But ACOs could pave the way for more significant cost-cutting based on competition.
By KEN TERRY
The Medicare Shared Savings Program (MSSP), it was revealed recently, achieved a net savings of $314 million in 2017. Although laudable, this victory represents a rounding error on what Medicare spent in 2017 and is far less than the growth in Medicare spending for that year. It also follows two years of net losses for the MSSP, so it’s clearly way too soon for anyone to claim that the program is a success.
The same is true of accountable care organizations (ACOs). About a third of the 472 ACOs in the MSSP received a total of $780 million in shared savings from the Centers for Medicare and Medicaid Services (CMS) in 2017 out of the program’s gross savings of nearly $1.1 billion. The other MSSP ACOs received nothing, either because they didn’t save money or because their savings were insufficient to qualify them for bonuses. It is not known how many of the 838 ACOs that contracted with CMS and/or commercial insurers in 2016 cut health spending or by how much. What is known is that organizations that take financial risk have a greater incentive to cut costs than those that don’t. Less than one in five MSSP participants are doing so today, but half of all ACOs have at least one contract that includes downside risk.
As ACOS gain more experience and expand into financial risk, it is possible they will have a bigger impact. In fact, the ACOs that received MSSP bonuses in 2017 tended to be those that had participated in the program longer—an indication that experience does make a difference.
However, ACOs on their own will never be the silver bullet that finally kills out-of-control health spending. To begin with, 58 percent of ACOs are led by or include hospitals, which have no real incentive to cut payers’ costs. Even if some hospitals receive a share of savings from the MSSP and/or private insurers, that’s still a drop in the bucket compared to the amount of revenue they can generate by filling beds instead of emptying them. So it’s not surprising that physician-led ACOs are usually more profitable than those helmed by hospitals.
Some of these physician-run ACOs have done remarkably well in cutting costs, particularly in areas where healthcare is riddled with waste. In south Texas, for example, the 24-physician Rio Grande Valley Health Alliance (RGVHA) saved Medicare nearly $13.5 million and earned $9.4 million of that in 2017. (The ACO was in the risk-based track 3 of the MSSP, so it received 75% of the savings.) RGVHA achieved this victory through solid physician support, the hiring of nurse coordinators, the intelligent use of data and analytics, and plain old street smarts. However, the latest MSSP data shows that most ACOs are not as skilled in managing care as RGVHA is.
Wanted: Provider Competition
What could significantly drive down health costs is competition among providers, which is currently rare. Hospitals in metropolitan areas do compete for high-ticket surgical and cancer cases through advertising, but not on the basis of published cost and quality data. Although Medicare and some states post healthcare provider scorecards online, there is no evidence that many doctors and patients use them. Geography is still destiny for most people when they get sick. Meanwhile, hospitals around the country are merging furiously, reducing competition and driving up healthcare prices in many cases.
The large physician groups owned by healthcare systems are also not competing with one another, because they’re usually in different areas. The remaining independent practices feel competition from the hospital groups, but many join with them in ACOs. The ACOs themselves tend to occupy separate geographical areas as well, so there’s little competition among them.
The Government’s Role
What could change this? Not the market, which is moving in the direction of bigger healthcare organizations that have less and less incentive to cut costs. One exception is readmissions: because CMS penalizes hospitals financially for avoidable readmissions, institutions are using a variety of techniques to reduce readmission rates. While this doesn’t prove anything about the relative impact of the market vs. government regulation, it does suggest that the government has an important role to play in reordering the market to curb health costs.
CMS has already moved in that direction with the MSSP. MSSP participants are currently limited to six years of upside-only risk, after which they must take downside risk, as well, and CMS has proposed decreasing the risk phase-in period to two years. That still won’t result in competition that could shrink health spending substantially. Nevertheless, successful risk-taking ACOs might be the key to making the transition to a competitive market. One reason is that they include thousands of physicians who have learned how to manage care. In addition, these ACOs have been shown to save more money than ACOs that only share in savings, not losses.
An Alternative Approach
In the current political climate, it is unlikely that the federal government will make significant moves to encourage competition among providers, because that would require a much stricter application of antitrust laws and the breakup of large healthcare organizations. Nevertheless, with the possibility of Democrats taking control of Washington in 2020, it’s worthwhile contemplating how ACOs might pave the way to more competitive healthcare delivery as part of a transition to a single-payer system or some other form of universal healthcare.
