Perhaps nothing should have quelled the hoopla surrounding the March 31 release of CMS' new rules for accountable care organizations more than a March 23 article in the New England Journal of Medicine by Trent T. Haywood, M.D., J.D., and Keith C. Kosel, Ph.D., M.B.A., M.H.S.A. In it, the authors profiled the results of one of the few actual implementations of something resembling the accountable care organizations envisioned in the 429 pages of the new rules.

Under provisions of the Patient Protection and Affordable Care Act, the Medicare Shared Savings Program, of which ACOs are a cornerstone, is to be established by Jan. 1, 2012. Haywood and Kosel commented, "With this rapid movement toward ACOs, one would expect that the previous government demonstration of the model would have produced promising results that warranted its rapid expansion. Our analysis of the results of the demonstration would suggest otherwise."

Disappointing ROI

The demonstration referenced by the authors is the CMS Physicians Group Practice Demonstration, whose design elements are consistent with the Medicare SSP. The PGP demonstration was conducted by CMS from 2005 to 2010 and used "a hybrid payment model that consisted of routine Medicare fee-for-service payments plus the opportunity to earn bonus payments known as shared savings." For those who have put their hands around the ACO rules, this should begin to sound familiar.

But there was an important difference embodied in the PGP demonstration. Rather than relying on the voluntary participation of a broad range of participants with no required level of experience or infrastructure as the ACO model does, CMS restricted participation to a very select set of large physician group practices with the experience, infrastructure and capital to make the model work. On average, in the first year alone, the 10 participating organizations invested $1.7 million each.

According to Haywood and Kosel's analysis, eight of the 10 participants did not receive any shared-savings payments in the first year, six did not receive any in the second year and in the third year, five did not qualify for shared savings. In addition, the payments that were received were not timely. The authors concluded that the time frame in which participants in an ACO model, as currently designed, could expect a reasonable return on their initial investment will exceed five years. Indeed, an ACO making an initial investment of $1.7 million "will require the unlikely margin of 20 percent for the three-year period envisioned by CMS."

Of course, the Haywood-Kosel article stood little chance of stirring a pot ready to reach full boil by the end of March. The consultants, lawyers, policymakers and conference planners already were fully mobilized, and the ACO train was pulling out of the station (albeit three months late). After all, what difference did it make that the ACO held the potential of significant losses for the hospitals and physicians expected to incubate it? Even if the savings are ephemeral, experience suggests that while the government can be stingy and slow when it comes to distributing carrots, it can be quite capable of applying a painful stick.

PPACA Here to Stay

If anything should be beyond debate among reasonable people, it is that ACOs will be expensive animals to cage and feed. Lots of new people and infrastructure are going to be needed to interface with this new reimbursement model. There are, after all, 65 measures spread across the "five domains" constituting the quality score that triggers eligibility for savings. And four pages in the 906-page PPACA (Section 3022) ballooned into more than 400 pages of rules.

While many of the executives with whom I've talked recently have quietly confessed a desire to see PPACA wither away, I believe it's likely that most of this is going to stick regardless of which political party is in power. So rather than just keep their heads down, some savvy leaders in health systems, hospitals and physician groups have concluded that health care reform only validates and adds impetus to some of the initiatives already under way, including:

Securing an adequate primary care base. You need them in fee-for-service arrangements, and you'll need them to qualify as an ACO or a medical home.

Building a robust clinical information system that drives high-volume patient data to the point of care. Readily available, transparent data will help organizations overcome the fragmentation that undermines quality and affordability.

Reducing their cost structure—significantly—in the range of 20 percent. For organizations that feel they've already squeezed out as much cost as they can, my only advice is to squeeze some more. Medicare reimbursement was falling before reform. It is poised to gain downward momentum. Commercial payers will follow. If you can't make money on Medicare, you're in for a rough road ahead.

