The Cost of Quality

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It’s called an accountable care organization, or ACO, and it’s the hot concept in health care. But to Everett businessman Steve Neighbors, it’s more like a unicorn: “Everyone knows what it is, but no one’s ever seen one.”

To some, an ACO is a promising new way of organizing health care to improve outcomes for Medicare patients. To others, it represents a much-needed break with a current, flawed economic model. Some think it’s the last, best hope for preserving privately managed health care; others say it sounds like just the latest trendy acronym.

Dr. Gary Kaplan, chairman and CEO of Virginia Mason Hospital and Medical Center in Seattle, points to the daily influx of proposals from ACO consultants as a sign of how loud the ACO buzz is. Virginia Mason is considering forming an ACO, either alone or in partnership with another operation, such as Pacific Medical Centers, which focuses on physician services.

“I’d be shocked if virtually all the hospitals weren’t looking at it—to make sure they’re relevant in the market,” says Greg Vigdor, president and CEO of the nonprofit Washington Health Foundation, which aims to improve health and health care.

The specific catalyst for the boomlet is a provision in the 2010 federal Affordable Care Act that authorizes the creation of ACOs, described as organizations of health care providers that agree to be accountable for the quality and cost of the treatment delivered to participating Medicare recipients.

The sweetener for providers is that if the ACO delivers that care at a lower cost to the government than would otherwise be expected—based on expense history from the previous three years—then the ACO can share in the savings.

But what may be a more powerful force causing hospitals, clinics and insurers to catch ACO fever isn’t part of the federal legislation: It’s fear—fear that runaway health-care spending in a hard-pressed national economy could trigger far more draconian reforms than the ACO initiative.

“If we don’t embrace that [ACO initiative], what we’ll have is something we don’t want—something that eliminates the benefits in the United States that come from a market-based system,” says Kaplan at Virginia Mason, which operates several regional clinics in addition to its Seattle hospital.

Those benefits aren’t just BMWs and second homes in the San Juans for cardiologists. They include a high level of innovation and technology. But the problem is that, in the widespread view of hospital executives, clinic directors, insurers and others, the existing economic model for health care is “not sustainable.”

“The country is broke, and we’re not going to be able to continue to have these outrageous increases in health-care costs, and so something is going to have to change,” says Dr. Al Fisk, chief medical officer of The Everett Clinic, a 300-physician group practice that provides care to 295,000 patients a year across Snohomish County.

Growth in American health-care spending regularly outstrips inflation, and the nation now spends 15 percent of GDP on health care—more than all other countries. For United States employers, health-care costs could increase by 8.8 percent this year, some consultants predict, and the employees’ share of the bill could go up even more sharply.

“It’s getting harder and harder to find affordable health insurance,” says Neighbors, whose recruiting and staffing company, Terra Staffing Group, counts 40 workers on its permanent payroll. “It’s gotten out of control.”

The culprit, health-care wonks say, is that health services—like shoes, or ships or sealing wax—are treated as trade goods, meaning that the more the providers sell, the more revenue they generate. Whether that approach is really beneficial to the patient or not, hospitals have incentives to encourage more patient visits, order more tests and handle more procedures even if those things aren’t medically the best decision.

Says executive director Mary McWilliams at the Puget Sound Health Alliance: “We need to change the mindset from ‘I’ve got to get my revenue’ to ‘I’ve got to manage this cost.’”

The Health Alliance is a regional, nonprofit organization of providers, employers, unions, governments and others working to control costs and boost quality. To McWilliams, the potential for improving quality is part of the appeal of ACOs. “They reinforce bringing doctors and hospitals and other providers together in an organized system of care for patients,” she says.

Dr. James Lee of The Everett Clinic describes an ACO as “sort of like a medical neighborhood, where the entire neighborhood is involved with the patient.”

The idea is that in an ACO, the providers would follow the patient through the care process—from prevention to treatment to aftercare—coordinating their efforts to reduce unnecessary expense by avoiding duplication and basically keeping the patient healthier. A patient hospitalized after a heart attack, for example, would be contacted by a nurse after her release to make sure she is eating right, exercising and following her post-treatment routine.

