A linchpin of health care reform: accountable health care organizations

By: Stephen D. Zubiago

Improving the quality of health care services delivered and reducing the cost of such services must be among the primary goals of health care reform. At first blush, these goals may seem incompatible, but a proposal currently pending before the United States Senate includes provisions that would reform the health care delivery system through the use of accountable health care organizations (“ACOs”). Accordingly, the purpose of this article is to explain how ACOs could operate and to encourage our health care provider clients to focus on this potential linchpin of the reform of our health care system.

An ACO can be generally described as a local network of health care providers, including physicians and a hospital or hospitals, that can manage the full continuum of care of patients with the goal of improving health quality outcomes and reducing health care costs. The Senate proposal sets forth the following criteria for an ACO:

1. 2-year participation contracts between health care provider members and the ACO,
2. formal legal structure,
3. inclusion of primary care physicians,
4. a list of primary care and subspecialty physician providers to the Center for Medicare and Medicaid Services (“CMS”),
5. contracts with core groups of specialty physicians,
6. management and leadership structure for joint decision making, and
7. defined processes for promoting evidence-based medicine and reporting on quality, cost reduction, and coordination of care.

An ACO would change the health care system because ACO health care provider participants would receive payment for improving the quality of health care and reducing costs. According to the ACO proposal, CMS would predict a cost in a subsequent year for patients receiving their care from the ACO. Next, if the actual costs during the subsequent year were below this prediction and other health care quality targets (i.e., immunizations, primary care services, reduced hospital stays) were satisfied, part of the savings would be paid to the providers. Therefore, providers would have a direct incentive for “beating budget.” In addition, it is likely that health care reform laws would allow ACOs to qualify as a medical home, which would allow primary care physicians to take responsibility for coordination and longitudinal care and to receive bundled payments for a continuum of health care services as well as other incentives such as payments for adoption of health information technology.

An ACO could take many forms. Proposals include extended medical staffs for hospitals, multi-specialty group practices, physician hospital organizations (“PHOs”), interdependent practice organizations, and HMO networks. The extended medical staff would consist of single and multi-specialty group practices associated with a hospital that refer to one another and refer directly or indirectly to the hospital. There are approximately 1,000 PHOs in the United States and most are loosely governed and integrated but could be mobilized to achieve the goals of ACOs. Interdependent practice organizations exist in most rural areas and consistent of various independent practice associations that have strong leadership and governance as well as enough patients to support quality initiatives and investment in information systems. Finally, HMO networks would include an entity that takes on the risk of paying for health care services and delivering those services through employed physicians and hospitals that contract on a capitated basis. Such systems would have the size, financial resources, and clinical and financial integration that would lend itself to functioning as an ACO.

While ACOs have many positives, there are also several drawbacks. First, health care providers, specifically physicians, generally practice either alone or in small groups and tend to cherish their autonomy. A properly functioning ACO would require more integration and physicians would need to be willing to give up autonomy in exchange for financial incentives. Next, in order for an ACO to function properly, there would need to be changes in the laws and regulations related to kickbacks, fraud and abuse, antitrust, scope of practice, and the corporate practice of medicine. Those changes can be included in any health care reform legislation and are essential for the success of ACOs. Third, prior efforts aimed at health care reform in the 1990s encouraged physician/hospital integration in order to support a capitated payment system and/or exclusive networks. As the health care system moved away from these prior efforts, competition among hospitals has increased dramatically and physicians have become more entrepreneurial. Accordingly, the current state of the health care market may not be easily susceptible to the collaboration that ACOs would require.

While complex and having considerable hurdles, ACOs represent the kind of fundamental structural change the health care system will need in order to improve care and reduce overall spending. This will be a challenge to all health care providers and their management. We at Nixon Peabody stand ready to help you meet the legal challenges associated with this and any other part of health care reform.