But beyond reinforcing some existing strategic commitments, there are two things that bear consideration given the emerging shape of a transforming health care environment:

  • pursuing joint ventures across otherwise independent health systems, hospitals and group practices
  • learning from those who have demonstrated their ability to swim in both the FFS and population-health streams

Pursuing Joint Ventures

The purpose of joint ventures should be to share the cost of acquiring and administering the infrastructure necessary to be accountable participants in a world that will demand accountability. Hospitals have a profound tendency to reinvent the wheel or borrow somebody else's wheel. There are a variety of things providers can do through cooperative effort to drive down their costs significantly, including sharing:

  • information technology systems
  • group practice infrastructure
  • demonstration of quality and cost performance
  • training and education
  • medical staff collaboration on chronic-disease management across defined patient populations

These joint ventures can be evolved into an ACO if and when the model proves sustainable.

Credible Role Models

As soon as ACOs became more than a twinkle in a professor's eye, there were organizations ready to proclaim they were already what policymakers imagined. And just as quickly, they were on the conference circuit confidently showing others the way. Already, some of these early movers have collapsed into smoldering heaps.

Perhaps no one was more surprised than Mayo Clinic when The Wall Street Journal first began to give currency to the ACO concept and declared Mayo to be an ACO. There is much about Mayo and its close cousin, the Cleveland Clinic, worthy of emulation. They are juggernauts whose robust commitments to teamwork and organization will stand them in good stead as the reimbursement winds begin to shift. But role models for ACOs they are not.

There are better role models, and two of the best also can be found in the Midwest. Both have gotten used to tolerating the high degree of ambiguity and schizophrenia that living simultaneously in an FFS and population-health world requires.

Dean-St. Mary's. This role model is really two organizations so closely aligned that they routinely are referred to as one. Located in Madison, Wis., Dean Health System and St. Mary's Hospital are a big part of the reason costs and utilization in the region are among the lowest in the nation while clinical quality is among the best.

St. Mary's Hospital is part of SSM Health System based in St. Louis, Mo. SSM was health care's first winner of the Baldrige Award for Quality. Dean Health System operates one of the nation's largest multispecialty group practices with more than 350 physicians. Dean and St. Mary's co-brand many of their key service lines.

Both the clinic and the hospital are led by outstanding physician executives (Craig Samitt, M.D., and Frank Byrne, M.D., respectively). Together, Dean and SSM-St. Mary's own and operate a large rural physician organization that comprises nearly 100 salaried primary care physicians. They also jointly own and operate Wisconsin's largest HMO, the Dean Health Plan, with more than 200,000 enrollees.

The Dean Health Plan is operated for profit. That means that the hospital and the physicians live in a world where they can profit or suffer based on how well they manage the volume of their FFS patients as well as the health status of their HMO patients. Too much of an FFS mindset can prove problematic. So can too much of a population-health mindset. They are caught between two worlds and succeeding in both.

Advocate Physician Partners. Not too far south of Madison in the Chicago area, Advocate Physician Partners has emerged as one of the best examples of a combination of employed and independent physicians who successfully have navigated the rocks represented by antitrust and Medicare regulations. Today, more than 2,000 physicians deliver care under the Advocate banner and do so with the blessings of the Federal Trade Commission and the Department of Justice.

In Advocate Physician Partners, an FTC-compliant clinical integration model, can be found operational examples of some of the key components of what a successful ACO will require, including a shared-information system platform, common practice standards and active collaboration among a variety of specialties that include chronic-disease management across defined patient populations. Because its purpose is so clearly directed toward delivering improved value and its stance pro-competitive, its physicians are able to negotiate as one. The Advocate boat already floats in the safe harbor it has dredged.

I could be wrong on this, but it seems to me that not even the most financially secure health care organizations will be able to afford becoming an ACO on their own. That's the real lesson in the Haywood-Kosel study. The only solutions are to share the costs and learn from those with credible experience.

Dan Beckham is the president of The Beckham Company, a strategic consulting firm based in Bluffton, S.C. He is also a regular contributor to H&HN Daily.