The political dysfunction resulting in the government shutdown and threat of default on our federal debt last month was the result of passionate disagreement about the Affordable Care Act. Since its passage in March 2010, public opinion about its suitability has been split between those believing it an overreach by the federal government and others thinking its effort to expand coverage is worth its risks. Both groups harbor strong feelings, concede it's unlikely to be repealed, and believe repairs are necessary. Ironically, polls show the general public equally divided but factually unaware of what's in the law.

This dissension has been the backdrop for Health Reform 1.0. Our anemic economic recovery will be the backdrop for the next phase — Health Reform 2.0. At 7.2 percent, unemployment is unacceptably high. Annual GDP growth has stalled at 2 percent or less for three years, and consumer spending — the driver of economic vitality — has shown mixed signals.

The ACA presumed an overly optimistic view of economic recovery. The reality is otherwise, so Health Reform 2.0 likely will reflect a shift of focus.

Health Reform 1.0: increasing access to coverage through insurance reforms and Medicaid expansion

The ACA's focus on increased access is two-pronged:

In the private insurance market, new regulations in the ways the private insurance companies operate are punctuated by individual and employer mandates to drive enrollment. For those with income up to 400 percent of the federal poverty level, the law makes subsidies available to encourage coverage and the creates online marketplaces for affordable coverage, i.e., the state health exchanges featuring standardized plans. The goal: expand insurance to those currently not covered, especially "young invincibles" who'd buy coverage they'd likely not need.

The other piece of the puzzle is Medicaid, with expanded coverage for individuals who earn up to 138 percent of the federal poverty level. The ACA sought to induce each state to expand, but the Supreme Court nixed the obligation, making it optional. As a result, the goal for expansion of 16 million is now reduced to 9 million as 25 states opted not to expand.

Notably, most of the law's provisions about coverage were front-loaded in the ACA: many provisions were "effective on enactment," and state health exchanges were supposed to be up and running Oct. 1. Administration officials now promise that the federal exchange supporting 36 states, HealthCare.gov, will be ready Dec. 1, while the marketplaces run by 14 states appear to be functioning.

Health Reform 2.0: reducing costs through delivery system reforms

In contrast to insurance reforms in Health Reform 1.0, the ACA's efforts to reduce costs via delivery system reforms were not immediate requisites for providers. Medical homes, bundled payments, accountable care organizations, value-based purchasing and others borrowed from pilots previously sponsored by Medicare to bend the cost curve. Providers anticipated the ACA's increased emphasis on transparency, preventive health, primary care, health information technologies and comparative effectiveness. Most of them climbed on the bandwagon of physician alignment, population health, accountable care and transparency. 

But economic pressures changed the urgency of these activities: The Congressional Budget Office expects health costs to increase at least 6 percent annually starting next year vs. the 4 percent annual clip of the past three years since ACA's passage. Added pressures resulting from sequestration cuts, physician income insecurity and employer activism combine as the primary theme in Health Reform 2.0. For health system leaders, answers to tough questions are urgently needed:

  • Costs: Can the acute operation function at Medicare payment rates? How might outsourcing be optimized? With affiliated medical practices, how is compensation aligned with institutional goals and economic solvency? And how should the clinical portfolio be purged to achieve highest volume, highest efficiency gains without compromising safety and quality?
  • Scale: What new sources of revenue may be captured? How large should the organization be, and what partnerships are necessary to achieve desired long-term goals? What's right for the organization? Go big or get out?
  • Contracting: How fast and in what manner should financial (insurance) risk be integrated into core operations? Is owning an insurance plan necessary or a partnership advisable? And what is the organization's value proposition to prospective customers — employers, individuals, government or private plans?
  • Clinical risk: Are diagnoses accurate? Do treatment recommendations optimize outcomes and efficiency? Are consumer (patient) populations actively engaged in their own care? Does the organization compromise adherence to best practice to accommodate physician or third-party influences? How effective is clinical integration with physicians? And is the organization structured to support bundled payments and value-based payments?
  • Leadership: Is the management team competent to manage in Health Reform 2.0? Are the right skill sets and behaviors rewarded? And is the board knowledgeable about the industry and the realities of Health Reform 2.0?

Health Reform 2.0 is a certainty. It is rooted in economic reality. The health costs must be aligned with overall economic growth or the system will collapse.

Health Reform 2.0: the next phase of activity

Focus

Table Stakes in Health Reform 1.0

Added Focus in Health Reform 2.0

Cost

Supply chain
Revenue cycle
Outsourcing
Shared services

Organizational structure
Workforce development
Clinical portfolio pruning
Analytics (clinical and administrative)

Scale

Ancillaries
Physician services

Medical group
Retail health
Long-term care
Diversification

Contracting

Medical homes
Accountable care

 

Bundled payments
Plan integration
Direct contracting
Transparency (price, quality)

Clinical risk

Safety
Accreditation
Avoidable error

Patient-adherence management
Physician competence
Long-term care
Alternative health

Leadership

Management experience
Credentials
Compensation
Community representation

Board competence
Board independence
Diverse management skills

The stakes are clear, but success will be defined by notable achievements in Health Reform 2.0. There will be winners and losers in each sector of health care.

The transition from Health Reform 1.0 to 2.0 is under way. It will be more intense and, perhaps, more disruptive than anything experienced to date.