Many experts argue that the fee-for-service reimbursement model is a key driver of the nation’s rising health care costs and care fragmentation. While lawmakers have tried for years to curb so-called unnecessary utilization, this year’s health care overhaul aims to change health care provider behavior by hitting them where they’ll notice: their pocketbooks.

Medicare increasingly will experiment with several payment models, including value-based payment — where reimbursements are linked with quality and patient outcomes — and bundled payments, where physician and hospital reimbursements are combined into a lump sum. While both models raise questions, such as how Medicare will define “quality” and how physicians and hospitals can legally align, providers generally grasp the concepts.

Less understood is Medicare’s planned move to contract with “accountable care organizations” beginning in 2012 — partly because CMS has yet to define what constitutes an ACO.

Who Can Become an ACO?

We do know how the new ACO payment model is intended to work. Medicare will push providers to reduce utilization of high-cost services by setting total-cost-of-care targets for a given population of patients. This reimbursement concept will initially be voluntary but is meant to eventually encompass the entire Medicare population.

Most likely, ACOs will be an integrated combination of hospitals, physicians and other providers that can manage the cost, quality and utilization of services for a given population of patients. A recent Health Affairs brief posited five potential delivery system models, ranging from hospital-centric ACOs like Cleveland Clinic to ACOs driven by large primary care groups, such as California’s Monarch HealthCare, which could act as “gatekeepers” for the delivery of care.

Questions remain about which providers are positioned to transition into ACOs, and which providers will become supporting actors in another organization. The California law preventing hospitals from directly employing physicians creates a further wrinkle, although integrated delivery systems like Kaiser Permanente are well-positioned to manage costs while providing team-based care.

Echoes of HMOs Among Concerns

The model also raises questions because ACOs harken back to the “failed” HMOs and capitated payments that were in vogue during the 1980s and 1990s, but ultimately were abandoned. Under capitation, “California became notorious for such profit-enhancing schemes as ‘drive-by deliveries’ that would ban newborns and their mothers from even an overnight hospital stay,” Consumer Watchdog’s Judy Dugan wrote in California Healthline‘s Think Tank in February.

Others have raised concerns that ACOs may be hamstrung by political maneuvering. The California Association of Physician Groups, which the Wall Street Journal notes is the largest U.S. accountable care trade group, recently protested that lawmakers’ efforts to narrow insurers’ medical-loss ratios and classify expenses like nurse hotlines and wellness provisions as administrative costs “would create a disincentive for plans to contract with our members and undercut” the ACO model.

Nine out of 10 experts surveyed by Commonwealth Fund also felt that current financial interests and misaligned incentives will create significant barriers to ACO implementation. However, 54% of the same experts said ACOs will be an “effective” reform model — once CMS gets around to defining them.

Local Efforts Dot Landscape

With Medicare’s January 2012 ACO launch on the horizon, many providers already are re-evaluating how they operate to offer the best standard of care and repositioning for the coming payment shift, often by contracting with other organizations. In some areas, “the scramble is so intense” that physicians are signing new partnerships almost daily, the Los Angeles Times reports.

At the same time, hospitals are joining forces, state lawmakers are kicking off pilot projects and even private payers are getting into the act. Anthem Blue Cross of California in May announced its own ACO pilot with two Southern California physician groups; the pilot is slated to begin in 2011 and to last five years.

Can California Be a National Leader?

California’s Department of Managed Health Care’s Financial Solvency Standards Board is slated to help develop the state’s ACOs and ensure successful regulation. 

According to Keith Wilson, the physician who heads the board, California’s experience with managed care gives the state a leg up on implementing ACOs. Moreover, “It’s the kind of thing the rest of the country is looking to emulate,” Wilson said. He noted that some California physician groups recently led a standing room-only “national seminar on how to run accountable care organizations. … We have a lot of experience with this.”

The law firm Paul Hastings also suggests that California’s unique medical foundation model “could serve as a good platform for establishing an ACO,” given most medical foundations’ existing billings and collections infrastructure, high degree of clinical integration and legal structure.

