October 2011, Vol 6

Message From An Actuary
Tim Luedtke, FSA, CFA

The Centers for Medicare and Medicaid are expected to release the final regulations for the Medicare Shared Savings Program over the next few weeks. While we do not know how the final regulations will look, we hope that any revisions retain those provisions which support development of smaller Accountable Care Organization (ACOs). In this edition of The Actuarial View we share why we believe physicians and hospitals pursuing acquiring physician practices may wish to consider "Going Against the Flow". Should your organization wish to learn how you can leverage the ACO opportunities 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

Primary Care Physicians: "Go Against the Flow"

Tim Luedtke, FSA, CFA

On September 30th Dr. Ralph Steinman died; on October 3rd he was awarded the Nobel Prize. And thus, in death as in life, Dr. Steinman stands alone by becoming the only posthumously honored Nobel prizewinner. Dr. Steinman's work is revolutionizing cancer treatment as his discoveries laid the foundation for immunotherapy. Yet, in life, he received little praise, and often ridicule, during his early years. "Here's a guy who single-handedly started a whole field and stuck with it after the rest of us would have given up to save our careers," said Ira Mellman, vice president of research oncology at Roche Holding AG's Genentech, and a former colleague of Steinman's1.

Like Dr. Steinman's early days, opportunity abounds for primary care physicians willing to "go against the flow". Primary care physicians are being offered numerous opportunities from becoming an employee by selling their practice to starting a patient-centered medical home to joining a hospital-managed accountable care organization (ACO). Some believe that ACOs led by hospitals may lead to little change or worse lead to increased rather than lowered costs. As stated by Dr. Randall Bock, a solo general practitioner:

      "ACOs encourage market-consolidation. Hospitals, positioning themselves to become integrated systems join forces: purchase some physician practices ignoring others; choose separate, non-conflicting geographical areas - spheres of influence, in a real-life version of the board game Risk. Crowding out the smaller hospitals and independent doctors will result in decreased competition and lessened innovation. These new larger entities, contrary to the stated designs of the ACO-plan, can use this greater leverage with insurance companies to drive health-care costs higher2."

This view is further supported by a recent New England Journal Article which indicated that "[h]ospitals lose $150,000 to $250,000 per year over the first 3 years of employing a physician3". As hospitals are businesses, it is only reasonable that a purchasing hospital will find ways to make up for these losses.

Of all the opportunities available to primary care physicians and hospitals seeking to acquire them, the most interesting requires "going against the flow", maintaining independence, and creating independent accountable care organizations to participate in the Medicare Shared Savings Program. Unlike Patient-Centered Medical Homes which continue to reward primary care physicians for providing additional services, the Medicare Shared Savings Program seeks to align physician/patient interests by rewarding patient satisfaction, improved outcomes and lower costs.

Primary care physicians with strong, long-term patient relationships retain a unique position of trust. When combined with the price disparities which exist in health care today and the growth of higher deductible consumer-driven plans, this trust offers the solid foundation required for the physician and patient to work together to bring about lower health care costs and improved quality. Again, Dr. Bock:

      "In 25 years' of practicing medicine (such as mine), doctors see parents' infants grow to parents themselves, dependable adults gracefully age to more dependent seniors, while providing attentiveness and personalized care considering personalities, families, and community. Long-term primary care clinicians (PCC's) tend to order fewer tests through more time in conversation, addressing not just the symptom, but the person's reaction to it. But even with this high level of care, smaller group PCC reimbursement rates are lower than institutions' due to the latter's leverage over insurers; yet if not in a financial position to become an insurance-entity, any smaller practice will founder and disappear4."

Fortunately, primary care physicians and hospitals do have an alternative. Establish smaller more flexible ACOs with the physicians as the lead. While the Department of Health and Human Services estimates it will cost $1.8 million5 to establish an ACO and the American Hospital Association projects actual development and first year operational costs will be $11.6-26.1 million,6 smaller ACOs can be created for far lower cost. By creating a structure that heavily incents improved quality, cost savings, and patient satisfaction without adding employment bureaucracy, I am confident that physicians and their patients will work together to improve patient health. With rising deductibles, patients largely have the incentive to lower cost. And now the ACO regulations provide similar incentive to smaller physician practices that create an ACO.

Creation of such ACOs could advance knowledge and benefit science as well. By maintaining independence the diversity of physician/patient relationships will allow original thought to flourish within the medical community without widespread acceptance of "groupthink" and its associated shortcomings. Perhaps fostering an environment where discovery is encouraged and new solutions rise from practitioners for improving the experience of care, improving the health of populations, and reducing per capita costs of health care.

1 Nobel Laureate Ralph Steinman Dies 3 Days Before Prize Announced, Bloomberg, Oct. 4, 2011
2, 4 How an ACO will affect the relationship between a doctor and a patient , Randall Bock M.D., KevinMD.com and Accountable Care Organizations: "Accountable to Whom", Randall Bock M.D., May 16, 2011 Doctoring the Evidence
3 Kocher R, Sahni NR. Hospitals' Race to Employ Physicians -The Logic behind a Money-Losing Proposition. New England Journal of Medicine 2011. DOI: 10.1056/NEJMp1101959.
5 Medicare ACO options added after criticism, May 30, 2011, American Medical News
6 THE WORK AHEAD: Activities and Costs to Develop an Accountable Care Organization, Report prepared by McManis Consulting for the American Hospital Association, Keith D. Moore & Dean C. Coddington, April 2011

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