Hot zones / dead zones: Local factors produce patchy national shift to ACOs

Over the past three years, the number of people covered under Eastern Maine Healthcare Systems' value-based payment contracts has swelled from 9,400 to 100,000.

In that period, the eight-hospital not-for-profit system has seen emergency department visits decline 2.8%, admissions drop as much as 21%, and primary-care visits jump 23.7%. The system calculates that it has lowered its per-member, per-month Medicare cost trend by 4.7%, and healthcare costs for its employees have grown less than 5%.

But as Eastern Maine's accountable care organization subsidiary, called Beacon Health, has achieved success in lowering costs and utilization, the system has seen reduced revenue from fewer admissions and procedures. Still, that's not stopping Eastern Maine from pushing ahead with its value-based contracts. “We can't continue to do business the way we've always done business,” said Jeff Sanford, Beacon's chief financial officer. “We're not going to sit here and let the change be upon us. We want to be part of the change.”

Maine is one of a few states that have more than 15% of their population enrolled in an ACO, which offers healthcare providers financial incentives for meeting cost and quality targets rather than paying based on the total number of services delivered. But across the country, the move toward value-based payments has been patchy, with some areas of the country moving much faster than others.

More health systems are reporting a higher percentage of their revenue from value-based contracts. But most of these contracts involve bonus-only models or supplemental payments linked to quality. The second and more demanding phase will be in assuming full upside and downside financial risk, said Phil Kamp, CEO at Valence Health, which provides technology and consulting services for value-based payments and population health management.

“The hard part for hospitals is in the transition,” he said. “Provider organizations are resisting this. What will happen over time is they'll realize they're better off in the second phase. They'll have more control.”

Factors such as market competition, experience with Medicaid managed care and the level of physician integration all play a role in the pace at which health systems adopt value-based payment models. There are also mounting pressures from the federal government and private-sector groups to make the shift. The CMS recently announced a three-year goal of having at least 50% of federal healthcare spending under contracts that reward quality and outcomes. In addition, a task force composed of providers, insurers and employers has committed to shift 75% of its members' business into contracts with incentives for health outcomes, quality and cost management by January 2020.

“This is a classic Malcolm Gladwell tipping-point story,” said Ken Kaufman, managing director of consulting firm Kaufman Hall.

Sanford said Maine has been ahead of the curve. “A lot of it has to do with the (healthcare) industry in Maine focusing on these issues before we knew what they were called,” he said.

Nationally, the number of lives enrolled in an ACO tops 20 million, representing about 6% of the population, according to a June report from Leavitt Partners' Center for Accountable Care Intelligence. But nearly 10% of those people, or 2.1 million, live in only three states, Colorado, Oregon and Utah, which have the most mature Medicaid ACO programs.

One of the unanswered questions for providers is whether they can stay in the black while holding down utilization and focusing on lower-cost care settings. For that reason, some systems don't want to be early adopters. “They're making money on fee-for-service,” said Kim Looney, a Nashville-based attorney at law firm Waller. “It will almost need to be a cram-down environment. When people have to, they will.”

Many systems that are choosing to take on financial risk are doing so as a market-share play. “They think they can drive more lives into their system,” said Dion Sheidy, a partner at advisory firm KPMG.

Providers that are best positioned to start taking on risk under value-based payment models are those with sophisticated health information technology systems, physician cooperation and enough market clout to change the delivery model, experts say. “Where you have dominant plans and dominant providers, they're more likely to have these value-based arrangements,” said Dr. Andrei Gonzales, director of value-based reimbursement initiatives at McKesson Health Solutions. “Size gives systems a little more breathing room to try out different models.”

A national survey of hospitals last month from Kaufman Hall found that 42.1% of respondents have more than 10% of their revenue coming from risk- or value-based contracts, up from 21.6% when the question was asked last August.

Advocate Health Care was the first system in Illinois to enter into a commercial ACO program, which grew out of discussions with Blue Cross and Blue Shield of Illinois in 2011. Advocate added a Medicare Shared Savings ACO the following year. And last summer, the 11-hospital system signed up to participate in Illinois' new Medicaid accountable-care entity program.

