Accountable care organizations: The new provider model?

Both Medicare and the state of Massachusetts are reviewing alternatives to healthcare's fee-for-service models with an eye toward greater integration and coordination in the delivery system. These population-based payment models, or accountable care organizations (ACOs), provide a possible foundation for controlling healthcare costs by rewarding providers for efficiently coordinating services and achieving measurable quality outcomes. We spoke with Milliman principals Rob Parke and Kate Fitch for the early outlook on this new strategy.

Q: What is an accountable care organization?

A: While an ACO can take many forms, essentially it is a group of healthcare providers—primary care physicians, specialists, and hospitals—that have been incentivized with a system of rewards (or penalties) to join forces to more efficiently and effectively deliver their services. The much-discussed "medical home" model is a primary care delivery approach that can be used by ACOs to help accomplish these goals.

The ACO is "accountable" for specific population spending targets and clinical outcome improvements. When the ACO meets, or exceeds, these targets, it is rewarded with a share of the overall savings. In some of the proposed ACO arrangements there are also penalties for failing to meet the targets.

This provider accountability approach has been implemented in programs like Medicare's Physician Group Practice (PGP) demonstration, which measures and rewards cost savings and quality improvements for large group practices.

Q: What problems are ACOs intended to address?

A: There has been a growing recognition and, recently, more widespread agreement that the current fee-for-service payment system in healthcare creates perverse incentives. This problem is highlighted by the presence of widespread regional cost disparities in healthcare. These disparities, first identified by the Dartmouth Atlas 20 years ago, were recently highlighted in a New Yorker article by Atul Gawande.

Milliman's own research indicates wide swings in cost from one location to another. In 2009, the cost of healthcare for a typical family of four in Miami exceeds $20,000, while the cost for a similar family in Phoenix is under $15,000.

There is significant evidence that the parts of the country where integrated delivery systems are the predominant form of care delivery consistently rank as the most cost effective—for example, Rochester, Minn., and Seattle, Wash. A payment system that holds providers accountable for overall quality and costs, and encourages provider integration, would seem to have a better chance at improving quality and controlling spiraling healthcare costs. ACOs can be a useful way to provide the structure and financial incentives to encourage integration.

Of course, if ACOs sound like capitation, that's because in many ways they are a version of it. For patients and providers with bad memories of capitation in the '90s, the ACO concept will raise concerns. Still, the concept is gaining industry attention; most notably with an article in Health Affairs proposing shared savings around voluntary ACOs as a potentially acceptable way to move along the continuum towards integration of the delivery system. This would avoid the controversy that a more widespread, mandatory approach would likely generate but still meet the interests of providers, patients, and taxpayers by incrementally shifting fee-for-service providers toward integration. But a voluntary approach, without providers having skin in the game, may not be incentive enough to move the dial toward more efficient practices.

Q: How does the ACO concept work?

A: At the heart of the ACO concept is the expectation that when groups of providers are collectively accountable for meeting cost and quality targets, internal peer review and peer pressure will drive the identification and implementation of best practices systemically, which in turn could lead to better cost controls and outcomes. In an iterative process the providers themselves, not payors, will drive efficient, evidence-based care delivery.

Q: What's the appeal of ACOs to Medicare and to the state of Massachusetts?

A: Massachusetts is on the forefront of developments that dovetail with ACOs. Its healthcare reform initiative first addressed expanding coverage rather than payment reform. The Special Commission on the Health Care Payment System has indicated that, if reform is to survive, Massachusetts now needs to address cost issues. The current cost trend is driven by the fee-for-service payment system, which rewards volume rather than outcomes and efficiency.

The Special Commission recommends two alternative payment models: episode-based payment or global payment. In both models, provider groups are accountable for financial and clinical outcomes. It is interesting to note that the big insurers in Massachusetts have begun to implement contracting strategies that are shifting providers into variations of these payment models.

Similarly, in response to the unsustainable volume increase and uneven quality experienced by the Medicare program, MedPAC is proposing ACO demonstration projects as an alternative to fee-for-service payment. The pilots would expand beyond the PGP demonstrations in hopes of incentivizing integrated, efficient care delivery to slow spending and improve quality.

Interestingly, both Medicare and Massachusetts, while highlighting the magnitude of the task, anticipate the necessity for ensuring that all changes to the system are incremental and phased, especially given the sensitivity over a repeat of the capitation pains of the 1990s.

Q: What are some of the potential challenges for ACOs?

A: In many cases it will be a challenge for ACOs to meet financial targets. ACOs will, in many ways, need to operate as mini health plans, building the infrastructure to manage utilization and insure quality care delivery. To establish targets, cost trends, and provider payment and incentive distribution models, ACOs will require sophisticated financial and actuarial analyses. To control demand and improve the quality of care delivery, ACOs will need to have the tools, processes, and reporting for chronic disease management, complex case management, and wellness/prevention services. To control medically unnecessary services, ACOs will need to have the tools, processes, and reporting for preauthorization, hospital utilization review, high-tech radiology management, specialty referral management, and pharmacy management. These functions have typically been carried out by health plans and arrangements to provide some of or all of these services for ACOs will need to be evaluated. It is an open question as to whether ACOs will have the financial resources to internally develop or purchase from health plans the infrastructure, tools, and reporting capability. Also, will they have the expertise to undertake the financial and actuarial analyses necessary for success? Regardless, the need to control supply and demand for medical services will directly impact provider revenue, which will pose a significant and sensitive challenge.

Q: What's the downside to ACOs?

A: Policy change in practically any area will come with unintended consequences, and ACOs are likely to be no exception. In order to make participation attractive to providers, it will be necessary to find the winning balance between rewards and requirements. Voluntary ACOs may have the carrot of financial rewards but may not be sufficient to drive the desired improvements in overall system performance. Mandatory ACOs could well encounter fierce resistance.

It's also hard to anticipate the challenges that may be encountered in the physician/patient relationship as witnessed in the managed care backlash of the 1990s. There will be reluctance in quarters that benefit from the lack of accountability that exists currently in the fee-for-service model. Any efficiency improvements will undoubtedly result in reduced income levels to some providers. Without the administrative and technological support discussed above, financial success by providers in ACOs is also unlikely. If ACO payments include significant penalties this could well result in a provider backlash.

However, the time for ACOs would appear to be ripe as providers advocate for more control of patient care ("medical home"), better tools are available for managing care (electronic medical records, comparative effectiveness information, evidence-based clinical pathways), and there is increasing transparency around the costs and quality. At the very least, ACOs offer a reasonable alternative to the fee-for-service model, particularly an incremental approach that starts to better align the interests of stakeholders, patients, providers, and payors.