Like HMOs and PPOs, the next big thing in corporate health care could be a three-letter acronym: the ACO. Accountable care organizations are regional or local groups of medical providers — doctors, hospitals, clinics — intended to provide coordinated health care with higher quality and lower costs. Although their genesis predates the Affordable Care Act (ACA), which took effect in 2010, the act contained an incentive for creating ACOs: a shared-savings program for groups that can meet cost and quality targets for Medicare patients. Since then, more than 400 ACOs have formed.
Now, some of these organizations are negotiating similarly intended and structured managed-care contracts directly with companies.
“Over the next few years, providers are going to have more interest in working directly with employers,” says Jordan Silvergleid, vice president at The Advisory Board Company, a health care consultancy. “They’re looking for growth opportunities, as Medicare and Medicaid are paying less and less over time, and reimbursements are often below their costs. That aligns well with employers that are looking to manage the cost trend.”
That will remain true even if the Republicans, now solidly in control of Congress, take the White House in 2016 and subsequently follow through on their threat to dismantle the ACA. While that might please a lot of CFOs, it’s generally believed that not everything the law wrought would simply vanish. In particular, it’s likely that ACOs will continue to be formed and developed — and to contract with employers.
“Companies that are doing these contracts with ACOs are looking to drive business-type efficiencies into them,” says Brian Marcotte, CEO of the National Business Group on Health (NBGH), an affiliation of large employers. He compares the enhanced efficiency of ACOs with the finely honed processes of lean manufacturing.
“Manufacturers have standard processes, standard ways of defining things, common cultural expectations, and an orientation to reorganize things as needed and to incentivize behaviors,” Marcotte says. “And they can methodically do this location by location and get a sense of how it’s working across the enterprise. We haven’t seen that in health care, because it’s so fragmented.” On the other hand, cooperation among providers is central to the ACO concept, and ACOs are popping up nationwide.
How They Work
Employer-ACO arrangements differ in the details, but the following elements are fairly common:
Certainly, some ACOs can be expected to perform better than others. The federal Centers for Medicare and Medicaid Services credited Houston’s Memorial Hermann Accountable Care Organization with saving more money than any other ACO, $58 million, from mid-2012 through 2013, the first two years of the Medicare Shared Savings Program created by the health-reform law. (See “Top-Saving ACOs,” below.)
Memorial Hermann’s share of the savings — measured against historical spending for current Medicare patients, adjusted by factoring in a national average spending-growth figure — was $28.3 million. It’s not a given that the program’s top performers will do as well under corporate contracts, but their results to date are promising.
The Savings Opportunity
Much of the cost-saving potential is driven by the degree of diligence with which an ACO adheres to standards for evidence-based medicine. For example, there is evidence that chronically ill patients who take their medications as prescribed have better outcomes, so devoting resources to making sure that happens is a best practice. There is evidence that certain surgical procedures reduce the rate of post-operative infections. Evidence-based medicine can lead to many such positive results, experts say, including shorter hospital stays, fewer readmissions and getting sick people back to work sooner.
“Evidence-based medicine should be the standard for all health care, but a significant portion of the supplier community doesn’t practice it because the way they are compensated, with fees for services, doesn’t drive it,” says Tami Graham, director of global benefits strategy at Intel.
Intel has been working since the beginning of 2013 with Presbyterian Health Services (PHS), an ACO in New Mexico, where it has 3,000 employees and 10,000 covered lives, including dependents. About 60% of those who use Intel health benefits have opted for the PHS plan. The company plans to launch its second “Connected Care” arrangement in 2015 in Oregon, where there are five times that many employees.
An “ah-ha” moment that figured prominently in spurring Intel’s direct-contracting effort came when the company determined that a mere 800 covered lives, among a total of more than 100,000, rang up $100 million of its $600 million annual health-care tab, Graham says.
Still, Intel has not yet seen much difference in claims costs in New Mexico between those using PHS and those opting for a more traditional, broader-network health plan. Graham expects that in time a gap will open up, but for now she’s encouraged that “we’re getting more for our money.” Employees and dependents in the PHS plan, as well as the company, are benefiting from better access to care, better care and better health outcomes, she says.
Another big company testing the ACO waters is Boeing, which has direct contracts for 2015 with two provider groups in Washington state, home to more than 80,000 of its employees. The deals are with UW Medicine and Providence Health & Services, the latter of which is also working with Intel in Oregon. The new care model is available for now to nonunion workers and some of Boeing’s smaller labor unions, with the two largest unions having opted to stick with their existing negotiated benefits arrangements.
Like Intel, Boeing cites saving money as a key motivation for doing the contracts. But Jeff White, director of healthcare strategy, acknowledges that it would be unrealistic to expect a big reduction in claims costs right away. “We’ll see how quickly the ACOs are really able to change the way care is delivered,” he says. “I think several years of evolution will be needed to unwind how things have been done for the past 40 years.”
