Building an accountable care organization is viewed by many hospital executives as the holy grail as they try to figure out how to better manage patient care across the continuum and as they brace for the growth in bundled payments.

Yet, relatively few hospitals and health care systems are ready to form ACOs today. One reason is that their physicians are not ready. Unless a hospital employs most of its staff, ACO success depends on having physician organizations with which to work, and those are still few and far between.

"Hospitals that should be considering an ACO ... either have to employ a sufficient number of physicians to make an impact, or they have to have a very well-structured physician hospital organization or independent practice association with a track record of success," says Thomas Enders III, managing director of the health care group at consulting firm CSC. "If you don't have that, you can't deliver on the requirements of an ACO."

A hospital also needs market clout to draw physicians into an ACO and hold patients there, notes Lisa Bielamowicz, M.D., national physician practice leader of the Advisory Board Co., another consulting company. "If you're a 200-bed hospital on the edge of a major metropolitan area, it will be difficult to become an ACO, aggregate providers, and manage patient care across the continuum. Because with accountable care, you have to keep patients within the family if you're going to effectively manage their care," she says. "Take that same 200-bed organization and plunk it in a small- to medium-sized market, and it could be positioned strongly to aggregate providers and become a successful ACO."

If your hospital's competitive situation allows you to consider an ACO strategy, look at your physician alignment and identify the gaps, suggests Wes Champion, senior vice president of Premier Inc., a group purchasing organization that has formed collaboratives to help hospitals start ACOs. You may be able to revive an independent-practice association or a physician-hospital organization that has become ineffective, or work with a multispecialty group that can be the core of an ACO's physician organization.

Smaller community hospitals might consider joining forces with larger health care systems to form ACOs, Enders says. This may be necessary partly because of the large investment in health information technology that will be required (see sidebar on page 23).

Whatever your situation, standing pat is not an option because reimbursement is going to change. "You can just continue to hunker down and push as much volume as you can through your system at the current managed-care contract rates," Champion says. "But in the long term, you'll be in a much more difficult position to react to a potential move in the marketplace to keep people healthier and pay health care systems for value."

The Centers for Medicare & Medicaid Services expect to issue proposed ACO regulations in mid-January. Here's a primer on the many issues that hospitals need to consider as they grapple with the challenges of accountable care.

How Will ACOs Be Paid?

For purposes of the Medicare shared-savings program that launches in 2012, an accountable care organization is defined as "an organization of health care providers that agrees to be accountable for the quality, cost and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to" the ACO.

According to the Patient Protection and Affordable Care Act, which authorizes the shared-savings program, ACOs may include group practices, physician networks, partnerships or joint ventures between doctors and hospitals, or hospitals that employ physicians.

An ACO must serve at least 5,000 Medicare beneficiaries, include enough primary care doctors to care for those patients, and have a formal legal structure to receive and distribute shared savings. To obtain shared savings from the Centers for Medicare & Medicaid Services, an ACO also must show that its quality of care surpasses certain benchmarks.

Steve Newman, M.D., chief operating officer of the Tenet Healthcare Corp., predicts that the initial phase of the shared-savings program will be a demonstration project, perhaps testing bundled payments for specific episodes of care, rather than being focused more broadly on population health.

Enders forecasts that state Medicaid programs also will launch shared-savings programs for ACOs, partly because of the big expansion in the Medicaid population that will begin in 2014 under the health reform law. Since the states already emphasize Medicaid managed care plans, "we're going to see a rapid surge in Medicaid ACO strategies," he says.

Meanwhile, a number of private payers also are talking to health care systems about ACO strategies or are offering alternative payment programs to large providers.

Blue Cross Blue Shield of Massachusetts is enrolling ACO-like provider organizations in its alternative quality contract, which is basically global capitation with quality thresholds.
BlueCross BlueShield of Illinois recently signed a shared-savings PPO contract with Advocate Health Care in Chicago.

While Advocate Executive Vice President and Chief Medical Officer Lee Sacks, M.D., won't reveal the terms, he says the aim is to reduce health cost increases to the level of the Consumer Price Index within three years.

Newman notes that health plans' interest in dealing with ACOs varies greatly from market to market; he believes reimbursement strategies will differ by region and evolve over time. For example, he says, Tenet has a bundling arrangement for hip and knee operations with Anthem Blue Cross in California and discussions are under way with other payers for similar contracts in orthopedics and maternity care.

