Health care can thank Elliott Fisher, M.D., of the Dartmouth Institute for Health Policy and Clinical Practice in Lebanon, N.H., for the term "accountable care organization," though he insists that part of the credit goes to Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission. About four years ago, the two men started to tout the ACO concept, in which all providers caring for the same patient populations share responsibility, risk and part of the cost savings such collaboration might provide.

Since then, the idea has gained traction among many policymakers, and officially became one tactic for reforming the nation's health care system when the new Patient Protection and Affordable Care Act was signed into law by President Obama in March. The law calls for demonstration projects to test various ways to develop and implement ACOs around the country.

Dozens of ACOs in one form or another are already being organized. Most, though not all, include hospitals, physicians and other providers. By agreeing to adopt evidence-based quality standards and measurements and by aligning hospital and physician incentives, ACO participants aim to improve outcomes and reduce waste, duplication and inefficiencies.

Health care analysts say ACOs offer the infrastructure for members to integrate care and embrace emerging reimbursement methods such as bundled payments, medical homes, gainsharing and pay for performance.

Medicare's Shared Savings

The most important component of the reform law impacting ACOs is the Medicare Shared Savings Program, slated for a 2012 startup, says Doug Hastings, a Washington, D.C., health care attorney who serves as board chair of the Epstein, Becker & Green law firm. It allows provider ACOs that meet quality standards to share accountability for treating Medicare beneficiaries, as well as a cut of any cost savings that result. The networks must include primary care providers, employ evidence-based medicine and achieve levels of integration that include sharing patient information and joint governance.

ACOs in the demonstration project must sign a three-year agreement and attract a critical mass of at least 5,000 Medicare beneficiaries. Hastings says that while the law will accelerate the growth of ACOs, it does not resolve long-standing legal issues that have constrained tighter relationships between physicians and hospitals. "Parties need to be mindful of the antitrust and fraud and abuse laws," he says.

Payment and Quality Benefits

ACOs might ease the pain of diminishing health care resources, says Joane Goodroe, founder of Goodroe Health Solutions and a senior vice president for innovation for VHA Inc. "We've got to accept—and it's not even political to admit this—that there will be less money available for health care," she says. "We have to figure out how to make the dollars go further."

Goodroe, who developed a widely replicated model for gainsharing earlier this decade, says ACOs bring hospitals and physicians together in a meaningful economic way to accept risk and deliver the best care possible. "We're really moving from a payment system of silos to paying hospitals and physicians for collectively managing populations through ACOs," she says.

The American Hospital Association has long hoped to create payment models to better align physician-hospital incentives "to drive toward that high quality of care we all are seeking without having one part or sector suffering financial penalties," says Vice President for Quality and Patient Safety Nancy Foster.

"This is one and perhaps the most significant model embedded in this legislation that reinforces the theme that we need to be better at integrating the care of patients across the continuum of care," she explains. "Whether you move that way in accepting bundled payment or join an ACO, hospitals need to figure out how to integrate with other providers who are touching the same patients they're touching."

Most physicians already participate in referral networks affiliated with hospitals, "so we felt we could move toward integration without dramatic interruptions of current referral patterns," says Dartmouth's Fisher.

The Centers for Medicare & Medicaid Services' demonstration model offers shared savings without shared risk, which Fisher says should make it more palatable to risk-averse hospitals. He predicts the savings could be substantial. Dartmouth research has found that most of the differential in health care spending across geographic regions can be explained by whether significant populations use hospitals as primary care providers.

"ACOs support the reduced use of hospitals as sites of primary care and allow hospitals to close wards they're trying to keep full under the current payment models," he says.

Virginia, Kentucky, Arizona Tests

Dartmouth and the Brookings Institution's Engelberg Center for Health Care Reform are collaborating with three health systems to pilot ACO programs. They chose the three health systems in their demonstration project—the Carilion Clinic Health System in Roanoke, Va., Norton Health System in Louisville, Ky., and Tucson (Ariz.) Medical Center—to achieve geographic and system model diversity.

John Bertko, a Brookings guest scholar who has worked on the ACO collaborative, says most hospitals receive 40 percent or more of their revenue from Medicare. Dartmouth collects claims data on 20 percent of Medicare's beneficiaries and lends academic resources and superior number-crunching skills, he says, while Brookings' staff work closely with congressional aides and have been involved with physician-hospital organizations and capitated medical groups for years.

