One of the major changes occurring, in large part. Accountable Care Organizations The Promise, Perils and Pathway to Value for Plan Sponsors

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1 Delivery Method Changes Accountable Care Organizations The Promise, Perils and Pathway to Value for Plan Sponsors If the potential of accountable care organizations (ACOs) is realized, they could significantly transform how health care is delivered and financed, bringing the promise of high-quality affordable health care within reach. This article explores the root causes that have handicapped the value in the health care delivery system historically and the critical requirements to overcome those issues. The authors describe how commercial and Medicare ACOs attempt to address those issues, the potential land mines in the transition to a new paradigm and the principles plan sponsors should consider in understanding and integrating ACOs into their health care benefits strategy. by John Stenson PricewaterhouseCoopers and Michael Thompson PricewaterhouseCoopers One of the major changes occurring, in large part due to the Affordable Care Act, is the formation of accountable care organizations (ACOs). Most would agree that fixing the health care system will be impossible without accelerating changes in how providers deliver and are compensated for care. But this won t just happen by wishing it so. ACOs could bring significant transformation to how care is delivered and financed. If their potential is realized, the promise of high-quality affordable health care may be in reach. This article explores: The root cause issues that have handicapped the value in our delivery system historically The critical requirements to overcome those issues How commercial and Medicare ACOs attempt to address those issues Potential land mines in the transition to a new paradigm. It will finish with the principles that plan sponsors should consider in understanding and integrating these organizations into their health care benefits strategy. The Promise Employers have managed health benefits costs that have increased at almost twice the pace of wages by focusing on demandside strategies. Employers want employees to be 8 benefits quarterly fourth quarter 2013

2 more aware of health care costs and to take better care of themselves. These strategies have helped decrease the demand for services and thus reduce the pace at which benefit costs have grown. However, there are limits to how these strategies can impact health care cost increases over the long haul, and demandside strategies will do little to impact the 70% of health care costs that are beyond the financial means of most families. In spite of best intentions, there are still strong economic incentives to provide more care, not higher value care, and certainly not to reverse the artificially high levels of expenditures built into the current infrastructure. Innovation in every other industry has led to greater efficiency and better value, serving as an engine for American competitive advantage. In health care, innovation generally adds more costs and only marginal value. Bottom line, there is no health reform without payment and delivery reform. ACOs are the latest attempt to reform provider payment systems. However, the opportunity today may be greater due to improved analytic and measurement tools, improved health information technology support for care coordination, facilitated financing of health information technology transformation due to the Affordable Care Act, and the significant potential weight of Medicare reimbursement to refocus and accelerate the efforts. A 2012 study showed that 25 million to 31 million Americans, or roughly one in ten, currently receive health care through ACOs. 1 With the addition of 106 new Medicare Shared Savings ACOs starting January 1, 2013, there are roughly 260 Medicare-oriented ACOs operating across the country. 2 Even more encouraging is that the private sector is outpacing Medicare in terms of developing ACOs by a four-toone margin. 3 In these private ACO models, providers are working collaboratively with each other and often with payers to be responsible for the quality, care and cost of health care services to the ACO members. Integral to these private ACOs is a provider-payer contract that incorporates budget planning and shared savings distribution. Under the private commercial ACO models, private payers offer a number of alternative payment arrangements. These arrangements can include subcapitation, case rates, bundled payments and global payments. In most of these arrangements, private payers share savings and providers accept greater financial risk. The payment methods chosen are usually dependent upon an ACO s capability to manage the various levels of risk. The Affordable Care Act regulations offer new shared savings arrangements where the provider can choose between several options, including both retroactive and prospective calculation of shared savings. There will be further innovations with alternative payment options being created in the private sector, and additional Centers for Medicare and Medicaid Services (CMS) payment alternatives are being developed through the CMS Innovation Center. With 30% of health care spending considered as potential waste, the opportunities are great. The waste yields poor quality from unnecessary tests, lack of adherence to evidencebased guidelines, redundant services, a care-delivery-technology arms race and a dearth of care management technology to share information. Payment and delivery reform efforts do not compete with current efforts to improve patient engagement and enhance population health, but rather serve to reinforce and support those efforts. By realigning incentives and transforming the delivery of care, the promise is to align the health care value chain around improved health, efficiency and value (Figure 1). The Perils However, in some ways, we have been down this path before. There were significant efforts in the 1990s by payers to shift risk to providers, including initiatives to narrow networks during the peak of managed care. We have also seen past efforts by providers to buy physician practices to become more integrated delivery systems. These efforts had some success, but many turned out to be unsustainable efforts in transforming the system to realize its full potential. Some lessons learned include the following: Provider consolidation must be aligned with payment reform. Provider consolidation (hospitals buying doctor practices, hospitals consolidating into large systems, physicians merging into larger group practices) has the potential to lead to increased pro- fourth quarter 2013 benefits quarterly 9

