Unfortunately, too many discussions about Accountable Care Organizations these days are putting the cart before the horse – defining an ACO based on its ability to participate in a particular payment model, rather than defining the payment system that will best enable an organization to become accountable for the costs and quality of care it delivers.

This wrong-headed approach has been encouraged by the way the federal Patient Protection and Affordable Care Act (PPACA) was written. Contrary to popular belief, there isn’t a section of the law titled “Accountable Care Organizations.” The provisions about ACOs are in a new section of the Social Security Act entitled “Medicare Shared Savings Program”. In other words, the law defines a payment method, and then defines ACOs as entities that can accept that payment method.

What we SHOULD be doing instead is identifying what kinds of changes care delivery systems can make to get better outcomes and lower costs, and then defining the payment changes needed to support those changes in care.

For example, a clear focus for ACOs should be reducing the rate at which people with chronic diseases are admitted to the hospital. We know that can be done. Study after study has shown that things like having nurses make home visits, encouraging patients to call their doctor early, and improving access to primary care practices on evenings and weekends can dramatically reduce ER visits and hospitalizations. But current fee for service payment systems don’t pay for the nurse care managers, they don’t pay doctors to talk to patients on the phone, and the payers don’t even tell PCPs how often their patients are being admitted to the hospital. So the obvious solution is to pay for those things, in return for PCPs accepting accountability for reducing admission rates.

Another example is hospital-acquired infections. Tens of thousands of people still get infections in hospitals, and some infection rates are going up, even though we know infections can be eliminated with appropriate protocols. But under current payment systems, hospitals lose money – a lot of money – when they prevent infections. Again, the solution is obvious – pay for care that has a warranty, the same way we pay for products and services in every other industry.

Those care delivery changes should be central to an Accountable Care Organization, and the priority should be creating payment changes that support those delivery changes. But most people in Washington aren’t talking about those changes. Instead, they’re mostly talking about “shared savings.” Unfortunately, shared savings does nothing to enable the PCP to afford to hire a nurse care manager; it provides no upfront money and only the uncertain prospect of future payments long after the PCP pays the nurse’s salary. Shared savings does little to change the fact that hospitals lose money by preventing infections or readmissions – losing less money is still losing money.

In fact, shared savings does nothing to fix any of the problems with the current fee-for-service system. In other words, shared savings isn’t really fundamental payment reform. It’s just another form of pay-for-performance (P4P), and a pretty weak form at that. And we know that pay for performance has shown very modest success in overcoming the powerful negative incentives built into the underlying payment system.

Shared savings can be useful if it’s paired with appropriate changes in the underlying fee-for-service structure. However, too many people are assuming that the “right” payment reform is merely shared savings on top of the current fee for service system, and nothing else.

Indeed, too many discussions about payment reform today are based on the erroneous belief that we have to give financial incentives to doctors and nurses to provide better care. The reality is that most doctors and nurses WANT to provide better care, they don’t need a financial incentive to do that. The problem is that the current payment system penalizes them for doing the right thing. So the key thing is to start paying for the right things and stop paying for the wrong things, i.e., remove the disincentives.

If we aren’t explicit about how we think care is going to improve and how payment changes will support that, what will consumers think when they hear that ACOs are fueled by “savings?” They’re likely going to assume the worst – that rationing is going to occur. And if we don’t ensure the payment system supports genuine improvements in care, some providers are going to use rationing as the way they create those savings.  If they do that, it will taint the ACO concept for everyone, the same way that bad versions of managed care in the 1990s led to the demise of good versions.

It’s also unrealistic to expect that providers are going to suddenly be able to manage the total cost of care when they haven’t been expected to manage any costs of care for decades. So if a small physician practice or an IPA comes forward and says “we’re willing to take accountability for some things – hospital admissions, ER visits, use of high-tech imaging,” we shouldn’t say “No, you can only be an accountable care organization if you’re able to take accountability for total costs right away.” In fact, we should do exactly the opposite: we should provide payment systems that enable them to tackle the costs that they can, and not penalize them for the costs they can’t control. Shared savings doesn’t do that, because it’s based on total costs: for example, even if a provider successfully reduces ER visits or preventable readmissions, if costs go up somewhere else – in a part of the system they have no control over – they may get no shared savings payment at all to cover the upfront costs they had to incur to achieve the successes they had.  That’s just another disincentive to change.

