Health Care

Paying Doctors to Shun Hospitals


In an attempt to tame growing Medicare costs, the Affordable Care Act encourages doctors and hospitals to form groups called accountable care organizations, or ACOs. The idea is to get doctors, hospitals, nursing homes, and other providers to work together to treat Medicare patients. They’re supposed to avoid unneeded or redundant procedures and emphasize preventive care and chronic-disease management. These alliances typically invest in electronic health records to track patient treatments and hire social workers to make sure patients take their medication and don’t miss checkups. In exchange for lowering Medicare’s bills, ACOs get to keep a portion of the savings.

“If we make people a whole lot healthier, they’re not going to go to the hospital”—Stephen Klasko

Three years into the voluntary program, 367 groups of health-care providers nationwide have formed ACOs. They’re responsible for 5.3 million Medicare patients, or about one in eight people on the federal insurance program for Americans 65 and older. Some 115,000 doctors in the U.S. are involved in a Medicare ACO in some way, according to data from Leavitt Partners, a consulting firm. Doctors forming an ACO generally create a new corporate entity responsible for their Medicare patients, but most stop short of merging their practices entirely. The first class of 137 ACOs, formed in 2012, has saved $380 million over the first year, Medicare announced on Jan. 30.

ACOs have achieved those savings in part by doing something the law didn’t anticipate: excluding hospitals from their groups. Although the program is designed to align the incentives of hospitals and physicians around keeping people healthy, more than half of ACOs are led by doctors’ practices and leave out hospitals entirely. “Some had come with the hypothesis that those who formed ACOs … would be led by hospital-dominated systems,” Jon Blum, principal deputy administrator at the Centers for Medicare & Medicaid Services, told reporters in January. “Quite the opposite has happened.”

Those who run ACOs say that avoiding expensive hospital stays is the key to keeping costs down, especially for nonurgent care that can be performed for less in clinics or during home visits. “Hospitals, they want to do your robotic surgeries, your heart catheterizations, your PET scans, your MRIs—all the expensive items,” says William Biggs, chief executive officer and medical director of the Amarillo Legacy Medical ACO in Texas. “We actually felt that hospitals were part of the problem.”

Hospital administrators aren’t thrilled about this turn of events. Stephen Klasko took over at TJUH System, a hospital group affiliated with Thomas Jefferson University in Philadelphia, in September. In his previous job running a health system in Florida, he helped set up a physician-led ACO at the Villages, the largest retirement community in the country. It didn’t include hospitals. Now he’s part of a new ACO that joins hospitals and doctor groups in southeastern Pennsylvania. Klasko says it will improve patient care, but it also poses a challenge to the finances of a big academic medical center. “If we make people a whole lot healthier, they’re not going to go to the hospital,” he says. “You’re going to need 20 percent or 25 percent less hospital beds, which means 20 percent are going to close.” That leaves hospitals with conflicting incentives. “If we’re successful,” Klasko says, “the hospitals are going to get killed.”

Anticipating this shift, some hospitals are buying doctors’ practices, says John O’Brien, former president of UMass Memorial Health Care in Worcester. Executives “are saying, ‘I have a strong hospital system, but I need a stronger presence in the primary care market, because a lot of the dollars in the future paradigm are going to go through doctors, not through hospitals,’ ” says O’Brien, now a professor at Clark University.

In Amarillo, Biggs says he’s resisted offers from hospitals interested in buying the physician-led ACO he formed. He says having a medical center on board won’t help lower costs or improve his patients’ health. Biggs recalls recently boasting to a hospital executive about reducing admissions by 15 percent in 12 months. Biggs says the man responded, “Well, don’t do it all at once.”

The bottom line: ACOs have saved Medicare $380 million, largely by reducing the number of patients admitted to hospitals.

John_tozzi
Tozzi is a reporter for Bloomberg Businessweek in New York.

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