Health Care: End the 'Perverse Incentives'

Imagine you were a diabetic whose doctor developed a customized plan to help keep the condition in check. Imagine a team that monitored blood sugars remotely and called you periodically to see how you felt. Imagine your doctor knowing when you experience a diabetic episode, with an appointment automatically scheduled to address it that day. Imagine seeking more intense treatment at a hospital whose staff already knew your history and could discuss follow-up care with your doctor. Here's the best part: Imagine getting all this for less than you pay today.

Sound unbelievable? With health-care costs rising every day, consumers—and even providers—have reason to be skeptical that a utopian world of good care at a good price could ever exist. But this is the future promised in Accountable Care Organizations (ACOs), a new model designed to reduce spending by improving health, eliminating inefficiencies, and preventing costly complications.

There are two premises underlying ACOs that make them unique and unlike past efforts to contain costs, including Health Maintenance Organizations (HMOs). First is the need to change the way we pay for health care. Today's health-care providers are paid by the number of office visits, tests ordered, and procedures performed, regardless of whether these services yield a better outcome. The system rewards volume: the more services consumed, the higher the payments. This approach has had disastrous effects, including runaway spending and insurance premium increases that reached an estimated 17.3 percent of U.S. gross domestic product in 2009, the largest one-year increase in history.

ACOs propose to fix this system of perverse incentives. Rather than paying for treatments when people get sick, caregivers in an ACO would be held accountable for keeping patients well. Their reward is a portion of the funds that are saved when people improve their health and require less care.

Cheaper To Prevent Than To Amputate

Diabetic care today costs insurers an average of about $30,000 a year, most of which goes toward treating expensive complications. An oft-cited example of today's absurdist approach to health care is that many insurers will not reimburse $150 for someone to get a routine foot checkup, but nearly all will pay $30,000 for a foot amputation, an all-too-common remedy in advanced cases of diabetes. In the ACO model, there would be a significant investment in the preventive care needed to avoid the expensive amputation, obviating the hospital visit. In such a scenario, average diabetic care costs could be reduced to $20,000. The ACO could keep a chunk of the $10,000 savings as a new form of reimbursement. Moreover, doctors who achieve such quality enhancements would be able to earn bonus pay for better care and reduced costs. The reward is no longer based on consumption, which HMOs tried to restrict. Instead the incentive is for doctors to make decisions to improve a condition, which benefits patients, insurers, employers, and doctors alike.

A second break with the past is the onset of the notion that we must overcome fragmentation in health care. In our current system, people are passed among doctors, specialists, clinics, hospitals, and others, often without coordination of care or discussion by providers. This frequently means that vital information is unavailable when a clinical decision needs to be made, leading to duplicate or conflicting treatments, waste, and unnecessary expense. The Congressional Budget Office estimates that up to 30 percent of all health-care dollars are wasted in unnecessary or duplicate care, with no corresponding benefits in outcome.

In contrast, when working as part of an integrated ACO, doctors, specialists, nurses, long-term care providers, and others are all part of a united team that provides seamless access to care, any time, anywhere. That sort of teamwork will ensure that clinicians have the information they need to provide effective treatments to improve health. Because they will be measured and rewarded based on their ability to balance cost containment and quality improvements, ACOs will satisfy patients—something at which HMOs have failed.

Changing a Culture of Skepticism

This is easier said than done. For all its sophistication, health care is factionalized. Providers lack expertise at working cooperatively and there are few incentives to foster that level of coordination. With doctors and hospitals, incentives can even be adversarial: Doctors make clinical decisions, including whether or not to use expensive medical technologies, while hospitals bear all the costs. Changing that culture of skepticism will be challenging, even in an aligned model.

The new organizations will require an extensive investment in technologies to improve coordination and convenience, such as electronic health records. Even with the government's investment in health technology, adoption will cost dearly and prove technically complex. RAND puts the adoption costs at $7.6 billion annually.

Legal barriers stand in the way, too. Outdated laws bar hospitals from sharing efficiency savings with doctors unless the physicians are employees. These policies must change so that loose hospital-doctor cooperatives can operate as ACOs, functioning as teams on behalf of patients while preserving independent ownership and autonomy. This can't happen until federal agencies such as the Justice Dept. and the Federal Trade Commission make clear that integrated models do not violate antitrust and other laws. Without such clarification, ACOs are unlikely to flourish in the private market.

Perhaps most important are the many unknowns in the world of ACOs. If a group reduces costs, what portion of the savings should it keep? How should payments be divided among doctors, specialists, nurses, and others providing care? What financial benefits will flow to patients? How should ACOs be organized and led? How fast can they be implemented, given the cultural, financial and operating changes required?

Premier Healthcare Alliance: Testing

The only way to answer these questions is through experimentation. This is what 25 health systems—integrated delivery networks of hospitals, physicians, and a range of acute care services—in the Premier healthcare alliance have been doing for close to a year. We're testing a variety of ACO approaches in more than 80 hospitals in 19 states that will serve as models for the nation as we move to more accountable health care.

Through our experience in collaborating, we've learned that there is no "one size fits all" approach. Today's emerging models need to be flexible and customized to meet a given community's competitive conditions, care needs, and physician make up. Moreover we've learned that a range of payment models needs to be tested. These include a near-term approach that entails fee-for-service reimbursement with the potential for bonuses based on quality and efficiency gains, as well as those that provide monthly or yearly payments for care, allowing the ACO to keep any funds that go unused—provided quality goals are achieved.

The work ahead will be difficult, but we must have the courage to test this new idea in health care. The U.S. Medicare program has already embarked on this road and will in 2012 implement an ACO program based on shared savings. To ensure continued success, we first have an obligation to prove this concept in the private markets. It's the only way we will be able to move away from a status quo that offers myriad known pitfalls for consumers—not to mention the federal budget. ACOs have the potential to shift the focus from treating the sick to keeping people healthy. Although we don't yet have all the answers, I believe we're finally on to something that will create a better, more sustainable future.

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