The Paradox of Accountable Care Organizations

May 3, 2010

In the run up to health care reform, there was considerable discussion and advocacy for the idea of encouraging the implementation of something called accountable care organization (ACOs). Count me as a hope-to-be proved-wrong skeptic of this idea.

The definition of an ACO is somewhat vague. Essentially the idea is to have groups of providers (group practices, individual providers, hospitals) take responsibility (and thus, “accountability”) for the care of a defined set of patients, i.e. to be fully responsible for all care, including the cost and quality of that care, and share in any savings that might accrue if that care is delivered more cost effectively than it would be in the standard environment.

Sound familiar? Yes, it shares the same overarching philosophy of health maintenance organizations (HMOs) but without the concomitant structure. As defined in the health reform Act, ACOs would continue within the fee-for-service system, but with a sharing of savings. There is no risk arrangement per se; and it is a direct contract with groups of providers rather than a health plan. Sound too good to be true? I am afraid it may be, and perhaps worse, may have an unanticipated negative effect on health care spending.

Here’s the too-good-to-be true part: after health care reform failed under President Clinton, the country shifted wholesale into managed care-heavy ( i.e. risk based), capitated HMOs. These HMOs did slow the cost of health care; national health care spending trends were flat for several years after this shift. But many consumers hated conforming to the requirements and limitations of those HMOs. Most HMOs achieve cost savings by aggressive oversight of hospital stays and expensive referrals, using both financial incentives/disincentives for providers and administrative mechanisms for approvals of certain types of care. Consumers not used to these kinds of processes rebelled against them and the “managed care backlash” was born in the late 1990s. Because health plans do in fact respond to the market (and also to legislators, who began enacting laws to prohibit limits on hospital stays in certain cases), they began to loosen the constraints in their plans and shifted instead to a preferred provider organization (PPO) model – a less tightly controlled version of managed care (managed care “lite,” to many).

So, what happened to health care spending? Well, it did indeed go up – in some cases, a lot.

And now, along comes the latest “rage” in health care (as noted by the Healthcare Economist): the ACO – an even “lighter” version of managed care. Can such an organization really slow national health care spending? Color me doubtful.

And, here’s the unintended potential negative effect: In all the furor around the 39 percent rate increase requested by Anthem Blue Cross earlier this year, one important aspect of the issue didn’t get enough attention: what drove the need for that rate increase? Anthem argued it was the result of demands by certain providers for higher fees, and the negotiating leverage of “marquee” providers that were essential to include in the network in order to serve Anthem customers.

This is an issue that has been well documented elsewhere (see the Massachusetts Attorney General’s report). Having negotiated contracts with providers on behalf of a health plan for many years myself, I can tell you it is a lot easier to negotiate in an environment of plenty than when a provider controls a significant portion of the market.

ACOs have the positive effect of encouraging providers to get organized and structure themselves to deliver and coordinate quality of care. But they also will have the unintended effect of creating bigger geographic blocks of providers – with more negotiating leverage – within regions. Hospitals have been trying to do this for years through physician-hospital organizations (PHOs) and other strategies. ACOs may finally give this idea such a boost that markets become dominated by a small set of “must-have” providers that will shift negotiating leverage with health plans. Color me worried.

Don’t get me wrong: I do hope ACOs work, and I do believe that the underlying philosophy is a good one: care should be managed by providers and not insurers; quality should be the responsibility of providers; care must be better coordinated between and among providers, and shared savings is a great idea. But, as with any big idea, we must go into this with our eyes open – watching for and protecting against those unintended consequences and making sure not to over promise what can really be achieved.