Wednesday, January 26, 2011

The Future of Accountable Care Organizations (ACOs)

An Interview with Bill DeMarco, President of Pendulum Healthcare Development, an affiliate of DeMarco Health Care Consulting

What follows is an interview with Bill DeMarco, a health care consultant for more than 30 years and an advisor on Accountable Care Organizations (ACOs). The subject of Accountable Care Organizations (ACOs) accounted for only 10 pages of the 2500 page health reform bill. Yet ACOs are now the buzz, the rage, the hottest 3-letter acronym since sliced bread, and the most talked about subject in hospital board rooms, medical staff lounges, and the medical talk circuit, and consultant enclaves. I am cautiously pessimistic about the future of ACOs. My views on ACOs are available in an e-book , Pros and Cons of Accountable Care Organizations (

How long have Pendulum Healthcare and DeMarco and Associates Consulting been in existence?

Pendulum since 2001 and DeMarco and Associates since 1980.

As you know, you and I go back a long way, starting with the formation of the SHARE corporation in Minneapolis.

Yes, I was one of the 10 people who started SHARE, a small primary care group that contracted with specialty physicians as a staff model HMO, which we might call today a medical home.

Today let’s talk about Accountable Care Organizations (ACOs). ACOs are the hottest subject going, as hospitals and physicians contemplate implications of the health reform law and their future.

Yes, ACOs are a hot subject. I prefer to call them Medicare Shared Savings programs. They are connected to the prepaid demonstration projects CMS conducted with several of the big multi-specialty groups five or six years ago. Also they tie into the discussions about cooperative organizations. CMS had a meeting last week encouraging hospitals and doctors to become cooperative health plans.

I’ve been reading your articles on ACOs. One thing that comes through is that you believe ACOs are a “new path” for physicians and hospitals.

Yes, they are indeed a new path. They are truly an opportunity, for physicians specifically, to generate a bonus in exchange for increased consistency, efficiency, and effectiveness. ACOs put dollars on the table for quality.

Previous variations of the ACO model, PHOs and IPAs, have failed or faltered for various reasons, one reason being physicians fearing hospital control and the other being lack of any revenue advantage for physicians. Do ACOs change the control and revenue landscape?

I think they do. They create an opportunity for Medicare, the biggest payer by far, to generate savings in conjunction with aligned physicians. There will now be physician dollars available to reward efficiencies and to offset startup costs. ACOs are moving away from a production mentality of PHOs to a value-based mentality. They are crossing the quality chasm by focusing on medical management to bring costs down by removing waste from the system. ACOs are about population management, and physicians who participate and lead this change are going to get paid for quality.

What are the start-up costs for an ACO?

It depends on where the physician organization is on the integration scale. If they are fully integrated, like Geisinger and the Greater Marshfield Plan, they could go ahead quickly and be part of the ACO class of 2012.

If the physicians don’t have anything in place, you are easily talking about $3 to $5 million to organize for the first year and then ongoing administrative costs to have a licensed driver in the driver seat. There are management companies out there to provide the needed management services, and there are some shrewd investors interested in providing the start-up capital for ACOs in exchange for a part of the bonus.

The electronic infrastructure by itself required to track data to calculate rewards would be a huge expense, with EMRs on both the hospital and physician sides

In an ideal world, having that EMR will be important. However, when we started HMOs in the 70s, we needed the same kind of utilization data, and we survived. In addition, many physicians are already using some sort of data clearinghouses because they get an extra 3% to 4% using electronic billing. Many of these ACOs will be administrated through a fiscal intermediary. You could start an ACO without an EHR.

But you are right, it would be expensive to put in an internal EHR from scratch. That’s why you need to earmark some of your savings for that purpose integrating HIT and EHR.

Who are your clients? Are they mostly hospitals or physician groups?

It’s been a combination of physicians, physician organizations and IPAs who want to set up a data warehouse, and who want to be certified as an ACO. We’re working with a couple of hospitals, who want to do a joint venture with physicians. I am also talking to two companies, with another in the wings, who want to form an ACO for their employees. Employers are taking it upon themselves to go out to hospitals and physicians and create their own custom networks versus the insurance company discount networks of the past.

This is something most hospitals were not aware of, and many of their existing physicians could wind up joining a competing ACO. Also Phycor-like organizations are roaming the countryside to form ACOs by buying practices right out from underneath the hospitals’ nose. So we’re telling hospitals, don’t be shy about forming your own ACOs. Sit down with medical staff and tell them you are interested in cooperating with them to form their own physician driven ACO.

In preparing for this interview, I ran across this statement “Hospitals are the raw meat physician-ACOs will feed upon.” Is that an over-statement?

I think it is. Removing waste from the delivery system is not all about physician ACOs chopping out hospital days. Many existing physicians and hospitals are leaving dollars on the table because they are not coding and documenting correctly. ACOs will help correct these problems, and help both parties’ reimbursements but there are so many things that can be done before chopping out days per thousand.

Hospitals need doctors to help them correct problems like re-admissions, which come at hospital expense. And you’re going to be looking at better coordination between primary care doctors, specialists, and the hospital. Under bundling of hospital and doctor fees, pay will be more predictable and controlled than under fee-for-service because there will be agreement in advance as to what the “package “ of services are and what the Medicare payment rate may be for that package.

You mentioned bundling, which comes under the guise of global payments, and reducing fee-for-service. Is that one of the main thrust of this reform law?

Should we have “bundles” only, or should we have modified fee-for-service? That’s one thing holding up discussions of ACO legislation. Many years back we had cost HMOs and risk HMO contracts with the government. The choice was up to the HMO but risk arrangements usually offered better opportunity for additional revenue from savings. If we extend this down a bit we could have risk and cost ACOs. I think it will eventually go mostly into bundling, but not necessarily capitation. Capitation is paid on a per member per month. Bundles work differently because you’re paying for episodes and your success is tied to patient population management.