“The savings come from not having that second heart attack—or from not having that second [magnetic resonance] image done because the first one was done at the hospital across town and we can’t get a copy of it, or having to rerun tests because I need them ‘right now,’” says Michael Foley, a spokesperson for Group Health in Seattle. “There’s a lot of redundancy and just plain old bad care that has happened” under the current system.

If providers can share in the savings that come from reducing treatment costs, then they could maximize their revenue by providing no treatment at all. That necessitates another, crucial element of an ACO: measuring the quality of care. In order to collect its share of any savings, an ACO must meet certain benchmarks to be set by the federal government, such as specified blood-sugar levels for diabetics or completion of annual mammograms by a certain percentage of female patients.

An ACO may seem a lot like a previous next new thing in health care, the HMO, or health maintenance organization. But there are some key differences. To begin with, a patient is not limited to obtaining treatment from a provider in the ACO. It’s conceivable that ACO patients wouldn’t know they were participating in an ACO. Actually, the ACO wouldn’t know, either—at least, not until the end of the year, when the Medicare charges for individual recipients would be added up. Those recipients who generated a certain percentage of their total from the ACO would be retrospectively assigned to its pool, for purposes of calculating costs and savings.

This “retrospective attribution” proved to be a sticking point for The Everett Clinic when it participated in an ACO-like pilot project Dr. Lee helped direct from 2005 to 2010, under a different federal health law, Fisk says. The clinic achieved savings in only one of the project’s first four years (fifth-year results are not available yet).

The after-the-fact counting greatly complicated management of the project, which ended up costing the clinic about $1 million in investments in patient monitoring, follow-ups and other health-management techniques, Fisk notes. Also, Medicare charges incurred by patients at other providers figured into the cost calculations—one reason ACOs may mushroom to take the soup-to-nuts approach.

Despite that experience, The Everett Clinic is involved in a two-year transition to a possible ACO. “It holds the potential of reimbursement more for value than just for the volume of service, and that’s a pretty dramatic change that many of us welcome,” Fisk says.

The change may be less dramatic at Group Health Cooperative, which cares for about 675,000 residents of Washington and Idaho. Like a handful of other organizations in the United States, Group Health both insures and treats its enrolled patients. Its physicians are salaried, and the co-op benefits from restraining the cost of care.

“We do better financially when the patient does better,” Foley says. “If you’re a hospital and you make medical errors, and the patient keeps coming back to the hospital because of those medical errors, you still make money. At Group Health, if you make medical errors, you start to lose money.”

Group Health has become less HMO-like by networking with Virginia Mason, The Everett Clinic and other providers—and it’s talking with Providence Sacred Heart Medical Center in Spokane about forming a partnership outside of Medicare, Foley says.

That change reflects the clout of the federal government—Medicare is the single largest payment source for health care—in shaping reform throughout the industry. Mountlake Terrace’s Premera Blue Cross, a nonprofit that sells private health insurance to employers and individuals in Washington, Oregon and Alaska, is talking to providers about linking up in what it calls an “incentivized provider care program,” says Bill Akers, vice president for health-care delivery systems. He hopes the approach will moderate cost increases. “Moving away from fee for service, and rewarding value and evidence-based medicine—absolutely, it’s the right way,” he says.

Exactly what the first ACOs will look like is not clear. The launch date is not until 2012, and no one is sure they will deliver on their promise. “It’s complicated. It’s controversial,” McWilliams adds.

Dr. Eric Larson, executive director of the Group Health Research Institute, the resarch arm of Group Health Cooperative, is skeptical ACOs will actually work. “One person’s excess capacity,” he points out, “is another person’s job, or business, or scanner or surgical center. There are so many people who have so much at stake and so much to lose.”

Regardless of whether or not ACOs succeed under current rules, there is widespread recognition that health-care institutions will have to evolve toward ACO-like entities to survive. That’s because government, which has so much power as a provider, payer and regulator, is moving health care in that direction as the only way to rein in costs. Large medical systems like UW Medicine, Group Health and Swedish Medical Center have all been making strategic alliances in an effort to reduce costs while improving services.

“I’ve been in the business for almost 20 years, and it does feel to me like the first substantive change to everyone’s approach,” says Premera’s Akers. “It is such a fundamental change, and we’re not likely to hit the right balance of all of those things, with all of the programs, right away. But I don’t think that anybody thinks we should back off that fundamental change.”

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