To make matters worse, even if a provider comes forward and says “I’m willing to take accountability for the total costs of care for a subset of my patients,” they won’t be able to do that, either. Why? Because under the shared savings model, Medicare will determine which patients the provider is accountable for through retrospective statistical attribution, i.e., the provider won’t know who its patients are until after the care has already been delivered.

Think about it – is it better to have only 10% of the providers in the country taking accountability for 100% of their costs while the other 90% are accountable for nothing, or is it better to get 80% of the providers taking accountability for 50% of costs (or whatever portion of costs they can control)? Simple math shows the latter is far better, but a pure shared savings is likely to result only in the former.

Fortunately, although the new Section 1899 of the Social Security Act is titled “Shared Savings,” a separate part of PPACA (Section 10307 of the bill) added language to Section 1899 giving the Secretary of HHS the “Option to Use Other Payment Models.” PPACA says that this can include partial capitation or “any payment model that the Secretary determines will improve the quality and efficiency of … services…” This provision deserves much more attention than it has received to date, because it provides the flexibility that the Medicare program needs to support the specific kinds of care changes that ACOs should be implementing.

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In a new article in the Journal of Hospital Medicine, David Mitchell, a hospitalist at Akron General Medicine Center, presents a superb example of the impact on healthcare costs clinicians can make if they’re willing and able to spend the time to do careful diagnosis and conservative testing/treatment.

His example is “an elderly woman who presents to the emergency room with syncope occurring at church.”

Hospitalist 1 “takes time to gather history from the patient, family, eyewitnesses, and the primary care physician, and requests a medication list and outside medical records, which reveal several recent and relevant cardiac and imaging studies. He performs a careful examination, discovers orthostatic hypotension, and his final diagnosis is syncope related to volume depletion from a recently added diuretic as well as a mild gastroenteritis. The patient is rehydrated and discharged home from the emergency room in the care of her family, and asked to hold her diuretic until seen by her family physician in 1 or 2 days.”

Total Cost: $935
Level 4 emergency room visit $745
Level 4 internal medicine consultation $190

Hospitalist 2 “tells the staff to get the patient a telemetry bed. He sees the patient 2 hours later when she gets to the floor. The family has gone home and the mildly demented patient does not recall much of the event or her past medical history. The busy hospitalist constructs a broad differential diagnosis and writes some quick orders to evaluate the patient for possible stroke, seizure, pulmonary embolism, and cardiac ischemia or arrhythmia. He also asks cardiology and neurology to give an opinion. The testing is normal, and the patient is discharged with a cardiac event monitor and an outpatient tilt-table test scheduled.”

Total Cost: $18,749
Level 4 emergency room visit $745
Level 3 history and physical $190
Laboratory evaluation: CBC, CMP, cardiac panel, urinalysis, D-dimer $843
EKG $150
Head CT $1426
Chest CT angiogram $2120
Brain MRI $3388
Echocardiogram $687
Carotid ultrasound $911
Level 4 neurology consult $190
Subsequent visits day 2, day 3 $150
EEG $520
Level 4 cardiology consult $190
Nuclear stress test $1359
Specialist subsequent visits $150
Telemetry bed, 3 days $3453
Discharge, low-level $90
Cardiac event monitor $421
Tilt-table test $1766

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There is a lot of discussion today about using “shared savings” as an approach to healthcare payment reform. Medicare has used it as the key element of its Physician Group Practice Demonstration, and it has been proposed as the key mechanism for encouraging the creation of “accountable care organizations.”

The basic concept is fairly simple: if a healthcare system or provider reduces total healthcare spending for its patients below the level that the payer (Medicare or a private health insurance plan) would have otherwise expected, the provider is rewarded with a portion of the savings, i.e., the payer still spends less than it would have otherwise, and the provider gets more revenue.

