The New Health Dialogue

As we work to implement health reform and change our health care system so that we pay for value and quality of services instead of quantity, health systems across the US will be testing several different strategies for quality improvement. One quality improvement concept generating a lot of buzz is the Accountable Care Organization or ACO. In this series of blog posts about ACOs, we will attempt to answer the question of what exactly constitutes an ACO, why we’re trying to make these things work in the first place, and what that has to do with the new health reform law. In this post, we look at what kind of entities can team up to form an ACO. Part I of this series can be found here.

Who can form an ACO?

In theory, health care entities of almost any shape and size could band together and form an ACO. They need a commitment to accountability, high quality, low cost and cooperation. In practice, certain types of providers are more likely to succeed logistically in forming ACO structures than others. For example, a really small group of physicians -- three to five doctors -- could form an ACO. However, they may find it nearly impossible to provide statistical data on the quality of care they deliver that is solid enough to justify reimbursement changes. Experts recommend about 5,000 patients to one ACO to mitigate statistical variation.

The more precise the ACO definition gets, the greater the literature diverges. Very basically, there are two types of ACOs: 1) physicians and health plans or 2) physicians and hospitals.

Physician Groups

One suggestion is simply to convert large physician groups into ACOs. Studies show that in most markets, physicians affiliated with multispecialty groups already have, on average, lower costs and higher quality. They have many of the qualities needed by a good ACO, like shared organizational culture, vision, values and clear goals, accountability and transparency of information, and patient-centered teamwork. They also have more resources to help track and coordinate care, using tools like a health IT system to share information.

Large physician groups, in the context of ACOs, usually mean either multispecialty group practices or independent practice associations. A large multispecialty group practice is an alliance of doctors who are financially and clinically integrated into a single practice. An independent practice association (IPA) takes this a step further -- physicians in (IPA) are legally affiliated into a kind of corporate entity, but still maintain their autonomy to practice and see whatever patients they want in their own offices. The IPA contracts with an HMO or other managed care organization and negotiates payments for its members, which can be anything from traditional fee for service, to fixed rates per number of patients, or something in between.

However, though it may be very plausible to convert large physician groups into ACOs, there simply aren’t that many large group practices in the United States. In 2001, only 4 percent of physician group practices in the U.S. had 100 or more member physicians, while approximately 75 percent of all practices were either solo or had less than 10 members. So, the physician and hospital structure for ACOs may be the way to go in the future.

Physicians and Hospitals

In addition to the large physician group structure for ACOs, another common suggestion for defining an ACO is a group of doctors (including primary care physicians and specialists) and at least one hospital. The idea here is that most doctors already have "go-to" or what Dartmouth's Elliot Fisher calls "primary" hospitals where they do most of their work and send most of their patients, which means it mostly likely wouldn't require dramatic upheaval in a physician’s day to day practices to form an ACO with the hospital. Fisher calls this the “extended medical staff model,” though there are alternative labels such as “Hospital Medical Staff Organization.” According to data from CMS, about 75 percent of Medicare beneficiaries are already informally part of local, relatively stable physician-hospital networks that serve about 5,000 beneficiaries, and 83 percent of these beneficiaries remain in the same network from year to year. Additionally, about 75 percent of the care Medicare beneficiaries receive comes from the primary hospital where their doctor tends to do most of his businesses, or from a “secondary” hospital where their doctor habitually sends most of his referrals.

A variation on this model is the Physician-Hospital Organization, which involves a jointly owned hospital and a specific subset of hospital staff whose economic interests are most aligned with the hospital. (This means that the ACO would be more of a joint economic venture between the hospital and the doctors, because it would involve the doctors with the greatest economic interest in success, not just any hospital staff member interested in participating.) About 1000 PHOs already exist, and though they are currently pretty loosely governed, formally integrating into an ACO could change the PHO into a more active manager of cost and care quality.

MedPAC encourages the inclusion of hospitals in an ACO structure because, they argue, care coordination means that doctors and hospitals will have to cooperate anyway, and hospitals have the power to bring parties together to facilitate joint decision making. (See their report here or our previous post summarizing it here). Also, MedPAC estimates that one of the big cost savers in an ACO will be reducing preventable hospital admissions and re-admissions (keeping you healthier and out of the hospital by providing more continuous care before and after you get there). And while healthier people is a good thing all around, MedPAC points out that keeping people out of hospitals means -- in the traditional payment system -- less money for hospitals. In new systems, hospitals would be able to share in the savings brought about by such quality improvements. Additionally, hospitals can provide a solid infrastructure for health information technology and electronic medical records, which is vital in the coordination of care because it allows for the simple (and secure) exchange of health information. The physician and hospital ACO can additionally incorporate other care settings into its partnership, such as ambulatory care clinics or home health services.

In the next post, we will look at how ACO payments are structured to promote high value care.