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An Explanation about How ACOs May Save Money

Posted Apr 25 2013 12:00am

I have never quite understood how accountable care organizations (ACOs) are supposed to reduce the cost of healthcare although many hospitals have been creating them, often with the help of consultants (see: Hospital Executives Search for the Formula for an Accountable Care Organization ). I recently came across a clear explanation about how ACOs are designed to work (see: ACOs Won't Work According to Clayton Christensen in the WSJ ). Below is an excerpt from the article (see: A Health Provider Finds Success in Keeping Hospital Beds Empty ):

[T]he Affordable Care Act, President Obama’s health care law, has helped encourage a shift to [ Advocate Health Care's ] payment model. Such agreements were merely a theory four years ago. But an estimated 428 accountable-care organizations now cover four million Medicare enrollees and millions more people with private insurance. Under Advocate’s deal with Blue Cross Blue Shield, certain patients are assigned to the accountable care framework — about 380,000 — and their health costs are projected. If Advocate achieves savings below that amount while meeting explicit quality targets, it splits the money with the insurer. If not, its revenue is at risk. In some ways, accountable care resembles earlier efforts to control medical spending, including the health maintenance organizations that proliferated in the 1980s but fell out of favor, in part because they severely limited patients’ choices. But accountable care differs by giving doctors and hospitals a direct financial stake in saving money and a reason to invest in various programs of preventive care rather than relying exclusively on the fees they would normally earn from providing services....To help control costs, Advocate has hired scores of workers to coordinate care and keep an eye on the highest-cost patients, like those who are obese or have diabetes. It started providing doctors’ offices with report cards on their performance. Dozens of quality-control measures cover items as varied as blood pressure, rehospitalizations for asthma attacks or the use of expensive imaging machines....Advocate, a faith-based nonprofit, has an advantage over other health systems just jumping into what is more broadly known as “value-based care.” In the late 1990s, well before it forged its contract with Blue Cross Blue Shield, Advocate began taking steps to control costs and improve quality. 

For me, it doesn't get any clearer than this. Advocate has a deal with Blue Cross Blue Shield encompassing a defined population of 380,000 patients for its ACO. Future healthcare costs for this group of patients are estimated. Advocate personnel then employ various preventive measures to reduce the healthcare costs of these patients while simultaneously maintaing the overall quality of care for them. If the costs experienced by the patients fall below the projected costs, the hospital system gets to split the savings with the health insurance company. Obviously, the Advocate personnel will seek to focus their preventive measures on the highest cost patients in the group such as those who are obese or have diabetes because this is where the greatest payoff lies. All of this makes perfect sense to me. Provide financial incentives to promote preventive care to at-risk patients.

I suspect that most hospital executives will be taking a hard look at their ACO options in the future and try to assess whether their best course of action is to embrace this approach or to continue business as usual. This would involve admitting more patients to the hospital, performing more surgical procedures, and not emphasizing preventive care. Remember that many such executives have large physical plants to maintain and employees on their payrolls. If preventive medicine begins to take hold and reduces hospital admissions, many cities may be overbedded. This could lead to the development of bedless hospitals, a concept discussed in a previous note (see: The Future of Healthcare: Virtual Physician Visits & Bedless Hospitals ).

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