Physicians versus Hospitals as Leaders of ACOs

[CAL/AAEM News Service]

November 10, 2010
Physicians versus Hospitals as Leaders of Accountable Care Organizations

NEJM
Robert Kocher, M.D., and Nikhil R. Sahni, B.S.
Enactment of the Affordable Care Act (ACA) was a historic event. Along  
with the Recovery Act, the ACA will usher in the most extensive  
changes in the U.S. health care system since the creation of Medicare  
and Medicaid. Under this law, the next few years will be a period of  
what economists call “creative destruction”: our fragmented, fee-for- 
service health care delivery system will be transformed into a higher- 
quality, higher-productivity system with strong incentives for  
efficient, coordinated care.1 Consequently, the actions of physicians  
and hospitals during this period will determine the structure of the  
delivery system for many years. The implications will be profound for  
hospitals’ dominant role in the health care system and for physicians’  
income, autonomy, and work environments.

The ACA aims to simultaneously improve the quality of care and reduce  
costs. Doing so will require focused efforts to improve care for the  
10% of patients who account for 64% of all U.S. health care costs.2  
Much of this cost derives from high rates of unnecessary  
hospitalizations and potentially avoidable complications,3 and these,  
in turn, are partially driven by fee-for-service incentives that fail  
to adequately reward coordinated care that effectively prevents  
illness. The ACA includes numerous provisions designed to catalyze  
transformation of the delivery system, moving it away from fee for  
service and toward coordinated care.

These provisions will result in incentives for the development of the  
information systems and infrastructure necessary for better and more  
efficient management of chronic conditions. Such outpatient changes  
will be reinforced by hospital readmissions policies that improve  
handoffs and by initiatives to reduce the occurrence of hospital- 
acquired infections and “never events.”The desired consequence of  
these changes is enhanced tertiary prevention, leading to substantial  
reductions in unnecessarily expensive specialty referrals and tests  
and avoidable complications. And the ultimate consequences should be  
significant improvements in health and fewer exacerbations of chronic  
illnesses.

Achievement of this level of care coordination will require the  
development of larger integrated delivery organizations — preferably,  
accountable care organizations (ACOs) that incorporate primary care  
practices structured as patient-centered medical homes and that can  
support new investments in information systems and care teams and can  
maintain service hours resembling those of retailers.4 A move toward  
ACOs will mean major changes in the structure of physicians’  
practices, since even physician-group–based ACOs may include one or  
more hospitals, though they may instead contract with hospitals for  
specific services chosen on the basis of their relative value.

Larger ACOs are likely to be contracted directly by payers to manage  
the continuum of care. They are also likely to bear financial risk,  
receiving greater payments for the care of chronically ill patients  
and accepting at least partial responsibility for the costs of  
specialists’ visits, tests, emergency room visits, and  
hospitalizations. Memories of the inflexible managed-care gatekeepers  
of the 1990s could lead to theoretically permissive, if practically  
narrow, networks of providers, although these organizations will need  
to work closely with a small group of efficient specialists and  
facilities to achieve their quality and efficiency goals.

A crucial question is who will control these ACOs. We can envision two  
possible futures: one of physician-controlled ACOs, with physicians  
affiliating and contracting with hospitals, controlling the flow of  
funds through the marketplace; and one of hospital-controlled ACOs  
that will employ physicians. Whoever controls the ACOs will capture  
the largest share of any savings.

For physicians to control ACOs, they would have to overcome several  
hurdles. The first is collaboration: ACOs will require clinical,  
administrative, and fiscal cooperation, and physicians have seldom  
demonstrated the ability to effectively organize themselves into  
groups, agree on clinical guidelines, and devise ways to equitably  
distribute money. Nearly three quarters of office-based physicians,  
representing nearly 95% of all U.S. practices, work in groups of five  
or fewer physicians.5 Since much of the savings from coordinating care  
will come from successfully avoiding tests, procedures, and  
hospitalizations, the question of how to divide profits among primary  
care physicians and specialists will be contentious. Proceduralists  
who would end up losing income are likely to resist key structural  
changes.

In addition, ACOs will require sophisticated information technology  
(IT) systems and skilled managers in order to hold clinicians  
accountable. Historically, doctors have not shown the willingness to  
assume more capital risk or to invest in overhead. Finally, memories  
of the failed capitation models of the 1990s may make some physicians  
hesitant to participate.

