August 2011, Vol 5

Message From An Actuary
Tim Luedtke, FSA, CFA

This edition of The Actuarial View discusses the opportunity for new leadership in the establishment of Accountable Care Organizations (ACOs). 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.

And, if you wish to learn more about health reform and how you can stay abreast of the new regulations, you may wish to consider adding to your health care reform knowledge base. Healthcare Visions, Inc. offers a Health Reform Navigator that will help make it easier for you to follow the law and all of the new regulations. If you wish to learn more, please go to Health Visions, Inc.. Or, if you'd like to see what others have to say about Navigator Benefit Solutions LLC, please see Love A Local Business.


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

Diane Luedtke, FSA
Principal & Consulting Actuary

Help Wanted: ACO Leadership

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.

Policymakers have indicated the desire to meet this 'Triple Aim' by empowering and rewarding physicians, primary care in particular, which coordinate care for their ACO patient populations. Empowerment can be seen by the greater anti-trust freedom allowed for physicians working within an ACO. Recently released draft FTC guidelines create an anti-trust safety zone which permits physicians working within an ACO greater freedom to improve and coordinate care.1

The 'Triple Aim' primary-care physician (PCP) focus is evident by how beneficiaries are assigned within the Medicare Shared Savings Program. Each Medicare patient beneficiary is assigned to a particular ACO solely based upon PCP services. Hospitals appreciate how important physicians are to their future as they increasingly seek to acquire primary care physician practices.2,3 This article reviews creating an ACO from both a physician and hospital perspective and ends with some thoughts regarding other potential parties who may wish to establish an ACO.

Physician Perspective

In order to help the Delaware County Medical Society assess physician understanding of and interest in ACOs, Navigator Benefit Solutions LLC prepared and recently released a survey. The survey shared some new insights and opportunities created by the Medicare Shared Savings Program with several follow-on questions designed to assess current ACO understanding within the physician community. Accountable Care Organizations are a hot topic with local Philadelphia hospitals as each creates its own ACO and solicits participation from the local physician community.

Initial Thoughts

Participation so far has been too light to draw significant conclusions, yet wish to share some initial thoughts and encourage broader participation:

    1. Physician knowledge of ACOs is currently limited and have keen interest in learning more
    2. Local medical societies are viewed as an important information source
    3. Physician interest is greatest within the specialist community
    4. In the absence of any viable alternative, physicians believe that hospitals will be the most likely ACO organizer

ACO Challenges

Areas offering the greatest challenge to establishing an ACO by the physician community include:

    1. Creating the Legal and Financial Structure for an ACO
    2. Understanding and Managing the Risks Being Taken
    3. Finding Required Startup Capital/Legal Expenses
    4. Maintaining Compliance and Working Within Government Regulations

Yet, the most significant challenge expressed within the initial responses is concern about being able to actually lower the cost of health care and create savings. Physicians do not believe they can do it alone. Hospitals, too, recognize that improving health care efficiency demands closer alignment with physicians and utilize the accountable care organization concept to drive closer alignment with physicians.

Hospitals Leading the Way to Integration

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.4 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".5

How is this accomplished? According to Geisinger, "[The ProvenHealth NavigatorSM] functions as a partnership between participating primary care practices and Geisinger Health Plan (GHP). Central to the model is the transfer of population management capabilities, including nurse case managers, from the health plan to the practice sites."6 These nurse case managers are GHP employees, integrated as part of the practice care team and located at the primary care office. By having case managers directly in the primary care office, the movement toward greater integration among health plan, hospital, and physician becomes much nearer to reality.

And financially, it is believed that a significant portion of Geisinger's success came at the expense of the many community hospitals in Geisinger's market area. As an example, Shamokin Area Community Hospital suffered both a decrease in revenue and in net operating contribution margin (revenue less expenses divided by revenue) from 2008 to 20097, before agreeing to an acquisition by Geisinger at the end of 2010.8 And in the last six weeks, Geisinger announced it is also exploring acquisitions of both Bloomsburg Hospital and Scranton Community Medical Center.9,10

In 2010, Geisinger Health System's revenue increased by over 10% and operating contribution margins expanded significantly.11 Clearly for Geisinger, closer alignment with the physician community through the ProvenHealth NavigatorSM led to success for Geisinger and ultimately to the opportunity for significant delivery integration.

It is too soon to predict the long-lasting benefits of Geisinger's integration. Such integrations have been attempted in the past with mixed results. While care coordination can be enhanced, physician independence and competition can suffer. The end result depends heavily upon how well the resulting organization works together, improves care, lowers costs, and shares in improved efficiencies. In the past meeting these objectives has been challenging, as physician incentives may become misaligned within a large integrated system.12,13

Rather than pursuing full integration, an alternative may well be for hospitals to align with primary care physicians without actually owning them. As stated earlier, physicians view the establishment of an ACO as quite challenging with numerous hurdles which need to be overcome. Hospitals could consider offering a physician community-led ACO as a benefit for affiliating physicians. 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.

ACOs - Opportunity for Physician Partnerships

Beyond physicians and hospitals, the opportunity is significant for new entrants willing to provide the capital, organization, governance, and leadership to create new relationships with physicians that could dramatically change the health care landscape. Pharmaceutical companies, insurance payors, reinsurers, community groups, and venture capitalists may all wish to consider the opportunities presented by the Medicare Shared Savings Program.

Pharmaceutical companies in particular may wish to consider establishing a physician/patient-centered ACO. Owning an ACO organizer offers a unique opportunity to manage earnings risk for pharmaceutical companies that will be doing business within an ACO environment. One significant advantage is that an ACO adds a component whose value goes up as health care cost increases moderate.

Another interesting ACO organizer might be for a leading company from the food industry to organize an ACO. As Hippocrates said, "Our food should be our medicine. Our medicine should be our food." As some believe that the food industry is contributing to our obesity problem14, organizing an Accountable Care Organization offers the food industry an interesting opportunity to more closely marry health care benefits with its food strategy.

We at Navigator Benefit Solutions LLC have seen first-hand the potential risks involved in an ACO and have developed a unique approach for managing these risks while retaining physician empowerment.

1 Antitrust Considerations from the Recently Released ACO Proposed Regulations
2 Indiana's Good Samaritan Hospital Acquires Medical Practice in Effort to Develop ACO
3 Physicians, hospitals rush to form ACO alliances.
4 Geisinger's Multi-ACO Efforts May Not Be Easily Replicated.
5 Value and the Medical Home: Effects of Transformed Primary Care
6 Ibid
7 See Form 990s at
8 Pennsylvania's Geisinger-Shamokin Area Community Hospital Merger Receives Final Approval
9 Geisinger, Bloomsburg to consider merger
10 Geisinger Health Plans Merger with Scranton's Community Medical Center
11 Geisinger Health System Annual Report - 2010
12 From Primary Care Physician Employment to Private Practice: Easing the Transition
13 Lovelace Doctors Leaving the System
14 The Role of the Food Industry and Its Impact on Global Health

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