Will ACOs really get off the ground?

The hype over accountable care organizations—something every major hospital in Indianapolis is moving to become—is increasingly being laced with skepticism as the economics behind the idea get more scrutiny.

Accountable care organizations were one of the key provisions in the 2010 health reform law designed to help reduce the cost of medical care.

The idea is that doctors, hospitals and other health care providers would work together to care for a specific population of patients. By coordinating care, an accountable care organization should be able to reduce errors and avoid duplication of services, thereby saving money. A chunk of the savings would be paid by the federal Medicare program back to the hospitals and doctors in the accountable care organization.

Private health insurers, such as Indianapolis-based WellPoint Inc., want to create similar ACO contracts with hospitals and doctors, in which they would eventually pay “capitated” payments to ACOs for each patient they manage. Such a system would let hospitals and doctors keep whatever money is left over from those payments at the end of the year—or eat whatever overages occurred.

A new paper published by the National Bureau of Economic Research suggests the potential for ACO savings could be 30 percent or more—or it could be a lot less. The question is whether health care providers across the board really embrace the idea, or instead find the idea of gaining market share or gaining market power to be too alluring.

And not everyone—particularly medical device companies and specialists—will come out as winners under ACOs.

“However, we do not know how well ACOs will sidestep cost-ineffective technologies, particularly if the latest shiny innovation increases market share,” wrote Harvard professors Katherine Baicker and Amitabh Chandra in their August paper. “The viability of ACOs will depend on the receptiveness of physicians to capitated payments—some specialists will see their incomes fall and are unlikely to take these cuts quietly. While their concerns may not resonate with patients, they might if providers claim that valuable care is being withheld.”

In anticipation of the ACO concept being implemented by Medicare and private health plans, many hospitals and doctors have been merging, figuring they can work better together if they all work for the same employer. But this consolidation also gives them more heft in negotiating prices with health insurers, note Baicker and Chandra.

“It is worth reiterating, however, that some of the savings from lower quantities may be offset with higher prices as ACOs exert market power,” they wrote.

Even if ACOs could significantly reduce health care spending, there are big questions about whether they will even get off the ground.

The American Hospital Association estimates that small ACOs would need $5.3 million in startup capital investments and another $6.3 million per year for operating costs. For larger ACOs, as would most likely be formed in Indianapolis, the association estimates an initial capital investment of at least $12 million and annual operating expenses of $14 million.

"As the expected payouts from CMS or commercial contracts are yet to be solidified, these substantial costs present a degree of risk that many smaller health care entities may be unable to [make]," concluded a recent report by Health Capital Consultants, a St. Louis-based consulting firm for hospitals and physicians.