The quick answer to the title question is yes, but not in the way the architects of the Affordable Care Act (ACA) intended. Indeed, the most significant unintended consequence of the ACA may be the way poorly designed regulations are inadvertently opening the door to improved medical practice.

But first things, first. At the time the ACA was enacted, the belief that health care delivery in the United States was about to be radically transformed was widespread. “We’re going to find out what works and then go do it,” said Barack Obama. Doctors will learn to practice medicine like engineers, predicted Atul Gawande. The profession will be dominated by Accountable Care Organizations (ACOs), said Karen Davis, and doctors will be rewarded for lowering costs and raising the quality of care. Only through ACOs can we achieve low-cost, high-quality care, said Elliott Fisher. Fee-for-service medicine is the problem, we were told, and the solution is bundled care. The idea that we should buy on value, not on volume, was a sentiment often heard.

Four years on, these predictions have been far from the mark — to put it charitably. We have spent tens of millions of dollars on demonstration programs and pilot projects investigating coordinated care, integrated care, managed care, pay-for-performance medicine, electronic medical records systems, etc. The result? Three separate Congressional Budget office reports have concluded that none of this is working, or at least not working very well. (See here, here and here.) The experience of the pilot ACO projects has been dismal. A total of 5.3 million Medicare beneficiaries are now in Medicare ACOs. Yet in their first year, only 29 percent of the physician-led ACOs and only 20 percent of the hospital-sponsored ACOs turned a “profit.” And among those that did so, the results were fairly mediocre.

The response of the advocates: double down and do more of the same. But before we throw good money after bad, perhaps we should stop and take stock.

In what I am about to say, I am relying heavily on input from Larry Wedekind, CEO of IntegraNet. This is a firm that operates independent physicians associations under contract with Medicare Advantage plans and commercial insurance plans. These groups go under different names but let’s settle for Integrated Delivery Networks, or IDNs. As far as I can tell, the IDNs managed by IntegraNet are at the cutting edge. The company also has managed about 30,000 patients under contract with the Texas Medicaid program. And it manages an ACO which appears to have saved the most money (per enrollee) of any ACO in the entire country

Here is the bottom line:

  • As I have pointed out before, (see here and here) many of the ideas that aren’t working in the pilot programs both here and in other countries actually are working in some of our best Medicare Advantage (MA) plans — especially in ones that are contracting with doctor associations. IntegraNet, for example, routinely lowers costs by about 25 percent. while raising quality at the same time.
  • The most significant innovations in medical practice are usually produced by entrepreneurs, and although they may be motivated by many factors, entrepreneurs tend to flourish where there is significant downside financial risk and significant upside potential for profit. That’s why some of the most interesting things going on right now are in IDNs managed by entrepreneurs, in contrast to the activities of hospitals, insurance companies and government agencies.
  • Ironically, the ill-advised medical loss ratio (MLR) regulations have inadvertently had a good effect — they have spurred insurance companies to shift the management of care to doctor organizations, and thus increased the sphere of opportunity for entrepreneurial medicine.
  • The original ACO regulations were so onerous that entrepreneurs (and some of our best medical centers) avoided them altogether. But now it appears that the Obama administration is moving in the direction of using Medicare Advantage-type (risk adjusted) formulas to pay ACOs. This will attract more entrepreneurs to the ACO market and, if the administration continues the trend, ACOs could actually become more attractive to enrollees than the MA plans.
  • Politically, we are about to come full circle. Although Barack Obama ran against the MA plans in the 2008 election, and although many Democrats regard Medicare Advantage as unhealthy “privatization,” this is the only place in all of Medicare where the president’s promise is being realized: practitioners really are finding out what works and they are doing it. Unwilling to endorse the MA approach, the administration created a new entity called an ACO. But the ACO model is likely to become viable only to the extent that ACO plans look more and more like MA plans. If all goes well, we are likely to end up with a reformed Medicare that looks very much like something the president campaigned against when he promised to reform the health care system. And if that happens, the President and Rep. Paul Ryan may discover that they see eye to eye on just about everything relating to Medicare!

Let’s look more closely at how all this is working.

