Growth of Accountable Care Organizations in California: Number, Characteristics, and State Regulation

Journal of Health Politics, Policy and Law Growth of Accountable Care Organizations in California: Number, Characteristics, and State Regulation Brent D. Fulton Vishaal Pegany Beth Keolanui Richard M. Scheffler University of California, Berkeley Abstract Accountable Care Organizations (ACOs) result in physician organizations and hospitals receiving risk-based payments tied to costs, health care quality, and patient outcomes. This article (1) describes California ACOs within Medicare, the commercial market, and Medi-Cal and the safety net; (2) discusses how ACOs are regulated by the California Department of Managed Health Care and the California Department of Insurance; and (3) analyzes the increase of ACOs in California using data from Cattaneo and Stroud. While ACOs in California are well established within Medicare and the commercial market, they are still emerging within Medi-Cal and the safety net. Notwithstanding, the state has not enacted a law or issued a regulation specific to ACOs; they are regulated under existing statutes and regulations. From August 2012 to February 2014, the number of lives covered by ACOs increased from 514,100 to 915,285, representing 2.4 percent of California s population, including 10.6 percent of California s Medicare fee-for-service beneficiaries and 2.3 percent of California s commercially insured lives. By emphasizing health care quality and patient outcomes, ACOs have the potential to build and improve on California s delegated model. If recent trends continue, ACOs will have a greater influence on health care delivery and financial risk sharing in California. Keywords accountable care organizations, health insurance regulation, California Introduction In California s health care market, physician organizations not only provide care, but some physician organizations via the delegated model The authors wish to acknowledge the following funding sources: Office of the Attorney General, California Department of Justice; Nicholas C. Petris Center on Health Care Markets and Consumer Welfare, School of Public Health, University of California, Berkeley. Journal of Health Politics, Policy and Law, Vol. 40, No. 4, August 2015 DOI 10.1215/03616878-3149988 Ó 2015 by Duke University Press Published by Duke University Press

668 Journal of Health Politics, Policy and Law assume full or partial financial risk for the cost of care and take responsibility for utilization management and health professional credentialing (Scheffler et al. 2013; Ginsburg et al. 2009). This results in physician organizations accepting capitated payments for professional services and, at times, for hospital services. The Berkeley Forum for Improving California s Healthcare Delivery System estimated that in 2014 approximately 8.4 million lives were covered under fully or dually capitated systems like Kaiser Permanente, Medicare Advantage contracts, and health maintenance organizations (HMOs) at full risk for hospital admissions (Fulton et al. 2014). Another 9.8 million lives were estimated to be covered under partial capitation arrangements that include primary and some specialty care (but generally exclude financial risk for hospitalizations), such as through Medicare Advantage contracts and HMOs. Together, the 18.2 million lives constitute approximately 47 percent of Californians. Accountable Care Organizations (ACOs) are formed by partnering organizations, including physician organizations, hospitals, and payers, to organize care with the goals of reducing costs while improving health care quality and patient outcomes (Shortell et al. 2014; Robinson and Dolan 2010; Fisher et al. 2007). Physician organizations and hospitals (hereafter providers ) receive risk-based payments based on the cost of care, but with an emphasis on tying these payments to health care quality and patient outcomes. The payments are more strongly tied to health care quality measures, as compared to patient outcomes measures, because the former are more within providers control. The Affordable Care Act (ACA) includes ACOs as a major delivery system reform within Medicare, for providers reimbursed on a fee-for-service basis. In the commercial market, partnering entities that self-identify as ACOs are also expanding in response to both the ACA and market trends that emphasize paying for value instead of volume (Lewis et al. 2013). These commercial ACOs are layered onto existing HMO and preferred provider organization (PPO) products for specific populations, whereby financial incentives are tied to total cost of care and health care quality, and sometimes to patient outcomes as well. Some of these ACOs existed prior to the ACA, such as the Blue Shield of California s ACO for California Public Employees Retirement System (CalPERS) members (Markovich 2012). California has an extensive history in managed care with HMOs. The ACO model includes several components that are common in HMOs, such as the delegation of risk and utilization management to physician organizations (Scheffler et al. 2013). However, ACOs are distinct from HMOs. While ACOs provide care through coordinated delivery systems, it is not