"This is part of the continuum for ACOs," Newman says. "You have tiered networks, you have bundling, and you have ACOs that can be chronic disease-specific or oriented to large populations. So, I look on this as a spectrum of relationships between payers and providers to care for patient populations, as opposed to random fee-for-service medicine."

The American Hospital Association, in a recent letter to CMS, supports the shared-savings approach, but urges the agency to use some of the expected savings to help health care organizations shoulder the considerable investment required to build ACOs. The AHA also is willing to consider: alternate payment methods, such as partial capitation contracts covering some services; "risk corridors" that place limits on rewards and losses; per capita care-coordination payments; and condition-specific capitation covering all care for certain patients, especially those with chronic diseases.

Upside-Down Business Model

Accountable care represents a new business model that in some ways is the opposite of hospitals' current model. Instead of trying to increase revenue by maximizing throughput, service volume and negotiated rates, hospitals will have to work with their physicians to keep patients healthy and out of the hospital and the emergency department. What this could lead to is fewer admissions, tests and procedures.

Champion says the chief executives of the health care systems in Premier's ACO collaboratives—representing about 75 organizations and nearly 200 hospitals—accept the challenge. "The organizations understand there's a need to bend the cost curve and improve the sustainability of the Medicare program," he says.

But how can these health care systems survive if they build a structure that's designed to reduce their own volume? For starters, Bielamowicz suggests that they use their ACOs for Medicaid patients—on whom they're currently losing money—and their own employees, if they have a self-funded insurance plan. Enders says the long-term answer may be to increase market share. While this might be unnecessary in a market where there's plenty of business to go around, hospitals in other areas will have to compete on service, quality and all the other traditional bases to attract more patients.

Patrick Falvey, senior vice president and chief integration officer for Aurora Health Care, based in Milwaukee, says that the big integrated delivery system can cope with the financial implications of becoming an ACO. But he acknowledges that shared savings from Medicare probably won't be enough to compensate for reductions in volume. "A key area of growth would be to gain market share as well," he says.

Clinical Integration Is Key

Clinical integration is essential if an ACO is going to manage care properly and increase efficiency. The biggest linchpin is the cooperation of and links with physicians. Without their support, an ACO has no chance of getting off the ground. But post-acute care providers, including nursing homes, rehab facilities and home health care agencies, also need to be brought into the fold.

Integration also offers business advantages, notes Bielamowicz. First, it enables physician practices to remain independent while functioning as part of the ACO network. Second, it may allow independent providers to negotiate collectively with payers and get higher rates. To do that, an IPA or PHO must convince the Federal Trade Commission that its members are working together to improve quality and reduce costs.

Some years ago, Advocate received the FTC's green light for its PHO, Advocate Physician Partners, to bargain with health plans. "Financial incentives for physicians are the catalyst that starts the quality improvement, gets the attention and compensates for the extra work that is not currently rewarded," says Sacks, who serves as CEO of the joint venture.

Memorial Hermann Healthcare in Houston also has persuaded the FTC to suspend antitrust restrictions because of its IPA's clinical integration. But that IPA, known as the Memorial Hermann Physician Network, has not been as successful as Advocate's in getting health plans to come to the table. It's currently talking to self-insured employers about exclusive provider-organization contracts.

Nevertheless, 2,100 of the 3,600 doctors in the IPA are engaged actively in the 4-year-old clinical integration effort, says Douglas Ardoin Jr., M.D., physician-in-chief of Memorial Hermann. The reason has as much to do with physician culture as with monetary incentives. The IPA goes back to 1982, Ardoin explains, and the doctors have become used to working together on safety issues, formulary and vendor choices, and computerized provider order entry. Moreover, the IPA is subsidizing electronic health records for some of the doctors in the clinical integration program.

Since Memorial Hermann employs only 100 physicians (another 500 or so belong to the University of Texas Medical School's faculty practice), its ties to private-practice doctors are crucial. In contrast, Aurora Health Care employs 1,400 physicians, including most of the primary care physicians Aurora will need for an ACO. In some markets, such as Milwaukee, Aurora relies more on independent doctors, but most of those are specialists, Falvey says.