3 Figure 1 Changing the Health Delivery Paradigm Payers Patients Facilities Primary care physicians Specialists Specialists Primary care physicians Facilities Patients Payers Characteristic Current Delivery System Future Delivery System Focus Aim Financial intent Quality Contracts Physician focus Provider and payer Price reductions Grow volume Quality assurance Fragmented agreements Specialists Patient Population cost reduction Find savings and efficiencies Quality-dependent payment Single integrated contract Primary care physicians vider market power and potentially raise health care costs in a given market. While there is the potential to achieve efficiencies through improved delivery integration and economies of scale, the reimbursement incentives must be realigned concurrently so that the overall market impact is positive, not negative. Providers that become too big to ignore effectively become utilities within their communities and will require value-based incentives and oversight at the community level. Market share and alignment matter if incentives are to incentivize. Past efforts to realign incentives have often been done independently by individual health plans, each of which has very low market share. These efforts have tended to be marginalized by the provider systems since the preponderance of reimbursement incentives guide how they manage their systems. To the extent that metrics and incentives are not aligned across the entire payer community (including Medicare and Medicaid), they are less likely to get integrated into the way the delivery system manages itself. Incentives at the top must align with incentives at the bottom. While much effort may be focused on incentives at the top of the provider supply chain, there needs to be an equal focus on how those incentives are then translated below to the actual provider practice and other contributors to the system. Transforming the supply chain cannot stop at the health system level but must translate through to all providers to ensure system success. Risk shift to providers should match the maturity of the delivery system. Risk shift without delivery reform can lead to financial losses and relationship damage. Delivery transformation takes time, and moving to full risk transfer prematurely can (1) lead 10 benefits quarterly fourth quarter 2013

4 Figure 2 The Plan Sponsor Pathway to Value Strategic Steps ACOs Must Take in First 1-3 Years to Manage a Population Organization s need for reinsurance Operational Implementation Improving Quality Improving Cost Managing Total Cost of Care Cradle to Grave Example Measures to Track Success Implement diseasebased programs. Target patients for disease management program enrollment. Implement call centers. Percentage of pediatric vaccine rates Percentage of diabetic patients on lipid management Percentage of mammograms performed Length of stay Length of stay variables Bed days per 1,000 Emergency department visits per 1,000 Percentage of physician services with organization True total cost of care to significant and potentially unsustainable provider losses if set too low or (2) lock in unnecessarily high cost structures if set too high. Transition and transformation is complex and will require unprecedented provider leadership and payer partnership. No matter how we approach payment and delivery reform, the transition will be tricky. Health systems have significant overhead to support. To be successful in new payment arrangements, new population management technology and data are required to understand system performance and manage toward valuebased metrics. Furthermore, any change in incentive structures will face a steep backdrop of feefor-service legacy reimbursement mechanisms that may provide counterincentives to delivery reform. (For example, it will take true transformation for hospitals to work aggressively to lower occupancy.) The Pathway to Value The pathway forward is not simple but it is essential (Figure 2). Employers and other purchasers play an essential role in making this happen. Some key guideposts for this journey include: Promote and support payment reform. In health care, employer purchasers are the top of the supply chain, and what they care about and how they buy matters. Plan sponsors should insist on payer partners that are committed to (1) payment transformation toward value and efficiency, (2) industrywide collaboration on common provider quality and performance metrics and (3) public reporting of costs and quality metrics. At the same time, subject to their normal fiduciary responsibilities, plan sponsors should be open and commit to paying into new reimbursement methodologies (e.g., bonuses, global payments) that are fourth quarter 2013 benefits quarterly 11