ACOs are targeted at the Medicare population. It is my understanding that a physician in private practice can belong to an ACO and continue to conduct fee-for-service in private practice independently for seniors not in the ACO and for his non-Medicare patients. Is that correct?

Absolutely. The private physician is not a government employee, and this is not government takeover. What the government is going to do is set the criteria for bundling for an episode of care. The physician can manage within that framework. But I do think ACOs will be a vehicle many employers will look to for managing non-Medicare employees, and we are seeing this with Humana and Norton as well as similar shared savings arrangements between Blue Cross and Advocate hear in Chicago.

Hospitals are hiring primary care doctors as well as specialists in record numbers. The number of physicians in private physician-owned practices has dropped from 75% of physicians to less than 50% in the last five years. Doesn’t having physicians as salaried employees make the creation of ASOs easier for hospitals?

The reform law is directed at physician- owned and physician- driven enterprises. The statute mentions hospitals in only one aspect - when hospitals own primary care physicians. These hospitals are eligible to apply, all the other ACOs are “physician-driven.” In my opinion, ACOs are really an “physician-anointed” program. Hospitals are hiring more doctors to make sure they don’t wander off the reservation. And yes, salaried physicians would help hospitals to form ACOs, if the primary care physician practices hospitals buy are seeing more than 5000 non-Medicare Advantage patients. And yes, having both primary care physicians and specialists under one corporate roof as employees would help in care coordination.

Many specialists and primary care doctors see cooperative groups involving specialists, primary care physicians, and hospitals as their future over the next 3 to 5 years.

The federal government is moving very fast on ACOs, and just like another business you need to get ahead of the curve. State governments are moving even faster with Minnesota, Michigan, Colorado, Massachusetts, Pennsylvania already having ACO like organizations operate in conjunction with Medicare.

Florida, Arizona and others are also moving this way as the money for these and similar programs are cut. The states are very interested in partnering with providers to hold the line on unnecessary care costs. Vendors and purchasing organizations, on their part, are taking a serious interest in forming ACOs. As the ground shifts underneath physicians, they are realizing they may be left out of these cooperatives that are being built. As Dr. Jack Lewin likes to put it, “Either you have a seat at the table, or you are on the menu.”

Another powerful trend is the consolidation and concentration of health care into larger and larger entities, many of whom may have the power to negotiate higher and more favorable rates. This may be an unintended consequence of health reform and raises anti-trust issues. How do physicians avoid anti-trust in forming ACOs?

You manage anti-trust by making sure physicians who are part of your organization understand the difference between competitive and anti-competitive behavior.
How do you do that? The first thing you do is read the document that the Federal Trade Commission prepared in 1966 that offers several pathways to “safe harbors” when physicians develop their own networks. The 50 page document says you have an exemption from antitrust if you are clinically integrated OR financially integrated. If you are taking capitation or at risk financially , you are exempt. Then the government doesn’t see you as a bunch of competitors, but as a cooperative group with a community benefit.

The same occurs when a group becomes clinically integrated, they are exempt because instead of being seen as competitors trying collude to a anti-competitive strategy you are building a cooperative strategy to improve quality.

But beware. If you are not truly clinically integrated, you are at risk for an antitrust action. In Chicago, an insurer challenged the Advocate health system as not being clinically integrated, and Advocate spent tons and tons of money defending themselves. But Advocate did take clinical integration very seriously. Now that they have done that, they have re-engineered their system to the benefit of both their hospitals and their physicians. Blue Cross Blue Shield has offered them an exclusive for their ACO bundled payment plan.

This example shows that ACOs offer a new pathway for physicians and the government for their mutual benefit.

Physicians need to read the FTC document, not sit in a room talking about price and contracts, and to hire a good antitrust lawyer to advise them. The Association of Health Care Lawyers has a whole list of qualified lawyers to advise on antitrust issues.

Definitely get yourself a good attorney to review what you’re doing. You do not need to apply to the FTC to proceed with an ACO, but you do need to follow the rules in the six pathways advised by the FTC. I think CMS will defer to the FTC to enforce the rules even though, as written CMS has that power today.

So, to conclude, “re-engineering” the health delivery system is underway. To navigate the maze, get yourself a good lawyer to avoid antitrust issues.

First you would want to find out who your best referrals are coming from and defines your virtual group. Talk with this series of doctors about what an ACO is and what could be done in terms of developing a loosely knit group to meet high performance standards

Once you have at least a core group to discuss the vision you need to get advice on operational ACOs and also get a lawyer to make sure you have a pathway through the clinical integration steps. There are a lot of good things in this health reform law for physicians. And there are a lot of good things being published by medical societies to help doctors avoid the pitfalls in forming an ACO. The Massachusetts Medical Society just published a one-page summary of what to avoid in forming an ACO. The Physicians Foundation is also preparing tools and background information to answer physician questions.

Physicians need to do their homework, even before hiring a lawyer, before proceeding with an ACO.

Tweet: In a Medinnovation interview, consultant Bill DeMarco says ACOs offer doctors the chance to make more money delivering quality care, #PPACA

Richard L. Reece, MD, blogs at Medinnovation and has a website under construction. He is the author of three recent books, Obama, Doctors, and Health Reform (Iuniverse, 2009), Innovation Driven Health Care (Jones and Bartlett, 2007), and an E-book, Pros and Cons of Accountable Care Organizations (Practice Support Resources, 2011). He works with The Physicians Foundation, a 501C3 organization representing physicians in state medical societies. Opinions expressed in his blogs are his alone. He can be reached at, 1- 860-395-1501

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