HMO or ACO? What’s the difference?

The following originally appeared on The Upshot (copyright 2015, The New York Times Company).

In pursuit of greater efficiency in the United States health system, public programs and private insurers have begun to pay some hospitals and physicians differently. These new payment models take many forms, but they all impose greater responsibility for cost control and quality improvement on providers and bear some resemblance to failed health care financing arrangements from the 1990s. However, there are some distinctions that could make all the difference.

recently announced partnership that includes Anthem Blue Cross in California and seven Los Angeles-area hospital systems exemplifies these new models. Some have called “Anthem Blue Cross Vivity” (or just “Vivity”) bold and game-changing. It has characteristics of managed care plans more popular in the 1990s — like health maintenance organizations — as well as those of more modern accountable care organizations, or A.C.O.s. It has been characterized as both. What’s the difference?

As reported by my colleague Reed Abelson, the ambition of the new venture is to provide coordinated, high-quality care normally associated with big-name, integrated systems like Kaiser Permanente, Intermountain Healthcare and Geisinger Health System. Such systems are the inspiration for accountable care organizations, which vary in form but generally contract with Medicare, Medicaid or private insurers to provide integrated care for a large population of patients and can earn bonuses for meeting cost and quality targets or, in some cases, be penalized if they don’t.

Vivity is positioning itself as the antidote to high health-insurance premium growth in California, five times faster than inflation in recent years. It will team up with hospitals and doctors to provide coverage at 10 percent below the typical cost of a large-employer health plan by “aggressively manag[ing] care,” with little to no cost sharing, both characteristics of 1990s-style managed care. Vivity will also operate under a fixed, per-patient budget, called capitation, which was also a characteristic of some 1990s managed care plans. Participating providers must meet quality benchmarks (as yet unspecified), and Vivity’s partners will share in profits and losses, which are characteristics of accountable care organizations.

Vivity is not alone. In a recent commentary in The Journal of the American Medical Association, Zirui Song and David Chokshi described other initiatives by private insurers intended to control health spending by changing how they pay doctors and hospitals. One of them is Massachusetts Blue Cross and Blue Shield’s Alternative Quality Contract. With it, the insurer has contracted with 15 provider organizations to purchase care under prespecified budgets (with some protections so that providers aren’t at full risk for all costs) with quality-contingent bonuses. A recent survey of private health plans revealed that about 3 percent of their spending is under similar contractual arrangements. Some state Medicaid programs, in Illinois and elsewhere, are also experimenting with accountable care organizations. And Medicare has initiated several A.C.O. payment models that organizations may voluntarily join.

Do accountable care organizations just offer H.M.O.-style managed care by another name? My colleague Rick Mayes, of the University of Richmond, and I addressed this question in a paper published in Health Affairs. We concluded that the accountable care organizations, by and large, are devised more in response to the shortcomings of H.M.O.s than as a copy of them.

Consider, as we did, capitation. One way to view the relationship between an insurer — whether a private company or a public program — and a health care provider (like a hospital or physician group) is the extent to which each bears the risk of health care costs. When care is more costly than expected, who pays the difference? Or, when care is cheaper, who pockets the profit? Capitation is at one extreme: It puts all the financial risk of care on providers because they get a fixed annual or monthly payment per patient no matter how much care the patient uses. This is better for insurers, since it provides budget certainty for them. Though risky for providers, capitation offers them greater incentive to manage care and its costs; but it raises the concern that they’ll economize by providing less care than patients require.

Contrast capitation with more typical financial arrangements in which insurers bear most or all of the risk of health care costs. When it began in 1965, Medicare — like most insurers at the time — paid doctors whatever cost they claimed, so long as it was “usual, customary and reasonable.” And Medicare originally paid hospitals their claimed costs plus a bit more, a built-in profit. If a patient used more care, the doctor or hospital got paid more and the insurer bore the extra cost.

Though Medicare and private insurers have since moved away from standards such as these, by and large they have not moved very far. Most health care policy experts point to this feature of health care in the United States as one of the major contributors to its growing costs.

An exception to this type of financing was the experiment with capitation in the 1990s. Its ascendance at that time was fueled in part by managed care organizations’ desire to limit financial exposure. By the end of the decade, about one-third of physicians had capitation contracts, accounting for 21 percent of their total revenue. However, many providers were unable to keep the cost of care below capitation rates and suffered large financial losses. Many survived only by growing larger, consolidating with other provider groups, gaining sufficient clout to negotiate more favorable terms with insurers, including getting out from under capitation entirely.

Capitation and H.M.O.s waned after the 1990s, but some think they’re coming back under the guise of accountable care organizations and that they will, therefore, suffer the same fate. That’s not quite right. Accountable care organizations are not H.M.O.s. As the Harvard health economist David Cutler wrote in his recent book, the latter are insurers that “dictate to doctors and patients what they are allowed to do and what they cannot,” which was a significant source of friction between patients and insurers in the 1990s. Accountable care organizations, in contrast, are providers that “decide on good care and work with patients to provide that care.” Another difference that improves the experience of Medicare patients is that Medicare accountable care organizations do not require beneficiaries to receive all their care within the organization for it to be reimbursed, as H.M.O.s typically would.

A.C.O.-like contracts typically do not rely on full capitation. Instead, they usually put providers at risk for a portion of the cost of care; that risk is shared with insurers, somewhat sidestepping a major financial challenge to providers under 1990s-style capitation. Another big difference is that 1990s H.M.O.s and capitation contracts didn’t require providers to meet quality targets to receive full payment. Today’s accountable care organizations tie bonus payments to quality, a feature intended to mitigate against providers sacrificing quality for lower cost. Finally, accountable care organizations are developing in a climate of far better information resources — electronic medical records and techniques for using the data they collect for quality measurement and improvement — than existed in the 1990s.

So, in a variety of ways, the design of accountable care organizations has evolved from that of capitation-based H.M.O.s. Nevertheless, both capitation and the accountable care organization model encourage providers to integrate. If accountable care organizations are able to use greater market clout to negotiate higher prices, they may not lead to the savings many hope for. Indeed, coinciding with the rise of accountable care organizations or in response to it, a growing number of hospitals have merged, integrated with physician groups or offered their own insurance products, among other types of alliances that increase market power.

The takeaway is this: New health care payment models have evolved from those that proved unsustainable in the past, but that doesn’t mean they’re guaranteed to be long-term successes. Vivity is not just the next H.M.O.


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