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Tests were inconclusive

California's experiment with ACOs raises questions about whether they'll save money

By Rebecca Vesely
Posted: November 1, 2010 - 12:01 am ET

Some say accountable care organizations are like unicorns: They want to believe in them, but they've never seen one. Others say ACOs do exist, and they know this because they've seen them in California.

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ACOs bring together providers and then reward them for taking responsibility for the quality of care for their patients while controlling costs. And everyone in healthcare seems to be talking about them these days.

In California, many providers have been working in ACOs for decades, and they say they can work well—although there are pitfalls and limitations. California ACOs could be models for providers in other parts of the country, but they also offer up lessons learned through the years of experience.

“It's not the type of organization that defines the success of an ACO, it's the leadership,” said Tom Williams, executive director of the Oakland, Calif.-based Integrated Healthcare Association, a leading provider quality and pay-for-performance group. “For success, there needs to be alignment between hospitals and physicians.”

Out of the hundreds of pages of the Patient Protection and Affordable Care Act, fewer than a dozen are devoted to ACOs. But those pages are causing a stir in the provider community. That's because the law gives providers incentives to start ACOs. The Medicare Shared Savings Program, slated to launch in January 2012, allows providers to set up ACOs that will account for the quality, cost and care of Medicare fee-for-service members for at least three years. The CMS is expected to issue regulations on the program in December or January. On Oct. 19, the National Committee for Quality Assurance issued a blueprint on ACOs for public comment.

The law also allows the new Center for Medicare and Medicaid Innovation to evaluate delivery system reforms, including ACOs, by January 2011. Medicare and Medicaid pilots on ACOs could start ahead of the shared savings program. Others are experimenting with pilot projects around the country.

Half of Californians

In California, the ACO experience springs from the managed-care boom of the past 30 years, according James Robinson, director of the Center for Health Technology at the University of California at Berkeley, who wrote a paper on the topic that was issued by the Integrated Healthcare Association last week.

About half of insured Californians receive their care through some type of ACO (See chart). The Golden State has 285 physician organizations with characteristics of ACOs. These ACOs run the gamut from Kaiser Permanente, the managed-care giant with 6.7 million members, to small-size independent physician groups. Hospitals also have foundations that employ physicians that coordinate care for patients.

In his paper, Robinson identifies 10 lessons of California ACOs that apply to the national debate. Aligning incentives and strong leadership are more important than the actual institutions, Robinson wrote. Also important are varied payment mechanisms, instead of a one-size-fits-all approach, such as capitation. Health plans must play a key role, and ACOs must not be fixed to only one insurance type. Regulation of the financial solvency of provider groups is important, as is balancing patient choice with care coordination, Robinson wrote in the 32-page report.

Sharp HealthCare in San Diego has been working on ACOs for decades. The Sharp Rees-Stealy Medical Group has 400 physicians in 28 specialties and capitation generates 70% of the group's revenues. The group provides care to 140,000 patients on a full-risk basis.

Jerry Penso, medical director for continuum of care for Sharp Rees-Stealy, says the system works like a car dealership. Typically, in our fragmented healthcare system, patients have to see different doctors for different problems, and pay each one separately, with no care coordination. Penso likens it to seeing a different mechanic for each separate car problem. Sharp works like a dealership in the sense that it coordinates the fixes on an auto such as a paint job, transmission and brake lights.

“What people really need is help navigating the system,” Penso said. “I think ACOs are trying to move us in the direction of the best aspects of managed care but still with freedom of choice.”

At Sharp, the patients in this capitation model are in HMOs. The challenge, many experts say, is moving ACOs beyond HMOs and integrated systems such as Kaiser Permanente. Nearly 60% of insured Americans get coverage through PPOs, and 13% are covered by consumer-driven plans, according to the Kaiser Family Foundation.

Even in California, global capitation has narrowed over the years. Beyond robust organizations such as Sharp, most capitation arrangements do not cover hospital stays or pharmacy anymore. This “weakened the incentives for ACOs to manage their most expensive components of healthcare,” Robinson wrote in the paper. “This, in turn, reduced the once-important cost advantage of the ACOs and their partner HMOs relative to the cottage industry of small physician practices and PPO insurance products.”

Can care coordination work in a PPO environment where consumer choice reigns?

“I personally think this is the biggest challenge to ACOs or coordinated care in general,” Robinson said at a conference on ACOs convened by IHA in Los Angeles last week. “Either you want coordinated care or you want free choice at any time. We can blend them to some extent and we should.”

In California, free choice appears to be winning out. Commercial HMO enrollment in California, for instance, is down 20% over the past five years in the state, excluding Kaiser Permanente, he said.

PPO coordination: An oxymoron?

Some are trying to turn this around. Pilot projects are under way in California that seek to collaborate among providers and payers across business lines.

Last January, the state's largest purchaser of health benefits, the California Public Employees' Retirement System, launched an ACO pilot in the Sacramento area, working with not-for-profit Blue Shield of California, Catholic Healthcare West and Hill Physicians Medical Group.

Data on the program's success won't be available until early next year, according to a Cal-PERS spokesman. But the system is already planning to expand the pilot to another region in the state beginning in January 2011.

Meanwhile, Sharp is in negotiations with a major insurance carrier to start an ACO pilot for PPO members, also in January, Penso said.

Two Southern California medical groups also are testing ACOs for PPO patients. Monarch HealthCare in Irvine and HealthCare Partners in Torrance are working with Anthem Blue Cross of California, a WellPoint subsidiary, on an ACO pilot. The medical groups are among the five sites nationally chosen to participate in the pilot run by the Dartmouth Institute for Health Policy and Clinical Practice and the Engelberg Center for Health Care Reform at the Brookings Institution. The five-year pilot starts in January and includes Anthem PPO members in Los Angeles and Orange counties.

Bart Asner, CEO of Monarch HealthCare, said patients and providers have to get on board and see ACOs in a positive light. “We think that patients will reap benefits,” he said. “Patients and doctors have to believe there is added value or it won't work.”

But there still are a lot of skeptics out there. Elliott Fisher, director of the Center for Health Policy Research at Dartmouth, is one.

“I am agnostic on ACOs,” he said last week at the conference in LA. “It might not work. Payers are deeply concerned about market consolidation. I think there's a danger that providers could see this as a zero-sum game.”

Can hospitals be the driver of an ACO? Absolutely, some say. Jay Crosson, founding associate executive director of the Permanente Medical Group at Kaiser Permanente, says hospitals can play a crucial role.

“There's the issue of the first-mover, who's going to come out and set this up?” Crosson said. “What I'm talking about more is where it should end up. Because physicians drive so much of the cost of healthcare, they need to be responsible ultimately.”

Asner said the rising cost of healthcare requires solutions, and ACOs could be it. “This is such a great opportunity, but if it is not successful, it threatens everything,” he said.

But that doesn't mean the California experience has all the answers, those interviewed agreed.

“We've got a lot of lessons learned in California, for good and bad,” Penso said. “We're not saying we know everything.”



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