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The idea of the “Accountable Care Organization” (ACO) appears to have taken hold well in advance of a clear understanding of what these organizations might be or how they will fit into the overall health care system.

At Blue Cross Blue Shield of Michigan, we’ve been using the term “Organized Systems of Care” (OSC) since 2005, when we began transforming our relationship with physicians through the Physician Group Incentive Program. This term, which can be used interchangeably with ACO, implies an emphasis on and commitment to “before the fact” responsibility for creating an effective system of care and “after the fact” responsibility for the results of that system – at a population level.

I want to share with you my understanding of ACO/OSCs, and recommend how we should approach using them as key strategy in creating a high performing health care system in America.

First, let’s set the stage.

The American health care system costs much more and performs below other developed countries on population-based performance indicators on cost, quality, and access to care.

Much – but not all – of the cost difference is due to the relative advantage American health care workers and facilities have over their foreign counterparts on what they are paid for equivalent services. High (and increasing) use rates contribute substantially as well.

In this country, health care professionals earn a higher multiple of average prevailing wages than is the case elsewhere. With an increasing percentage of health care payments coming from government programs, the sustainability of these higher incomes is clearly threatened. The annual political wrangling over the formula for the “Sustainable Growth Rate” serves as a harbinger of the day when Medicare professional payment levels are reduced to a more affordable level, presumably one that does not rely on deficit financing.

The threat of declining payments on a per-service basis has created something of a consensus for replacing the fee-for-service system with one that incorporates the principles of “pay for performance.” The rationale is that a higher performing health care system can bring overall costs in line, while preserving the relative income advantage enjoyed by American health care workers. This hope (that incomes can be preserved) explains the general appeal of Accountable Care Organization/Organized System of Care prior to a general understanding of what they are.

This openness – in some cases eagerness – to change offers a unique and compelling opportunity. Can we use the widespread support for a performance-based payment model to create a high-performing and affordable system?

Now, let’s explore the root causes of our current health care system’s sub-optimal performance:

Root Causes of America’s High Cost Health Care System

Poorly aligned incentives. Fee-for-service drives increased delivery of services and members lack benefit incentives to promote better health. Lack of counterbalancing incentive to provide services efficiently from a population perspective.

Lack of population focus. Providers deliver services that are demanded and paid for, instead of focusing on the health of the overall population.

Fragmented healthcare delivery. Physicians and hospitals lack information infrastructure and integration of care processes across the care continuum.

Weak primary care foundation. Missed opportunities for care coordination and lower cost approaches.

Lack of focus on process excellence. Creates variation and re-work, not clinical process improvement.

Any organizational solution to creating a high-performing health care system must address these root causes.

The essential elements of an Accountable Care Organization/Organized System of Care will be determined empirically – by observing which organizational framework and attributes best achieve affordability while meeting the health care needs of the defined population.

The first requirement is alignment of incentives. The payment model must assure that better performing organizations are more financially successful than those delivering less value. This is how markets should work – high margins should be the result of delivering greater value relative to the quantity of resources required to deliver that value. At present, value is determined by the quantity of services delivered and the “relative value” of each service. There is no connection between payment and the outcomes of care or the impact of services on health at the population level.

Any payment model can be subverted to serve short term interests rather than the interests of achieving a high performance health care system. We’ve seen many examples of this in both fee for service or capitation-based payment approaches over the past three decades. The commitment to tying a substantial portion of provider payment to population level performance is the key to long term success. Hybrid payment approaches, including some degree of fee for service payment, may be just as successful as fully capitated payment approaches, if they include accountability for population level performance. In addition, any payment method will be strengthened if consumers have analogous incentives for effective self care and to seek care from providers committed to creating and sustaining high performance systems of care.

In the current state, primary care practices are ill-equipped to act as the foundation of a system that consistently delivers evidence-based services at the population level. A proactive model of care relies on a registry of all persons in the population, a process to determine the services that they should receive, and a system for consistently getting them done. Given that this is a core role of primary care, such practices should routinely identify and track all persons with whom they have an ongoing care relationship. HMOs have had primary care assignment for decades – but only rarely has the principle been applied to all patients in the practice.

In the Patient Centered Medical Home model, primary care teams have a care relationship that extends over time and across settings of care. The relationship includes a responsibility to assure that the process of care works to advantage the patient. This role has withered under a fee-for-service system that failed to recognize the value of communication and coordination across what is now the dis-continuum of care. Creating a system with an emphasis on process management, effective communication (including role clarity), and coordination of care can only exist under a payment model that rewards improving and optimizing performance.

So, how does the Accountable Care Organization/Organized System of Care fit in?

The ACO/OSC is the organization that accepts performance risk at the population level. The population is comprised of all persons with a care relationship with primary care physicians operating within the system of care. The population served by the ACO/OSC is, therefore, a “roll-up” of the individual patient populations of the primary care physicians operating within the system. The ACO/OSC conducts performance measurement for that population, supports effective processes for communication and care coordination across sites of care, establishes goals, tracks progress to goal, and interacts with payers to assure that the organization receives payment commensurate with the value that it delivers to the population it serves.

The model is much easier to imagine if the organization is an integrated delivery system, but “virtual” organizations led by physician organizations or physician-hospital organizations may be a more common arrangement. For all, the challenge is creating a high performance system of care for a population. Organizations aspiring to be an ACO/OSC must prepare themselves to transform the process of care to succeed in population management. And that starts with identifying the population that the organization serves.

The rest will be history.

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Thomas L. Simmer, M.D. is senior vice president for Health Care Value and Provider Affiliation and chief medical officer for Blue Cross Blue Shield of Michigan. He is the vice-chair of the board of directors of the Center for Healthcare Research & Transformation.