Big Changes Announced for Medicare, But Watch Out, There's a Problem

This week the Obama administration announced a dramatic plan to accelerate payment reform under Medicare, by moving away from the fee-for-service model toward something akin to pay-for-performance. The administration pledges to tie 50 percent of payments to quality by 2016.

On the one hand, this is promising forward momentum that has been long overdue. Virtually everyone hates fee-for-service, with its perverse incentives that end up paying providers more money for worse care. An avoidable hospital acquired infection, for instance, results in more services and more fees, meaning that bad outcomes yield good money. This announcement commits Medicare to fast-track the much more sensible approach of tying payments directly to the quality of care delivered to the patient.

On the other hand, the plan heavily relies on the success of Accountable Care Organizations (ACOs)--success that has yet to be fully realized.

The concept of ACOs arose in 2006 as the brainchild of Dartmouth's Elliott Fisher, MD. Fisher is a brilliant and innovative researcher, who is also known for his work with the Dartmouth Atlas, which analyzes Medicare spending to show remarkable geographic variation in the likelihood a patient will be referred for surgery. His ACO idea captured the imagination of Washington policymakers and think tanks, and ultimately made its way into the Affordable Care Act. The concept is that physician groups, hospitals, and other care settings like ambulatory surgical centers and nursing homes should coordinate their efforts to care for patients. Payments depend on how well the ACO succeeds at achieving positive outcomes so, in theory, an ACO gets paid for delivering the right care for the benefit of the patient.

That's the theory. But even the smartest ideas can be difficult to operationalize. Today, hundreds of real, non-theoretical ACOs have emerged from provisions in Obamacare, and many aren't living up to their theoretical potential, at least not yet. Quality of care varies greatly among ACOs and their costs seem to have nothing to do with level of performance. Such variation in quality and costs is to be expected under a fee-for-service model, but ACOs were supposed to solve that problem.

Most discouraging is the story of the elite "pioneer ACOs." Whereas regular ACOs get payment incentives if they do a good job and exceed quality benchmarks, these pioneer ACOs take on downside risk--paid less if they fail to achieve benchmarks. But when CMS moved to actually ding pioneers that underperformed, nearly half of them dropped out of the program. Out of the original 32 pioneers, only 19 remain. Daniel Boone must be rolling in his grave.

In fairness, ACOs are very new, and given the complexity of their operations and the fact they are largely untested, it's understandable that the results are mixed or unclear. Certainly some ACOs are demonstrating real progress. The problem is that while we wait and hope for more results, the ACO movement has created unintended consequences in the healthcare industry, fueling massive mergers and acquisitions among hospitals and physicians. Already these large new health systems dominate virtually every major market in the country.

We don't have much research on the full implications of this sudden ACO-inspired market shift, but we do have data on what happens in general when behemoth health systems have dominated markets in the past. Employers and other health care purchasers and payers have less leverage at the negotiating table, quality goes down and costs go up. Now with the burgeoning ACO movement, these problems may be multiplying rapidly, and the Federal Trade Commission is only now figuring out how to keep up with the anti-trust implications.

The business community needs to watch this carefully, because purchasers are always hardest hit when the health care marketplace proves dysfunctional. Much work remains to be done on the ACO experiment before we are ready to tether our $2.7 trillion health care system to it. Thankfully, the administration recognizes that ACOs aren't the only answer, and announced formation of the Health Care Payment and Action Network to explore payment strategies that work either within ACOs or beyond ACOs. That's important because so far, today's ACOs aren't the whole solution to the fee-for-service problem. And the wrong strategic moves, no matter how well-intended, could make the cure even worse than the disease.

A version of this article was first published on and can be seen here.