How Can Accountable Care Organizations (ACOs) Generate Savings to Share?

The existence of the new healthcare organizational structure, the Accountable Care Organization (ACO), has taken off like none other. As of June 2012, there were 221 ACOs in 45 states testing various methods of sharing risk, up from 160 in November of 2011. Although there is tremendous interest and rapid growth, it remains to be seen if ACOs can be successful. How are ACOs going generate enough savings to share? Because the transformation to an ACO requires a significant capital investment, restructuring role and responsibilities, usually hiring new resources and redesigning workflows, how are these investments going to pay off for the provider making these changes?

A Health Affairs study shows that the savings are unlikely to come from quality improvement efforts alone. Dr David Eddy used the sophisticated Archimedes simulation model to analyze the effects of the Shared Savings Program quality measures and performance targets on Medicare costs in a simulated population of patients ages 65–75 with type 2 diabetes. They found that a ten-percentage-point improvement in performance on diabetes quality measures would reduce Medicare costs only by up to about 1 percent over a five year period. When you consider the costs of attaining this level of performance improvement the savings would decrease or become a net cost increase. To achieve greater savings, accountable care organizations will have to lower costs by other means, such as through improved use of information technology and care coordination. This is the reality of the challenge of quality improvement. Although it is the right thing to do, even in a shared savings environment, at least for the short term, it may not be profitable.

So what are the critical success factors for an ACO to generate enough savings such that there is a profit margin? The Return-On-Investment (ROI) for making these changes from a provider perspective will depend on the provider’s ability to achieve a certain level of cost reduction, generally greater than 2%. If this is not achieved, margins are worsened because the capital costs will not be reaping benefits and the organizational changes will be disruptive without generating value. At the same time you are, by design, decreasing your FFS volume which may have been the cash cow sustaining your margins. Becker’s Hospital Review discusses how to calculate provider revenue loss in an ACO. The important point is that in the new world of value based reimbursement, you create margin by safely decreasing the use of services and creating internal efficiencies to do so at the lowest possible cost. This is the new game. And, very importantly, old foes can be critical allies in achieving this goal. In particular, this shift in the reimbursement model now aligns provider and health plan incentives.

As cost became an issue over the past 30 years for the ultimate payers or funders of healthcare services (i.e. the government and employers), health plans have successfully and profitably become a powerful middle man. Because, for every financial transaction, one person’s cost is the other’s income, this tug of war between health plans and providers has been waging for years. Health plans have used various means to decrease their cost and providers have fought back with countermeasures to increase their revenue. This situation has lead to an acrimonious relationship between health plans and providers characterized by a lack of trust and bitter battles to gain an advantage with sometimes very high stakes. In the late 1990’s, there was an inappropriate and disastrous shift of insurance risk to providers that led to provider losses and increased the animosity between health plans and providers.

There are two kinds of risk to manage as it relates to the use of healthcare services. First is insurance risk, which is the risk that a patient will develop a catastrophic illness or injury such as cancer or have severe injuries from an auto accident. This is generally the purpose of insurance. Insuring against this risk is the primary reason why health insurance companies exist. The second kind of risk is performance risk. Performance risk is the risk of over-, under- or mis-use of healthcare services for a particular condition, illness or injury. This is particularly difficult to manage because the gold standard is so difficult to determine. So much is based on patient characteristics, co-morbidities, medical evidence and clinical judgment. When costs in healthcare began to dramatically increase, it was noted that there was great variation in the use of services for the same condition. This was evidence that clinical performance risk was not being managed. Health plans stepped in to do so. Health plans have build up infrastructure over several years to micromanage the clinical performance of providers through various means which typically culminate in denial of payment for services deemed inappropriate. These tools include guidelines, data analytics, predictive models, case managers and other clinical staff, disease management systems and provider profiling systems. This has been a frustrating situation for physicians who have had their clinical judgment challenged and for patients who have been caught in the middle. However, now the game has changed. In an ACO world, health plans and providers have the same perspective on what are costs. The goal is to decrease cost from the perspective of the government or employer payer. Therefore there is an opportunity for health plans and providers to align efforts and partner to create a higher quality and more efficient system. This health plan infrastructure can be used to help providers manage clinical performance risk. Patients still need to be aligned but that is a topic for another time.

