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A health-care cost cutter with promise

America spends more on health care than any other country in the world, yet there is little evidence proving these costs yield quality care. When compared to 16 other developed nations, the United States ranked dead last in health outcomes.

Luckily, there is ample room to generate savings. Dartmouth University researchers estimate that approximately 30 percent of health-care spending is wasted. The key to rein in health-care spending is to uncover the sources of waste and proactively discover solutions to minimize it.

In the status quo the majority of hospitals use a fee-for-service model. Critics argue that this payment system is the crux of wasteful spending. Doctors are paid for the number of services performed rather than the quality of care they provide. This incentivizes a “more is better” approach to medicine. Bob Wachter, M.D., chair of the American Board of Internal Medicine explained in the Wall Street Journal’s The Experts, “much of medicine involves decision-making under uncertainty, and when the incentive system favors doing more, that’s what we end up doing.”

We need to adjust incentives so that they are truly in line with cost effective quality care.

In response to the fee-for-service model, the federal government included 45 provisions to the Affordable Care Act intended to cut costs. 

Earning a share of savings

One of the most promising provisions includes the implementation of Accountable Care Organizations. According to the Centers for Medicare & Medicaid Services (CMS):

“Accountable Care Organizations (ACOs) are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to their Medicare patients. … When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, it will share in the savings it achieves for the Medicare program.”

There are now well over 400 ACOs nationwide, currently serving about 10 percent of Americans. 

Minnesota pursued the ACO initiative aggressively. The state’s already highly integrated delivery system and extensive networks put them in a unique position to adopt the ACO model. In 2011, three Minnesota based health care organizations — Allina, Fairview and Park Nicollet — signed on to be one of the 32 Pioneer ACOs. The project intends to successfully accomplish the Triple Aim of improving population health and experience of care, while simultaneously reducing per capita cost.

Easier said than done

However, this is significantly easier said than done. Last month the CMS published a press release explaining the status of Pioneer ACOs, and the results were mixed.

Annalise McGrail
Annalise McGrail

The Pioneers served a total of 669,000 Medicare beneficiaries. All Pioneers exceeded 15 of the 33 quality performance benchmarks. Eighteen of the ACOs performed below budget and 13 of those performed well enough to receive bonus payments. Medicare costs in the ACO system increased by a smaller amount — 0.3 percent in comparison to the 0.8 percent experienced by non-ACO Medicare beneficiaries. Over a one-year period, savings amounted to $87 million, with $33 million going to Medicare.

While the savings are impressive, they do not account for the high input costs of creating an ACO. Therefore, as Dr. Kavita Patel and Steven Lieberman from the Brookings Institute point out, the majority of Pioneer ACOs likely did not break even.

In Minnesota, Allina was 0.8 percent over budget. Fairview and Park Nicollet did not report. All three have decided to remain within the ACO Pioneer program.

Potential difficulties in future years

These results demonstrate that it is possible to generate significant savings under the ACO model, but it is not easy. And the necessity to continually generate savings from one year to the next in order to qualify for bonus payments does not make it any easier. For relatively efficient organizations, continually cutting costs year after year while simultaneously improving care may not be feasible, and could undermine the ACO.

Discovering how to reach the Triple Aim’s third pillar of cost savings is not the only concern confronting ACOs either. The ACO model measures organizations based on several quality benchmarks. Hospital performance is empirically difficult to measure. For example, determining something as seemingly simple as hospital death rates has proven very challenging. Depending on the algorithm used, a hospital’s ratings can range from outstanding to dangerous.

There is also widespread disagreement pertaining to what benchmarks ACOs ought to strive for. Should they use a flat rate target? Or would it be better to base standards on comparative improvements from the previous year? Just this past March, 30 of the Pioneers — including all three Minnesota based ACOs — threatened to quit the program unless the quality benchmarks were postponed and adjusted. While the Center for Medicare & Medicaid Innovation (CMMI) and the Pioneers were able to come to a compromise, the request demonstrates the need to further re-evaluate benchmark standards.

However, these concerns are far from game over for ACOs. The ACO initiative has accomplished a lot by way of payment reform, and the recent Pioneer results offer a framework for organizations to move forward with appropriate adjustments. All in all, ACOs hold a lot of promise, but the health care payment system will not change overnight. The process will be lengthy and difficult.

The issue of transparency

In order to cut costs in the meantime, there is a comparatively simple approach of increasing transparency through publishing insurance negotiated rates. Health-care costs vary greatly not only by region, but by hospital, and by doctor groups too, according to a recent report from America’s Institute of Medicine. Seventy percent of price variation in commercial health-care spending is due to price mark-ups; therefore, increasing transparency could increase competition, thereby driving down costs. Small measures such as this one could help quell anxiety and ease the payment reform transition.

Payment reform is necessary, though as a stand alone insufficient. At this point, ACOs appear to be a viable option and Minnesota should continue to pursue the initiative. However, we do not need to stop there. While looking for ways to make ACOs more effective we can implement additional policies to supplement health-care cost cutting.

Annalise McGrail is an Undergraduate Research Fellow at Minnesota 2020, a nonpartisan, progressive think tank based in St. Paul. This commentary originally appeared on its website.

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Comments (2)

  1. Submitted by rolf westgard on 08/20/2013 - 09:44 am.

    Health care systems

    Judging the “quality of care” is very difficult. We don’t need to guess about which way to go.. Those other developed nations with single payer systems have demonstrated how well they work.

  2. Submitted by Todd Hintz on 08/20/2013 - 03:44 pm.


    While transparency is a good idea, it’s not a practical item for most consumers. People already lead very busy lives and don’t have the time to research a good toaster, let alone sort through medical ratings to find which hospital or clinic does which procedures the best. And when they’re in the midst of a medical emergency all considerations are right out the door: just get me to the nearest hospital!

    Payment reform is definitely necessary as doctors should be paid based on results, not how many procedures they can cram through the system. But we also need to implement single payer universal health care to make this system really work. Anything less is just spitting in the wind.

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