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The Trillion Dollar Health Care Fix You've Never Heard Of


If you don’t know about ACOs, you should, for they could play a huge part in making our health system much smarter. Abhas Gupta reports on what an “ACO” is and how it could save US health care:

An Accountable Care Organization (ACO) is a health system where providers—doctors, hospitals, etc.—agree to align financial incentives with better health for a particular population. ACOs come in various flavors, but one particularly disruptive ACO business model is capitation. In capitated systems, organizations receive a fixed payment for delivering care, which means that they accept the financial risk for managing the costs of their covered population. Doctors who successfully control the costs of their patients get to pocket the difference between the fixed payments and their patients’ costs. This type of system ultimately profits by unleashing entrepreneurial innovation towards lowering health care costs.

Obamacare makes some provisions for ACOs, which is an important reminder that some parts of the law show a promising openness to real reform. However, as Gupta notes, there haven’t yet been enough ACO trials to know if they will actually work as the theory behind them predicts (a point Stephen Davidson expands on in his book on the ACA). These kind of organizations are still in the experimental phase, which makes Obamacare’s embrace of them premature. This may turn out to be (yet another) challenge for Obamacare’s implementation.

Still, ACO’s look to have a lot of potential, paired alongside the other reforms and innovations that are on the horizon. Gupta gives a good guide for readers interested in what they are and what they can do.

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  • Gene

    The structure and operational details of ACOs may be somewhat new, but the model is one we’re long-familiar with: managed care. I always get so confused about managed care. In the early ’90s it was the wave of the future, and then it became evil, and now it’s the wave of the future again. Why Dr. Mead is presenting this as something revolutionary is a mystery.

  • mgoodfel

    There are two problems you haven’t mentioned:

    1) a fixed capitation amount means doctors should avoid people with chronic medical conditions. They cost more to treat and the doctor doesn’t get more for treating them.

    2) if profits go up, the Medical Loss Ratio provision of ObamaCare requires them to lower the price, killing the extra profits from efficiency. Plans have to spend 80% of the price on care.

  • wigwag

    Capitation does not work because patients hate it. It was the centerpiece of the HMO movement a couple of decades ago and patients rebelled because rightly or wrongly, they were convinced that care deteriorated. Capitation provides physicians with a financial incentive to withhold care even when its needed just as the system that prevailed in the United States in the 1970s and 1980s (called fee for service) provided doctors with a financial incentive to provide care that wasn’t needed. The bottom line is that neither approach works.
    The other problem with accountable care organizations is that they provide an incentive for specialists in particular to eschew treating the sickest patients in favor of treating patients who are most likely to have a positive outcome.
    We already know how to reduce health care costs while improving quality; in fact, the solution is obvious. What we need to do to health care is implement the same approach that has dramatically brought down costs in banking, investing, long distance telephony, pornography, publishing, music and farm grown organic food.
    We need to disintermediate health care by destroying the middle man. It doesn’t matter whether that middle man is a private insurance company or a government bureau
    Disintermediation is the answer. Capitation, which has already been tried and failed, is only a potential solution where a big, fat, gluttonous, inefficient and hulking intermediary stands in between patients and doctors.

  • wigwag

    One reason that medical care is so expensive in the United States is that it’s a labor intensive industry, and the particular labor involved in running the industry is very highly paid.

    There is an obvious and very easy solution to part of the cost problem in medicine but its hard to achieve because the medical guild, led by medical schools themselves fight that obvious solution, tooth and nail.