Building Bridges to Physicians

Primary care doctors are integral to ACOs, but there aren't enough to go around. Some hospitals are addressing that problem by snapping up every generalist in sight. That can work if hospitals don't overpay for practices, says Enders, but Champion warns it only makes sense in markets where there aren't strong physician organizations. In some areas, competition dictates what hospitals do. Bielamowicz points out that markets can flip overnight from being private practice-oriented to having most doctors employed by hospitals.

The CMS guidance on ACOs (issued prior to the actual regulation) suggests that a primary care physician can belong to only one ACO. In contrast, specialists may participate in multiple ACOs. Specialists may be leery of signing on, though, because of the expected decline in procedures. Surgeons are bound to be unhappy, notes Enders, but medical specialists might do OK if they can coordinate care for some patients by forming their own medical homes.

In the view of many experts, primary care-based medical homes are the building blocks of ACOs because they provide a central point and a method for care coordination. A key part of Aurora Health Care's strategy is having a "significant" portion of its primary care practices certified as medical homes, Falvey says.

"Providers will have to put a lot of time into developing a hospital-physician culture that centers around collaboration and the delivery of patient-centric care," Bielamowicz says. "That's a difficult task for hospitals."

Regulatory Concerns

The Obama administration plans to modify the antitrust and fraud and abuse regulations in ways that will allow ACOs to flourish. The AHA supports this approach and urges CMS to "eliminate regulatory barriers that inhibit clinical integration," including the Stark laws, Civil Monetary Penalties, the Anti-Kickback Law, antitrust regulations and IRS restrictions on payments to physicians.

The hospital association favors modifying these regulations "not only for ACOs but for all providers to respond to the behavioral changes required to address other [Patient Protection and Affordable Care Act] requirements, such as reducing readmissions, adopting evidence-based medicine and payment bundling."

Insurance companies and other observers have warned that if the antitrust rules are rescinded for ACOs, hospitals may use the additional bargaining clout of ACOs to extract higher rates from payers. The American Medical Association also has asked CMS to level the playing field between hospitals and physician organizations so that the latter can take the lead in forming ACOs.

Without addressing either of these concerns directly, the AHA letter proposes the relaxation of antitrust rules for IPAs and physician networks so that small practices and hospitals can form clinically integrated organizations. Unless that's done, the association contends, many private practitioners will have little choice but to work for hospitals if they want to participate in the shared-savings program.

Governance Issues Loom

As the AMA comments to CMS indicate, a power struggle is brewing between physicians and hospitals, with the ACO at its center. While Premier works with hospitals to learn how best to form ACOs, for example, the American Medical Group Association has formed a similar collaborative to help large physician groups do the same. As a recent New England Journal of Medicine article notes, both sides are determined to lead ACOs.

The CMS guidance requires an ACO governance structure separate from that of the health care system, and it must represent all members. While it would be tempting for hospitals to dominate the organization, that would be a mistake, say observers, because the ACO's value depends on physicians' coordination of care and management of their patient populations.

"If the hospital is the primary sponsor of an ACO, it's going to have to put physicians in charge of care management and give them a truly executive voice in the executive suite of the hospital," Enders says.

Even if that happens, it won't be easy to divide the pie. Hospitals, specialists and primary care doctors will engage in a three-way tug-of-war; even if they can reach an agreement, many operational issues will remain.

"For example, most hospital patient accounting systems are not set up to do payment bundling," notes Norma Zerinque, senior vice president of strategy for Conifer Health Solutions, a Tenet subsidiary that specializes in revenue-cycle management. "So hospitals will need some kind of third party that can take all the disparate systems and pull them together to get one bill out to the payer."

It's also unclear whether health plans will pay an ACO or its constituent members. Depending on how that shakes out, Zerinque points out, completely different billing and collection systems will be required. If only some services are covered under ACO contracts, multiple billing methods might be required for the same patient. Eligibility verification, too, will be affected by the need to check coverage with both the ACO and the payer.

While accountable care organizations are few in number today, they're expected to grow as a result of mounting pressure from payers to improve quality and control costs. ACOs will evolve in a number of different directions and at different rates in various markets. Every hospital has to figure out its own strategy, depending on its market position and the state of clinical integration in its area.

But in the long run, no organization can ignore the changes that are sweeping through health care.

Ken Terry is a freelance writer in Sheffield, Mass.