Fulton et al. - Growth of ACOs in California 669 necessary for them to be in the business of insurance. They also place a greater emphasis on tying payments to health care quality and patient outcomes. Patients that receive care from an ACO are not restricted to receive care from the ACO network of providers, although they may face a higher cost share outside the ACO network, which may be narrower than the providers covered by the private plan they are enrolled in. In this article, we discuss the types of ACOs within Medicare and California s commercial market. Next, we describe how the California Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI) regulate ACOs with respect to financial risk and administrative capacity. Finally, we analyze the proliferation and characteristics of ACOs in California. ACOs by Payer Although ACOs predate the ACA, they have gained more prominence since its passage. In this section, we describe ACOs within Medicare and the California commercial market, as well as ACOs that are emerging within Medi-Cal and the safety net. Medicare ACOs. There are three models of ACOs within the Medicare fee-for-service program: (1) a permanent program known as the Medicare Shared Savings Program (MSSP); (2) the Medicare Advance Payment ACO Model; and (3) a demonstration program known as the Medicare Pioneer ACO. The MSSP is administered by the Centers for Medicare and Medicaid Services (CMS), while the Advance Payment ACO Model and the Pioneer ACO model are administered through the newly created Center for Medicare and Medicaid Innovation (CMMI) within CMS. All Medicare ACOs use thirty-three nationally recognized quality measures organized into four areas: patient/caregiver experience (seven measures); care coordination / patient safety (six measures); preventive health (eight measures); and at-risk populations (twelve measures). The MSSP promotes greater accountability for a patient population; coordination of services under Medicare Part A (e.g., inpatient hospital services) and Part B (e.g., physician and outpatient services); and investment in infrastructure and redesigned care processes for high-quality and efficient service delivery. Participants in the MSSP may include physician organization and hospital providers. Within the MSSP, there are two models, which are distinguished by the type and level of financial risk that the provider bears. In the one-sided MSSP model, the provider shares in

670 Journal of Health Politics, Policy and Law savings only, so this model is commonly referred to as an upside risk or upside savings model. In the two-sided MSSP model, the provider shares in greater upside savings in exchange for bearing risk for losses. This model is also referred to as downside risk or a shared savings and losses model. A provider s participation in either model often depends on the experience it has with managing its patients overall health and managing financial risk. In addition to financial performance, the amount of shared savings depends on the number of quality targets the ACO meets. The Medicare Advance Payment ACO Model is a companion program to the MSSP, primarily for rural and smaller physician organizations that experience additional hurdles, such as having insufficient capital to invest in technology upgrades. To promote their success in the MSSP, the Advance Payment ACO Model provides advancement payments to cover the costs associated with ACO formation. These payments are repaid from the accrued savings realized during participation in the MSSP. The Pioneer ACO is a two-sided ACO model that grants physician organization and hospital providers greater financial rewards in exchange for more aggressive risk arrangements. The Pioneer ACO is geared toward providers with experience in delivering coordinated, patient-centered care and bearing financial risk. Pioneer ACOs are required to have a minimum of fifteen thousand beneficiaries in urban areas or five thousand beneficiaries in rural areas. Commercial ACOs. Commercial ACOs have more diverse arrangements than Medicare ACOs, because they do not need to meet the CMS requirements for participation; however, they share many of the same features, such as incorporating global budgets and managing care for a defined population. For example, a global budget for expenditures in commercial ACOs can be layered on top of an existing health plan payment model (e.g., fee-for-service, capitation, diagnostic related groups, and per diem). Commercial ACOs are likely to use a combination of existing quality measures that their providers already report to CMS as well as new measures that help them achieve organization-specific objectives. Some key measurement sets include the National Quality Forum s endorsed measures, the Consumer Assessment of Healthcare Providers and Systems, CMS s quality measures for ACOs, the Integrated Healthcare Association s recommended measurement set, and patientreported outcomes (Kessell et al. 2015 [this issue]). Commercial ACOs have more flexibility in tailoring measures to individual ACOs, which can