Unfortunately, there are some fundamental weaknesses in the shared savings approach that make it far less desirable as a payment reform than it might first appear:

1. It’s P4P, Not Payment Reform. Shared Savings is just another form of pay-for-performance (P4P). It doesn’t actually change the current payment system at all – key primary care services that aren’t paid for today (like nurse care managers for chronic disease patients, phone and email consultations with physicians, etc.) still wouldn’t be paid for, services where fees are too low to cover costs would still lose money, etc. (Although shared savings proponents would argue that it does pay providers for things that are under- or non-compensated today, the problem is that the payment, if it comes, arrives long after the service is delivered, and may or may not be adequate to cover the cost of the services delivered). It’s not even clear if the reward through shared savings would be sufficient to offset the profit that the provider is losing by reducing the number of services it provides, particularly if only one payer is sharing savings but the provider changes its approach with all of its patients. Creating a P4P incentive based on total spending is a good idea, but only if it is coupled with changes in the underlying payment system.

2. It Gives Providers Risk Without Resources.At first glance, shared savings looks like the perfect deal for the healthcare provider – if the provider is successful in reducing total costs, it gets a bonus; if it’s not successful, it suffers no penalty. The flaw in the logic is assuming that what the provider needs to do to achieve success is costless. For example, although there are programs that have been demonstrated to reduce preventable hospitalizations, those programs require an increase in upfront spending by the primary care practice or the health system that implements them. Even if the shared savings payment would ultimately cover the provider’s costs, it has no way of knowing whether this will be the case, and there is a non-zero risk that even if it reduces costs, it will not meet the threshold established by the payer to declare “savings,” or it will end up spending more money on a net basis even after any shared savings are paid. Moreover, when multiple providers are involved, shared savings creates a variant of the “prisoner’s dilemma” – if one provider makes the investment to improve care but others don’t, the savings may not be sufficient to cover that provider’s costs; conversely, if most providers make the investment, any individual provider can increase their profit by sharing in the savings without making any upfront investment themselves.

3.  It Rewards Improvement Rather Than Performance. The communities and providers that have the most to gain from shared savings are the ones that are “wasting” the most resources today, through high rates of hospital admissions, use of unnecessary procedures, etc. In contrast, the communities with relatively low costs and high quality of care are already “saving” Medicare and other payers significant amounts of money but with no reward. The first group can improve relatively easily, since they have so much “low-hanging fruit” to pursue. The latter group, even if it can still improve further, may need to invest significantly more resources to do so, yet it will likely receive far less reward relative to the costs it incurs. In effect, shared savings exacerbates the current inequities in the payment system. The problem is even worse if the payer chooses to take a disproportionate share of the savings first, as Medicare has done in the Physician Group Performance Demonstration. Although this is intended to avoid rewarding providers for reductions in spending simply due to random variation, the practical effect is to increase the amount the provider has to spend or lose before receiving any reward through shared savings.

4.  It’s Inherently Arbitrary. How much of the savings should be shared? Merely picking a percentage between 0 and 100% provides no assurance to the provider that the costs they incur or the losses they would sustain will be offset by the amount shared. Although it would theoretically be possible to select a percentage that matches the amount of the savings to the cost of the specific investments that the providers plan to make, this would have to be done on a case-by-case basis, rather than on a uniform basis across the country.

5.  It’s Not a Sustainable Approach. Even in a place where there is the potential for significant savings, what happens after most of the savings is achieved?

• If shared savings is viewed as a one-time bonus payable in a year that savings is achieved, then the motivation it creates for providers to change disappears when there is little no additional bonus to be achieved in the future. Moreover, if there is no downside risk to the provider for increased costs, one-time shared savings creates the perverse incentive for the provider to again increase utilization of services in order to create a new pool of potential “savings” to go after in the future. (Similarly, it creates an incentive for low-spending regions to increase spending temporarily in order to lower it again and get a bonus payment they would not have otherwise received.)
• If the shared savings payment were not a one-time payment, but were to be paid repeatedly each year once achieved, there would need to be a mechanism for determining what kind of future growth is acceptable in a region that has achieved savings initially. For example, if a region reduces costs by 5% during the first savings calculation period, but then it experiences cost increases slightly higher than other regions in the second year, would its shared savings payment be reduced, and if so, by how much? What if the payer impose an even more stringent set of standards for spending in the future, which would reduce or eliminate repeated payments? From the provider’s perspective, it would need to understand in advance the requirements to achieve shared savings payments over an extended period of time in order to make investments that require a multi-year payback period.

