ACO – Panacea or Placebo?

Background:

It’s important to be held accountable for results.  Accountable Care Organizations (ACOs) are one of the few new ideas where it is believed that the new healthcare reform legislation “bends the cost curve” in the right direction (downward). Sections 3021 and 3022 of the Patient Protection and Accountable Care Act of 2010 (PPACA) create ACO initiatives.  ACOs will be able to apply for participation in a Medicare Shared Savings Program.  The intent is to improve the quality of care and reduce costs by changing the incentives for providing healthcare services to Medicare members.  Are ACOs a panacea, are they an attempt to take advantage of providers via capitation, or are they something in the middle?

An ACO is a group of providers, which may include primary care physicians, specialists, ancillary services providers and hospitals, who agree to be held accountable for the cost and quality of healthcare delivered to a defined population of Medicare beneficiaries.  The ACO model allows for the physicians and hospitals to lead both the practice of medicine and the cost containment process rather than have those processes be led by payers.  In essence, the ACO itself will tell doctors how to practice medicine and deliver care as opposed to having payers determine what providers will or will not do based upon the payers’ reimbursement decisions.

Criteria for participation as an ACO are established by the Centers for Medicare and Medicaid Services (CMS) in Section 3022(b) (2) of the PPACA regulations.  The criteria outlines the requirements needed to create an environment for success as an ACO, such as the proper number and type of medical professionals and the clinical, management and administrative resources needed to support the delivery of care in an integrated setting.  In essence, the criteria are designed to ensure that the ACO is ready, willing and able to perform in the desired fashion.

ACOs must be in place by October 2011 to be considered for approval in 2012.  CMS has already said it will designate only a limited number of ACOs in a given territory in an attempt to create competition to bring down Medicare costs.

Anecdotal evidence indicates that many provider entities are considering the development of ACOs.  This will spur a growth industry of consultants and vendors to support the development and management of ACOs.  Unfortunately, there still is much to be clarified in the PPACA regulations and much work to be done, such as determining how shared savings payments will be calculated and what quality performance standards will be implemented by the Department of Health and Human Services (HHS) to promote this form of managed, integrated healthcare. 

Initially, ACOs will be paid on a “fee-for-service” basis by Medicare. ACOs will be eligible to receive additional payments if the ACOs meet the quality performance standards and achieve savings, to be defined in the HHS regulations.  ACOs as provider organizations hold the promise of changing the way care is delivered, from a fragmented system to a coordinated care model.  The focus will be on practicing evidence-based medicine designed to improve patient outcomes and patient satisfaction.  Fee-for-service systems promote paying for volume, rather than paying for quality outcomes. 

Alternatives to fee-for-service reimbursement include bundled payments and capitation.  Under capitation, providers are paid a set dollar amount for assuming the financial risk for the provision of a predetermined set of healthcare services to a defined population. In the late 1980s and 1990s, capitation was popular among HMOs as a means of controlling utilization and reducing costs.   Providers rushed into capitation agreements with major payers, such as the Blues, United, CIGNA, Aetna, PacifiCare and Health Net.  They accepted capitation for commercial, Medicare and/or Medicaid programs, believing that they could make money on the “spread” between the capitation rates they were being paid and the cost of providing care.  Many provider entities capitated by these payers failed because their delivery systems weren’t integrated, they didn’t fully comprehend what risk they were assuming, and they were not able to manage care effectively. Some of those who were able to manage risk appropriately ended up having capitation arrangements terminated as anti-managed care, anti-HMO market sentiment reached its peak.  Consumers were arguing for more choice versus the limited-access models afforded by HMOs at the expense of cost control.  Capitation also became widely disliked by physicians, some of whom saw it as an attempt by payers merely to shift financial risk to providers rather than treat them like partners. 

New and Different:

Reasons provider capitation via ACOs could produce better results than the last time capitation was prominent include the following:

1. There are more established standards of best practices in medicine.  Expanded healthcare information technology capabilities exist to support physicians to maximize best practices and implement electronic health records.  The current financial and operational independence of providers can lead to lack of coordinated care and increased costs due to unnecessary or duplicate tests and visits.
2. Integrated delivery systems of physicians and hospitals are now more fully integrated.  There has been more experience and success with “bundled” payments.  The current economics of healthcare are promoting more consolidation among physicians and hospitals, creating larger provider entities capable of delivering more integrated care.
3. There will be more trust and collaboration between the health plan payer and the providers.  Many physician-hospital organizations failed in the 1990s due to the financial constraints associated with improper capitation and inability to manage risk.  They didn’t have the requisite skills and capabilities needed to succeed in a risk-taking environment despite their appetite for risk and there was no feeling of partnership between payer and provider.  There is more provider-payer collaboration with the new round of experimentation.
4. The capitation models will offer appropriate risk-adjusted capitation rates with an emphasis on quality outcomes and evidence-based medicine.  Because of healthcare reform, providers and the general populace are more focused on evidence-based medicine and the elimination of unnecessary services as means to control costs and increase quality.  Capitation payments will also be adjusted for age, gender and health status – a more fine-tuned approach to delivering a population-for-risk management to an ACO.  Providers will have an appropriate incentive to manage care, but not under or over managed care.  In prior experiences, providers were not the drivers of the arrangement, but rather the recipients.  Now, providers are in the driver’s seat and the focus of change.
5. Providers have learned from the past.  Providers will be more knowledgeable purchasers of risk. They will treat capitation as a business, hire appropriate business professionals, and develop management systems and support to manage the risk they assume.
6. There will be an incentive for payers to capitate providers in the new PPACA environment because capitation provides a means to lock in claim costs, and, therefore, meet the minimum loss ratios as required by law at the 80-85% minimum loss ratio level.  ACOs that successfully manage care will benefit financially from the savings they achieve.  With risk comes reward if handled properly.
7. Management service organizations (MSOs) exist to assist providers in managing capitation contracts.  MSOs are organizations under contract with the providers to perform administrative, clerical and claims processing functions.  These and other entities handle and support the medical management and administration of risk.
8. The ACO movement is supported by the largest payer, the U.S. government.  New state and federal legislation is in full support of health reform and the pressure to control costs in the PPACA expansion will promote the new directions described above.