Fulton et al. - Growth of ACOs in California 671 reduce duplicative reporting requirements for providers and reduce the cost for data collection (Belfort 2014). Emerging Medi-Cal and Safety Net ACOs. Safety net providers recognize the need for improving the safety net system and care coordination (Dolan 2011). However, safety net providers face challenges to forming ACOs, such as the significant health needs of this population, limited financing to invest in information technology and quality improvement, and shortages of primary care physicians and specialists that serve this population (Shortell 2012; Chayt et al. 2011). At the state level, California s Medicaid program, known as Medi-Cal, has not formally implemented ACOs. However, as part of its Bridge to Reform Medicaid section 1115 waiver, Medi-Cal is authorized to test accountable delivery models to improve quality and control costs for specific vulnerable populations, including children with special health care needs that are served through the California Children s Services Program (California Department of Health Care Services 2010). The program has approved two provider-based ACO pilots to serve this population (California Department of Health Care Services 2014). In addition, California s Medi-Cal program contracts with managed care plans, which are participating in the development of ACOs. For example, an emerging safety net ACO is HealthCare First South Los Angeles, which involves the collaboration of several providers, as well as the Los Angeles Department of Health Services and L.A. Care, which is Los Angeles County s public health plan (Dolan 2011). While HealthCare First South Los Angeles is still being piloted, it is making progress in developing provider networks, care models, and financing structures that may serve as a model for future safety net ACOs. State Regulation of ACOs in California This section discusses how ACOs are regulated by the DMHC and the CDI with respect to financial risk and administrative capacity, such as network adequacy and timely access to care. It focuses on describing the criteria to determine whether ACOs are regulated as a health care service plan (or health insurer), a restricted licensee under the Knox-Keene Health Care Service Plan Act of 1975 (also known as the Knox-Keene Act), or a risk-bearing organization. Our focus is within the context of numerous state laws and regulations that ACOs are subject to, such as governance requirements, antikickback and self-referral prohibitions, the corporate

672 Journal of Health Politics, Policy and Law practice of medicine prohibition, antitrust provisions, and data sharing and privacy requirements (Bernstein et al. 2011). To understand how ACO arrangements are currently regulated by the DMHC and CDI, we reviewed literature and existing statutes and regulations, including the Knox-Keene Act and subsequent amendments for health care services plans and risk-bearing organizations, and the California Insurance Code for health insurance policies. We conducted key informant interviews with the DMHC and CDI. We also received health plan notice of material modification ACO filings from the DMHC through our public records request. California has a dual regulatory structure of health insurance markets, including the DMHC s oversight of health care service plans and the CDI s oversight of health insurance policies. The DMHC regulates plans that cover 22 million lives, while the CDI regulates insurers that cover 4 million lives (California Health Benefits Review Program 2013). Department of Managed Health Care. The DMHC was created in 2000 to regulate health care service plans, which include all HMOs and some PPOs, under the Knox-Keene Act. The Knox-Keene Act defines a health care service plan as the following: any person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees (Cal. Health & Safety Code x 1345 (f) (1) (2014)). There are two types of Knox-Keene Act licenses: full and restricted. A full license is required when a health plan assumes financial risk for physician services, ambulatory services, and institutional (e.g., hospital) care this is effectively global risk. Full Knox-Keene Act licensees must demonstrate to the DMHC that they have the financial viability and administrative capacity to arrange and pay for the care provided to their enrollees (Cal. Health & Safety Code x 1375.1 (2014)). In addition, full Knox-Keene Act licensees have various requirements, including standards for geographic distance that ensure consumers can access an adequate provider network in a timely manner and for minimum physician-enrollee ratios (Hammelman et al. 2009). The restricted Knox-Keene Act license was created for the subset of delegated providers (i.e., physician organizations and hospitals) that accept downside global risk from health plans. Unlike full licensees, restricted Knox-Keene Act licensees do not directly market and sell health care

