one. So, we might as well attempt to fix failure before it becomes inevitable since we have tools to make it work.