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How to Control Healthcare Costs: Make Hospitals Share Financial Risk

Under the Affordable Care Act, Medicare has been empowered to try alternative reimbursement methods to counteract the tendency of traditional fee for service to raise costs. One of those alternatives, as I explained a couple of weeks ago, is for Medicare to share savings with physician-and-hospital organizations -- so-called accountable care organizations, or ACOs -- that cut costs through more efficient utilization of services, while meeting certain quality standards.

Many healthcare organizations see this as a business opportunity, but some industry observers wonder whether the approach will really "bend the cost curve." A more promising approach might be to combine the quality improvement emphasis of ACOs with old-fashioned "risk contracting" -- which transfers the financial risk for all or part of patient care to doctors and hospitals.

That's the message coming out of Blue Cross Blue Shield of Massachusetts, which has been offering provider organizations an HMO "alternative quality contract" for the past two years. Under this contract, physician organizations, healthcare systems, and physician-hospital organizations take on full financial responsibility for patient care -- in other words, they have a budget. They can make extra money by spending less than their budget and/or by meeting a graduated series of quality targets. Nine organizations -- among them such heavyweights as the six-hospital Caritas Christi system and Atrius Health, an alliance of five physician groups that includes Harvard Vanguard Medical Associates -- have accepted the alternative quality contract (AQC) so far. (A notable omission is Partners Healthcare, the 800-pound gorilla of the Boston-area industry, which seems to be doing quite well financially by swinging its weight in contract negotiations.)

The goal of the AQC, Massachusetts Blues executive Deb DeVaux told me, is to improve quality and to reduce cost growth to the level of the Consumer Price Index within five years. That would mean decreasing the annual level of provider cost inflation from its current level of 10 to 12 percent to about 4 percent, DeVaux says. While that's a daunting challenge, she notes that every organization holding an alternative quality contract has reduced cost growth below the average for the Blues network this year.

Cardiologist Gene Lindsey, president of Atrius Health and Harvard Vanguard, informs BNET that Atrius has stayed within its AQC budget partly by moving patients from the Partners hospitals in Boston to Beth Israel Deaconess Hospital, which offers comparable quality at a significantly lower cost. Atrius' constituent groups are also working with their doctors to reduce waste, but that's a taller order: For example, Lindsey points out, expensive ARB medications are indicated for only 5 percent of patients with hypertension, but Atrius physicians prescribe them for 25 percent of those patients -- a trend that he ascribes to drug detailers and the doctors' "lack of focus." That practice pattern alone costs Atrius a six-digit figure every year, he says.

In Lowell, Mass., the Lowell General Physician-Hospital Organization (PHO) also holds an alternative quality contract. Internist David Pickul, the PHO's medical director, tells BNET that the first year was "bumpy," as anticipated, because there was little clinical integration among the many small physician practices in the PHO. Nevertheless, he says, the doctors' hard work paid off, and they received substantial quality bonuses that raised their income from the Blues HMO above what it had been the year before.

One reason for the primary-care physicians' attention to this contract, Pickul adds, is that it represents about 15 to 20 percent of their volume.

The question is whether the Medicare approach -- fee for service with shared savings -- will get doctors' attention to the same degree. Of course, Medicare represents a big chunk of many doctors' practices (as well as of hospitals' business). But this approach depends on patients having a relationship with a particular primary-care doctor who will be incentivized to coordinate their care to a greater extent than in the past. If that relationship doesn't exist, Lindsey points out, there are not likely to be any savings. Similarly, a shared-savings approach to commercial PPO patients could fail if those patients decline to be guided by a personal physician.

In any case, these are early days, and many different variations on the theme are being proposed. Some of them may work, and some won't. But as one West Coast healthcare executive says, "We've got to try something. This is a recognition that the existing model of reimbursement is unsustainable."

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