Update on the Affordable Care Act

It has now been five years since the Affordable Care Act (ACA) changes began. While many changes such as exchanges have been visible to the public, the real inner workings of the ACA have been a mystery to many consumers, providers and purchasers as the details escaped most media attention due to the complexity and politically supercharged atmosphere surrounding health care changes.

The economics of why this reform was needed in the first place has not been presented in a manner that is understandable to the public.

A Price Waterhouse Coopers survey in late 2010 conducted an in depth series of interviews with consumers as well as physician and hospital leaders. The research substantiated what most of us have observed – wasteful spending. That is spending that is not connected to care outcome improvement, quality or efficiency improvement. This spending was something that could be found in all levels within the health care system.

In some cases, as attempts to reign in one factor of the health care industry occur, what often happens is that it expands upon another factor of the industry. For example, as many of us fought hard to come up with ethical yet cost conscience guidelines to reign in utilization volume in the 1970s, the effect on pricing of service per unit increased substantially. By the same token, if one were to put a ceiling on prices and fee schedules, it was discovered physicians and hospitals simply increased the volume of services to make up for these fee caps. Our work with capitated IPAs in the early 1970s pointed out that even a capitated primary care medical group might see a reduction in price and volume but as the primary care group networked to other specialists and hospital outside the IPA to fill in for needed specialties the fee for service charges and open ended volume of services used by specialists offset whatever savings the PCP group may have achieved. This gave the entire physician panel a higher than predicted Per Member Per Month Total Cost of Care (TCOC).

One thing is certain; the magnitude of waste is staggering. It is estimated that between $1.2 and $2.2 trillion is on wasteful spending. This represents nearly 50% of all health care spending nationally.

This wasteful spending can be categorized into three broad areas of clinical waste, operational waste and behavioral waste.

Clinical waste is in the defensive medicine area where redundant testing and unnecessary or duplicative services are performed to protect the physician from accusations of shoddy care. This Price Warehouse Coopers (PWC) report has estimated to be $201 billion annually. In terms of operations, the wasted spending is mostly in inefficient claims processing which is another $210 billion. Finally, in terms of behavioral waste, we see preventable conditions such as obesity and being overweight which lead to diseases, such as adult onset diabetes; getting this under control would save $200 billion annually.

The survey concluded that while higher prices were to blame for some of the spending gap rather than just higher resources used, there are now global comparisons proving that there is a substantial opportunity to eliminate a large portion of waste from the system while still enhancing care outcomes for the patient.

As we redefine waste as something more than mere inefficiencies  in the system we now see purchasers including the large (and becoming larger) insurance industry buyers of care and Medicare, the nation’s largest insurer, now focusing on Preventable and Avoidable Costs (PAC) as a means to judge what is effective and therefore a necessary part of the care delivery system. This means that buyers and providers of healthcare have a grand opportunity of using the ACO to construct a better delivery system of the future that is both user friendly (patient as consumers) but substantially more effective and efficient than our current non-system of fragment care sites.

Innovations we see emerging are vast.  As health care now represents 18% of GDP it has become a leading sector of the economy attracting solutions and capital like no other. Part of this attraction has been the move to for-profit intervention bolstering weaker parts of these standalone components, thus allowing for their own maturity and growth. Part of this is the framework laid out by the ACA that, even five years later, is testing the earlier business model of health care management and delivery.

We view these themes and trends as transformative and not cyclical, because once they have occurred and people have led this change or adapted to it in their market there is no going back.

Risk is now the future

There is not a single health care book, magazine or newsletter being published today that does not subscribe to the trend towards Risk in the health care sector. Some call it value based payment and some call it capitation but the reality is that in order to control rising prices and avoid a corresponding rise in utilization, a more predictable pricing model and health outcome are demanded of health care providers.

Purchasers ten years ago were just beginning to use utilization data that HMOs used in the late 1960s to predict price and utilization in order to reset premiums and implement early versions of care management protocols for medical providers and case managers. Today billions are being spent on advanced processing, auto adjudicated claims processing and high end analytics. Soon, as ACOs expand, many hospitals and physician will be investing in access to these same tools either through ownership or outsourcing.  “If you cannot measure it you cannot control it,” goes the old saying and in this post reform environment we have many sources of metrics and tools for clinical decision support we never had before. The exciting introduction of a shared risk approach to provider contracting has brought private employers together with once estranged physicians as physicians have seen the value of becoming a High Performance Network as a private ACO to curry favor with employers or a preferred vendor to earn volume of net new patients in exchange for submitting performance data directly to the employer or employer coalition/network.

For providers the same principle of risk management applies as it does for every decision. You must first understand what the risk is. In other words what does the contract say you are at risk for? Are they bundles of care for a fixed price, fees plus, global all-encompassing by episodes of care, per diems, or are they fee schedules so onerous it seems futile to accept? Most of all, what is the volume of net new patients you expect to obtain from that employer or health plan in exchange for your fee concession? And what if it does not happen?

Then there is the means to manage the risk through reinsurance on the large claims and limiting liability on the front end in terms of being at risk for services you are good at providing and being at no risk for services that can get complicated very quickly.

