July 2011, Vol 4

Message From An Actuary
Tim Luedtke, FSA, CFA

This edition of The Actuarial View discusses the potential impact the establishment of Accountable Care Organizations (ACOs) could have on community hospitals and small physician practices. Should your organization wish to learn how you can leverage the opportunities found with ACOs please contact us. We are actuaries and understand the risks involved with ACOs and the rewards you can achieve.

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Tim Luedtke, FSA, MAAA, CFA
Principal & Consulting Actuary

Diane Luedtke, FSA
Principal & Consulting Actuary

ACOs - Community Hospitals Helping Physicians

Tim Luedtke, FSA, CFA

Accountable Care Organizations (ACOs) are receiving significant press; generating discussion in hospital board rooms and around physician lunch tables; and creating significant revenue potential for conference planners. With ACOs, policymakers seek to achieve the 'Triple Aim' of improving population health, enhancing the patient experience, and lowering the growth rate of health care costs.

In his September 9, 2010 health care address to Congress, President Obama identified Intermountain Healthcare and Geisinger as 'Best Practice' standard-setters that other health care organizations should model.1 Yet, a September 2010 Managed Care article cites potential problems with such ACO approaches, including "potential contentious and problematic relationships between providers - for example, a community hospital and tertiary medical center may compete for patients."2

Geisinger's cost decreases have had a sizeable impact on local community hospitals. Geisinger's ProvenHealth NavigatorSM is credited with lowering health care costs by 7%. Geisinger further reported that the key cost driver to this 7% reduction was "an 18% decline in hospital admissions [including a] 36% decrease in readmissions when measured across the entire population".3 As only about 4% of hospital admissions are readmissions, the vast majority of the decrease in hospital admissions is from first-time admissions and most likely admissions to the community hospitals that ultimately admit into Geisinger's tertiary capabilities.

As a possible way of addressing the financial impact on community hospitals, Geisinger introduced the ProvenCareSM program. The program sought to reduce costs by establishing and instituting best practices. During the five-year Heart Bypass Center Demonstration, Medicare saved $42.3 million, or roughly 10 percent on CABG surgery at the seven participating hospitals (including Geisinger under its ProvenCareSM program), compared to expected spending.4 Sources indicate that one example of a ProvenCareSM cost reduction was to reduce the types of sutures used for CABG surgical treatment from five to one, thus simplifying purchasing and inventory management. Yet, it is too soon to tell whether such programs will help the local community hospital as several of the Geisinger's local community hospitals are now seeking to merge with Geisinger.5

As an alternative to seeking such tertiary alignments, which are often costly and fail6, community hospitals may wish to consider offering the physicians with which they work a physician/community-led ACO as an affiliation benefit. It is commonly believed that the initial capital cost to establish an ACO is more than any one physician or physician group is willing to spend. Yet, for a community hospital or group of community hospitals, such a cost could be a far more attractive capital improvement opportunity than adding new bed capacity or a new specialty wing.

ACO Challenges
Some areas that may challenge physicians as they consider establishing an ACO include:

    1. Creating the Legal and Financial Structure for an ACO
    2. Understanding and Managing the Risks Being Taken
    3. Maintaining Compliance and Working Within Government Regulations

We at Navigator Benefit Solutions LLC have seen first-hand the potential risks involved and have developed a unique approach for managing these risks. If you would like to learn more, please give us a call.

1 Geisinger's Multi-ACO Efforts May Not Be Easily Replicated
2 Defined Contribution: Magic Bullet?.
3 Value and the Medical Home: Effects of Transformed Primary Care.
4 Bundled Payment: AHA Research Synthesis Report, May 2010.
5 Geisinger explores merger with Bloomsburg Hospital
6 UCSF/Stanford: Building A 'Prestige Cartel'

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