Seriously Testing The ACO Waters

Brian Klepper

Published April 2013 in Accountable Care News

BK 711If necessity is the mother of invention, then tentativeness and ambiguity are the parents of procrastination. In health care, fee-for-service remains the dominant paradigm, so the ACO movement, lacking almost any semblance of true financial risk, is far more bark than bite. What’s the point of health systems going to all the trouble – and there’s no question it will be an overwhelmingly complicated overhaul – required to move from volume to value if it isn’t a pressing concern? Or, as several health system CFOs have expressed it, “Why should we change what we do and take less money until we have to.” There is no immediate imperative.

But there are some strategic imperatives. Overall health care cost has continued to explode. Kaiser Family Foundation data show that, for more than a decade, health plan premiums have risen 4.5 times as fast as general inflation and more than 3.5 times workers earnings. A recent RAND calculation showed that $4 of every $5 of household income growth is now absorbed by health care. It doesn’t seem likely that much more revenue can be squeezed from group and individual purchasers. (Though many of us have been saying that for decades.)

But there are other signs that tomorrow’s reimbursement will be significantly less than in recent years. A flurry of risk-based commercial payment pilots suggest the potential for the rules to change. In late January, Moody’s issued yet another negative financial outlook for non-profit health systems, based in large part on diminishing revenue growth. In recent years, declines have been associated with the recession and have resulted from drops in procedural volumes. Over the next seven years, they will be driven by the Affordable Care Act’s $300 billion in Medicare cuts, and comparable cuts from commercial health plans. The questions, then, are whether it will be possible to maintain historical revenues and margins in this deteriorating environment and, if not, what changes must be made to bolster sustainability.

Most health system executives are aware of these dynamics, but few have bought into change, and probably won’t until there is no other alternative. Steven Blumberg, a senior executive at AtlantiCare, responsible for that system’s ACO development, has framed how different health systems are responding.

“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.”

We know that the first group is very small. The consulting firm Oliver Wyman noted that more than 500 organizations applied for the third round of the Medicare Shared Savings Program, beginning in 2013, and there are also organizations developing non-Medicare ACOs.  Combined, organizations pursuing Medicare and commercial ACOs probably represent fewer than 5 percent of the US’ 5,700 hospitals.

Worse, discussions with many ACO senior team members have made it clear that most see this as a long process, and that few are actively trying to, as Mr. Blumberg said, “change utilization and cost patterns.” Their outward enthusiasm about ACOs notwithstanding, commitment to meaningful change may be more muted. In my experience, most are doing everything they can to protect their fee-for-service business for as long as possible. And, as Jaan Sidorov described recently, many are also using this period to grow and consolidate their organizations, rolling up physicians and other services, and strengthening their market positioning and control.

These acts make sense in the short term. While FFS has been an egregious burden for purchasers, it has been a huge bounty for providers, driving health care to become the largest and wealthiest industry sector. Why would anyone running a health care organization undermine that?

Two reasons. First is the inevitability of change, most likely toward risk, as public and commercial purchasers become increasingly stressed by the ever-growing burden of cost. That transitioned hasn’t happened so far, but that doesn’t mean it can’t.

The second is that every health system owns the risk of certain populations: its employees and retirees, and their dependents; the medically indigent; and Medicaid and Medicare Advantage. An inability to effectively manage the risk inside these groups is a needless drain on resources. At the same time, though, at-risk populations provide an opportunity to test the thesis that the health system CAN manage its care, or marshal the resources necessary to manage that care under the likely scenario that it discovers it doesn’t have those tools and skills inhouse.

Of course, increased market share is the opportunity that can arise from successfully managing health care risk. Show regional employers hard data conveying that a referral to  your health system results in measurably better outcomes at lower cost, and you turn the tide of business in your direction, and at the expense of your competitors. Yes, your new approach may yield lower per patient revenues and margin, but the compensations are more patient volumes and a more sustainable future. In this environment, these can be transformative advantages.

In other words, independent of notions about the future, the prudent health system, worried about continued viability in a shifting environment, will demonstrate to itself that it can drive appropriate care and cost, if it desires.

This is easier said than done. Over decades, a highly motivated health care industry has developed scores of ways to extract money from us that they’re not entitled to. There is the craziness of the charge masters that Steven Brill described in his recent Time article. There is the exorbitant unit pricing of drugs and labs that health plans impose. The unnecessary utilization of stents, or the fact that, according to MedPAC, the fact that physicians who acquire an imaging device suddenly order them at a high multiple of their previous rate.

As it turns out, many of our solutions are wholly inadequate. One current mythology is that primary care, constituted in an advanced medical home, will significantly drive down costs. So far, though, there’s little or no data to support this.

Another argument claims that better managing chronic disease will save us. But as Al Lewis nails down in his recent book, Why Nobody Believes the Numbers, the data don’t show this either.

There is too little attention paid to the 6 percent of patients who consume 80 percent of the money – recent Munich Re/PwC data show that, in Northern California, cases that have exceeded $1 million have grown seven-fold over the past decade – and too much attention focused on false values like “provider choice,” rather than the identification of high performing (meaning consistently getting good outcomes at reasonable cost) physicians and other providers. We have failed to favor what we know works – e.g., evidence-based medicine – and instead have fallen for platitudes, like giving patients “more skin in the game,” but without the information to make good choices.

Health care cost drivers are a multi-headed monster, so beginning to drive appropriateness requires an operational orientation that is broad-spectrum and multi-vectored. These capabilities don’t simply appear. They are based in the right kinds of data and analytics, and in the protocols that can make findings actionable. They are based in a financial structure that encourages doing the right things rather than doing more.

These changes will require huge investments in an organization’s cultural and infrastructure redesign. Pulling them off will entail far more than simply flipping switches. Ego and pride of ownership won’t get you there.  There are a few organizations in the country – not many – that have deep experience in aggressively managing health care clinical, financial and administrative risk, and they should be recruited to help.

ACO’s, as they are currently constituted, require entrants to jump through a variety of hoops, but the jury is very much out on whether they can work. What is clear, though, is that, so long as they remain tied to fee-for-service, health systems can cruise with very few changes to the old paradigm. In other words, ACOs can become a distraction from the real imperative, which is learning to effectively manage risk.

The point is that an organization that is avoiding learning to aggressively drive care and cost to appropriateness, even for a small subset of its population, is setting itself up for failure when the stakes get much higher. And an organization ill-prepared for dramatic environmental change has placed its sustainability at peril.

2 thoughts on “Seriously Testing The ACO Waters

  1. A “hospital trust” in the UK is a budgeted financial unit. The administrator is given so much money per year to run a hospital and pay all the staff, including surgeons and specialists. The budget is based on the number of people in the geographic referral area for the hospital (generally they do not overlap with other hospital trusts). This is a working ACO and they have been working for about 60 years. Sometimes administrators are not up to the task and are fired. So when thinking about a possible American version of the ACO remember they will not all succeed and they should not be so privileged that failure is impossible. Fee for service has no budget, an ACO has a budget — that is the big difference!

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