    In the United States as a whole there are about 24 physicians per 10,000 population though the numbers vary widely from state to state. By way of comparison, in France, Italy and Israel, there are over 30 physicians per 10,000 population. Because the medical establishment ruthlessly limits the number of physicians, we have a sellers market for medical care in the United States while what we need is a buyers market. If the number of physicians was significantly higher while the number of patients remained stable, the fees that physicians would be able to charge would plummet.
    In 2012 about 45,000 students applied to medical school in the United States; about 19,000 were admitted. There is no reason that with a little bit of clever marketing, the number of students applying couldn’t be significantly increased. Medical schools insist that the admit fewer than 50 percent of the applicants because they want to keep their standards high. With all due respect, that’s a joke. They could easily admit an additional 20 percent of the applicants without sacrificing quality. Of course, its really not quality that they are worried about but the professions ability to insure that the demand for the care of physicians exceeds the supply.
    To make matters worse, physicians themselves are in charge of state licensing. Physicians use this power to make it extraordinarily difficult for foreign born physicians or American physicians trained in foreign medical schools to practice in the United States. Again, the claim that foreign physicians are kept out to preserve quality is little more than a lie.
    The Federal Government could fix this problem in a heart beat if either the Democrats or Republicans in Congress were able to exercise an ounce of sense. A huge portion of the income of medical schools is provided by the United States Government. The U.S. provides billions of dollars to faculty members at medical schools to underwrite their research endeavors and billions more are provided to underwrite the overhead of running these institutions as part of these grants. The U.S. subsidizes the interest rates paid by students taking out loans to attend medical school and the Federal Government, through the Medicare program pays for over 90 percent of all the salary costs of residents and interns after they leave medical school and enter there graduate training programs at hospitals throughout the United States.
    It the United States would use its financial leverage over American medical schools it could force them to admit far more students which would ultimately have the effect of driving physician salaries down. If physicians were paid less, American medical costs would plummet.
    The Government could insist that in return for the billions in research grants, and billions in overhead costs that it provides to medical schools that the schools would be required to increase the number of students that they matriculate by 30 percent without raising tuition. As anyone who works with these institutions can tell you, they could accomplish this easily if they were properly motivated.
    Similarly, the Government could use its power as the provider of interest rate subsidies to students borrowing money to attend medical school as a lever to insist that these institutions produce more doctors. Finally considering the fact that the Government (through Medicare) pays virtually all the costs associated with residencies for recent medical school graduates and it is easy to see that the Government has numerous arrows in its quiver to insure that a far larger number of doctors graduate and enter practice.
    If all of this sounds like pie in the sky, remember that the Government tells automobile manufacturers what the mileage standards must be for the cars they produce and it is about to tell operators of coal burning electric plants how much carbon they can release.
    There is no valid reason that the Government can’t force the medical industry to produce and license more doctors, but there is a political reason; Republicans are captives of the AMA while Democrats are captives of the higher education industry.
    The fastest way to insure that medical costs stop escalating is to make sure that the economic inputs that feed that system cost less; the major economic input is physician salaries. Dramatically increase the number of doctors and the entire medical establishment will be far less expensive to operate.

  • MarkE

    Managed care programs like ACO’s are probably necessary for poor people. Since these people never will make enough money to pay for their medical care, doctors and bureaucrats do and will choose what care they receive.
    People that can afford to pay for most or all of their medical care should be in a system where they can choose medical resources that they believe are the best for them while paying significant out-of-pocket costs. The choices they make can serve to rationalize the allocation of medical resources for the managed care systems since there can be no patient-derived price signals in such a system.

  • ljgude

    @WigWag My father explained the AMA and medical school monopolistic practices to me in much the same terms many years ago. I agree it is still a huge part of the problem. I also agree that ACO’s don’t sound like they use free market pressures in the right way. In Australia we don’t bar foreign doctors, but make them do some additional training. My own GP is a Nigerian chap, and a sharp guy, and there are plenty more like him. What we do is pit the public system against the private. If waiting lists got too long people take out private insurance and if private insurance gets too expensive people drop the insurance and rely on the public system. That is way over simplified and our system has problems too, but compared to the US (where I lived the first half of my life) Australian medicine is much better run and costs 8.5% of GDP as opposed to 17.5% in the US. Curiously, the health outcomes are excellent in both countries with Australia slightly ahead in most areas. In isn’t the medicine that is the problem in the US, it is the way it is structured and run and it will be an ongoing issue – heck national problem – until costs are contained.

  • ojfl

    I would be very cautious about this “revolution”. As currently structured it seems healthcare companies do not seem to be finding much to love:

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