These problems do not meant that shared savings is totally without merit, but it cannot effectively serve as the primary mechanism for healthcare payment reform.

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One of the goals many people have for federal and state healthcare reforms is to eliminate “medical underwriting” by health insurers, i.e., refusals to provide health insurance coverage for those with existing illnesses and conditions. How to do this — individual mandates, employer mandates, single payer, etc. — remains controversial, but the goal is widely shared.

If health plans can’t medically underwrite, how will they compete? Victor Fuchs, in a recent article in Health Affairs, says “If insurers have to provide a standard benefit package with guaranteed issue and no pre-existing disease exclusions, receive risk-adjusted premiums, and have their outcomes monitored, they will have a strong incentive to change their business model from excluding sick patients to actually managing care for efficiency and value.  This is how competition can work to control costs.”

In another corner of the health reform arena, there’s deep concern about the decline in primary care and a major push for supporting creation of the patient-centered medical home.  One of the core principles of the medical home is to provide comprehensive management and coordination of a patient’s care.

So which is it?  Do we want health plans to manage our care, or do we want primary care practices to do it?  The experience of the 1990s indicates pretty strongly that people don’t like health plans managing their care.  (Based on the same experience, it’s not even clear that people like primary care practices doing it either, but the PCP gatekeeper role then was being driven by the health plan, not the practice itself.)

Yet most health plans have created an extensive care management infrastructure inside their own walls and they are already competing for business based on how extensive it is.  Drive down the highway in any major city or turn on the TV to see the proliferation of advertisements by health plans.  The message (unfortunately) isn’t how much less they cost, but how much they can help you manage your health care.

So not surprisingly, one of the challenges in implementing medical home initiatives is that the improved  services in the medical home appear to duplicate services the health plan already claims to be delivering.  Why should the health plan pay primary care practices more so they can hire nurse care managers, when the health plan is already paying for them on the health plan’s own staff, and advertising that that’s a way they control costs?  Why should the health plan pay more for a physician practice to install IT systems, when the health plan already claims to provide extensive data and decision support to help physicians better manage their patients?

The problem with having these services at the health plan, rather than the physician practice, is that they cannot be effectively integrated into care delivery for patients.  Health plan care managers try to help patients manage their care independent of the physician, when care management and physician treatment should be closely coordinated.  Physicians need one effective IT system they can use for all of their patients, not a half dozen systems, each of which only works for the patients from a particular health plan.

In order to truly fix the healthcare system, there will need to be a resolution to what, if any, care management services should be provided by health plans instead of by health care providers.  The likely answer, at least in the long run, is “as little as possible.”  There will always be some patients who can’t find or won’t use a medical home, and in those cases, the health plan (assuming the patients have a health plan) may be the only practical way to provide a semblance of care coordination.  But if the goals of the medical home advocates are realized, there will be fewer and fewer such patients over time.

Moreover, resolving this also helps resolve one of the key barriers to implementing the medical home — maintaining budget neutrality.  Health plans are reluctant to pay more for medical home services because it may increase spending with no guarantees of offsetting reductions in other costs.  Yet an obvious place to achieve offsetting reductions is reducing the spending on similar services inside the health plans.  Moreover, in light of the results of several recent studies showing low effectiveness of disease management programs, such a shift may result in better outcomes and lower costs.

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A story in the Pittsburgh Post-Gazette last fall demonstrates how current healthcare payment systems encourage higher costs with no better value.

A retired university professor found that an anti-nausea drug (Zofran) that he was paying $557 per month for at his local Rite Aid was available from an independent pharmacy for $46.58.    This is not a brand name vs. generic difference — it’s the cost difference for the same generic product.  In shopping around, he found that CVS was charging $420, Walgreen’s was charging $410, and Wal-Mart was charging $110, quite a variation, and all higher than the independent.  According to the article, the wholesale price was under $17.

He had an unusually strong incentive to shop around — even though his prescription plan pays 80% of the cost, he has to front the money and get reimbursed.  People with flat co-pays wouldn’t have either the incentive of the percentage co-insurance or the need to float the funds for the full price, and would likely go to the closest store.  

