ACOs: US Health Care is Doomed to Repeat History If We Ignore Our Past

No Comments

altEveryone seems to be talking about this new idea called Accountable Care Organizations. However, the best way to look at these may be as a recycled product.

Everyone seems to be talking about this new idea called Accountable Care Organizations. However, the best way to look at these may be as a recycled product.


We have been down this road before, and even though similar programs did not proliferate as expected, the basic concept of building integrated networks of care is essential to the future. In terms of payment structures, in the end, all health care financiers are trying to shift the risk from the insurer/payer to the providers and hospitals. With that, we have a very long history of what works, and what doesn’t. Perhaps it’s time to pull out the old videotape.

First, a little history lesson.
Everyone my age remembers two things: where they were when they heard that President John F. Kennedy was shot, and where you were when managed care came to town. While the former was a terrible tragedy that shocked the world, the second pretty much played out with the same end result. From the mid-1980s to early 1990s, I lived in California with an environment that was rapidly changing in terms of the healthcare marketplace. Managed care was expanding rapidly and payment models changed so rapidly that the California healthcare landscape was known as the “War of the West.” It was truly the wild, wild West.

I was a long-haired, young buck running the Stanford emergency department, and quite new to all this healthcare financing debate. Luckily, Stanford Hospital is on the university campus, was surrounded by fabulous resources. We had the Stanford Business School nearby with both great executive coaches and well-known health economists. There were also connections with the emerging healthcare practice of the Advisory Board Company and a plethora of outside consultants who kept us dancing to constantly changing tunes.


As a young faculty member, I learned a lot of things. Looking back at how different changes in healthcare financing by payors created different responses by providers and hospitals is enlightening and worth reviewing as we ramp up for yet another period of change.

Managed care grew with the promise of keeping costs down and improving quality of care. In truth, it was all about the money, and we certainly felt that. Managed care is actually managed finances, and healthcare providers and hospitals are amazingly chemotactic to the spigot of money. Each year, the hospital created committees to participate in an “Operations Improvement” Task Force, which is Latin for “severe budget cut.”

The first salvo from managed care was something called discounted pricing. For example, the managed care organizations said that they would pay the hospital $25 for a CBC. The first thing we had to do is find out what it really cost us to do a CBC. To our surprise, we didn’t know! So that we could identify the entire cost of a test, Stanford put us through Deming process training, where we learned how to outline the steps required from when a test was ordered until completion and when the results were ultimately charted. Even more to our surprise, our cost was more like $50. Not good. We had to re-engineer the process, eliminate waste and drop the cost so that we could make a margin on the test. The good news is that the committee was able to get the cost down to about 20 bucks and, God forbid, decided everybody needed at least seven CBC’s per day. You can’t be too careful.

After about 22 months of this particular dance, the managed care organizations came back and said, “Aha! How about this. We’ll no longer pay for each test, just a fixed payment per day. Order all the tests you want. Good luck with that!”


So, once again, the Operations Improvement Task Force was put to work and found ways to decrease the cost of care per day. That same group also determined that patients now needed to stay additional days in the hospital. Check. Your move.

Then the managed-care organizations were really scratching their heads. That didn’t work either. So, in about 22 months, they come up with a new program. “Hey. Guess what. We’ve got a new plan. It’s called Diagnosis Related Groups, or DRGs. For each admission, we’ll pay you a global fee. You get the whole fee, but you also pay for all the costs of the admission. Have fun.”

At that point, the name of the game was to get those people out of hospital as soon as possible. I mean really? Do patients really need to stay four long days for major illnesses? It is much safer at home. Patients can catch a nasty bug in the hospital. Really, it’s for their benefit.
This shift did create some alignment with other services and prompted programs such as clinical pathways and dialog about utility of various tests, but the effects were muted over time due to misalignment of financial incentives. Hospitals were paid DRGs, but providers were paid fee-for-service, albeit at lower rates.

Eventually, the managed care players were finding that the best way to ensure profits was to better manage their financial risk. If they could throw that risk across the table to the providers and hospitals, then the amount of money they could lose would be fixed, and any additional financial risk would now be owned by the providers or hospitals. After all, in their minds, it is the latter that incur the cost to begin with. Let’s not forget that insurers call patient care “cost loss.”