A health plan that has been particularly aggressive in developing new ACO-like reimbursement models with providers is Cigna. They recently published early results of their Collaborative Accountable Care initiative. In terms of what must providers do, beyond quality improvement, to reduce costs, care coordination seems to be a critical success factor. In the Cigna model, registered nurses who serve as care coordinators employed by participating practices are a central feature of the initiative. They use patient-specific reports and practice performance reports provided by Cigna to improve care coordination, identify and close care gaps, and address other opportunities for quality and efficiency improvement. This effort included referrals into Cigna’s programs for complex case management. Cigna provided significant resources and support for the practices including consulting support. Cigna reported interim quality and cost results for three geographically and structurally diverse provider practices in Arizona, New Hampshire, and Texas. Although not statistically significant, the early results demonstrated favorable trends in total medical costs and quality of care.

As successful ACO models emerge, it becomes clear that quality improvement will be necessary but not sufficient and partnerships with plans may be a way to accelerate progress and help fund the infrastructure needed. Although there are lingering trust issues and there will be other battlegrounds to negotiate, in the ACO model of care, plans and providers can be on the same side.

Accountable Care Organizations (ACOs) Showing Rapid Growth

Accountable Care Organizations (ACOs) are expected to be one of the key vehicles of transformation of the healthcare system from volume-based to value-based reimbursement.  But how many ACOs are out there and how fast is this trend advancing?  In a nice industry summary, Leavitt Partners identified the number of publically known or recognized ACOs from news releases, media reports, trade groups, collaborations and interviews through the beginning of September 2011.  This is definitely a growth industry and the financing model and primary sponsor varies significantly. Of the 164 identified ACOs, the sponsoring entities included hospital systems, physician groups and insurers with a market presence in 41 states but less than half of all HRRs. Of these entities, 99 were primarily sponsored by hospital systems, 38 by physician groups and 27 by insurers.

Fig. 1: ACO Distribution by State

Summary of Results

•  Dispersion of accountable care organizations varies significantly by market with certain regions devoid of ACOs:  The states with the highest numbers of ACOs were California (17), Michigan (12) and Texas (12).  Poorer and rural regions, in particular, that you would expect to benefit from ACOs, had little ACO growth.  Alabama, Mississippi and West Virginia each had 0 identified ACOs.  Pioneer ACOs, which take on greater risk, are concentrated in 5 states, with California leading the pack with 6 Pioneers, followed by Maine (5), Michigan (3), Minnesota (3) and Texas (2).
• Hospitals and hospital systems are the primary backers of ACOs:  Nearly two-thirds of ACOs identified were started by hospitals or hospital systems.  This can be seen as a defensive strategy if driven by the need to compete for physician alignment or an offensive strategy if driven by the goal to prepare for value-based reimbursement and sustain margins by integrating outpatient care.  Becker’s has described the five key considerations for hospitals thinking about forming an ACO.  This movement sounds similar to the 1990’s strategy of hospitals buying up physician practices, which was a dismal failure.  However, there are several differences today.  We are all (hopefully) smarter, especially around the physician productivity and management issues, we have more focus on quality, Information Technology (IT) is much more mature for the needed analytic power and the incentive model is clearly moving toward a compatible focus on value-based reimbursement.
• Significant investment in the accountable care model exists independent of the Medicare Shared Savings Program:  ACO growth is growing independent of Medicare reimbursement as at least 27 insurers have partnered with providers to operate under ACO-like payment contracts.  Norton and Humana have established an ACO that is showing positive early results.
• The success of different accountable care models is yet unproven:  Although many organizations such as Kaiser Permanente and Geisinger could be considered long-standing ACOs, the variety of models in play and recently developed in this nascent market are yet to be proven.  We will have to wait 2-3 years to begin to really understand what works and what doesn’t, especially for the newer models.

It does seem, based on the interest and growth of ACOs, that this can be a vehicle for transformation of the industry.  For providers to begin to manage risk, it will mean significant cultural change and retooling of their Information Technology (IT) infrastructure.  A few have a history of success and are already there while many others are jumping in.  It will be interesting to see who succeeds and who fails.