A spokeswoman for Rite-Aid confirmed that.  “Most of our customers are insured, and they have a wide choice of pharmacies for prescription services, and so convenience, value-added services, and days of operation, rather than price, are the primary drivers” of where customers choose to go, she said.

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On December 9, the leaders of three national groups — the American Hospital Association (AHA), America’s Health Insurance Plans (AHIP), and the Blue Cross Blue Shield Association (BCBSA) — jointly released a study by Milliman, Inc. designed to measure the aggregate amount that was being “cost-shifted” to private insurance plans due to underpayment by Medicare and Medicaid.*   The study estimated that, nationally, private insurance plans pay $34.8 billion more in hospital costs due to cost-shifting from Medicare and $16.2 billion in hospital costs due to Medicaid cost-shifting, and they pay $14.1 billion more in physician costs due to Medicare cost-shifting and $23.7 billion more in physician costs due to cost-shifting from Medicaid.  All told, the study said that $88.8 billion is being shifted to private health plans from Medicare and Medicaid.   The study said that because of cost-shifting, hospital and physician costs for private insurance payments were 15% higher than they would be otherwise.

At the press conference when the study was released, reporters repeatedly asked if AHA, AHIP, and BCBSA felt this meant that Medicare and Medicaid spending should be increased by $88.8 billion.  No one was willing to say those exact words; they merely re-emphasized the magnitude of the cost-shifting that was going on and urged that it be taken into account as national healthcare reform plans are formulated.  In the press release the groups issued, Karen Ignani of AHIP called it a “hidden tax” on families and employers.

Unfortunately, no reporter asked the obvious question — Is it possible in some cases that Medicare and/or Medicaid are actually paying an appropriate price for hospital or physician, and that private insurance plans are merely subsidizing inefficiency?  There is no doubt that there is inefficiency and overuse in healthcare; some have estimated that as much as 40%  of the spending in healthcare is wasted on inefficiencies and unnecessary treatments.  Even if that is only half-true, eliminating the inefficiencies would mean that Medicare and even Medicaid may be paying closer to the correct amounts, at least in aggregate.

The study did not attempt in any fashion to determine whether the amounts Medicare or Medicaid were paying were sufficient to actually deliver good-quality care.  It merely looked at what hospitals and physicians reported as their average costs, and measured the difference between what commercial plans were paying relative to those costs vs. what Medicare and Medicaid were paying.  

No one really knows for sure what it really costs to deliver specific types of care, or what it could cost if obvious inefficiencies were eliminated.  It’s likely that in some cases, commercial insurers are overpaying, and in other cases, Medicare and Medicaid are underpaying.  In some cases, such as with primary care, both commercial insurers and Medicare are underpaying.   But there is certainly no basis for saying that Medicare and Medicaid are underpaying by a total of $89 billion simply because they’re paying that much less than commercial insurers are.

What is needed is a system that enables healthcare providers to define clear prices for their services and then to compete on those prices as well as on the quality of care they provide.   Then it would make sense for all payers to pay the same amount for those services.

 

*If (a) it costs a healthcare provider $1,000,000 to provide a service to 100 people, i.e., $10,000 per person, and if (b) the 100 people are covered by two different insurers and one of the insurers only pays $8,000 per person for its 50 members, then (c) if the other insurer pays $12,000 per person in order to cover the provider’s total costs instead of $10,000, it is said that $200,000 has been cost-shifted from the first insurer to the second insurer.

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It’s obvious that in any environment where there are multiple stakeholders, “win-win” solutions are more likely to be successful than “win-lose” approaches.   In healthcare, there are three key categories of stakeholders — patients, payers (e.g., health insurance plans), and providers (hospitals, doctors, etc.).  So an important question about any healthcare quality improvement effort is whether it’s a “win-win-win” for all three groups.

All efforts to improve healthcare quality are presumably “wins” for the consumer/patient, assuming that quality is measured appropriately in terms of patient outcomes.   (Sometimes simply providing more healthcare services is represented as “higher quality,” but that is marketing, rather than true quality.)

