HEALTH REFORM: Accountable Care Organizations -- The Real Thing This Time?

Health Reform is bringing us a whole new set of acronyms, including the Accountable Care Organization.  Exactly how ACOs will be defined and how they get created aren't yet clear. We asked Paul DeMuro, a prominent health care attorney at Latham & Watkins who has spent many years working on various approaches to creating integrated systems, to reflect on some of the lessons of the past and what we need to think about going forward.

Health care veterans recall the days when Health Maintenance Organizations (HMOs) were going to be the answer, bringing all hospitals and doctors into a capitated payment system. We know how that turned out. Then there was the move toward more fully integrated delivery systems, to try to create more organizations that would manage care the way Cleveland Clinic and the Mayo Clinic do. That hasn't succeeded on a large scale either -- yet.

So much went wrong in the 1990s. Hospitals overpaid for physician practices in bidding wars. Then they didn't know how to administer their new physician practice divisions or how to create incentives that would get doctors to change in ways that would make these new systems work. All this happened at a time when physician practice management companies (PPMCs) were becoming the darlings of Wall Street. A few survived and thrived; most did not. It's no wonder that today's talk of  physician-hospital integration is often greeted with skepticism. That's a mistake. Some systems that stuck with their integration plans, who grew and consolidated and improved their physician practices instead of spinning them off or selling them, are beginning to reap the rewards. And they now find themselves well-positioned for health care reform.

Many of the predictions I made about 10 years ago in a book I wrote about care networks have come true as the markets have matured. I predicted that:

• Health plans would consolidate, becoming larger and more national in scope. Physician compensation would be recalibrated, and incentives would become a bigger piece of it.
• Health plans would offer products that were more integrated, more complicated, and more sophisticated.
• Disease management programs would proliferate.
• We would see more emphasis on wellness, on returning employees to work, on outcomes analysis, and patient satisfaction.
• Organizations would learn to adapt to the changing legislative and regulatory landscape.

Now changes in the marketplace, trends in physician practice preferences, and the anticipation of national health reform create an environment that favors development of Accountable Care Organizations (ACOs) that will be both dynamic and durable. Physicians of all ages are less interested in operating their own private practices; many newly-minted physicians have no interest whatsoever in developing their own practices and all the business skills and administrative headaches that entails. Health care systems are not paying huge sums to acquire practices; many are only paying for hard assets. And when they do buy them, they are retaining experienced physician practice administrators who know how to run them.

New physician compensation models have incentives tailored to pay-for-performance, clinical quality and efficiencies, and new Medicare payment schemes. Novel ways of ensuring physician leadership and governance are being developed. Direct employment by hospitals is not the only option. Innovative models are also reaching out to community physicians who do participate with the hospitals and to more closely aligned physicians in managed care contracts. (Lawyers among our readers may be interested that this is consistent with the FTC's Advisory Opinion in Tri-State Health Partners, Inc.) These emerging models often include substantial clinical integration; workable models for cost containment, and ways of improving -- in measurable, documented ways -- the quality of care.

Accountable Care Organizations may take slightly different forms but to succeed they will need a sound medical management program; clinical protocols; performance reporting and benchmarking with peers both regionally and nationally. They will have to develop ways of managing high-cost and high-risk patients aggressively -- and effectively -- without triggering the same kind of backlash we saw against HMOs. I think electronic health records; web-based health information technology; and clinical practice guidelines are also important, as is a a P4P (pay-for-performance) bonus system. This is, after all, about accountable care.

Dedicated physician membership and participation will be key. Community physicans who are not employees of the hospital will have to contribute and participate, although they don't necessarily have to have exclusive managed care contracts with the ACO. Best practices will work when physicians develop them, share them, follow them, and encourage their colleagues to follow them as well. Payments and incentives must dovetail with the goals and objectives of clinical integration. Quality counts.

These new models will assist physicians and hospitals, working in tandem as they adapt to healthcare reform. They will help minimize the regulatory hurdles traditionally faced when new systems are developed. Under the kind of comprehensive health reform under discussion in Washington today -- addressing quality, coverage and cost -- integration is the real thing. For physicians and hospitals, it will also be the key to excellence and success.