Top 10 Trends That Will Transform Healthcare in 2012

The US healthcare industry is in the midst of the “perfect storm”.  The issue of cost cannot be kicked down the road any further and payers, including the government, are pursuing cost reduction strategies by any means necessary.  Although the Fee-For-Service (FFS) reimbursement model is often cited as the root cause of the dysfunctional care delivery system, it cannot be changed overnight.  In an effort to catalyze the necessary transformation, the government has created several programs and incentives to model, test and drive care delivery in a more functional direction.  Combined with market forces, all payers are expected to follow suit in one way or another to shift the incentives and financial reimbursement model in a more rational direction.  All of these efforts are heavily dependent on upgrading the Information Technology and analytic infrastructure of the industry.  Healthcare has greatly lagged other information intensive industries, such as banking, in investing in and leveraging technology.  All of these efforts will transform the industry and there clearly will be winners and losers.  The early and effective adopters will be well-positioned, although there will certainly be a transition period when overall results may slip.  It will be important to find and take advantage of the synergies in these drivers so as to respond most effectively and without wasting resources.  The basis of competition in the industry is changing and that will be transformative.  The following are the top 10 most important drivers to pay attention and respond to.

1) Healthcare Reform

The broad and comprehensive reforms put forth in the Patient Protection and Affordable Care Act of 2010 legislation will be tested at the highest level this year.  The Supreme Court decision will have fundamental impact on which components of the law can go forward and which cannot.  The increased covered lives is not only an important objective but also bringing healthier enrollees into the pool would make providing health insurance more financially viable.  If this form of healthcare reform fails, an alternative would have to be found quickly or draconian cuts in public programs will be likely and private insurance would not be able to make up the difference.  The impact on reimbursement for some providers would be devastating for some.

2) Patient-Centered Medical Home (PCMH)

The PCMH is a driver which already has tremendous momentum.  There has been unprecedented industry alignment around this concept and adoption is rapidly spreading through primary care practices.  Many early tests are beginning to show results.  The challenge is the reimbursement model and creating a “medical neighborhood” that is aligned with the PCMH.  The most important work of the PCMH is often the uncompensated work of coordinating care.  This is where the FFS reimbursement model comes into direct conflict with more effective reimbursement models.  Many groups and payers are testing hybrid models to see if they can be mutually beneficial.  This model of care is also very dependent on technology and care teams to support the work of coordination and outreach as well as better engaging the patient.

3) Accountable Care Organizations (ACOs)

As one of the programs of the healthcare reform act, testing of Accountable Care Organizations (ACOs) was established to drive a system orientation for the care of a designed population of patients.  This approach incentivizes the development of Integrated Delivery Systems (IDSs) as the “medical neighborhood”.  The results are expected to be better than the failed movement in the late 1990’s to develop IDSs because incentives are better aligned between providers and payers, quality is more defined, measurable and expected and technology is more mature and affordable.  This is a heavily technology and analytics dependent model in that it means that providers must become more like insurance companies with the attendant need to manage risk.  Data and analytics are the lifeblood of an ACO as what you don’t know can really hurt you.  This will be transformative at a macro level for the entire industry.

4) Population Health Management (PHM)

Population Health Management (PHM) attempts to strike at the root cause of high healthcare costs.  The cost of healthcare has now reached a crisis level.  To solve this crisis, we have to go where the money is.  The costs of care are extremely unevenly distributed with 1% of the population generating 20% or more of the costs.  Chronic conditions are a driver of as much as 75% of costs.  These are patients that you cannot wait until they show up in your emergency room or clinic.  They may be well on their way, by that time, to generating high levels of cost.  ACOs will have to manage risk to be successful and that means becoming very good at PHM.  It will be critical to identify and outreach to high risk patients and mitigate their risks before the clinical time bomb goes off.  This will become the basis of competition as value-based reimbursement becomes more prevalent.  The move to PHM will be a powerful driver of transformation of the system.

5) Health Information Exchanges (HIEs) 

As one of the elements of the stimulus program, funding to support the development of Health Information Exchanges (HIEs) has increased dramatically the number of viable exchanges in the country.  This concept has had appeal for a number of years under different names (e.g. CHINs and RHIOs) but financial sustainability has always been an issue.  HIEs may finally have a sustainable business model in that ACOs and PCMHs need the knowledge of patient care activities that HIEs can potentially aggregate and make available.  Care coordination and proactively managing risk in a population is important because, if you are an ACO, what you don’t know can hurt you.  HIEs will help with tracking patients in and out of your system.

