Earlier this week, my paper with Rick Mayes on 1990s capitation contracts and modern ACOs appeared in Health Affairs. As this post hits the blog, I am making some brief remarks about the paper at a Health Affairs forum held at the National Press Club. Below is roughly what I am saying.
I want to begin by thanking Rick Mayes for inviting me to collaborate on the paper, Health Affairs for its continued recognition of good scholarship on timely issues, as well as for inviting me to speak today, and WellPoint and the California HealthCare Foundation for their generous sponsorship that made this issue and this forum possible.
Medicare, and some commercial health plans, are embarking on an experiment, one informed by past failures but with no guarantee of future success. It’s the accountable care organization (ACO), a network of providers responsible for the care of a defined group of patients and that receives bonuses or suffers modest penalties based on cost and quality targets.
Some say ACOs cannot work because they are too much like certain, failed managed care contracts of the 1990s. Some say ACOs cannot work because they are not enough like those managed care contracts of the 1990s. Some people are a little bit right even if everyone is a little bit wrong. Let me back up a bit and explain.
The decades-long struggle with health care cost control has been an effort to find the right balance of financial risk for providers and payers, a “sweet spot” that is both an economic and political equilibrium. Today, fee-for-service, per diem, and diagnosis-based, inpatient bundling are the norm, placing most of the financial risk on public programs, private insurers, employers, and individuals. Those are the payers.
But it was not always thus. The 1990s offered a private-sector experiment with high financial risk for providers: capitation, or the payment by managed care organizations (MCOs) to providers of a fixed annual or monthly lump sum per patient. If a provider organization could deliver health care services to a patient that cost less than the lump sum, it made a profit; otherwise, it lost money. This is provider financial risk at the extreme.
At its zenith, in the late 1990s about one-third of physicians had capitation contracts. Among them, revenues from capitation accounted for 21 percent of their total. Growth in capitation motivated provider consolidation and coincided with rapid expansion of physician practice management companies. As for-profit, investor owned companies, these firms purchased physician practices and linked them together in large networks.
First came the unraveling. As larger, consolidated provider groups exercised their new-found market power, they regained the upper hand in negotiations with health plans. They began to cancel their capitation contracts, shifting financial risk back to insurers.
Then came the crash. Provider groups still under capitation suffered financial losses as health care cost growth accelerated in the late 1990s. Wall Street’s valuation of the fifteen largest physician practice management companies fell by more than 60 percent between December 1997 and September 1998, and the entire industry lost nearly half of its stock market value over the same period.
Among the lessons learned are, on the one hand, that providers can be too small to effectively manage health care financial risk, spreading it over too few patients. On the other hand, they can be too big for insurers to resist their efforts to push the assumption of that risk back on their plates. Both lessons point in the same direction: capitation is too much risk for providers to willingly, viably absorb.
Enter ACOs. There are a variety of different flavors both within Medicare and in the private sector: Shared Savings, Pioneer — I’ve heard rumors about zesty ranch and chipotle. In the interest of brevity, I will not describe them in detail. Suffice it to say, to the extent any of them penalize providers financially, the penalties are modest relative to capitation. Another important difference is that bonuses are tied to quality performance, which was rarely, if ever, part of 1990s capitation contracts. So, ACOs are an intermediate step toward capitation and attempt to balance the twin concerns of quality and costs.
Finally, sorry to get all second derivative on you, but ACOs are forming during a period in which the rate of growth of health care costs is moderating. In contrast, the demise of capitation was hastened by an accelerating growth rate. This difference may help provide ACOs a foothold, though it is no guarantee of long-term success.
At the moment, ACOs are a tiny part of today’s health care landscape. But they are growing. For example, Medicare’s Shared Savings and Pioneer ACO programs now contract with 154 organizations serving 2.4 million beneficiaries in forty states. Including private payer ACOs, there are 221 in 45 states.*
But will they work? To the extent that they place providers at less insurance risk than capitation contracts, ACOs are less likely to suffer the same financial failures. The flip side is that they also have less incentives to control cost, though more incentives to provide more care, as well as care consistent with measured quality.
The ACO movement also encourages provider consolidation, something we saw in the 1990s that, for better or worse, contributed to the unraveling of capitation. Apart from its relation to political power, Medicare is largely immune to provider market power. But private insurers are not. One potential consequence of Medicare’s push toward accountable care organizations is that hospitals and other provider groups will increase their bargaining leverage over insurers, extracting higher prices in contract negotiations and leading to higher private insurance premiums. Whatever you call this, it’s not cost control.
Naturally, I’ve omitted some important points and details that are available in the paper. But I hope I’ve conveyed enough to impress upon you that there’s a good reason we’ve been at this cost control problem for so long. It’s hard! Our effort to find the sweet spot on the spectrum of allocation of financial risk to payers vs providers manifests itself today in a Catch-22: Current ACO models may not come with big enough sticks to control costs. The implicit carrots encourage amassing of greater market power, which is problematic for private payers. On the other hand, we tried a larger stick in 1990s — capitation — and that didn’t succeed either.
The United States remains in the same situation it has been in for decades: unsure of how to bend the cost curve while maintaining or improving the quality of care. With accountable care organizations, the search for the sweet spot between provider and payer risk continues.
* This is the only fact in this post not in the paper. Source: The Commonwealth Fund.
Austin Frakt is a health economist at the Department of Veterans Affairs and Boston University’s Schools of Medicine and Public Health. He blogs on health economics and policy at The Incidental Economist.
As part of our ongoing effort to raise awareness of health services research and increase its application in policy and practice, AcademyHealth has partnered with Austin Frakt, Ph.D., and Aaron Carroll, M.D., M.S., to contribute posts on the subjects of health care costs, delivery system transformation, and public and population health – areas AcademyHealth has identified as a priority in the current policy environment. As regular contributors, they’ll be discussing current events with an eye toward how new and existing research informs the issues.