If hospitals are to control ACOs, they, too, will need to overcome  
barriers. First, they will need to trade near-term revenue for long- 
term savings. Hospitals are typically at the center of current health  
care markets, and by focusing on procedures and severely ill patients,  
most have been fairly profitable. Building an ACO will require  
hospitals to shift to a more outpatient-focused, coordinated care  
model and forgo some profits from procedures and admissions.  
Hospitals’ decisions will be further complicated if payers do not  
change their payment models similarly and simultaneously.

Second, hospitals, which have generally struggled to operate  
outpatient practices effectively, may have difficulty designing ACOs.  
Acquiring practices and hiring physicians as employees typically  
reduce the physicians’ incentive to work long hours and, therefore,  
reduce their productivity.

It is unlikely that one of these ACO models will dominate throughout  
the country; local market conditions will influence which one prevails  
in each community. In geographic areas where the physician base is  
fragmented and physicians are unlikely to collaborate or where there  
are already well-established hospital-based health systems, hospitals  
are likely to dominate. In areas that have well-functioning physician  
groups, with working IT systems and effective management systems,  
physician dominance seems more likely. In many other markets, the  
future is open. In these places, hospitals have the advantage, since  
they traditionally have more management talent, accounting capability,  
IT systems, and cheaper access to capital than do physician groups.

Holding off on creating ACOs is likely to be a bad long-term strategy  
for physicians. First, health care reform has passed, bringing  
extensive changes, and it would be very difficult to repeal or modify  
the ACA so as to delay reforms. Congress’s pay-as-you-go rules would  
require lawmakers to find equivalent savings if they discarded ACA  
provisions that were expected to save health care dollars — especially  
at a time when there is tremendous pressure to use any available  
savings to reduce the deficit. Moreover, policies pursued by the new  
Independent Payment Advisory Board will probably increase the pressure  
on providers to coordinate care and form ACOs. Finally, private health  
plans are facing even more pressure from employers and state insurance  
commissioners to control premiums.

Established institutional relationships tend to persist because of  
“path dependence”: decisions about the future are constrained by  
decisions made in the past, even though circumstances may change.  
Although it is unequivocally inefficient, inequitable, and otherwise  
problematic to finance health care with a combination of employer- 
based coverage, Medicare, and Medicaid, it has proved impossible to  
change this structure. Similarly, once the new payment system and  
other changes included in the ACA transform the relationship between  
hospitals and physicians, the new order will become entrenched and  
persist until the next period of creative destruction.

If physicians come to dominate, hospitals’ census will decline, and  
their revenue will fall, with little compensatory growth in outpatient  
services, since physicians are likely to self-refer. This decline  
will, in turn, lower hospitals’ bond ratings, making it harder for  
them to borrow money and expand. As hospitals’ financial activity and  
employment decline, their influence in their local communities will  
also wane. And it will be hard for them to recover from this  
diminished role.

Conversely, if hospitals come to dominate ACOs, they will accrue more  
of the savings from the new delivery system, and physicians’ incomes  
and status as independent professionals will decline. Once relegated  
to the position of employees and contractors, physicians will have  
difficulty regaining income, status, the ability to raise capital, and  
the influence necessary to control health care institutions.

Therefore, the actor who moves first effectively is likely to assume  
the momentum and dominate the local market. A wait-and-see approach  
could succeed if the first mover executes poorly, failing to  
coordinate care and manage risk. But rather than controlling destiny,  
cautious actors will be hanging their fate on the mistakes of others.

In the early 20th century, the health care system changed dramatically  
with the introduction of antisepsis and the increasing safety and  
success of surgery: hospitals gained power as they became associated  
with hope and health rather than fear and death. Now, after decades of  
hospital hegemony, we stand at another crossroads; physicians may be  
able to gain market leadership if they move first. How the development  
of ACOs plays out over the next few years is likely to have lasting  
implications for the practice of medicine, patients’ experience of  
health care, and health care costs in the United States. The next  
decade will be critical for developing an effective model and making  
historic changes in the structure of our health care system.

This article (10.1056/NEJMp1011712) was published on November 10,  
2010, at NEJM.org.

Disclosure forms provided by the authors are available with the full  
text of this article at NEJM.org.

Source Information
 From the McKinsey Center for U.S. Health System Reform and the  
Engleberg Center for Health Care Reform, Brookings Institution — both  
in Washington, DC (R.K.); Harvard Business School, Boston (N.R.S.);  
and the John F. Kennedy School of Government, Harvard University,  
Cambridge, MA (N.R.S.).




Anna Parks &
Brian Potts MD, MBA
Managing Editors, CAL/AAEM News Service
University of California, Irvine


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