So capitation came into the market in a big way…
Simply put, capitation was when the managed care organization paid a provider, group or hospital a fixed amount of dollars for each patient (per patient per month, or PMPM) that is assigned to the group or hospital system. These payments were to cover all costs associated with all of their patients’ care. Organizations that spent less than what they were paid kept the difference. Those that spent more ate the difference. This trend created dramatic changes in the healthcare market, and quickly.

Many groups of clinical providers banded together quickly and accepted the money themselves. Bigger was better because you could accept more patients and grab a bigger market share, spreading the financial risk. In some cases, the physician groups ended up with so many patients that they turned to the hospital to buy a set number of hospital days at a set price from the hospital. In this way, they made the hospital a vendor and hospital days a commodity. On the other side, hospitals went on a buying spree of physician practices and physician groups, often overpaying for medical practices and having little control over the care provided.

In both cases, those entities that accepted capitated payments converted their internist and family practitioners into “gatekeepers” who would manage the patient’s care and, more importantly, control access to specialists and emergency departments. This latter duty led to some very difficult strains on long-standing relationships. Under a capitated environment, you are no longer a colleague, but a cost.

I found this out through first-hand experience. I had a patient involved in a major motor vehicle crash who presented with neck pain and tingling in her legs. Wanting to work her up for cervical spinal injury, I placed a call to a longtime colleague, who was now her gatekeeper.

To my surprise, he would not authorize her care and asked her to be discharged and referred to his office for evaluation. More surprised than upset, I strongly recommend against that plan and offered for him to evaluate the patient in the ED, while urging further imaging. The patient overheard part of this discussion and tried to get up to
leave. In the end, we did the right thing for the patient and resolved the issues in a fairly committed debate through the medical staff process. As Bill Crocker of Yale School of Management notes, “When the pie gets smaller, the table manners change.”

So, why don’t we have wide-spread capitation programs currently? The short answer is that no organization found that it could manage the risk very well. Practice groups and hospitals often found that their data systems were inadequate for monitoring patients and cost and identifying outliers. Typically, several months after the fact, a number of patients would be identified who were consuming a disproportionate amount of resources and much – sometimes, all – of the profit. Neither the hospitals or provider groups had the ability to manage risk in a timely manner. In the end, most organizations simply quit taking capitation.

Much has changed, and some form of capitation is coming back. The move toward value-based purchasing is another attempt to shift the risk to the providers and hospitals so that they have a stake in the game in both the utilization and the outcomes of patients. The proposed ACOs actually encourage the hospitals and providers to be linked together and share the risk. The current strong investment in healthcare IT is creating better data, monitoring and information systems. Fee-for-service will likely fade away over time.

There will be greater focus on utilization and cost of care, not just from the insurers, but from our colleagues who share financial risk. For emergency medicine, this can be a blessing or a curse. It can be a great opportunity for leadership, too. Let’s face it, the greatest growth in imaging is in the emergency department. Undoubtedly, there are many reasons for this, including medical staff who demand that every patient be “worked up” before they’ll admit them. And we have plenty of emergency physicians who over-order tests and chase every symptom. But is this good medicine? Better quality? More importantly, is it a good value, that is, quality divided by costs?

When the hospital, medical staff and emergency physicians are aligned financially and sharing the cost, a greater focus on eliminating unnecessary tests and procedures will be present. Emergency physicians appear to be some of the last bedside clinicians left in medical practice, and the ability to use bedside acumen and clinical skills will have increased value. For those of you who have gotten away from being able to do rectal and pelvic exams, glove up. Your clinical skills are needed, and are a blessing.

This is a time for leadership. There is opportunity to position the emergency department as the entryway for value-driven quality care, creating clinical protocols for undifferentiated presentations and creating evidence-based clinical pathways that minimize unnecessary testing and facilitate smooth transitions in care. The growth in information systems will allow EPs better access to prior records and results as a foundation for better decision-making.  Observation units and telemedicine will grow and extend the oversight of emergency medicine physicians within and outside of the hospital setting.

It’s unknown what the future of healthcare will bring, but it’s clear that fee-for-service is going to be replaced by other models. The best way to position emergency medicine is not to be bound by the past, but to build upon it, improving the care of our patients and the effectiveness of our profession. Learning from our past will provide us opportunity to build a better future.

Leave A Reply