1. January, 2011
The effects of accountable care organizations on
corporate strategy
River Corporate Advisors
Newsletter
Introduction
The Medicare Trust is projected to go
bankrupt in 2017, causing the Center for
Medicare and Medicaid Services
(“CMS”) to intensify its efforts to “bend
the cost curve.” Traditionally, CMS has
addressed this issue by cutting provider
reimbursement, thereby forcing the
healthcare market to become more
efficient. While CMS will continue to use
this “tried and true” method to cut costs, it
must now shift from a fee for service
payment method to one that rewards
providers for cost savings. Through the
enactment of the Patient Protection and
Affordable Care Act of 2010, CMS has
now been empowered to create such a
vehicle called an Accountable Care
Organization (“ACO”). The advent of
ACOs has caused many healthcare
organizations to refine, revisit or revamp
their operating strategies. This article will
define ACOs, review the types of
reimbursement and organization
structures, discuss some of the issues to
their implementation, and examine how a
healthcare organization should address
this change in the healthcare delivery
system
ACOs Defined
I recently attended a conference featuring
a panel discussion led by healthcare
thought leaders from CMS,
consulting services and providers.
Frankly, they had a difficult time
defining “ACO.” While one moderator
humorously quipped, “ACO stands for
Accountant and Consultant
Opportunity,” it was not their fault there
is no true definition. CMS has yet to
issue the ruling defining ACOs and their
payment methods. Thus, we can only
make educated guesses at this point.
An Accountable Care Organization,
more of an evolution than a revolution,
is an umbrella structure that integrates
providers with a payment method and
performance measurement approach that
ensures accountability. Some refer to it
as “Staff Model HMO 2.0.” At the core
of the ACO is the “medical home,”
which consists of a team of healthcare
providers dedicated to patient care and
education. Think of it as “concierge
lite.”
One of the more cited examples of an
ACO is Geisinger Health System, a not-
for-profit, fully integrated, physician-led
health service organization that serves
2.6 million residents in 42 counties in
northeast Pennsylvania. The
organization consists of four hospitals,
800 primary and specialty physicians, 38
outpatient locations and a 230,000
member health plan.
The organization prides itself on
maintaining a robust information
technology platform that enables it to
manage patient care proactively, thereby
lowering hospital admissions and, in turn,
healthcare costs. While Geisinger has
built the exemplar of ACOs, it should be
noted that the organization lost $50
million in 2009. This fact leads me to
believe that the jury is still out on the
financial viability of the model.
Reimbursement and
Organizational Structures
CMS believes that the US healthcare
system must wean itself off of the fee-for-
services reimbursement method if it is
going to lower its cost structure. Further,
it should move to pay providers for
keeping people healthy, preventing
disease and disability and for coordinating
comprehensive chronic care.
While discounted fee-for-service,
capitation, and bundling will continue to
be important reimbursement
methodologies, shared savings programs
are designed to capitalize on the ACO
structure. In the shared savings structure,
CMS and the ACO establish an annual
budget based upon a rolling three-year
average less an assumed savings amount
and the patient population base. If actual
2. The Effects of ACOs on Corporate Strategy (continued)
healthcare expenses are lower than
budget, then the ACO would share in a
portion of the savings. This payment
would also be subject to the ACO
meeting certain quality measurements.
This new payment form will result in two
primary organizational structures: (i) the
“equity partner,” which is the owner of
the ACO; and (ii) the “shared savings
partner,” which is a contractor to the
ACO that is paid a bonus based upon the
cost savings and determined by the Equity
Partner. Those providers who are strictly
fee-for-service will be relegated to
subordinated roles in this system.
Implementation
The formal implementation of the ACO
system will take time and resources. The
primary impediments fall into three
categories: (i) structural; (ii) regulatory;
and (iii) legal.
Structural: To qualify to be an ACO, a
healthcare organization requires: (i)
extraordinary healthcare information
systems that can measure population
health analytics; (ii) skills to integrate
with physicians; (iii) exceptional
accessibility for its patients; (iv) ability to
manage and assume risk; and (v) strong
financial budgeting capabilities. What
entities have these resources? At this
point, it looks like the large Independent
Physician Associations and Hospital
Systems are in the best position to
capitalize on the ACO trend. However,
full integration requires all of the
healthcare providers from the general
practice to the multispecialty group to the
large acute hospital to coordinate care.
Presently, many of these entities are
fierce
competitors. So, in the near term, it is
unlikely that these various constituents will
start singing “kumbaya” and play nice with
each other.
Regulatory: To be an ACO, an
organization must be certified by CMS,
which has very limited resources.
Currently, there are only 4,300
administrators managing $800 billion of
healthcare claims. As of this writing, CMS
has yet to issue the rules defining and
regulating ACOs. In addition, while
Washington is enamored with Geisinger,
CMS will continue to experiment with the
ACO structure before endorsing their full
roll out. CMS is entering a long trial and
error period with the ACO model. While
there have been successes in some markets,
this model may be more difficult to
implement in geographies with varying
demographics.
Legal: There are a series of legal issues
that need to be thoughtfully considered in
establishing an ACO including the Stark
Rules and Corporate Practice of Medicine.
As we know, Stark prevents self referrals to
certain healthcare services. If the ACO is
fully-integrated with Equity Partners and
Shared Savings Partners, there will be
complex referral patterns. Some of the
referring physicians may now have an
indirect profit sharing arrangement if they
become Equity or Shared Savings Partners.
As a result, the Stark Rules could
inadvertently prevent these relationships.
Corporate Practice of Medicine prohibits
certain organizations from employing
doctors. Under the ACO system, many
doctors may chose to become employed by
larger organizations as the individual
practitioners will not have the resources to
compete in the new environment. While
there are plenty of ways to structure around
this issue, Corporate Practice of Medicine
may need to be amended to accommodate
the timely roll out of the ACO structure.
Conclusion
Whether the ACO trend takes hold or not,
the simple truth is that providers will be
experiencing higher volumes with lower
reimbursement per encounter. In addition,
over the last several years, CMS has created
the need for providers to become larger and
more efficient by reducing reimbursements.
The types of companies that will thrive in
the new healthcare environment fall into
two broad categories.
• Large Organizations: with strong
balance sheets and access to capital
that enable them to assume and
manage risk. In addition, larger
organizations have a better opportunity
to capitalize on operating efficiencies
and purchasing power. The need to
create larger organizations has been
driving, and will continue to drive,
M&A activity in the healthcare sector.
• Smart Organizations: which are those
that offer a healthcare service more
efficiently or can make an existing
provider more efficient. These entities
include those in healthcare information
technology, tele-medicine, wellcare
and chronic care companies.
If your company does not fall in these
categories, don’t panic. Smaller companies
will have time to review their alternatives as
implementation of the ACO structure will
take time. However, they should start to
consider either partnering or merging with
larger organizations In addition, smaller
companies should consider raising capital to
bolster their balance sheet and/or to invest
in new patient care technologies and
delivery systems.