Fulton et al. - Growth of ACOs in California 673 service plans to employers and consumers. For this reason, they do not need to comply with some provisions of the Knox-Keene Act that apply to the full license (e.g., marketing standards, evidence of coverage, subscriber agreements), but they are still held to certain financial solvency and liquidity requirements. Well before passage of the ACA, California s HMOs had a history of transferring financial risk, utilization management, and health professional credentialing to physician organizations through the delegated model (Ginsburg et al. 2009). The two main types of physician organizations include integrated medical groups and independent practice associations. 1 Physician organizations are considered to be risk-bearing organizations under the Knox-Keene Act if they (1) contract directly with health plans or arrange care for the health plan enrollees; (2) receive capitated or fixed periodic payments from health plans; and (3) take responsibility for paying claims (e.g., to specialists and laboratories) for services covered by the capitated or fixed periodic payment they receive (Cal. Health & Safety Code x 1375.4 (2014)). 2 This situation poses financial risk for physician organizations, an issue illuminated in the 1990s when several physician organizations closed due to financial distress (Hammelman et al. 2009). To protect patients who rely on physician organizations as a regular source of care as well as claimants of physician organizations, California enacted Senate Bill (SB) 260 in 1999 to amend the Knox-Keene Act to establish the Financial Solvency Standards Board within the DMHC. This law is commonly referred to as SB 260 requirements. The Financial Solvency Standards Board is composed of eight members and is authorized to develop solvency standards for risk-bearing organizations by advising the DMHC director on matters of financial solvency that affect delivery of health care services (Cal. Health & Safety Code x 1347.15 (2014)). Physician organizations are required by SB 260 to submit organizational and financial filings to the DMHC. 1. In California, most hospitals cannot directly employ physicians, because of the corporate practice of medicine prohibition; however, a hospital-affiliated medical foundation can establish a relationship with a physician organization that gives it greater control over physicians (Draper, Berenson, and November 2009). 2. The DMHC currently only regulates physician organizations as risk-bearing organizations, because, as compared to hospitals, they generally have a higher share of risk-based payments and tend to be less capitalized. However, health care service plans have a general obligation to ensure that risk-bearing providers have the administrative and financial capacity to meet their contractual obligations (Cal. Code Regs. title 28, x 1300.70(b)(2)(H)(2014)). The California Department of Public Health s Licensing and Certification Division is the principal state agency that regulates health care facilities, such as hospitals, skilled nursing facilities, and nursing homes. However, the division s regulatory focus is on patient safety and quality, not facilities financial risk, including the financial risk that a hospital bears within an ACO.

674 Journal of Health Politics, Policy and Law Although recent Knox-Keene Act amendments have not included the term ACO, an ACO arrangement requires a health plan to file a notice of material modification for approval with the DMHC, pursuant to the California Health and Safety Code, section 1352 (b), because it involves a material modification of its plan and operations. The DMHC considers whether the contractual arrangements between health plans and physician organization and hospital providers in an ACO meet the definition of a fully licensed Knox-Keene Act plan, a restricted Knox-Keene Act licensee, or a risk-bearing organization. As shown in figure 1, the salient feature of ACOs sharing of global risk between a plan and a provider (see box D) does not influence the type of regulation that the ACO is scrutinized under (see box E). However, an ACO sharing of global risk would be examined as a part of the payer s and provider s overall risk portfolio. The figure displays criteria that affect the way plans and providers are regulated by the DMHC. Under box A, entities that directly market to consumers and employers are required to have a full Knox-Keene Act license. Regulation of providers has a few different pathways depending on how they are reimbursed and the financial risk they bear. Box B distinguishes whether providers receive capitated or fixed periodic payments and are responsible for paying claims, and if that is the case, then they are regulated as either a restricted Knox-Keene Act licensee or a risk-bearing organization. Under box C, when providers are exposed to global/full risk, which means that they are financially at risk for specialists and institutional services, then they are regulated as a restricted Knox-Keene Act licensee. For providers that receive capitated or fixed periodic payments and are responsible for paying claims, but are not exposed to global/full risk, box D distinguishes whether they share in global risk, such as in an ACO. Because both pathways under box D show that the provider would still be regulated as a risk-bearing organization, the type of regulation is not dependent on shared global risk. 3 Therefore, existing ACO arrangements have not triggered different regulatory oversight, but are instead regulated as a part of the payer s and provider s overall risk portfolio. The DMHC also ensures that ACOs comply with administrative regulations, such as network adequacy and timely access to care. California Department of Insurance. The CDI is a freestanding state department that is overseen by an elected state insurance commissioner. 3. The term provider includes physician organizations and hospitals; however, only physician organizations are currently regulated by the DMHC as risk-bearing organizations.