Here’s how it might work: First, the MSSP would limit ACOs—some of which currently include hundreds of doctors—to perhaps 50 primary care physicians. (Specialists would have to be treated differently, but there isn’t enough space here to discuss that topic.) As a result of such an edict, there would immediately be competing groups in many metropolitan areas. Second, Congress would have to pass a law requiring hospitals to divest their employed groups. This would not be much of a sacrifice: if hospitals gave up their groups, they would no longer have to subsidize employed doctors, and most physicians restored to independence would continue to refer their patients to the same hospitals. The divested groups would also be split up into smaller units, each of which included no more than 50 primary care doctors. These practices would compete for patients with each other and with the ACOs.
Transparency is Key
The key to making this system successful is transparency. First, the cost and quality of the competing groups would be measured and published, as it was in a famous 1990s experiment in Minneapolis that was supported by local employers. Second, employees and other insured people would be given a financial incentive to use that information to select the groups that provided the best care at the lowest cost. Depending on how well the group they chose to get their care from performed, their share of the insurance premium would rise or fall.
The competing groups would be paid fee-for-service and would take upside and downside risk the way that ACOs do today, through bonuses and penalties. The ultimate financial responsibility for patient care would continue to be borne by payers. These payers would not include health plans, which would provide administrative services only to physician groups, as they do now for self-insured employers. This approach could work within a centralized single-payer system, such as Medicare for All, or within a regionally governed, multi-payer system that guaranteed universal access to healthcare.
Much more could be said about how such a system would be organized, governed and financed, but there’s no doubt that the government could create a viable system of managed competition and that ACOs could be the crucial bridge to the new system. When ACOs learn how to manage care, they could be instrumental in making the transition from the current wasteful, anti-competitive system of giant providers and insurers to a truly competitive market that could cut costs significantly while improving quality and outcomes.
Ken Terry is a former senior editor of Medical Economics and is author of Rx For Healthcare Reform (Vanderbilt University Press, 2007).
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Thank for sharing this article-
Online Book Doctor’s Appiontment
Cash pay or third party pay?
Here is relevant credible research re the impact of price transparency:
“Efforts to spur patient price shopping by providing access to price transparency tools have been met with limited success. One potential reason is the absence of financial incentives. This paper uses data from a large employer that implemented a price transparency platform and subsequently implemented a reference pricing program for laboratory and diagnostic imaging tests. We find no price shopping effects when the price transparency tool is offered alone. However, combining price transparency with reference pricing leads to significant shifts in consumer choice of facility, resulting in a 27 percent reduction in the average price paid per laboratory test and a 13 percent reduction in price paid per imaging test. A variety of public and purchaser initiatives have sought to further the development and adoption of price transparency tools. Our results imply that these tools will capture the attention of consumers, and influence their behavior, only if patients have strong financial incentives to care about prices.”
Published in: American Journal of Health Economics [Epub March 2018]. doi: 10.1162/ajhe_a_00118
Posted on RAND.org on August 02, 2018
What a bizarre idea…give people pric e info and let them keep the savings and expenditures go down! ..(.it is only strange to health care pundits).
“Alas, have we ever really tested this theory?…especially in ambulatory patients?”
Why don’t we use the auction version. Patients would list their ailment and the fix they wanted on a central web site then providers would bid for the business.
To do the compleat job, i.e. insure for acute medical and surgical, mental health and autism and autism spectrum, rehabilitation and drug withdrawal, other chronic disease care and long term care, bariatric surgery, dental, precision care with genomic medicine…all this cannot be done under a banal Medicare design. With this larger challenge we must either give up doing what we dream for–it is far too expensive–or we must try everything that we know that works: All these tools for lowering prices and maintaining quality fall into either 1. monopsonic or oligopsonic purchasing or 2. competition at every level we can think of, including at the procedure level and fiddling with numbers and training of providers (which may abrogate quality)
Fixing prices does not work and #1. tends to do this unless it is oligo and allows clever bidding.
The dilemma is that doing large purchasing, #1, tends to preclude #2. So we are forced to choose a path and keep experimenting.
Also #1 causes a dead weight loss to society because every time you have to pay more providers because the demand has gone up, you have to pay all providers at the new rate.
It is better to work hard to achieve a competitive solution, but many people feel that the price elasticity of health care is too low to permit this. Alas, have we ever really tested this theory?…especially in ambulatory patients?
