Michael L. Millenson is a Highland Park, Illinois-based consultant, a visiting scholar at the Kellogg School of Management and the author of Demanding Medical Excellence: Doctors and Accountability in the Information Age. 

A radical change just getting underway in the U.S. health system could transform how medical treatment has been paid for since Hippocrates made his first house call. But the new payment method faces conflicting dangers: either it won’t be strong enough to upend entrenched incentives or it will be so successful it will prove too politically disruptive to survive.

The “accountable care organization” replaces the idea of reimbursing individual doctors and hospitals by procedure with a lump-sum payment to clinicians working as a formal ACO team. Under the terms of the Affordable Care Act, a Medicare ACO agrees to be responsible for all the care needs of a group of patients and to be paid based on those patients’ health outcomes, satisfaction and costs.

The federal government recently announced that Medicare ACOs are now serving more than a million elderly Americans in locales as diverse as Los Angeles County, the Mississippi Gulf Coast and New York City’s Chinatown. That number is expected to at least triple by year’s end. At the same time, most major insurers are also experimenting with ACOs, leading to a potentially powerful convergence.

“This is a vast change,” said Dr. George Lundberg, editor-at-large of MedPage Today and former editor in chief of the Journal of the American Medical Association. “It is a credible way to move the health-care system.”

Millenson

But as Lundberg and others caution, that credibility will be tested as ACOs move from concept to reality.  

The drawbacks of fee-for-service reimbursement are hardly secret. In 1909, the playwright George Bernard Shaw wondered why “any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg.” A century later, McKinsey Global Institute identified “payment for more care rather than more value” as one reason U.S. medical spending is more than 25 percent higher per person than even in other industrialized nations.

ACOs explicitly target the “value versus volume” problem. In an ACO, a group of physicians and a hospital share clinical and financial responsibility for providing all care needed by a group of patients whether in the hospital or outside it. Rather than each procedure propping up the bottom line, the partnership prospers by keeping patients healthy and meeting clinical and cost-effectiveness goals. The intent is to reward quality, not quantity, of care.

ACOs differ in important ways from the last two major attempts to infuse cost-consciousness into American medicine. In the mid-1980s, with Medicare in crisis, Congress changed how hospitals were paid. The old “cost-plus” system, giving every hospital a guaranteed profit margin, was replaced by a “prospective payment system,” in which Medicare would pay a flat fee set in advance and based on each patient’s diagnosis, not each hospital’s costs. Following that change, the average length of a Medicare hospital stay plunged, and many private insurers adopted the same payment model.

In the mid-1990s, health maintenance organizations and other private insurers moved to more restrictive managed care contracts using a variety of fixed payment schemes meant to push providers to reduce unnecessary care, or lose money. At the height of managed care’s influence, the average rate of health insurance premium increases dropped to less than a third that of both general inflation and workers’ raises.

Both victories proved short-lived.

With Medicare, there was a backlash against patients being discharged “quicker and sicker” that subsided when initial anecdotes proved overblown. Still, hospitals soon found ways to move care to the outpatient setting or other places where prospective payment didn’t apply.

With managed care, the backlash was more sustained. A spate of horror stories attributed to sharp cutbacks in genuinely needed care – such as new moms being discharged within 24 hours, ready or not – sparked a political uproar that ultimately persuaded insurers to loosen the rules.

ACO advocates have tried to learn the lessons of both too tight and too loose controls. For example, the “alternative quality contract” designed by Blue Cross and Blue Shield of Massachusetts, considered a model for ACOs, addresses the cost-shifting that allowed facilities to work around prospective payment by including inpatient and outpatient treatment, pharmacy and behavioral health.  At the same time, to protect providers from feeling unfair financial responsibility, the contract includes adjustments for factors such as general inflation and how healthy a particular group of patients has been.

Unlike prospective payment or managed care, ACOs also include a long list of rules meant to balance cost-containment incentives. Medicare requires ACOs to be run by hospitals or doctor groups – not insurers – and beneficiaries can seek care outside the ACO without financial penalty. Moreover, the government has mandated 33 publicly disclosed quality measures related to care coordination and patient safety, preventive health services, at-risk populations and the patient experience of care.

“You don’t get paid a dime if you don’t hit the quality metrics,” said Donald Fisher, president of the American Medical Group Association, a strong proponent of the concept.

Hopes run high. In a recent blog post, Lundberg wrote that ACOs could help “build a new medical world based less upon … lucre, and more on … outcomes” such as keeping patients healthy and treating illness effectively. Providers would no longer profit from catering to the “worried well.”

But the potency of that profit potential is exactly what concerns ACO skeptics. Establishing a Medicare ACO is voluntary and current financial rewards are modest, mostly due to fears that larger financial incentives might trigger accusations of “rationing” at a time when the political consensus for innovation is fragile. That raises the question of why providers should forego fee-for-service until forced to do so.

Lawrence Casalino and Stephen Shortell, two well-regarded academics, note that under the largest Medicare ACO program, “even an efficient, high-quality ACO will gain less money from sharing in savings than it would have earned if it had simply continued with business as usual.”

Going forward, the balance of ACO risk and reward will be crucial. Even if the health reform law is overturned, the concept has had bipartisan political support. Moreover, the Medicare fee schedule for physicians and prospective payments to hospitals is failing to keep pace with medical inflation, even though Congress staved off a 27 percent reduction in physician fees that had been scheduled for March 1. In this continued era of fiscal austerity, Medicare can either pay all providers less and less money for all the care they give or slow costs by paying an adequate reimbursement to doctors and hospitals providing high-value care. That’s where ACOs come in.

“The system cannot and will not pay what it has in the past,” said economist Michael Chernew, a professor of health care policy at Harvard Medical School. “The boat is sinking, and they’ve built a reasonable life raft.”

Chernew says an ACO-type contract allows providers to reap the benefits from providing more efficient and effective care. That’s one reason he believes ACOs are now being offered by even high-profile and prosperous organizations, such as Harvard-affiliated Partners HealthCare System.

Medicare has authority to create incentives for all providers to join ACOs without having to go back to Congress for permission. That’s unusual. “If it works, it’s easy to expand,” said Andrew Croshaw, a partner in the health care practice of Leavitt Partners.

And if that indeed happens, says AMGA’s Fisher, “this is the beginning of the end” of fee-for-service medicine.

This article was produced by Kaiser Health News with support from The SCAN Foundation.