Why Hospital-led Accountable Care Organizations are a Flawed Concept

April 24, 2014

Why CMS should do away with hospital-led ACOs, and instead, focus on physician-led ACOs.

The American Hospital Association (AHA) is complaining that the financial risks associated with Accountable Care Organizations (ACOs) outweigh potential bonuses for hospitals.

“The number one way to increase participation in ACO programs is to modify the shared-savings determination to ensure that more ACOs are able to receive a bonus - and a larger bonus - so that they can continue to invest in the program,” the AHA stated in a letter to Patrick Conway, M.D., acting director of the CMS Innovation Center.

While few would disagree that a bonus richer program would spur participation from

both hospitals and physicians, the very concept of hospital-owned and operated ACOs is flawed due to conflicted interests enabled and abetted by CMS.

A bit harsh? A simple logic exercise will allow you to draw your own conclusion:

1. Successful ACOs succeed by improving health status and reducing hospital admissions and procedures;
2. Hospitals lose revenues when ACOs succeed;
3. CMS shares half of those saved revenues at best;
4. ACOs are expensive to start and operate;
5. Hospitals would lose even if they got 100 percent of the savings; and,
6. CMS would spend a fortune administering the program.

Meanwhile, hospital consolidations continue, private low-cost community hospitals are becoming endangered species, and the marketplace is evolving to eliminate the very kind of cost transparency and competition that is necessary to help reduce the waste, redundancy, and high cost of services.  You know … the type that generally involve hospitals.

Let us know the first time you hear of a hospital CFO or CEO who, without a wink and a nod, tries to convince his board that it is good business to eliminate $20 million of revenue for a chance to earn $10 million at most in a shared-savings program, and share most of that with physicians. As a former hospital CEO, I have to admit that I would argue strongly that an ACO is a good investment - if only to block the far more costly prospect of physicians forming their own.

It would make more sense and provide a net savings to CMS to transfer ownership of all ACOs to physicians, split the reduced spending directly with them, and send half of the remaining money to hospitals under one pretense or another. At least the people doing the work would be fairly compensated and the people who are clearly conflicted would be out of the mix.

But, then again, CMS has never been big on using free market economics to manage the healthcare system. It is as gullible as any other federal agency, so common sense solutions are not necessarily politically palatable.