6) ICD-10

Although not scheduled to become mandatory until October 2013, the switch to ICD-10 is expected to have significant and far-reaching impact on the delivery of health services.  And preparation must begin far ahead of the deadline.  There is the priority one issues of ensuring that operations can continue with the switch and that cross-walks create comparable financial scenarios.  However, the transformative aspect is the increased clinical granularity of the codes.  This is expected to drive more effective analytics and understanding of care delivery.  Also the richer code set will enable more precise Clinical Decision Support (CDS) to be deployed.

7) Big Data

An interesting development, just in time to consume the volume of new EHR data that will be produced, is the concept of “Big Data”.  Big data is a term applied to data sets whose size is beyond the ability of commonly used software tools to capture, manage, and process within a tolerable timeframe.  Big data sizes are a constantly moving target currently ranging from a few dozen terabytes to many petabytes of data in a single data set.  The research group, Gartner, has defined the challenge data growth challenges (and opportunities) as being three-dimensional: not only increasing volume (amount of data) but also increasing velocity (speed of data in/out) and variety (range of data types, sources). This certainly describes the situation in healthcare as EHRs, outcomes data, predictive models and genomics are creating increasingly large and varied data sets.  Big Data technologies are tuned to manage these huge volumes of data with acceptable processing times.  This capability, especially in analytics, will be critical for healthcare quality and care management as an organization can move to near real-time decision support and rapid cycles of improvement.

8) Meaningful Use

The Meaningful Use incentives have created a powerful catalyst for organizations to implement Electronic Health Records (EHRs).  Although the incentive will not pay the total freight for implementation, it does defray a significant amount of costs and the looming penalty phase should push the laggards in this direction.  More than $1.3 billion in Medicare and $1.1 billion in Medicaid EHR Incentive Program payments have been made between May 2011 by the end of December 2011.  The result will be the retooling of the entire Information Technology (IT) infrastructure of the healthcare industry.  There will likely some come a time when you are not competitive if you do not have an EHR.  Most importantly, the basis of competition will shift from whether you have an EHR to how effectively you are using your EHR.

9) Personal Health Records (PHRs)

The Personal Health Record (PHR) is seen as an important tools as we move to managing populations and reducing risks associated with chronic conditions.  Engagement of the patient will be essential.  Consumerism and personal accountability for health will gain increased momentum especially as consumers continue to pay more out of pocket for health costs.  Access to quality information and guidance through remote and mobile technologies will be critical to the consumerism revolution. As we move to PHM approaches, it will be important for healthcare providers to use technology to electronically create a “continuous healing relationship” with the patient as well as support caregivers.  Having patients and caregivers empowered, engaged and knowledgeable about their illness and managing their own care is the most cost-efficient and, generally, high quality care delivery model.

10) Social Media

As with many other trends, healthcare has lagged the general business community in adopting certain approaches and technologies.  Social media is one of those technologies.  Issues of privacy are obviously a barrier.  However, the impact of social networking and social media is so important and pervasive that increased healthcare adoption would be transformative.  It is important to recognize that not only is social media technologies useful for engaging with patients but it is also valuable for internal use within the healthcare organization.

The Next 5 Years Will be Transformative for the Healthcare Industry

Rarely has there been so much change in play in the healthcare industry.  There is much at stake in this trillion dollar industry.  There clearly has to be winners, losers and change if we are to bend the cost curve.  In this transformative phase, some organizations will fail, some specialties will see decreased reimbursement, many roles and responsibilities will change and the patient will have to become more accountable for his or her own health.  However, as has typically been the American way, with innovation, influence of market forces and the right level of government intervention, we can come out of this transformation with a stronger, cost-efficient and high quality system that will, once again be competitive on an international scale.

