The Affordable Care Act, a part of the health care reformlegislation that became law in early 2010, is designed to improvethe health care delivery system for Medicare patients throughincentives to enhance quality, improve beneficiary outcomes, andincrease the value of care.

One of the key delivery reforms is the encouragement of thecreation of accountable care organizations. [See related: HHSissues ACO guidance]

As originally set up, ACOs are designed to facilitatecoordination and cooperation among providers to improve the qualityof care for Medicare beneficiaries and reduce unnecessary costs. AnACO is an organization of health care providers that agrees to beaccountable for the quality, cost, and overall care of Medicarebeneficiaries who are enrolled in the traditional fee-for-serviceprogram.

What forms of organizations can become ACOs? Physicians andother professionals in group practices. Physicians and otherprofessionals in networks of practices. Partnerships or jointventure arrangements between hospitals andphysicians/professionals. Hospitals employingphysicians/professionals. ACOs must agree to manage all of thehealth care needs of a minimum of 5,000 Medicare beneficiaries forat least three years. ACOs that save money while also meetingquality targets would keep a portion of the savings.

If an ACO can’t save money, it would be stuck with the costs ofinvestments made to improve care, such as adding new nurse caremanagers, but would still get to keep the standard Medicare fees.The Congressional Budget Office estimates that ACOs could saveMedicare at least $4.9 billion through 2019. CMS plans to establishthe program by Jan. 1, 2012. Agreements will begin for performanceperiods, to be at least three years, on or after that date.

“ACOs reflect a recognition that there needs to be a differentway to pay health care providers, and to pay them in a way thatgives them some ability to, and reward for, controlling costs,”states Harold Miller, president and CEO of Network for RegionalHealthcare Improvement and executive director of the Center forHealthcare Quality & Payment Reform, based in Pittsburgh. “Thepayment system that exists today, of course, is very volume-driven.The more things you do, the more money you make. The goal is ACOsis to pay providers more for keeping people well.”

“The purpose of ACOs is to improve the quality of care thatbeneficiaries receive while also lowering cost,” adds SteveLieberman, president of Lieberman Consulting (Bethesda, Md.) andvisiting scholar with the Engelberg Center for HealthCare Reform at the Brookings Institution (Washington, D.C.).“It is very important that these two objectives are linked. Forexample, an ACO would not gain financially if it does better thanbudget but does not meet its quality requirements.” As a way ofaccomplishing these goals, ACOs are intended to create systems ofcare in which providers come together in a wide variety ofarrangements.

“Empirical literature shows that care providedby organized systems tends to be better in terms of quality outcomeand also less costly,” notes Lieberman. Performance must bemeasured from a patient perspective, not an individual provider orservice-by-service. The reason is that the patient may receive carefrom a number of different providers.

In addition, there needs to be a minimum number of patients in asystem in order to obtain meaningful measurement of “financialperformance against target” and to evaluate the measured quality.“The challenge here is that this number is usually larger than anindividual practitioner or small group practice would typicallysee,” adds Lieberman.

Consolidation Concerns
One concern that health care economists have is that hospitalmergers and provider consolidations that are encouraged by ACOscould increase, leaving fewer independent hospitals and doctors.The greater market share could give these merged and consolidatedhealth systems more leverage in negotiating with insurers, whichcould drive up health costs. In rural areas, for example, healthsystems could grow so large that they would employ the majority ofproviders in the region.

This concern is gaining attention, according to Jordan Cohen ofthe School of Law, Health Law & Policy Program at Seton HallUniversity (Newark, N.J.). “One potential downside to ACOs is theconcern over increased consolidation in the health care industry,”he notes. “By definition, an ACO is a group of providers that comestogether to coordinate, so this can trigger anti-trust andcompetition issues. In fact, the FTC recently held a workshop onthis issue.” According to Cohen, consolidations might allowproviders to theoretically charge higher rates.

As a result, there’s concern that ACOs will have increasedbargaining power. “One of the goals of an ACO is to reduce cost,and there is a risk that these savings could be offset by higherprices on the provider side,” he notes. “There will need to be somegovernment oversight to prevent this from happening.”

In areas that have a lot of small physician practices, Millerbelieves it will be essential that they work together in somefashion through something such as an independent practiceassociation in order to be able to cost-effectively deliver some ofthe kinds of care management services that will help to keep peopleout of the hospital and improve care.“This is desirable,” hestates. “The challenge, though, is that, when it is done, it isbeing done for that purpose, and not being done just to developgreater negotiating leverage over prices.”

Employer and PrivateInsurer Involvement
According to Cohen, there’s also the possibility employers couldcreate their own ACOs. “Employers could approach physicians andhospitals and ask them if they would like to create an ACO fortheir employees,” he explains. “This would allow employers todirectly get the benefits and tailor it to their organizations.”And according to Miller, private insurance companies are alreadyinvolved in adopting this model.

“There is a lot of discussion taking place between providers andprivate insurers around this,” he notes. “In fact, the CMS wants tostrongly encourage, if not require, the adoption of multi-payersolutions. That is, it is highly likely that they will notparticipate in any efforts to pay ACOs in more innovative waysunless all or most of the private payers in the market areparticipating.” In addition, the biggest piece of the ACO conceptthat is not being addressed very effectively yet and will probablyonly be able to be addressed on the private insurance side is theissue of the benefit design for consumers.

“There has been a lot of focus on how to change payment toproviders and how providers should organize themselves,” Milleradds. “The missing piece is how the patient is going to change,because ‘it takes two to tango’ in health care. The physicians canonly do so much to keep chronic disease patients out of thehospital, if the patients can’t afford to take their medications,regardless of how much education and support you give thepatients.” In other words, keeping people well involves the kind ofpreventive care they get from physicians as well as what thepatients themselves do to try to improve their health.

