Accountable Care Organizations: Value Metrics and Capital Formation PDF

Preface

The only thing new in this world is the history that you don't know.

This year the consulting firm I started in 1993 will celebrate its twentieth anniversary. Over that period, Health Capital Consultants has developed a diverse clientele, first offering services to solo and small group medical practices, then participating in the consolidation accompanying the managed care boom of the 1990s, and, most recently, directing our focus to the economic and financial challenges of yet another iteration of healthcare reform. As both a healthcare consultant and small business owner (providing employee health benefits), I have witnessed the continuous transformation of the healthcare delivery landscape. In the past three years, however, I have noticed a policy movement that, while similar in many characteristics, may portend, in scope, a heretofore unseen paradigm shift. As I write this preface, the U.S. Supreme Court recently upheld the constitutionality of the Patient Protection and Affordable Care Act (ACA), in two consolidated opinions: National Federation of Independent Business v. Sebelius and Florida v. Department of Health and Human Services.¹ President Obama has just been reelected to a second term, as the primary driver and namesake for the historic healthcare form known as "Obamacare." These two landmark events will most certainly shape his presidency, as well as dramatically change the course of events in U.S. health policy.

However, regardless of the current level of political relevance, achieving cost and quality is not a new pursuit. For more than 80 years, there has been an effort to improve the cost and quality of healthcare.² The year 1946 brought the Hill–Burton Act that offered federal funding to hospitals that didn't discriminate and that covered a reasonable volume of patients. The year 1965 saw the advent of Medicare and Medicaid, the first universal (though limited) coverage for vulnerable populations. Then, in 1999, the Institute of Medicine's seminal work, To Err is Human: Building a Safer Health System, boosted public awareness of deficiencies in care for perhaps the first time; a harbinger of change for transparency and disclosure within an industry that had operated behind an opaque veil comprised of patients' often uninformed, and most always, trustful belief in the physicians and healthcare institutions on which they relied.³

Today the face of healthcare reform efforts toward a more accountable system of care is symbolized by, and has its foundation in, the ACA and related legislation on both federal and state levels. The Medicare Shared Savings Program (MSSP), which promulgates Accountable Care Organizations (ACO), is set forth on a mere four pages in the ACA.⁴ It has created waves throughout the entire industry and public discourse, by seeking to provide the accountability for quality and cost that the healthcare market has sought for decades. The ACA advances the movement toward universal coverage within a framework of existing federal, state, and private insurance models, in contrast to moving to a single payor system. The debate across every sector of healthcare begs the question: Given such high expectations, can ACOs deliver?

The United States attains lower global health ratings and spends nearly 50% more in per capital health expenditures than the next highest nation. At the same time, the percentage of GDP (gross national product) spent on U.S. healthcare is nearing 18%, 5% higher than any other country.⁵ As healthcare expenditures continue to rise, the economy has been suffering through the Great Recession.⁶ Although technically on the road to recovery, unemployment and the prevalence of uninsured and under-insured citizens have approached an all-time high.

Republicans and Democrats alike have agreed that the cost of healthcare is too high and quality must improve. More importantly, the discussion of quality and costs in healthcare has moved past politics and business into the homes of patients, resulting in a consensus that a change, of some sort, is needed, albeit the definition of that change is in volatile dispute. The incentives created by ACOs (a type of value-based purchasing) have the potential to shift the way healthcare is delivered to affect cost and quality issues.

Note that, accountable care is not a new concept, with roots in the past failed efforts of both managed care and managed competition. Despite the deep-seated history of accountable care, the newly proposed models of ACOs represent a renewed, and perhaps enhanced, opportunity to succeed in shifting the way healthcare services are delivered. Accountable care, transparency, and value-based purchasing are already making a foothold in healthcare through federal programs and private payors. The current economic environment of slowed growth, high unemployment, and record federal deficit and debt may be the perfect storm that drives lasting change. Whether ACOs are the ultimate answer, the aims of lower costs and better quality are the change which patients, payors, and the healthcare industry have pursued.

This text is designed to examine what ACOs may potentially offer, how feasible their promise is, and what value they create within the current healthcare environment. To provide a probative understanding of ACOs, requisite for any informed investment decision, we examine the history from which the accountable care concept evolved into the current manifestation of ACOs as conceived within the ACA of 2010. Without this background, a knowledgeable distinction between ACOs and the failed efforts at managed competition, through the managed care plans of the 1990s, cannot be made, dooming ACOs to result in a similar failed outcome.

To make an educated investment decision, the activities of capital and financial feasibility must be based on a thorough understanding of the structure and history of healthcare delivery. Once this foundation is laid, this book, through the looking glass of the Four Pillars of Healthcare Industry Value (i.e., regulatory, reimbursement, competition, and technology), addresses the following questions: what are ACOs; under what circumstances and capital structures might they represent a sound investment; what value might they offer; and, are they the cost containment and quality improvement answer for which we have been searching?

1. National Federation of Independent Business v. Sebelius, Certiorari to the United States Court of Appeals for the Eleventh Circuit, S.C. Slip Opinion No. 11-393, June 28, 2011.

2. The committee on the cost of medical care reports. 1932. The American Journal of Nursing 32 (12): 1286.

3. To err is human: Building a safer health system. 1999. The Institute of Medicine, November.

4. Patient Protection and Affordable Care Act. Public Law 111-148, Section 3032, 124 STAT 395 (March 23, 2010).

5. OECD health data 2011—Frequently requested data. 2011. The Organization for Economic Co-operation and Development, November. Online at: http://www.oecd.org/document/16/0,3343, en_2649_34631_ 2085200_1_1_1_1,00.html (accessed January 1, 2012).

6. Becker, G. S. 2011. The great recession and government failure. The Wall Street Journal, September 2. Online at: http://online.wsj.com/article/SB10001424053111904199404576536930606933332.html (accessed April 26, 2012).