Bertko says many studies have demonstrated that there is substantial overuse and misuse in the health care system. "A good proportion of that can be removed," he predicts. "But not overnight. I suspect positive incremental changes of a few percent a year over the baseline over the next 10 years."

Reducing overuse of new technology and inappropriate use of advanced imaging could extract 1 percent from the growth rate in addition to changing the baseline costs, he says, adding, "That doesn't sound like much, but over 30 years it can exert a dramatic effect."

Mark Werner, M.D., president of Carilion Clinic Physicians and executive vice president and chief medical officer for the Carilion Clinic, says practicing accountable care will reduce ancillary and ED visits, hospitalizations and readmissions. "Without rapid enough payment reforms to get a critical mass of more value-based payment systems, this will be very challenging to many average community hospitals," he says. "We need to be migrating toward full capitation models as soon as we can be ready and have the payment system to support that."

'Opportunity, Not a Guarantee'

Werner warned that providers aspiring to form ACOs can't just invite all the local doctors to a town hall meeting and announce they're starting an ACO. Hospitals and physicians must already have some demonstrable level of integration. "Doing an ACO requires passion, a commitment to focus on patient needs, an ability to manage change and develop organizations to manage quality and costs in a comprehensive way," he says. "You cannot fake your way through this."

Palmer Evans, M.D., the Tucson Medical Center's senior vice president and chief medical officer, says TMC is building its ACO network with roughly a dozen employed physicians and another 50 to 60 independent doctors with support from insurer UnitedHealthcare. "We're creating a virtual network by working closely with local independent physicians," he says.

Evans says his organization "could see the direction the country was heading and wanted to become more efficient and improve quality. At the same time, UnitedHealthcare was experimenting with programs to reduce costs to make health insurance more affordable for smaller employers.

"They've been a huge supporter of ours, prodding and encouraging us to move down this path," Evans says. "It's about getting waste out of the system."

Benton Davis, CEO of UnitedHealthcare Western States Health Plan, says the company is participating because "the current reimbursement models are untenable."

"We need to modernize the health care system.... One dimension of modernizing that system is creating better organization in community health systems," he says.

A Team of Rivals

Leaders of the ACO collaboration between Omaha competitors, the Nebraska Medical Center and Methodist Health System, called their Accountable Care Alliance an opportunity to form a best-practices network to share improvement strategies and improve community care outcomes while cutting costs.

This "team of rivals" believes it can achieve those savings by sharing patient health care information, reducing inefficiencies and cutting unnecessary tests using proven, evidence-based quality measures.

Ken Klaasmeyer, president of Methodist Health Partners, the physician-hospital organization, says the two not-for-profit systems formed a for-profit, limited liability company to formalize the structure. The board comprises five physicians representing each system, as well as their chief financial officers.

"We think this should be physician led," Klaasmeyer says. "That's one of our guiding principles. We're committed to this happening at the physician level."

Marcel Devetten, M.D., chief quality officer for the Nebraska Medical Center, agrees, adding that "to succeed, you need buy-in from your physicians. Anyone considering this also would be well advised to think about governance structure early on."

The ACO established a medical management committee whose goal is to identify disease processes and interventions that will draw payer and employer support, such as congestive heart failure, diabetes and chronic obstructive pulmonary disease. Among the ideas the ACO partners have discussed are hiring and sharing nurses to care for patients with chronic conditions and sharing a physician who performs home visits, Klaasmeyer says.

"There is a multitude of things we're going to try and see what offers the greatest reward," Devetten says. "But this is not about reimbursement. It's about care and how it should be delivered, and that's our focus."

Mark Taylor is a freelance writer in Munster, Ind.

