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Healthcare Reform: All About Accountable Care Organizations and Why They Matter

At least in the wonkier corners of the healthcare debate, there's a lot of buzz about "accountable care organizations," or ACOs. If you don't understand what these are -- well, you're not alone. Since these relatively new organizations could play a key role in the ongoing restructuring of the $2.3 trillion U.S. healthcare industry, though, you probably ought to know more about them.

In a nutshell, an ACO is a group of doctors and hospitals that has agreed to take responsibility for the cost and quality of providing medical care to patients. That sounds pretty straightforward, but it's a huge departure from the current state of affairs, in which hospitals generally get paid simply for doing stuff to patients, regardless of whether it makes them healthier or saves money. (Recall that economic incentives in healthcare are often perverse.)

That financial and medical accountability can take a variety of forms, but important thing is that starting next year, the healthcare reform law allows ACOs that meet certain requirements to pocket any money they save Medicare by making medical care more efficient without compromising quality. (I.e., no saving money by refusing to treat sick people!) In other words, there will finally be an economic incentive for hospitals to find new ways to save money without compromising treatment.

What a concept.

How ACOs may be organized
Under the reform legislation, 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.

It's possible that some state Medicaid programs may also strike agreements with ACOs. Thomas Enders, managing director of the healthcare group at consulting firm CSC, believes that's likely, partly because the states must prepare for the big expansion of Medicaid that will begin in 2014.

Meanwhile, some private insurers are also launching ACO pilots. Blue Cross Blue Shield of Illinois has a shared-savings program with Advocate Healthcare, a big Chicago healthcare system; Anthem Blue Cross is doing the same with a couple of independent practice associations (IPAs) in southern California. Blue Cross Blue Shield of Massachusetts has taken a somewhat different tack with its "alternative quality contract," which passes on financial risk for all patient care to large healthcare organizations while providing incentives for meeting quality goals.

How ACOs will dominate healthcare
Eventually, most ACOs will probably take full responsibility for the cost of care. In that case, they will be similar to group-model HMOs like Kaiser Permanente and Group Health Cooperative, in which the same organization acts as both insurer and hospital by financing and delivering care. The major difference between ACOs and HMOs is that ACOs must meet quality goals intended to keep doctors from skimping on care.

So far, only large hospital systems and big physician groups are pursuing the ACO concept, and just a handful of systems -- such as Advocate and the Geisinger Health System in Danville, Pa. -- have fully geared up to become ACOs. In part, that's because running an ACO requires a vast investment in healthcare IT and infrastructure, which excludes smaller healthcare systems unless they join with larger ones.

As for medical practices, there's no way that a small or medium-sized outfit could form an ACO unless it was part of a sizeable physician network. For example, each of the IPAs that are teaming with Anthem Blue Cross of California includes thousands of doctors.

ACOs, in other words, are also effectively designed to encourage consolidation among hospitals and doctors -- which has has already drawn antitrust scrutiny because these organizations would have the clout to potentially force insurers to pay higher rates. While the Obama Administration is pushing ACOs, some friction has developed between the Justice Department and the Federal Trade Commission on this issue.

How ACOs may make hospitals more powerful
Because hospitals are more likely than physician groups to form ACOs, they may emerge with even more influence in the healthcare system than they already have. Hospitals are hiring more and more doctors, and a major shift of Medicare revenue to ACOs would make it difficult for physicians to remain independent.

Conversely, in order to form ACOs capable of coordinating and managing care, hospitals will feel increased pressure to employ their doctors, as opposed to dealing with them as independent experts.

There's much more involved here, including changing roles for "post-acute-care" providers such as home care agencies, nursing homes, and assisted living facilities. But the bottom line is that ACOs have the potential to transform health care if the financial incentives work as planned, healthcare IT becomes widespread, and obstacles to change embedded in medical culture can be overcome.

Image supplied courtesy of Wikimedia Commons.

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