Can Accountable Care Organizations (ACOs) Reshape Health Care?

The Patient Protection and Affordability Act of 2009 (health care reform) includes the accountable care organization (ACO) as a promising new collaborative framework for physician practices, hospitals and other health care organizations. ACOs provide new incentives for sharing cost savings across service settings and providers. With all the talk about ACOs, many are wondering whether this will be just another CMS demonstration program, or a template for the future of health care. In the Chicago market—where CMS spends 25% more on care per Medicare patient, and ranks among the worst nationally at preventing rehospitalizations—Illinois’s largest health system isn’t waiting to find out. Advocate Health Care is taking aggressive steps now to curb the use of unnecessary diagnostic tests and prevent patients from being rehospitalized. While these cost saving efforts reduced Advocate’s revenue by $35 Million in 2009 (1%), Advocate leaders believe that episodic care payment is inevitable. In the ACO model, hospitals are paid a lump sum for an entire episode of care—from the initial diagnostic test to post-surgical rehabilitation. In ACOs health systems that deliver the best quality at the best cost will be rewarded.

An Urban Institute paper by Kelly Devers and Robert Berenson identifies three essential characteristics of ACOs: 1.) The ability to provide, and manage with patients, the continuum of care across different institutional settings, including at least ambulatory and inpatient hospital care and possibly post acute care; 2.) The capability of prospectively planning budgets and resource needs; and 3.) Sufficient size to support comprehensive, valid, and reliable performance measurement. What’s different about ACOs? While ACO reimbursement models based on episodes of care share some similarities with Ambulatory Diagnostic Groupings (DRGs) and prospective payments, there are some important differences. DRG payments to hospitals have only covered acute hospitalization costs and did not reflect other costs prior or subsequent to the hospitalization, including attending and consulting physicians, etc. (As most clinicians know, it’s what happens before or after hospitalization that can frequently determine the health care status and the risk of rehospitalization or other avoidable costs or complications.) The ACO framework originally stems from work by Dartmouth University’s Elliott Fisher who proposed extending and formalizing the informal networks that have always existed between physicians and area acute care hospitals. Fisher published the first paper on ACOs in 2007 titled Creating Accountable Care Organizations: The Extended Hospital Medical Staff. Fisher and his colleagues from Dartmouth have long-documented significant regional variation in quality and costs for Medicare recipients—with health systems in some regions of the country delivering significantly better care at lower costs. While multi-specialty physician practices have served as virtual networks for managing local patient populations for some time, there have been few formal linkages and incentives for managing patient-level results.

Most employer and government health care purchasers favor reimbursement for episodes of care because they encourage better performance by placing a limit on costs per episode. ACOs also are attractive because they can be adapted to local health care markets. Most health policy experts realize that health care is local and innovations and best practices must be adapted and implemented locally. For example, while Mayo Clinic may deliver better health care at a lower cost than health systems in Chicago or New York, the health care infrastructure and demographics in southeast Minnesota do not match those of other geographic regions. ACOs also are attractive because they fit with newer reimbursement options that encourage accountability including blended fee-for-service and capitation, global case rates and global or bundled payments based on diagnoses and morbidity and mortality factors. For top performing providers, payment for episodes of care is attractive because it takes into account case mix, reducing the overall risk—and rewarding best performance and value.

While there are a number of questions that remain about ACOs including whether physician participation should be mandated, provider payment methods, quality assessment standards, and which types of organizations should be required, etc., organizations interested in ACOs will need to act quickly if they want to participate. To encourage competition, CMS is allowing only a limited number of ACOs per region and organizations must have their ACOs operational by October 2011 to be considered for approval as an ACO in 2012. With the number of Medicaid enrollees expected to increase by up to 40% between 2010 and 2019, combined with more value-based reimbursement programs by Medicare and employer purchasers of health care, and given the billions invested by CMS in recent years to formulate episode-based payment, many believe that ACOs will be a framework for the future of US health care.

The challenge of ACOs, like other CMS demonstration programs of the past, will be ensuring that ACOs address the key implementation and change management factors that have foiled past demonstrations. ACOs will need to move beyond high-level models to focus on key implementation, strategy, process, technology and workforce development and performance management factors that have impeded other health care improvement models including the Chronic Care Model and the Patient-Centered Medical Home. As Stephen Shortell, Ph.D., Professor and Dean of the School of Public Health at the University of California-Berkeley observed, "We won’t get better health care value without a greater integration of evidence-based medicine and evidence-based management." Drs. Shortell and Lawrence Casalino (who have both studied high performing health care practices and organizations for years and have been supporters of value-based purchasing) emphasized in a recent JAMA article that ACOs would need to attend to key implementation factors and receive the technical support necessary to assist with the challenges of this transformation. Success in an ACO will demand more formal alignment strategies and alliances organized around delivering the most effective and efficient care. Ultimately, this will require shared workflows and patient flows and information technologies, as well as a strong focus on common standards and interdisciplinary approaches for serving the chronically ill.

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