Heath Insurance and Health Plans

We have made a separation between those health plans that are provider driven and community based versus those larger, for profit insurers that have dominated many markets for decades with little or no competition. For many employers, large and small, the lack of choice has numbed the potential for innovation.  They buy what’s “on the shelf” or listen exclusively to the broker that promised lower rates with a new carrier, only to see costs rise in three years and premiums sucking more from the bottom line.

Our observation of the shift to high deductible and high coinsurance has always been that if one delays access to primary care or sets in motion the fear of financial retribution for using an emergency room when it may be absolutely necessary only plays further into the waste of money in preventable and avoidable costs because many diseases, if caught early, will be manageable and even eliminated. However, if there is a $5,000 out-of–pocket, it is likely the patient will live with the pain until it becomes unbearable and then spend all the money, bury the deductible and be unhappy when the hospital demands monthly payments and unhappy with the employer for having “crummy insurance”. In short the employer pays more than it would have had the patient sought care earlier, the patient is in worse shape with possible loss of work and long term disability because care was not sought early, and the patient resents the fact the employer’s insurance would not “let” the patient go to the doctor until it got so bad.

We have not seen where the large deductible has actually been a good thing in preventing abuse of the care system as was originally thought, and, in fact, we believe many PAC opportunities were lost because of the financial barrier to receive care.

With new ACA rules for employers on the Cadillac tax (employers must pay 40% of an employee’s total health insurance costs  after $10,200 for individual plans and $27, 500 for family plans), a majority of employers in several surveys report they are encouraging employees to use the exchanges. Exchanges have had a large impact on both large insurers as well as smaller health plans in giving smaller plans a level playing field to be considered as an option.

This move from wholesale to retail insurance is something we have been so adamently advocating for both purchasers as well as providers because unlike the business to business approach of top selling insurance to groups, the providers may now have individuals that join or leave and insurers that favor the physicians or hospital as “in network”. This means competition to sell direct to consumers and participating in multiple carrier offerings is a strategic imperative for providers.

According to HHS APE’s Annual Open Enrollment report of March 10, 2015 there are about “11.7 million people enrolled in exchanges through the ACA marketplace. Of the 8.8 million people who signed up on the federal exchange 2.2 million had returned from 2014 to actively shop for this year’s health plan”. So the marketplace option is becoming ingrained in our culture and not just for the poor or uninsured but for the working consumer who has an employer that would rather get out from underneath the regulations.

Primary care: Back to basics.

From our perspective we envision the transformation of the delivery system to be the most essential and breathtaking component of the entire ACA.

Early on we saw private medical homes being constructed by pediatricians for their patients to reach out to specialty referral associates, and centers and other resources for the pediatric patient. This was quickly adopted by the primary care population to have more control over referrals and build small networks of resources upon which they could depend.  The ACA infused $11 billion into federally qualified primary care run health centers in medically underserved areas (MUA) because they saw the value of care coordination and care management for a population with chronic care needs but little assistance in managing through the health care non system.  Another $2 billion was offered to this primary care experiment by a new agency funded by the ACA called the Centers for Medicare and Medicaid Innovation (CMMI).

The call to integration in the 1990s and the early prognostication by us, the advisory board and others that risk was coming in the form of alternative payment mechanisms and that performance and the capacity to manage under strict risk would separate winners from losers, has indeed been reintroduced with the new rules.

This notion of capitation as the trigger point for payment reform came with the Clinton reform movement. Physicians and hospitals were taught what was already known in California, Minnesota and Massachusetts and that is that capitation can be a gold mine if you know how to manage it. As that reform fizzled so did the leadership to try and change the marketplace from the provider perspective. Change came instead from the health plans and employers with a demand for single signature contracts (PHO) clinical integrated delivery systems that were all encompassing. Employers demanded their managed care companies try and glue together the components of a good delivery system based on not just discounts but mostly on outcomes and quality measures.

If this starts to sound like an Accountable Care Organization you are starting to see the framework of what would become the ACA’s pride and joy to not only reform the delivery system structure (that is giving health care delivery a business model instead of a fragmented and redundant series of care outlets) but also change the payment plan with a series of shared savings incentives for quality and efficiency, and you were also seeing organizations get ahead of the ball with integration because they understood its value and its potency in a future marketplace. These clinically integrated systems are truly the early winners in reform.    

Think for a moment that in 2010 there was barely a definition of what an Accountable Care Organization was and now in 2015 we have over 640 ACOs operating with a new crop being added each January. Medicare has saved over $500 million while paying out an additional $400 million in bonuses to successful ACOs.  While some ACOs are still fighting to gain a better understanding of care management and especially the entirely new science of patient engagement, the private sector is now taking hold with the Pacific Business Group on Health and Boeing creating their own private ACOs to act as high performance panels and compete with the broader panels of older networks that continue to practice medicine as usual not understanding they will need to earn the employers’ favor and become part of the high performance network to thrive in a competitive market.

We now see the ACO as a business model to rejuvenate non risk IPAs and PHOs who may already be in violation of antitrust guidelines because they are conducting collective bargaining but taking no risk and are not clinically integrated. For new networks that are watching the large insurers merge into mega meds  who can demand incredibly strict guidelines and limited fee schedules, these ACO networks at least help physicians negotiate as a group for a territory so they have some say in the outcome of these third party negotiations.

