Healthcare Reform: What If ACOs Turn Out to Be a Money Pit?

The fundamental premise of the accountable care organization (ACO) is that it gives doctors and hospitals a way to work together to lower medical costs without compromising the quality of patient care. But it's not an uncontroversial idea: Some experts believe ACOs simply won't work, and few doctors have shown much enthusiasm for the idea, either. All that could put a lynchpin of healthcare reform in serious jeopardy.

According to a recent paper in the New England Journal of Medicine, most ACOs won't break even on their investment in infrastructure -- mostly IT system -- for at least three years. The authors base that assertion on the preliminary results of Medicare's five-year Physician Group Practice (PGP) demonstration, which bore some important similarities to ACOs. The 10 big group practices in the pilot could pocket up to 80 percent of the savings they produced for Medicare by reducing hospitalizations, ER visits and complications. They also had to meet quality targets to qualify for the bonuses.

Past as prologue, part I

The results were decidedly mixed. Eight of the 10 groups didn't receive any rewards in the first year of the demonstration; six didn't receive anything in the second year; and five failed to obtain bonuses in the third year. Yet the groups invested $1.7 million each, on average, in the first year of the project.

Based on that data, the NEJM authors calculated that an ACO would need a net margin of 20 percent for three years just to break even on its first-year investment. Since these groups were large and highly sophisticated, with advanced health IT, their inability to make money in the PGP pilot presumably spells trouble for ACOs, at least according to the authors.

Fine so far as it goes, but this argument ignores the fact that ACOs are far more likely to be dominated by hospitals than by large medical practices. Hospital chains have deeper pockets and can withstand losses for a longer time. Moreover, they stand a pretty good chance of boosting their revenue if they use ACOs to increase their bargaining leverage with health plans.

On the other hand, ACOs are designed to decrease the usage of expensive hospital services -- a conundrum that many healthcare executives are grappling with right now.

Past as prologue, part II
A more fruitful line of reasoning comes from Robert Berenson, a senior fellow at the Urban Institute and a former top Medicare official. In an article published last fall in the American Journal of Managed Care (no link, unfortunately), Berenson points out that the shared-savings model probably won't work because it has no downside and doesn't give providers enough of an incentive to change their behavior.

Some ACO advocates would like to see these organizations take substantial financial risk so they'd be more motivated to cut waste and save money. But Berenson recalls that in the late 1990s, Medicare offered to delegate financial risk directly to what were then called "provider service organizations" -- groups of doctors and hospitals very similar to ACOs. Few provider organizations were willing to take on that much risk, unless they had their own insurance plans, so the program just evaporated.

In California, many medical groups and IPAs take professional risk from HMOs, including Medicare HMOs. Health plans in that state and a few others are also starting to delegate partial risk to ACOs. It is this model, rather than direct risk contracting with Medicare or private employers, that's likely to catch on. If providers are successful with this approach, it should supply the capital they need to fund their infrastructure and the shift to a new paradigm of care delivery.

As for Medicare, Berenson suggests that the government agency use a "shared-risk" approach to ACOs that's somewhere between fee-for-service and prepayment. He also points out that Medicare patients must be given a clear choice between joining an ACO or staying in the traditional Medicare program if providers are to have any chance of coordinating their care. Both of those suggestions are sensible and are reflected in the newly issued ACO regulations.
Ultimately, whether ACOs are going to be viable business models depends on how they're executed and what the government requires of them. We now know the latter, but the devil is in the details.

Image via Flickr user Me and the sysop, CC 2.0
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Ken Terry

Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.

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