5 Sample ACO Payment Arrangements Attempts to address misaligned incentives in traditional fee-for-service arrangements by creating payment systems that better align payments with value and performance include: One-sided or two-sided shared savings. Providers receive a portion of savings if they meet quality-of-care standards while providing care at lower-than-projected costs. If two-sided, they may bear some downside risk if budgets or quality targets are not met as well. Partial capitation/global payments. An ACO is at financial risk for some, but not all, of the items and services provided to its patients. Global payments. An ACO is paid specified monthly or annual payments regardless of services rendered or costs incurred by providers. Bundled/episode payments. Provider organizations receive a single payment for all the services a patient requires for an entire episode of care. value-based to do their part to accelerate care delivery system transformation. Shine a light on provider comparative value. In itself, the label ACO does not connote higher value. And most employers would agree that provider efforts at delivery transformation are good, but positive results are essential. It will take time, but payment and delivery reform should improve provider value and performance. Purchasers need to help promote greater awareness and transparency on that performance by publishing and supporting industrywide standardized metrics as well as simplified rating systems designed to make it easier for consumers to understand and act on that information. This will not only support more valuebased choices by the consumer, but also reinforce to providers the need to continuously improve value and bend the cost curve of care delivery. Tailor value-based benefits toward care delivery. The movement toward broad uniform networks has created consumer-based incentives that are largely one-size-fits-all and do little to promote delivery-based value. This is particularly true for higher cost procedures where employees and their families are necessarily sheltered from the high costs of the care they receive. Plan sponsors need to be willing to create imbalance where provider performance varies or where providers resist the transformation of payment and delivery reform. At a minimum, plan sponsors should consider tightening the escape valve of out-of-network reimbursement, particularly as the bar gets raised on provider performance. Secondly, plan sponsors should consider providing direct and indirect incentives for employees and their families to utilize higher performing providers in their communities and outside of their communities if appropriate. Selectively integrate delivery partners, disruptors and advocates. Plan sponsors, no matter what size, cannot materially influence provider performance by themselves. However, in their larger locations, as part of their health strategy, they can elect to integrate part of the delivery system through on-site clinics or local primary care medical homes that can then serve as a natural gateway to overall health care delivery. For more mobile or dispersed populations, telehealth can serve as a convenient option for employees with minor issues and a value-based alternative to traditional provider delivery systems. Finally, the ability to implement strong care advocates can help to educate and support employee care choices and coordinate care delivery. These partners, disruptors and advocates can help employees better understand their choices, use the available tools and information, and support improved value in their 12 benefits quarterly fourth quarter 2013

6 health care consumption and in the overall system over time. Summary The past decade has focused largely on demand-based strategies by encouraging consumers to be engaged in their personal health habits and the care they receive. However, demand-based strategies will always be limited in their abilities to manage health care costs if we continue to support a provider reimbursement system that rewards volume, not value. While ACOs are the newest attempt at supplyside health care strategy, we need to learn from past efforts to understand and overcome the perils of payment and delivery reform. The Affordable Care Act has helped create some initial momentum in this direction, but employers and their commercial payer partners will be critical stakeholders in helping achieve and sustain a transformation that permanently bends the cost curve, reverses the waste and produces a health care system unparalleled in performance (not cost). While plan sponsors cannot achieve these changes on their own, the goal of delivery system transformation and higher value care cannot be achieved without parallel strategies executed by the plan sponsor community. If each of the stakeholders does its part, we will accelerate better health, improved outcomes and lower costs for our people and our communities. Endnotes 1. Niyum Gandhi and Richard Weil, The ACO Surprise. Oliver Wyman, November CMS MSSP, Pioneer and Brookings Dartmouth publicly listed Medicare ACOs. 3. Jay Nawrocki, The Number of ACOs Continue to Grow, but Mainly in the Private Sector, Wolters Kluwer, Law and Health, June 22, 2012, available at AUTHORS John Stenson, FSA, MAAA, is a principal in PricewaterhouseCoopers human resource practice, where he has led projects such as developing market strategies for health plans, financial forecasts of costs and benefits for state governments and large employers, and data strategy and decision support implementation for health plans and government agencies. He also has helped payers and employers deploy decision support systems to help analyze and strategically manage health care and benefits costs. Stenson has more than 25 years of experience in the health care industry. He holds a B.A. degree in history from Carleton College. He is a fellow in the Society of Actuaries, where he leads research projects, and a member of the American Academy of Actuaries. Michael Thompson, FSA, is a principal in Global Human Resources Services at PricewaterhouseCoopers. He has over 25 years of experience in health care and employee benefits strategy development and implementation, design, financing, pricing, operations and analysis. Thompson consults with major employers and health plans on integrated health, wellness and consumerism, defined contribution retiree health, vendor performance management, human capital effectiveness and health care supply chain management strategies. Thompson is a fellow of the Society of Actuaries and serves on the Federal Health Committee, Disease Management Committee and Medicare Committee and is chairman of the Quality Initiatives Subcommittee of the American Academy of Actuaries. He holds a B.S. degree in mathematics from Union College. fourth quarter 2013 benefits quarterly 13

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