Some historical perspective on ACOs

The following guest post is by Kevin Outterson, Associate Professor, Boston University School of Law.

Austin has blogged on ACOs several times in the past weeks, including this post on Bob Berenson’s article outlining how ACOs could fail.  This comment caught my eye:

Could someone help me out here regarding ACOs so I don’t have to spend hours studying hype. Isn’t this just HMO redux? I remember the discussion years ago that HMOs were going to control costs by making providers accountable (remember “capitation”) but when the public caught on that their doctors made money by withholding services HMOs blew up. Are we looking at the same thing regurgitated with a new name?…

Indeed.  In the 1990s, physician groups in some markets aggressively contracted for risk-based compensation, including full capitation.  They were “accountable” for the integrated delivery of care to patients.  The physician practice management (PPM) company industry was built on this model.  From the 1997 MedPartners 10-K:

The Company is the largest PPM company in the United States based on annual revenues of approximately $4.8 billion as of December 31, 1996. The Company develops, consolidates and manages integrated healthcare delivery systems. Through its network of affiliated group and independent practice association (“IPA”) physicians, the Company provides primary and specialty healthcare services to prepaid managed care enrollees and fee-for-service patients. The Company also … provides disease management services and therapies for patients with certain chronic conditions. As of December 31, 1996, the Company operated … its PPM business in 26 states and was affiliated with approximately 8,850 physicians, including approximately 2,600 in group practices, 5,300 through IPA relationships and 950 who were hospital-based, providing healthcare to approximately 1.6 million prepaid enrollees.

One of the magic bullets promised by PPM companies was the cost savings associated with clinical guidelines and better HIT:

The Company enhances clinic operations by centralizing administrative functions and introducing management tools, such as clinical guidelines, utilization review and outcomes measurement. The Company provides affiliated physicians with access to capital and to advanced management information systems.

The payment methodologies?  To move away from fee-for-service and embrace risk-based and episodic payment.  The following paragraph is priceless, all but calling MedPartners an ACO:

The Company’s PPM revenue is derived from contracts with HMOs that compensate the Company and its affiliated physicians on a prepaid basis and from the provision of fee-for-service medical services. In the prepaid arrangements, the Company, through its affiliated physicians, typically is paid by the HMO a fixed amount per member (“enrollee”) per month (“professional capitation”) or a percentage of the premium per member per month (“percent of premium”) paid by employer groups and other purchasers of healthcare coverage to the HMOs. In return, the Company, through its affiliated physicians, is responsible for substantially all of the medical services required by enrollees. In many instances, the Company and its affiliated physicians accept financial responsibility for hospital and ancillary healthcare services in return for payment from HMOs on a capitated or percent of premium basis (“institutional capitation”). In exchange for these payments (collectively, “global capitation”), the Company, through its affiliated physicians, provides the majority of covered healthcare services to enrollees and contracts with hospitals and other healthcare providers for the balance of the covered services.

How did it all work out?  In March 1999, California forced MedPartners’ local operations into bankruptcy, signaling the end of the PPM industry.  As Uwe Reinhardt wrote in Health Affairs a decade ago:

… much of the PPM industry now lies in shambles…  Between December 1997 and September 1998 Wall Street’s valuation of the fifteen largest PPM firms fell by 64%, from $10.6 billion to $3.8 billion.

In future posts, I’ll discuss some lessons learned from the PPM debacle that might apply to ACOs as well.

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