Medicare Advantage Plans. As noted, many Medicare Advantage plans are successfully doing what the Obama administration is unsuccessfully experimenting with in pilot programs and demonstration projects. That is, many of these plans are using coordinated/integrated/managed care systems to achieve fewer admissions, fewer readmissions and fewer hospital days than conventional Medicare. (See a summary of the evidence by Jeff Lemieux in a comment at the Health Affairs Blog.)

They are often doing so by adopting strategies that are the opposite of the administration’s approach, however. For example, IntegraNet pays its doctors fee-for-service (plus performance bonuses). The Obama administration is convinced that fee-for-service payment is the problem, not the solution. Also, IntegraNet pays doctors who meet performance goals more than Medicare’s standard rates. Yet the administration’s Plan B for cost control in Medicare is squeezing provider payments, not increasing them.

Of particular interest to me is the opportunity to give economic incentives to patients. A number of insurers are rebating some or all of the seniors’ Part B premiums if they will cooperate and choose a medical home. As Larry Wedekind explains:

It is the beauty of competition in a marketplace with several competitors all bidding for additional business from seniors. The ones that we have seen in the Houston market have ranged from a full Part B premium give-back to seniors to a 20 percent portion of it…I’ve seen as low as $20 per month give-back to full premium give-back of $96 per month in the past. The Part B premium this year is $110.50, but no one is giving more than $50 per month back this coming year. The give-backs are often related to a Medicare Advantage Special Needs Plan such as a diabetic plan to help defray the higher costs of drugs.

IntegraNet and other independent physician organizations got a big boost when the Obama administration imposed a medical loss ratio (MLR) regulation on participating insurers. Under the regulation, health insurers must spend at least 85 percent of their revenues on “medical care,” leaving no more than 15 percent for administration, overhead and profit. If the health insurer contracts with an IDN, such as the one managed by IntegraNet, however, all the fees paid to the IDN count as “medical care” — no matter how much the IDN spends on administration.

As a result, IntegraNet can do something Humana, Aetna, and UnitedHealthcare cannot do: By becoming efficient and improving patient health, it can lower its medical costs, say, to 70 percent of premium income and reap much of the remainder as profit — to be shared with the doctors and even the insurers (!).

Accountable Care Organizations.The biggest difference between MA plans and ACOs is that the former were designed by Republicans and the latter by Democrats — and I am being only partially facetious. Both are over-regulated. But ACOs are regulated to a degree that is hard to fathom.

For starters, there is a 427 page book of rules, describing what an ACO has to do in order to be an ACO. The administrative burdens are so large that the average ACO spends $2.2 million on startup costs alone. From that point forward, the ACO functions like a (highly) regulated utility.

Medicare patients do not choose an ACO. They are assigned to one. The ACOs are forbidden to market to prospective customers, and seniors don’t even know they are in one until they are contacted by the ACO they are assigned to. Even then, the communication is tightly regulated. Any letter from the ACO to a new member must be approved by CMS and all introductory letters essentially look alike. In general, no ACO is able to have a better promotional piece than a competitor.

In an initial letter, seniors are asked if they would like to be in an ACO. If they say “no,” the ACO is still responsible for all medical costs, even though it has no influence over any treatment decisions. Unlike MA plans, ACOs cannot restrict enrollees to a network. In fact, if an enrollee goes to a primary care physician not in an ACO’s network, CMS is likely to switch the patient to another ACO. Within the first twelve months of IntegraNet’s ACO experience, 60 percent of its enrollees were switched to another ACO and an equal number were imported from some other ACO. (Although see lower potential switches reported here.)

During the first three years of an ACO’s life, the benchmark for measuring savings is projected costs based on the previous three years’ experience for each patient. Whereas MA plans are paid a premium based on a highly sophisticated risk adjustment formula (with more than 70 variables), ACO adjustment is based only on one crude measure: recent spending. If the cost for ACO enrollees comes in above the projection, the government bears the entire loss. If it comes in below, the government shares half the profit (“savings”) with the ACO.

Even then, the ability of the ACO to profit is highly constrained. The ACO gets nothing if it reduces expected spending by 2 percent or less. And the government takes the entire profit to the extent that it exceeds 10 percent. The ACO gets to keep only half of savings that range between 2 percent and 10 percent.