However, California providers aren’t leaders on every ACO front. Many health systems have been slow to adopt patient-centered medical homes, which connect each patient in an ongoing relationship with a primary care provider. Given their focus on preventive care and goal of managing chronic disease, medical homes are “the cornerstone” for any new payment model, according to Thomas Bent, president of the California Academy of Family Physicians.

Like ACOs, much about medical homes remains ill-defined; for example, what role would nurse practitioners be allowed to play? California lawmakers may soon have an answer thanks to AB 1542, which would better define medical homes under California law and is wending its way through the Assembly.

While care providers strategize on ACOs, here’s a look at what else is happening in health reform.

Implementing the Overhaul

• On Aug. 30, Pennsylvania Insurance Commissioner Joel Ario will join HHS to oversee the establishment of state-based health insurance exchanges as the director of the Office of Insurance Exchanges.  The office is part of HHS’ Office of Consumer Information and Insurance Oversight. The federal health reform law calls for every state to have an exchange by 2014 (Blumenthal, Philadelphia Business Journal, 8/9). Prior to his appointment as state insurance commissioner in 2007, Ario served as Oregon’s chief insurance regulator (Von Bergen, Philadelphia Inquirer, 8/10).
• Funding for community health centers through the federal health reform and stimulus laws could spur up to $53.7 billion in economic activity in low-income neighborhoods over the next five years, according to study released on Monday by the Center for American Progress (Reichard, CQ HealthBeat, 8/9). Last week, HHS Secretary Kathleen Sebelius announced that community health centers soon will be able to apply for $250 million in grants to help them expand services. Sebelius said that the stimulus package has provided $2 billion to such centers over the previous 18 months, while the overhaul will provide $11 billion over five years (Norman, CQ HealthBeat, 8/6).
• Last week, Sebelius announced $159 million in grants from the Health Resources and Services Administration that will go toward training nurses, geriatricians and minority health care professionals. The move is the latest by the Obama administration to promote federal funding that addresses shortages in the U.S. health care professional work force, a problem that is expected to be more pronounced as the federal health reform law expands insurance coverage to more uninsured individuals (Reichard, CQ HealthBeat, 8/5).

Spreading the Word on Reform

• Last week, Republican Sens. John Barrasso (Wyo.), Richard Burr (N.C.), Tom Coburn (Okla.), John McCain (Ariz.) and John Thune (S.D.) requested that HHS pull a recently launched Medicare advertising campaign, featuring television star Andy Griffith, and reimburse the U.S. Treasury for any taxpayer funds used. HHS last week began a $700,000 TV ad campaign featuring Griffith, who touts new perks for seniors under the health reform law, such as no-cost check-ups and lower prescription costs (Lillis, “Healthwatch,” The Hill, 8/3).
• During his radio and Internet address on Saturday, President Obama credited the federal health reform law for putting “Medicare on a sounder financial footing,” alluding to a preliminary version of the Medicare trustees’ annual report, which predicted that Medicare’s hospital trust fund will remain solvent through 2029, 12 years longer than previously predicted. The report attributed the extended solvency to a series of improvements expected under the overhaul (Roll Call, 8/7).
• On Aug. 6, CMS sent a letter to state Medicaid directors informing them that the federal health reform law eases some barriers to care for U.S. residents who are “frail and disabled” outside of nursing homes. The letter states that as of Oct. 1, states can permit access under certain circumstances to “home- and community-based services” before Medicaid beneficiaries require institutional care. The services include home health aides, adult day health care and respite care services (CQ HealthBeat, 8/9).