Peter, first there is a trend underway toward bundled pricing for surgical procedures which includes hospital charges, physician fees, labs, imaging, rehab and anything else the patient needs. Second, PBM’s are getting ready for a world without rebates or at least with rebates that are completely passed through to payers and patients. They are confident they will be able to adapt. Hospitals will be able to adapt to price competition as well and once patients see how much lower their insurance premiums will be if they and their doctors steer more business to the most cost-effective high quality providers, they will embrace price transparency too.
It seems to me that state legislatures could outlaw confidentiality agreements around contract rate disclosure between insurers and providers including hospitals and doctors. They could also outlaw all or none contracting and prevent hospitals and large physician groups from insisting on being included in the most favorable payment and quality tier regardless of how high their contract reimbursement rates are. It’s pretty simple conceptually but very difficult politically because of the power of entrenched special interests.
How does removing a CON lower prices? Why would providers build facilities in an already over supplied market with most of the providers under contract or owned by existing hospitals.
There is good evidence that more providers don’t save the system money but simply expand billings.
It isn’t too difficult: first step, repeal this “The North Carolina Certificate of Need (CON) law prohibits health care providers from acquiring, replacing, or adding to their facilities and equipment, except in specified circumstances, without the prior approval of the Department of Health and Human Services. Prior approval is also required for the initiation of certain medical services.”
Barry, why do you think that the healthcare industry, which has never competed on price, will some how do a complete turnaround by posting and sharing prices? And how would someone choose on best price for hospital medical care when there is a surgeon, anesthesiologist, radiologist and other independent providers, along with the hospital, who all bill separately?
Health care is geographic, not everyone has access to many local providers. Here is Chapel Hill NC many of the independent practices/clinics have been bought by either Duke or UNCH. There IS no competition other than with themselves.
This is not going to be solved by pie in the sky free market wishfulness.
Very good posts. Inducing price transparency is a single act that would have profound impact , leading to a dramatic increase in the value the public gets for our $.
Now: how do we induce it? Is legislation a necessity (with all the risks Congress would load up such a bill with misguided ideas)?
It’s not sarcastic. I just don’t see how Medicare dictating prices will ever come close to striking a balance between supply and demand for medical services. Just as now, Medicare will overpay for some services and underpay for many others. For example, try finding a psychiatrist who takes insurance.
The current system could reduce costs with price transparency so both patients and referring doctors can identify the most cost-effective high quality providers in real time and direct more of their business to them.
Even today’s Medicare pays academic medical centers significantly more than community hospitals and it pays community hospitals more than ambulatory surgical centers for the same work. Why does it do that? It does it because its original reimbursement formula was intended to cover provider costs including the cost of capital. In other words, it was a cost plus formula which gave no incentives for providers to become more efficient.
By that logic we should increase costs to ensure a much better heath care system.
The sarcastic references you’ve stated are already with us along with the high costs.
One way to cut costs significantly is to close hospitals or parts of hospitals. That would shrink capacity and likely increase wait times. Another is to implement price controls on prescription drugs which would reduce medical innovation and delay the development of new lifesaving drugs. Another is to shrink the number of doctors as more older doctors retire sooner than they otherwise would and the quality of medical school applicants declines over time. Also more doctors in higher income areas will transition to concierge practices which will make it harder for those who can’t afford the subscription fee to find a primary care doctor. Current Medicare works as well as it does because there is still a large better paying commercial insurance sector to shift costs to. I think you should be careful what you wish for.
The only real path to significant health care cost reductions is Medicare for all and the adoption of the Medicare reimbursement rates for everyone – which would include drug price negotiation. Then let providers learn how to adapt to lower payments by cutting costs.
We continue to languish by ringing our hands about “ain’t it awful.” I refer of course to the book GAMES PEOPLE PLAY written by Eric Berne and published in 1964. Look up his explanation for the “Ain’t it awful” game and its variants. The GAMES could be viewed as representing a parody of our nation’s current efforts for healthcare reform. “Let me hold your coat” is still a favorite of mine.
The take away, of course, is that our nation’s healthcare reform will not be solved by economic incentives designed by people with little understanding of the basis for each person’s individual HEALTH within their own community. I wonder whether or not our nation’s sedative/narcotic overdose mortality will actually decrease with the recently enacted Federal investment of economic resources. Meanwhile, the pockets of entrenched poverty continue unabated, community by community. We should all be reminded, again, why do the “Blue Zones” still exist?