This undoubtedly explains why the initial experience has been so bad. For participating ACOs, there is no downside risk — at least initially — and there is a strict limit on any gains. Thus, the incentives to experiment and innovate are extremely weak. IntegraNet posted an 11 percent gain in its first year, for example, and the government seized all of the last 1 percentage point. Had the company performed in a manner similar to its Medicare Advantage experience, it would have posted a 25 percent gain and the government would have seized all of the last 15 percentage points.

During the first three years of operation, doctors are paid fee-for-service and the money goes directly to the physicians. So the ACO doesn’t actually get anything from the government until year end — and even then it can expect to wait another year or more before it sees the money. Also, there is tight regulation of what kind of bonuses the ACOs can promise doctors.

In the fourth year of operation, the ACO will be given capitated payments and it will share 50/50 in the losses as well as the gains. The benchmark for establishing gains and losses will be re-set, however, based on the firm’s first-three-year experience. Say the ACO saved an average of 5 percent of expected costs for the first three years. Then the benchmark for the fourth year will be expected costs minus 5 percent. No wonder so few entrepreneurs have been attracted to this market.

The entire set up is about as anti-entrepreneurial as one can imagine. In fact, firms like IntegraNet initially were not even allowed into this market! Most, if not all, of the recipients of demonstration grants for the initial ACO pilot experiments (the “pioneers”) were hospitals or hospital-based physician organizations.

Medicaid Contracting. Although not our main focus here, it is worth noting that many of the same problems that beset the ACO program also plague the Medicaid program. About two thirds of Medicaid enrollees are in private, managed care programs. The private insurers are not allowed to market to prospective enrollees, however.

Think about that. As of last year, roughly one-fourth of all the people who are entitled to sign up for “free” Medicaid insurance had not done so. Yet, the private contractors were not allowed to target neighborhoods and radio and TV venues where prospective enrollees are likely to be and encourage them to join. (Recently hired “navigators” are allowed to do this, however.)

Going Forward. The experience with the ACOs has been so disappointing the Obama Administration has announced that it is making important changes, including a change in the risk adjustment formulas. ACO payment formulas in the future will look more like Medicare Advantage risk adjustment. Other changes could further allow ACOs to do some of the same things MA plans are now doing.

If this trend continues, ACOs could actually gain a competitive advantage over the Medicare Advantage plans. For one thing, MA plans only have a 7-week open enrollment period each year. For the remaining 10 months enrollees are essentially stuck in the plan they are in. Enrollment opportunities for ACOs, by contrast, are effectively continuous. Also, ACOs are not considered “insurance companies” and they therefore escape the costly regulation that Medicare Advantage plans must endure.

What Should Be Done? There is an enormous opportunity here to capitalize on what is already happening. It is often said that one of every three dollars in health care is wasted. That observation is vacuous, however, unless a mechanism exists to ferret out the waste and eliminate it. Here are a few steps toward getting that done:

  1. Deregulate. We need substantial deregulation across the board — in every program in which the government is contracting with the private sector for health insurance and medical care. About 90 percent of existing regulations are counter-productive and are barriers to low-cost, high-quality care.
  2. Allow product differentiation and competition.Health plans should be encouraged to innovate, experiment and find new and better ways of meeting patient needs. They also should have complete freedom to market their products to target audiences — certainly as much freedom as commercial insurers selling to the general public now have.
  3. Level the playing field. All forms of insurance and delivery should compete under the same de-regulated set of rules.
  4. Eliminate all restrictions on profit. If we want entrepreneurs to find solutions to our problems they need to be able to take big risks and reap big rewards. The value to society of successful innovation in this area is enormous. If entrepreneurs get rich in the process, more power to them. The benefit they will create for the rest of us will far exceed any profit they manage to earn for themselves.
  5. Allow less comprehensive care organizations. Dr. Jeffrey Brenner (“hot spots”) is saving Medicare and Medicaid millions of dollars keeping people well and keeping them out of hospitals, and he is getting next to nothing from the government in return. The Obama administration wants to force Brenner to become an ACO and manage hospital costs as well. That’s a mistake. Let people specialize in what they do best.
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