Health Care: End the 'Perverse Incentives'

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Because they will be measured and rewarded based on their ability to balance cost containment and quality improvements, ACOs will satisfy patients—something at which HMOs have failed.

Changing a Culture of Skepticism

This is easier said than done. For all its sophistication, health care is factionalized. Providers lack expertise at working cooperatively and there are few incentives to foster that level of coordination. With doctors and hospitals, incentives can even be adversarial: Doctors make clinical decisions, including whether or not to use expensive medical technologies, while hospitals bear all the costs. Changing that culture of skepticism will be challenging, even in an aligned model.

The new organizations will require an extensive investment in technologies to improve coordination and convenience, such as electronic health records. Even with the government's investment in health technology, adoption will cost dearly and prove technically complex. RAND puts the adoption costs at $7.6 billion annually.

Legal barriers stand in the way, too. Outdated laws bar hospitals from sharing efficiency savings with doctors unless the physicians are employees. These policies must change so that loose hospital-doctor cooperatives can operate as ACOs, functioning as teams on behalf of patients while preserving independent ownership and autonomy. This can't happen until federal agencies such as the Justice Dept. and the Federal Trade Commission make clear that integrated models do not violate antitrust and other laws. Without such clarification, ACOs are unlikely to flourish in the private market.

Perhaps most important are the many unknowns in the world of ACOs. If a group reduces costs, what portion of the savings should it keep? How should payments be divided among doctors, specialists, nurses, and others providing care? What financial benefits will flow to patients? How should ACOs be organized and led? How fast can they be implemented, given the cultural, financial and operating changes required?

Premier Healthcare Alliance: Testing

The only way to answer these questions is through experimentation. This is what 25 health systems—integrated delivery networks of hospitals, physicians, and a range of acute care services—in the Premier healthcare alliance have been doing for close to a year. We're testing a variety of ACO approaches in more than 80 hospitals in 19 states that will serve as models for the nation as we move to more accountable health care.

Through our experience in collaborating, we've learned that there is no "one size fits all" approach. Today's emerging models need to be flexible and customized to meet a given community's competitive conditions, care needs, and physician make up. Moreover we've learned that a range of payment models needs to be tested. These include a near-term approach that entails fee-for-service reimbursement with the potential for bonuses based on quality and efficiency gains, as well as those that provide monthly or yearly payments for care, allowing the ACO to keep any funds that go unused—provided quality goals are achieved.

The work ahead will be difficult, but we must have the courage to test this new idea in health care. The U.S. Medicare program has already embarked on this road and will in 2012 implement an ACO program based on shared savings. To ensure continued success, we first have an obligation to prove this concept in the private markets. It's the only way we will be able to move away from a status quo that offers myriad known pitfalls for consumers—not to mention the federal budget. ACOs have the potential to shift the focus from treating the sick to keeping people healthy. Although we don't yet have all the answers, I believe we're finally on to something that will create a better, more sustainable future.

DeVore is chief executive officer of Premier, a national alliance of more than 2,400 U.S. hospitals and 70,000-plus health-care organizations.