A lot of the latter element can be encouraged by anappropriately-supported benefits structure set up by employers. “Ithink it’s far more likely that private health plans and employersare going to be able to make these changes more easily thanMedicare is,” Miller says. Tony Anastasia, vice president ofHospital Market for UMR (Wausau, Wis.), a national TPA forself-funded health benefit plans, is also seeing the implicationsof ACOs beyond Medicare into commercial insurance. “We are seeingit within our own company,” he states. “We do a lot of employeemedical plans for hospitals and health care systems. They areputting their own employees into ACOs.

They are also offering it to employers in their backyards.” AsAnastasia notes, hospitals and health care systems are all over thecountry. They’re in every broker’s and agent’s sales territory.They’re typically large providers, and they also tend to be morerecession-proof than other industries. “On average, we see many ofour employee groups shrinking,” he points out. “However, healthcare is one of the few industries where they are actually addingemployees. As such, there is a lot of opportunity for brokers andagents.” Example: The hospital or health care system CEO says tothe CFO, “We need to set up one of these ACOs.”

The CFO goes to the HR person and says, “If we are going to doone of these beyond Medicare, then for credibility purposes, weshould have our own employees in it.” The HR person then asks,“Where do I start?” This is where the producer can provideassistance. Premier Healthcare Alliance (Charlotte, N.C.), anational alliance of more than 2,400 hospitals and 72,000+ healthcare organizations, is currently testing ACOs. It launched two ACOcollaboratives in May 2010. One, the Accountable CareImplementation Collaborative, includes 28 health systems,representing 120+ hospitals and over 1.4 million patientsnationwide.

The other, the Accountable Care ReadinessCollaborative, has over 200 hospitals. “Although the Medicare ACOprogram has received the most attention, members of the Premiercollaborative are moving forward now with their models in theprivate markets,” explains Wes Champion, senior vice president,Premier Consulting Solutions. “Quite a few are working withprovider-sponsored plans to test the concepts in local markets andhave plans to move their employee base into the ACO once fullyoperational.”

Self-insured employers are also prime targets for the ACO,according to Champion, as they try to improve the health of theiremployees, reduce insurance costs, and eliminate productivitydrains that can ensue with an unhealthy workforce. “As the conceptbuilds, and more beneficiaries move into ACOs, we expect thatnon-profit commercial insurers and ultimately publicly-tradedinsurers will also be interested in pursuing these types ofarrangements, perhaps for a chronic care subset of their populationpool, and potentially for entire regions or geographies,” headds.

One insurer already involved in ACOs is Cigna in Bloomfield,Conn. “Our involvement in the ACO concept goes back a long way,especially in terms of creating health advocacy and health coachingprograms,” states Dr. Dick Salmon, vice president and nationalmedical director. “However, in recent years, we have come torealize that we need to align with the patient’s treating physicianmore strongly than we have in the past in order to driveimprovement in quality, affordability and satisfaction.”

Cigna wants to be able to do two things. One is to providetreating physicians with rewards for achieving these goals, bytransitioning from payment for volume to payment for value. Theother is to enable the physician groups to achieve the improvementsthat Cigna wants to reward them for. “We can do this by providingthem with useful information and also develop the integrationpathways between their clinicians and our health coachingclinicians,” Dr. Salmon explains.

“As a result, our clinicians become a virtual extension of theirpractice.” Cigna has eight ACO pilot programs up and running. Itplans to expand to about 30 this year. “We are making goodprogress,” Dr. Salmon notes. “We and our delivery system partnersare learning a lot.” He adds that, if producers have customers whoare particularly interested in this type of initiative, Cigna wouldlike to know about it.

“A good part of our prioritization process in terms of where wechoose to set up these pilot programs depends on whether or not wehave customers in that market who are interested,” Dr. Salmonexplains. “In fact, we have become aware of employers who have ahigh concentration of employees in a certain area and who want sucha program, and we are happy to meet that need.”

Challenges
While ACOs are likely to continue to gain popularity, there are anumber of challenges that must be addressed along the way. Championdelineates five of these. “For all its sophistication, health careis factionalized, and providers don’t have much expertise workingcooperatively,” he notes. “Changing culture will be challenging,even with a shift in incentives, particularly since doctors andhospitals don’t have much experience and, traditionally, not muchwillingness to share.”

There are new relationships with payors that need to bedeveloped. “Creating reimbursement structures based on value ratherthan volume is a new business paradigm, and providers and insurerstypically haven’t been willing or able to work cooperatively towardcommon goals,” he explains. “They also don’t have much experiencesharing data, which will be a necessity in an ACO.” ACOs require anextensive investment in technologies to improve coordination andconvenience, such as electronic health records.

“However, these technologies are expensive and far fromwidespread in today’s market,” Champion notes. There are also legalbarriers that stand in the way of ACOs. “Outdated laws barhospitals from sharing efficiency savings with doctors unless theyare employees,” he continues. “These policies need to change sothat loose hospital-doctor cooperatives can operate as an ACO andfunction like teams on behalf of patients, while still preservingindependent ownership and autonomy.” Perhaps most importantly,there are many unknowns in the world of ACOs. For example, if theACO reduces costs, what portion of the savings should theykeep?

How should payments be divided between the doctors, specialists,nurses and others providing care? What financial benefits will flowto patients? How should ACOs be organized and led? How fast canACOs be implemented, given the cultural, financial and operatingchanges required? “The only way to answer these questions isthrough experimentation,” he concludes.