On the Hill

• Last week, Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Committee Chair Max Baucus (D-Mont.) revealed changes to a tax-reporting requirement intended to partly offset the cost of the federal health reform law. The reporting mandate, which will take effect in 2012, requires businesses, not-for-profit groups and government offices to file 1099 forms with the Internal Revenue Service when they purchase $600 or more in goods from another business. Under the changes introduced by Reid and Baucus, businesses with fewer than 25 employees at any time during the tax year would be exempt from the reporting requirements. In addition, the threshold for filing 1099 forms for the purchase of goods would be increased from $600 to $5,000 (Rogers, Politico, 8/5).
• Sen. Blanche Lincoln (D-Ark.) recently announced that she is supporting a GOP-sponsored bill (S 3578) that would totally repeal the tax-reporting requirement from the health reform law, becoming the first Democrat publicly to do so. Sen. Mike Johanns (R-Neb.) introduced the bill last month, and 23 Senate Republicans already have endorsed it. According to Johanns, the existing provision would increase the number of 1099s filed by the average small business from 10 to more than 200 annually (Lillis, “Healthwatch,” The Hill, 8/5).

Spotlight on State Opposition

• After Missouri voters approved a referendum rejecting the individual mandate in the federal health reform law, Republicans trumpeted the results as evidence that U.S. residents oppose the overhaul. Last week, Missouri residents voted 71% to 29% to approve Proposition C (HB 1764), which effectively prohibits governments from mandating that state residents carry health insurance or penalizing residents for personally paying their medical bills (MacGillis, Washington Post, 8/5). Some experts argue that the Missouri decision could compel the law’s opponents to hit the polls in November and re-energize state-level efforts to challenge the legislation (Fields, Wall Street Journal, 8/5).
• State governments have begun implementing various parts of the federal health reform law, even as some of their leaders are challenging the law’s constitutionality. Currently, 20 states are engaged in a lawsuit contesting the reform law’s individual mandate and Virginia Attorney General Ken Cuccinelli (R) has launched a separate lawsuit arguing the mandate is unconstitutional. Regardless of their opposition, governments in those states are working to define new rules for health insurers and applying for a wide variety of federal grants offered through the overhaul (Pecquet, “Healthwatch,” The Hill, 8/6).
• PeopleV.US, a new group formed to oppose the federal health reform law, is expected to file a class action lawsuit in Nevada this week challenging the constitutionality of the overhaul and already is raising money for congressional candidates who pledge to support repealing the law. The lawsuit alleges that the reform law violates the U.S. Constitution’s first article and six of its amendments. Joel Hansen, a candidate for Nevada attorney general, will serve as the PeopleV.US’s attorney. The suit will name Obama, the Treasury Department and its Secretary Timothy Geithner, HHS and its Sebelius, U.S. Attorney General Eric Holder and the U.S. as defendants (Hunt, Politico, 8/9).

Eye on the Insurance Industry

• A new survey by the actuarial firm Milliman found that health insurance premiums will increase by 11% for preferred provider organizations and 9% for HMOs. Doug Proebsting, co-author of the study, said that several factors contributed to the estimate, including increased usage rates because of concerns over the economy and employment and the uncertainty surrounding the federal health reform law (Puget Sound Business Journal, 8/2).
• Although health insurers reported better-than-expected results in the second quarter of 2010, the federal health reform law likely will negatively affect the profitability of the largest commercial health insurers over the long term, according to a research note from Edward Jones analyst Aaron Vaughn. Edward Jones covers the managed care companies UnitedHealth Group, WellPoint and Aetna. Vaughn said the research firm is downgrading the three insurers from “hold” to “sell” and plans to drop coverage of all three stocks at the end of August (AP/Louisville Courier-Journal, 8/2).
• Health policy experts say the effect of the federal health reform law on health insurance premium rates is unclear, but insurers note that some people might soon begin paying more to account for expanded benefits mandated under the reform law. Several reforms that affect insurers and their premium rates already are beginning to take effect, such as provisions that require insurers to cover adult dependents until age 26; prohibit insurers from denying coverage to children with pre-existing conditions; eliminate maximum lifetime spending limits and end retroactive rescissions of policies for reasons other than fraud (Colliver, San Francisco Chronicle, 8/9).

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