Bundled Payment Alternatives:

Bundled payments are an additional healthcare reform strategy to reduce healthcare costs through more focus on outcomes, rather than the number of services. Under bundled payments, providers are paid one time for a set of services, rather than for each service individually.  The approach promotes integration, continuity and quality of care.  Examples include the Geisinger Health System’s ProvenCare for coronary artery bypass graft surgery, which is designed to promote best practices in addition to enhanced patient engagement. Bundled payments have demonstrated success at reducing complications and readmissions.  Provisions for bundled payments are included in PPACA through a national Medicare pilot program starting in 2013.

States such as Minnesota, Ohio and Pennsylvania are looking at bundled payments for Medicaid as well.  The number of Medicaid recipients is expected to increase by more than 40% from 2010 to 2019, so hospitals must learn to operate successfully on Medicare and Medicaid rates, regardless of the direction they take.  Traditionally, Medicaid reimbursement has not been adequate to cover all hospital costs, so hospitals need to address their fixed costs.  Many expect over time that provider contracts will move to more bundled payments for commercial, Medicare and Medicaid plans. 

Bundled payments are an episode-based form of capitation.  A provider entity assumes all risk for medical services related to a given episode of care.  These transactions typically occur for items such as cardiac and orthopedic procedures with well-defined treatment patterns.  The payment methodology is similar to DRG reimbursement.  There is less risk for providers under such bundled payments, as they are enduring capitation-like risk for a given episode of care, not for the full spectrum of care for an enrollee over the entire coverage period.

Who can successfully play this new ACO game?  Larger, more integrated provider systems have more resources to manage capitation risk and a better ability to predict costs given a larger capitated population.  Therefore, there may be some increase in merger and acquisition activity among provider groups to achieve the economies of scale necessary for global capitation and bundled payment opportunities in healthcare reform.  However, just because providers are integrated and larger doesn’t automatically make them better. 

To minimize catastrophic risk, providers will consider purchase of provider excess-of-loss insurance coverage.  Health plans such as HMOs and insurers can support ACOs by offering capitation arrangements with optional provider excess-of-loss coverage.  The health plan may retain the risk for selected catastrophic services, such as transplants, out-of-area emergencies and referrals, or it could provide reinsurance to the capitated providers for those items with the same result.  Alternatively, providers may look to their payers as partners to help them design and negotiate coverage with an external provider excess insurance company for catastrophic claims to protect the capitation payments paid to the provider. The health plan may also be in a position to provide consultative medical management to its delegated provider groups and/or assist with the review and contracting for MSO vendors and the evaluation of the ACO’s medical management policies and procedures.

Health plans have always been distribution channels and administrative arms for provider entities (especially provider-owned HMOs).  This will create a collaborative win-win partnership rather than an adversarial win-lose proposition, which the previous capitation environment created in many instances between payers and providers.

In conclusion:

Cynics may simply look at ACOs as another attempt to restructure the healthcare delivery system by shifting risk to unsuspecting providers and promoting underutilization.  However, many believe that ACOs bring the potential for a new, positive transformation in the healthcare delivery system.

As with most healthcare reform issues associated with PPACA, many questions remain.  Many health systems will establish ACOs to capitalize on the new opportunities presented by healthcare reform.  With capitation and/or bundled payments to ACOs, quality of healthcare should improve due to payment linkage to outcomes.  ACOs can become a reminder that more is not always better, let alone cost-effective.

Summit Re conducted a survey on healthcare reform issues with its client base.  The survey confirmed that there is strong interest in a variety of risk arrangements with providers such as ACOs as a way to reduce cost by controlling utilization, reducing leakage to high cost, out-of-network providers and improving quality of care for enrollees.

About the Author

Mark Troutman is president of Summit Reinsurance Services, Inc. (www.summit-re.com), a reinsurance intermediary providing medical excess coverage to insurance carriers and health plans on behalf of Swiss Re and to employer stop loss purchasers on behalf of Companion Life Insurance Company and Swiss Re.  He can be reached at (mtroutman@summit-re.com).