But also like Intel, Boeing will value improved care quality, which could prevent hospital readmissions and keep people at work and “may be worth more than direct savings on the cost trend,” White says. Longer term, “Investing time in creating these contracts, which is a pretty big effort, is going to pay dividends for us. We have many employees for 20, 30, 40 years. If we can get them doing the right things when they’re 30 years old, that will really pay off when they’re 45 and healthier than they would otherwise be.”
Among large companies with far-flung locations, most are currently less eager for such deals than Intel and Boeing. “There’s just complexity in maintaining separate contracting arrangements,” says Michael Thompson, a principal in the health-care practice at PricewaterhouseCoopers. “Many employers rely on their health plans to reduce the complexity associated with contracting. When you get into an ACO arrangement, you’re back in the contracting business, and you might not have the administrative capacity. Some employers are doing with less benefits staff now.”
Indeed, among the NBGH’s 395 members, almost all of which are large companies, only 5% have direct contracts with ACOs or ACO-like organizations, says Marcotte. Still, that’s 20 companies — perhaps enough to spark a broad trend if they ultimately get the desired results. And an additional 13% of the members say they’re considering such arrangements for 2016.
Contracting with large employers provides the biggest volume boost for ACOs, of course, but they’ll take market share wherever they can. Memorial Hermann ACO — which was formally launched in 2007, although its member hospitals and physicians began cooperating on the implementation of accountable-care concepts in 2007 — is offering its narrow-network product directly to employers through its own insurance arm and also offers it through other insurers that provide third-party administrator (TPA) services. CEO Chris Lloyd says the number of employer customers of its network “has grown from zero to about 50 in two years,” and they’re not all large companies by any means.
“Smaller employers are viable for our approach,” Lloyd says. “An employer’s decision to do this is not necessarily based on its size, but often on its geography. Let’s say a local employer already has 50% to 60% of its medical spend in our network. We can demonstrate that being inside that network is 5% to 10% cheaper. If they can get to 90% of spend, that can bring an additional 4% to 5% reduction in premium cost.”
The typically midsize employers that contract with MissionPoint see similar savings, according to Clay Phillips, vice president for network innovation with Blue Cross Blue Shield of Tennessee (BCBST), which serves as the TPA for employers that contract with the ACO. That is, if every one of an employer’s plan participants used MissionPoint for all health-care needs, that employer would get a 15% pricing break compared to what it would pay for services provided though BCBST’s broadest network.
That’s just the basic pricing for using the narrow network; it doesn’t include any reduced medical spend driven by the accountable-care approach. But utilization would never be 100%, as some employees inevitably will opt for out-of-network providers, Phillips notes. That’s why employees of MissionPoint clients have access to both the narrow network and the broad BCBST network.
One Step at a Time
Landscape Structures, a 280-employee company in the Minneapolis suburb of Delano that designs, makes and installs playgrounds, is winding up the first year of its relationship with Ridgeview Community Network. The ACO includes Ridgeview Medical Center, a hospital two blocks from Landscape’s offices. At present, 264 employees and dependents are using the narrow network.
Karlye Emerson, the company’s vice president of organizational strategy and human capital, is happy that the underwriter of Landscape’s health plan is forecasting that its medical spend will be 7% higher in 2015. Its cost trend has been at about that level for a few years now, she says, while many small employers have been smacked with greater increases. “But with Ridgeview, I really believe we’re moving toward having less than a 5% increase every year.”
The ACO has two more employers lined up for 2015, one with 400 employees and one with 3,000, says Michael Phelps, the organization’s chief executive, who is also chief operating officer of the hospital.
Unlike many companies its size, Landscape Structures is self-insured. So are most if not all employer customers of ACOs to this point, notes Phillips at BCBST. State regulations applicable to employer-insurer relationships make the arrangement more difficult for fully insured employers.
“But it is my firm belief that these products ultimately will have a home in the fully insured market, with employers that have 100 or 150 employees rather than 1,000 or more,” Phillips says. “Market development will eventually drive that change. The market for these things is just not all that mature. As that changes, it will become easier to create products scaled for our fully insured book of business.”
For ACOs, a direct contract makes sense only if an employer has enough workers in a location to drive meaningful market share. The volume Landscape Structures is providing may not be huge but it is still meaningful to the Ridgeview ACO. Its member facilities are smaller than those of the hospital systems that serve Minneapolis and St. Paul, for which that volume wouldn’t move the needle much, notes Phelps.
Likewise, for an employer a direct deal makes sense only if it sees a meaningful value proposition before pulling the trigger. “While a lot of provider systems are moving in the direction of accountable care and population health, not all of them are yet performing at a level that is distinguishable from that of the broad community,” Thompson says. But he adds, echoing Phillips, “As that delivery system matures, employers will be more open to these preferred arrangements.”