In 2014, the share of Advocate's revenue coming from traditional fee-for-service contracts declined to 32% from 82% in 2010. Fifty-five percent of its revenue comes from contracts that feature shared-savings bonuses and/or financial penalties if cost and quality targets are not met.

Advocate has had aligned physicians through Advocate Physician Partners since 1995. Despite that physician infrastructure, it still incurred $20 million to $25 million in additional costs for each year it has participated in an ACO program as it hired care managers and upgraded its technology infrastructure. Although it has lowered the cost of care, Advocate has not yet seen a financial return on its ACO efforts.

“We definitely have seen a loss of revenue because we've decreased length of stay and we've decreased admissions,” said Dr. Lee Sacks, the system's chief medical officer. “But we feel it positions us to move into more advanced products.”

Like providers, insurers have varied significantly in how fast they have moved to value-based contracting. Anthem, which operates Blue Cross and Blue Shield plans in 14 states, launched its value-based strategy in early 2013. Such contracts now cover 38% of the primary-care physicians and 23% of the commercial lives in those states—with $33 billion flowing through those arrangements.

Some markets are more sophisticated than others when it comes to having the infrastructure for effectively managing the health of enrolled populations, said Amy Cheslock, Anthem's vice president of payment innovation. “You have to be able to meet providers where they are,” she said. “It takes time to establish the care-delivery protocol.”

For contracting providers lacking that infrastructure, Anthem offers data and analytics on the enrolled population and helps them manage patients through the entire continuum of care, Cheslock said.

States with the most sophisticated infrastructure for managing population health tend to be the ones with the most experience with managed care. Oregon got a head start on ACOs in 2012 when it adopted coordinated-care organizations for Medicaid beneficiaries under a Medicaid waiver model to transform healthcare in the state. The not-for-profit coordinated-care organizations link hospitals, physician practices, community health centers, behavioral health providers and dental providers to deliver care for enrolled Medicaid populations. By 2013, Leavitt Partners estimated that 27% of Oregon's population was enrolled in an ACO.

Across the border, California also has a long history of managed care that created close working relationships between insurers and providers. While California had the largest number of ACOs, it had less than 10% of residents enrolled in one, according to Leavitt Partners.

But some states lack established integrated delivery systems and their physician communities are fragmented. Those factors have slowed the movement to ACOs or other value-based models in Alabama.

Like other hospitals in the state, 876-bed Huntsville (Ala.) Hospital has decided there isn't much benefit yet to forming an ACO. David Spillers, the hospital's CEO, points to low payments from insurers and low utilization rates in the economically depressed state as barriers to entering into risk-based payment models. “There's more risk than there is reward,” Spillers said.

Across the border, Tennessee also has seen sluggish ACO activity. Most of the enrollment has been in the Nashville area and the middle of the state. “ACOs have been slow in our market,” said Joe Landsman, CEO of the University of Tennessee Medical Center, based in the eastern Tennessee city of Knoxville.

UT had participated in the Summit Health Solutions' Medicare Shared Savings ACO, but Summit plans to leave the program to focus on a commercial ACO with Humana. Tim Young, Summit's CEO, said the Medicare Shared Savings Program wasn't a good fit for his group because the financial incentives are based on making progress against historical benchmarks and his group already provided low-cost care.

The investor-owned hospital chains, as a group, have been moving more slowly on ACO development than the not-for-profit systems, Waller's Looney said. That's in part because they lack the regional scope of some not-for-profits.

But for-profit Tenet Healthcare Corp. has embraced the ACO concept. It solidified its position with its 2013 acquisition of Vanguard Health Systems, an early participant in the Medicare Pioneer ACO program and bundled-payment initiatives. Still, less than 10% of Tenet's revenue would be considered at risk, CEO Trevor Fetter said. Commercial insurers account for about 40% of its revenue, and many aren't yet interested in risk-based payment contracts, he added.

Tenet doesn't feel constrained by the ACO-readiness of any particular market. “If you can build in better quality processes, it benefits everyone,” Fetter said. “Even if you don't have an integrated delivery network like a Kaiser, you can create something that's almost identical to it by contracting with physician groups and contracting with payers.”