Sidebar - ACOs Under the Health Reform Law

The Patient Protection and Affordable Care Act signed into law by President Obama in March creates new centers, pilot programs and incentives to test innovative payment and delivery systems. In addition to supporting a demonstration project to encourage the development of accountable care organizations, the law:

  • Creates a demonstration project for a pediatric ACO.
  • Expands CMS' efforts to bundle payments around episodes of care.
  • Funds the Patient-Centered Outcomes Research Institute to explore and compare evidence-based medical treatments.
  • Establishes Community Transformation Grants to develop and aid wellness and prevention programs.
  • Extends the existing Gainsharing Demonstration Project through 2014.
  • Launches a five-state Medicaid demonstration project encouraging state Medicaid programs to move to global capitated payment systems from fee for service by incentivizing safety net hospitals.
  • Establishes the new Center for Medicare and Medicaid Innovation to test new payment and delivery models. It is funded by $10 billion over the next decade.

Sidebar - What Do We Do Now?

By Dale Anderson, M.D.

Boards and their CEOs are facing one of the most challenging strategic choices of their careers: Should they maintain the current business model or transform their institution into an accountable care organization?

At its core, this decision is about how the organization will get paid and where it will operate along the health care continuum. The traditional hospital model as a specialist workshop with physicians as the primary customer is in sharp contrast to the ACO's core business of patient care it encompasses service, quality and cost management, where the primary customers are the patients and payers.

These two models represent very different businesses. Despite many leaders wanting to pursue both angles, an organization will not be able to straddle the two mutually incompatible models indefinitely.

The decision to become an ACO, however, is not for the faint of heart. The work and resources necessary to transform a traditional hospital system into a health system that manages community care across the continuum is formidable. This transformation will require a passionate champion, a new approach to physician and insurer relations and a long-term commitment to a new vision.

Turning this vision into reality will require wide-reaching changes in governance, executive leadership, organizational design and a multiyear investment in new systems and capabilities. It will require a degree of integration with physicians that few organizations have achieved to date.

Reasons not to become an ACO can be well defended. Those arguing against the change will point to the following:

  • Risk-bearing integrated provider systems were tried in the 1990s and generally failed.
  • Hospital revenues and margins remain strong, and demand is likely to increase with the expansion of insurance coverage.
  • Changing business models is risky for current leaders, many of whom are doing well both financially and professionally with the current model.
  • The organization could lose ground as competitors continue to invest in upgrading traditional facilities and adding new technologies.
  • ACOs require the engagement and alignment of a physician network, and providers may not be as ready to embrace the hospital plan.
  • ACOs require experienced and business-savvy physician executives, who are considered a rare commodity.
  • Existing hospital executive and management staff may resist the redistribution of power and reassignment of roles required by an ACO.
  • ACOs require a strong and capable primary care network to manage and coordinate care. Most systems have no such network, and primary care providers are in short supply.

Despite these reasons for holding ground in a pure hospital model, trustees cannot ignore the compelling cost and quality issues forcing delivery system reform. For hospitals, the biggest driving factor is the Centers for Medicare & Medicaid Services' movement toward bundled and risk-bearing payment systems.

Six Options

As CEOs and their boards begin to consider the ACO decision, there are six strategic options available to hospitals:

  1. Defend the current model. A Southern organization is defending the current model by continuing to invest in hospital facilities, preventing organization of effective primary care practices by deploying hospital-based urgent care centers and expanding emergency services. Its market position and brand strength makes it indispensable to insurers, who have failed in attempts to introduce tiering, pay for performance, or other quality or service differentiators into the market. It has had no collaborative discussions with managed care organizations and does not assist practices in adopting ambulatory electronic medical records. Care is driven by specialists with high volumes of testing, procedures and hospital days. Its financial position is strong, and its quality and brand are exemplary.
  2. Wait for a mandate. Many hospitals are operating from this position and have yet to engage their boards, senior management or physician leaders in a discussion about where the hospital system is headed and whether a fundamental industry shift is occurring. These organizations' historical approach has been to wait and see, a posture arising from a belief that payers and regulators will define the pace of change (which these organizations expect to be gradual) and move forward with its peers. This just-in-time strategic planning is seen as a low-risk, careful stewardship of a community resource.
  3. Hedge your bets. The dominant hospital in a three-system city is pursuing the hedge option by investing in its physician employment and practice management capabilities, acquiring key specialty practices and exploring the creation of a Federal Trade Commission-qualified clinically integrated network. There has been no board discussion about changing the business model, as the CEO and executive team are firmly rooted in the hospital business model. The team's rationale for any primary care investment is to drive referrals to the hospital (not to better manage chronic disease), and specialty acquisitions are defensive and intended to maintain current volumes and ensure hospital coverage. The purpose of the hedge is to favorably position the system should taking bundled payments or global risk be required. The system has a strong balance sheet and quality performance.
  4. Begin the ACO transformation. Leaders of a two-hospital system in the mid-Atlantic region decided to begin the transformation from a hospital system to an ACO. Its capital budget has been revised to move investments from inpatient service into the ambulatory world with a specific focus on developing a primary care network organized as patient-centered medical homes. The system leadership committees have been restructured by appointing physicians to all of the key boards and committees, and an aggressive physician employment plan is under way. The system believes it is unprepared to engage payers in a new model of reimbursement, but it believes it will begin such discussions within three to five years.
  5. Lead the ACO transformation. A large Midwest hospital system is transforming itself into an accountable care organization. The CEO is leading the transformation, and the goal is written in its board-directed strategic plan. The system already has a large, employed (predominantly primary care) group practice. The system's leaders are actively building a clinically integrated network to be led by a physician-majority board. Beyond engaging its payers in pay-for-performance contracts, it is preparing for the greater goal of assuming population risk. Pilots for medical homes and for reducing costs with a local payer are under way. The system is in the third year of a five-year plan to move to a digital environment where patient information will be available to all caregivers. A strong brand and consistent financial performance has made it the leader in its market.
  6. Find a niche or a partner. A successful single-hospital system with a dedicated network of physicians is beginning to explore relationships with nearby larger hospital systems interested in pursuing greater hospital-physician integration and community care. It is considering becoming a regional service area affiliated with the tertiary center's developing clinically integrated network. The organization believes it can contribute to the success of the larger network through the strength of its primary care practices and will benefit from the larger systems' ability to manage the bundled and risk payments of the future.

Is Standing Still an Option?

Between the extremes of defending the current model and beginning the transformation to an ACO, the majority of hospitals are waiting for a mandate. They are continuing business as usual, with any physician employment or independent practice contracting (joint ventures, professional service agreements) intended to help maintain the status quo, not transform the hospital business model. This position is the weakest of the six options because it puts the health system in limbo waiting for a definitive signal that may not come.

Hospitals that are not ready to embrace the ACO vision should instead hedge their bets. Hedging involves investing in those capabilities and system components that strengthen the organization in the current fee-for-service environment while simultaneously building required infrastructure and skills necessary for an ACO. The most potent hedge activities involve strengthening physician employment capabilities and organizing employed physicians into an effective system-level multispecialty group and building a clinically integrated network (CIN) to engage independent practice partners.

These two physician strategies, along with investing in clinical information systems to connect physicians, hospitals and patients, will better position any health system in its current fee-for-service market while building the backbone of an ACO.

Achieving these two physician alignment goals requires a long lead time (a CIN takes 18 to 24 months to put in place). And hedging should only be considered a short-term strategy requiring reconsideration as payment systems evolve. Within three to five years, the decision whether to pursue further transformation to an ACO will be required. The commitment to a new ACO vision and the effort needed to make it happen will not be found in organizations that haven't yet decided what they want to be.

An organization can assess its ACO strategic posture by examining its current mission and vision statements, its annual and three-year goals, its strategic plan and plans for capital investment, physician recruitment, leadership team recruitment, clinical IT, primary care and an approach to payers. These are the tangible reflections of strategic intent. If an organization decides to begin the transformation to an ACO, all of the above will likely need to be reconsidered.

To make the ACO call, CEOs and boards should immerse themselves into the world of office practice, population risk, preventive care, chronic disease management and physician culture. The CEO and board will need to bring new perspectives and compare the quality and cost management capabilities of their current model with those models managing the care continuum.

The ACO transformation will be led by those health care executives and physicians who believe that a system that is managing care for a population and paid based on their performance across the "triple aims" of access, quality and cost is a superior model of care. That it will address huge discrepancies in care, will lead to a healthier population and will create an affordable service is the promise of this vision.

It's clear that the United States health care system is in the midst of major change, and all providers will be affected. CEOs and their boards should roll up their sleeves, find some good advisors and let the strategic discussions begin.

Dale Anderson, M.D., MBA (Dale.Anderson@bdcadvisors.com), is a director with BDC Advisors, Miami.