Fulton et al. - Growth of ACOs in California 675 Figure 1 Criteria for Determining the Type of California Department of Managed Health Care Regulation for Health Plans and Providers Source: Authors analysis of Knox-Keene Act, Department of Managed Health Care regulations, and key information interviews Notes: The term provider includes physician organizations and hospitals; however, only physician organizations are currently regulated by the Department of Managed Health Care as riskbearing organizations. N/A = not applicable. The CDI regulates health insurance policies, including most PPOs and traditional indemnity plans. The CDI enforces the California Insurance Code by requiring that insurers subject to CDI regulation obtain a certificate of authority, a process that reviews components such as capital and surplus, financial stability, reinsurance arrangements, and hazards to policyholders or others (Cal. Ins. Code xx 717 718 (2014); Cal. Code Regs. title 10, ch. 5, x 2275 (2014)). Overall, the regulatory focus of the CDI is to review the insurance risk held by the insurer to determine whether insurers are able to pay their claims consistent with the insurance policy. At the insurer level, the CDI has larger cash reserve requirements than those for the DMHC-regulated plans. Insurers must have cash reserves that are either the statutory minimum of $5 million in capital or 200 percent of the risk-based capital standards developed by the National Association of Insurance Commissioners (Kelch Associates 2011). In addition, the CDI requires health insurers to provide access to care within certain geographic and travel-time distances and to monitor appointment wait times, but it does not have particular timeliness standards like those found within the DMHC (Coursolle 2014).

676 Journal of Health Politics, Policy and Law The CDI does not regulate providers, including providers that contract with the insurers it regulates. The CDI does not have a parallel board to the DMHC s Financial Solvency Standards Board that develops financial solvency standards for providers paid by insurers, including the adequacy of the payments. However, the CDI does respond to provider payment complaints. The California Insurance Code permits CDI-regulated policies to pay their providers fee-for-service or negotiated discounted rates (Kelch Associates 2011). In a shared-risk arrangement between an insurer and a provider, if the provider were to bear losses, then this would be akin to the provider discounting its fee-for-service rates from a regulatory standpoint. Because the discount is not considered a capitated or fixed periodic payment under the Knox-Keene Act, the downside risk arrangement would not trigger DMHC oversight. Despite not falling within the scope of DMHC oversight, there may be a need for further state regulation if providers in commercial ACOs involving CDI-regulated policies begin to bear greater financial risk in fee-for-service downside risk arrangements. Data Sources and Methods The most comprehensive available data on California s ACOs are from Cattaneo and Stroud, a management consulting firm specializing in strategic planning and managed care consulting services in the health care industry. Cattaneo and Stroud publishes periodic reports on ACO activities in California on its website, and we obtained the underlying data from the firm for the following four points in time: August 2012, March 2013, August 2013, and February 2014 (Cattaneo and Stroud 2012 14). Cattaneo and Stroud contacts both operational and planning-stage ACOs via telephone interviews to collect its data. The ACOs were identified through numerous sources, primarily from publicly available announcements or articles. As of February 2014, Cattaneo and Stroud collected data on sixtyseven ACOs. We used the following variables from the Cattaneo and Stroud data set: ACO name; type of ACO (MSSP, Medicare Advance Payment ACO Model, Medicare Pioneer ACO, and commercial); 4 number of lives covered (commercial HMO, commercial PPO, and Medicare fee-forservice); and the number of providers (i.e., primary care physicians and specialists) in physician organizations participating in ACOs. 4. The Cattaneo and Stroud data did not include Medi-Cal or safety net ACOs, because they are still emerging.