Accountable Care Organization (ACO) Final Payment Rules Released, Now the Real Work Begins

The final rule for Medicare Shared Savings Program (MSSP), the payment engine for Accountable Care Organizations (ACOs), were released on October 20, 2011 with an editorial published by Berwick in the New Journal of Medicine (NEJM).  What is evident is that the Center for Medicare and Medicaid Services (CMS) did listen to the complaints and issues raised regarding the proposed rules.  Changes were made to create more flexible options and reduce barriers to broader participation.  Major changes include providing more timely, information to ACOs at the outset of the performance year through preliminary prospective alignment of beneficiaries; reducing the total number of quality measures by about half; allowing start-up ACOs to choose a “savings only” track without financial risk during their initial contract period; sharing savings with successful ACOs on a “first dollar” basis when the ACO achieves meaningful savings for the Medicare program; and creating a pathway for full participation of federally qualified health centers and rural health clinics.  Also, the Center for Medicare and Medicaid Innovation announced an advanced payment initiative that will allow small physician practices and rural community hospitals to receive up-front access to needed capital to enable the transition to an ACO model.

This more palatable model and options should encourage more organizations to sign up.  However, now the real work begins.  The ACO model is expected to be the framework for transforming the healthcare industry to a value-based payment model.  It is important to understand that the underlying fundamental change is that of shifting performance risk from the payers, including the government, to providers.  There are two types of medical care risks: (1) insurance risk which is the risk that someone will have some relatively unforeseeable medical issue like an auto accident or develop cancer that would lead to high medical costs and (2) performance risk which is the risk that a provider will provide inefficient and low quality care for a particular condition.  Insurance risk is addressed in the underwriting process that considers various risk factors and predictive models to assign risk levels and charge premiums accordingly.  As we have no perfect models, this is an inherent probabilistic exercise due to the uncertainty in determining insurance risk.  Members of a high risk category may never have an incident while those in a low risk categories may have a catastrophic incident.  Most insurance, such as auto and home insurance, is designed to insure against these kinds of catastrophic risks.

Due to the rising costs of healthcare, medical insurance evolved over time to attempt to also address performance risk.  Healthcare costs began to rise dramatically in the 1960’s and 1970’s and it became evident that there was significant variation in the costs and quality of care for the same conditions depending on provider and geography.  Insurance companies began to try to manage performance risk to address the opportunity to reduce costs that this variation represented.  This lead to the development of Health Maintenance Organizations (HMOs) and Managed Care Organizations (MCOs) of the 1980’s.  These organizations began to invest in medical directors, nurses and and expanded infrastructure to evaluate and manage the “appropriateness” of care being provided to their members.  They used very crude tools such as contracting provisions, benefit design and utilization review and, early on and temporarily, were very effective in decreasing the costs of care.  Despite the early success, the fact that one organizations’ costs are another’s income lead to battle lines being drawn.  HMO’s and MCOs were making significant profits at the expense of providers.  This conflict pitted providers vs insurance companies and set-up the “managed care backlash” of the late 1990’s and early 2000’s, as patients and politicians sided with the more highly trusted providers.

Now, the absolute level and rate of rise of healthcare costs are threatening to bankrupt the US and the “can” cannot be kicked any further down the road.  The opportunity is that the ACO model will appropriately shift risk to providers and, for the first time, align the incentives of payers and providers.  There is evidence that the changing reimbursement environment is driving more partnerships between providers and payers, such as the partnership between Aetna and Banner Health.  There is opportunity for alignment because each share in the savings IF performance risk is managed better than expected.  This will be an extremely complex undertaking.  Nevertheless, there is not really a better alternative on the table.  The real work will be for providers to make the transition to become more like insurance companies with an increased, laser focus on managing performance risk.  This makes sense because most of the decisions that drive costs are made by doctors on the delivery side.  This will require new skills, infrastructure, processes and analytics for providers.  Most importantly this will involve a shift in culture and thinking from focusing on the importance of volume to the importance of value.  In particular, for hospitals this will require new partnerships and realigned thinking since the greatest costs to the system are for inpatient care.  This will also require a cultural shift from visit-based care to enrollment-based care.  Providers are used to being reactive and waiting until the patient generates a visit to provide care.  Since patients with chronic disease can generate up to 75% of costs, managing performance risk MUST involve better managing patients with chronic conditions.   These patients require proactive outreach, behavioral modification coaching and on-going monitoring to decrease costs and improve quality.  This approach to care called Population Health Management (PHM) should begin as soon as the patient enrolls in a system of care.  Again, this requires a dramatic shift in culture, people, process and technology.  It will be interesting to see which organizations will successfully navigate this transformation and become a leader in the new model of value-based care delivery.  Now the real work begins.