However, not all quality improvements are “wins” for both payers and providers.   In many cases, providers argue that they need more money to improve quality, with no assurance to payers that costs will be reduced elsewhere.   Such initiatives may be win-wins for the patients and providers, but losers from the viewpoint of the payers.  For example, the challenge that many initiatives to implement the patient-centered medical home are facing is that they are framed as asking payers to spend more money for primary care delivery in order to improve quality for patients.  From the payer’s perspective, it’s win-win-lose, not win-win-win.  (As noted in a previous post, it doesn’t need to be that way.)

At the other end of the spectrum, there are quality improvements that are clear wins for both patients and payers.  For example, reducing hospital-acquired infections is good for the patient, and often avoids extra payments to cover complications.   However, in many cases, because of the way current payment systems are structured, hospitals lose money by preventing infections — they don’t just lose revenue, but since their revenues go down more than their costs go down, their operating margins also get worse.   (The new policies prohibiting Medicare payments for infections won’t solve this — more on that in a future post.)   So these are also win-win-lose propositions, but this time from the provider’s perspective.

Are there win-win-win solutions?  Yes, but only if the right kinds of changes in payment systems are made.  For example, a hospital that reduces infections and other adverse events should be paid more for the successful cases than it is today, but nothing for the cases with adverse events.  Under that kind of payment structure, it has both a financial incentive and a quality incentive to reduce the adverse events.   Why does it have to be paid more for the successful cases?  Because before, the failures were actually subsidizing the successes.  With better quality, the hospital’s fixed costs will be spread over a smaller number of cases, increasing the average costs of care.   That’s why the hospital can be worse off financially if it reduces infections — the payments it receives would go down more than its costs would decrease.

But won’t higher payment for the successful cases increase healthcare spending?  No, not as long as the higher payment rate for the successful cases is offset by the reduction in spending for the unsuccessful cases (since they will no longer receive additional payment).   The payer can still spend less than it did before (just not as much less as it would have if the infections were reduced under the current payment system), but the provider’s losses are reduced or eliminated.  That enables a win-win-win solution for all three.

The importance of finding win-win-win solutions is why quality improvement needs to be coupled with reforms in healthcare payment systems.

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Many people are convinced that the only way to significantly reduce healthcare costs is by some type of rationing — limiting the kinds of services that health insurance will pay for.  But there are ways to significantly reduce healthcare spending without taking away anything that consumers want.

A perfect example is hospital readmissions.   Research studies and quality-reporting initiatives around the country show that 15-25% of people who are discharged from the hospital will be readmitted to the hospital within 30 days or less.  Many of these readmissions are for a complication or infection arising from the initial hospital stay.  In many other cases, they are simply a repeat of the same situation that led to the first hospitalization — for example, a patient with a chronic disease such as asthma, chronic obstructive pulmonary disease (COPD), or congestive heart failure who doesn’t understand how to manage their condition properly.

The patients certainly wouldn’t mind having fewer hospitalizations.   Billions of dolllars in spending on hospital stays could be saved if these hospitalizations could be avoided.    In other words, reducing readmissions is a win-win for both cost and quality, without a hint of rationing.  And study after study has shown that very simple, low-cost interventions, such as patient education about chronic disease management, can dramatically reduce hospitalizations. 

So what’s standing in the way of success?  Answer: the broken healthcare payment system.   In many cases, health insurers won’t pay for the services that would keep patients out of the hospital, even though they will pay every time they go in to the hospital.   (Many people believe that hospitals don’t get paid for readmissions, but in the vast majority of cases, they do get paid by both Medicare and commercial payers.)  And because of that, both hospitals and doctors would see their revenues decrease if hospital readmissions rates were reduced. 

Medicare and some commercial payers are now discussing whether to reduce or eliminate payments to hospitals for readmissions in order to create an “incentive” for them to reduce readmissions.   But this assumes that the cause of the readmission is under the control of the hospital.  In some cases it is, but in many cases it is not.  That doesn’t mean the readmission isn’t preventable, but rather that the change in care has to happen outside the hospital — often in the primary care practice.   And unfortunately, the payment system is broken there, too.

The solution?  Marrying the Patient-Centered Medical Home and Readmission Reduction.  More on that in a future post.

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