Fulton et al. - Growth of ACOs in California 677 We analyzed the data to answer the following research questions: (1) How has the number of ACOs in California increased over time? (2) How has the number of lives covered by ACOs in California increased over time? (3) How has the share of lives covered by ACOs in California increased over time? Results In this section, we present our findings on the number and characteristics of ACOs in California. As of February 2014, Cattaneo and Stroud identified a total of sixty-seven ACOs that cover 915,285 lives, including thirty-six Medicare ACOs covering 482,785 lives and thirty-one commercial ACOs covering 432,500 lives. Figure 2 shows the number of Medicare and commercial ACOs in California, from August 2012 to February 2014. The number of ACOs increased from twenty-six to sixty-seven (or 158 percent). During this period, the number of Medicare ACOs was generally higher than the number of commercial ACOs. Each ACO type had a positive growth trend, with the exception of a slight dip in the number of Medicare ACOs between March 2013 and August 2013. As of February 2014 within Medicare s thirty-six ACOs, 63 percent of those lives were covered in the MSSP ACO model, 33 percent were covered in the Pioneer ACO model, and only 4 percent were covered in the Advance Payment ACO Model. Within commercial ACOs, Blue Shield of California had twelve ACOs with 173,000 lives covered and Blue Cross of California (also known as Anthem Blue Cross) had ten ACOs with 156,200 lives covered, collectively representing 76 percent of commercial ACO lives. The remaining 24 percent of commercial ACO lives were with CIGNA, Aetna, and Health Net. Within commercial ACOs, the number of ACOs overlaid on an HMO initially grew faster than ACOs overlaid on a PPO, but the number of each type is similar as of February 2014: fourteen ACOs covered HMO lives, thirteen ACOs covered PPO lives, and four ACOs covered both PPO and HMO lives. Figure 3 shows the number of lives covered by Medicare and commercial ACOs in California, from August 2012 to February 2014. The number of lives covered by California ACOs increased from 514,100 to 915,285 (or 78 percent). During this period, the number of lives covered by Medicare ACOs was generally higher than the number covered by commercial ACOs. Each ACO type had a positive trend in the number of lives covered, with the exception of a slight dip in Medicare lives between

678 Journal of Health Politics, Policy and Law Figure 2 Number of ACOs by Insurance Type in California, August 2012 February 2014 Source: Authors analysis of Cattaneo and Stroud, ACO Activities in California (2012 14) March 2013 and August 2013. Within commercial ACOs, the number of lives covered by ACOs overlaid on an HMO initially grew faster than the number of lives covered by ACOs overlaid on a PPO, but the number of lives covered by each is similar as of February 2014: 221,750 lives within HMOs and 210,750 lives within PPOs. Figure 4 shows the share of California s Medicare fee-for-service beneficiaries covered by an ACO, the share of commercially insured lives covered by an ACO, and the share of the total population covered by California ACOs, from August 2012 to February 2014. During this period, the share of Medicare fee-for-service beneficiaries covered by an ACO increased from 5.7 percent to 10.6 percent, while the share of commercially insured enrollees covered by an ACO only increased from 1.3 percent to 2.3 percent. The share of the total population covered by California ACOs increased from 1.4 percent to 2.4 percent (or 75 percent). Anthem Blue Cross and Blue Shield of California had 6 percent and 7 percent of their commercial lives covered by ACOs, respectively, as of February 2014. In addition, the percentage of California physicians in physician

Fulton et al. - Growth of ACOs in California 679 Figure 3 Number of Lives Covered by ACOs by Insurance Type in California, August 2012 February 2014 Source: Authors analysis of Cattaneo and Stroud, ACO Activities in California (2012 14) organizations with an ACO contract increased from 21 percent to 65 percent, from August 2012 to February 2014. 5 Discussion Partners in the health care sector, including physician organizations, hospitals, and payers, are forming ACOs to reduce health care costs while simultaneously improving health care quality and patient outcomes. From August 2012 to February 2014, the number of lives covered by ACOs increased from 514,100 to 915,285 (or 78 percent) in California. This resulted in 2.4 percent of lives being covered by an ACO, including 10.6 percent of traditional fee-for-service Medicare beneficiaries and 2.3 percent of the commercially insured. 5. This result does not mean that 65 percent of physicians in California treat patients covered by an ACO. That measure was not available.