There are now 5 types of ACO shared savings arrangements using different levels of risk and reward depending upon the track selected. Add to this the various contracts used by employers in negotiating network agreements and there is a tremendous opportunity for private practice physicians to participate as small practices but have the impact of a Group Practice without Walls.

For many Medicare Shared Savings (MSSP) Accountable Care Organizations there was a savings created for Medicare. However, due to benchmark and threshold variations only 25% of the MSSP ACOs made savings for themselves in addition to Medicare. These savings varied from $6000.00) to $15 million dollars depending on their size of attributed population and geographic location.

For those who have made money and learned to “tame the beast of excess” in their local delivery system the options are becoming clear that eventually they will have wrung out the savings, and each year there are less and less savings, there are less and less contributions to operational and maintenance costs. For many of these ACOs the move to a risk bearing entity is a possibility and building their own licensed health plan for Commercial and Medicare populations gives them stability of the three legged stool of private pay commercial, Medicare Advantage and ACO patient market segments. to support their medical management engine across more and more of their patient population.

New Entrants

While there is a serious attempt to consolidate the physicians, hospitals and insurers in this post reform environment there are some new entrants to the marketplace that can, and should be led by physicians or physicians and employers.

The theoretical model of industry consolidation plays out in health care as it does in banking, airlines and telecommunications, and that is when the bigger players like Aetna, Humana and CIGNA consolidate, it leaves a greater opportunity for new entrants to create a new market for their products and services.

The barriers for market entry are reduced because employers are dissatisfied with the prices or lack of benefits or overall lack of service from the bigger insurers and are willing to seek an alternative such as a physician owned health plan. Because these new community based health plans are owned by providers their pricing can be more favorable than the publicly traded health plans. More importantly, a physician driven plan emphasizes coordination of care, patient engagement and quality outcome indicators as a means to lower costs versus lowering costs through fee discounts or payment and benefit denials and delays which are tools of the big insurers.

We see the first new entrants to be ACOs that have succeeded in managing cost and utilization or those that are forced to extend their ACO after the year three savings have been taken out. We know that ACOs who succeed and learn to manage risk for the senior population have the opportunity to expand this knowledge to manage risk across more populations and this should be part of the growth strategy for providers but also an opportunity for employers including large self-funded employers as well as smaller employer groups .


In many states such as Colorado and Illinois, ACOs are also part of the Medicaid landscape managing large populations of the medically disadvantaged using some of the same coordinated care techniques used for the Medicare population. Probably the most overlooked yet most attractive population of ACOs moving to full risk health plans is the dual eligible population. This offers a substantial per member per month (3 to 4 times that of commercial) and coordinates the Medicare and Medicaid internal  payments so as to give this Special Needs designated Medicare advantage plan a special revenue opportunity to manage Medicare and Medicaid eligibles many of whom do not know they are eligible for both programs .

The next entrants will be integrated care systems and PHOs that have actually succeeded in negotiating with third party insurance companies but now see a market to directly contract with employers ( Books on direct contracting connects here). In many cases these organizations may see the ACO opportunity as a private population opportunity and using their existing framework they can move to a unified signature (single signature) arrangement with employers. Many of these IDNs have done a feasibility study on their ACO Medicare possibilities and found it is just not feasible because even at the fully managed status of their population (that is everyone is meeting or exceeding national guidelines for quality and outcomes), there still may not be enough of a bonus to make the investment of time and energy into a MSSP ACO worthwhile. However, contracting with private employers can be an early step to establishing a product for small and large payers as a provider sponsored health plan.

The third entrants will be those networks and IPAs that, for whatever reason have been a participant in insurance company schemes to provide care for enrollees but are, none the less, not seeing the promised market share or withhold payback in addition to fee for service payment. These IPAs and Networks can form a stronger enterprise but will need data and some staff to assist with measurements and reporting to help employers and payers understand they are able to provide superior care against competing physicians and hospitals in a given area. We have assisted IPAs in forming Management Services Organizations (MSO) to actually manage this function and contract with providers and payers at this level of the high performance network.

Collaborative Model

One of the newer models emerging is the collaborative model that joins together several smaller enterprises into a regional operating company  that takes the responsibility of managing these enterprises as a “back office” but are none the less able to eliminate redundant expense of maintaining an ACO, MSO, or PHO.

These are being created in answer to the reality that a small ACO with 5000 to 7000 members will have a difficult time recover their development costs of $3 to $4 million plus ongoing maintenance costs of $2 million. Much of this cost is in hardware, software, and staffing which, if consolidated, could be a shared expense between three or more enterprises. In broad terms the staffing cost could be cut by two thirds once the new relationship is set up with this back office. IT costs, a continuing and expanding expense for all ACOs and MSOs, could be cut substantially with a data warehouse and centralized technology that could share best practices. In other words three buyers could get more for their money than a single buyer and the sophistication of everything from analytics to billing can be demystified by having highly trained staff and resources purchase across the platform versus trying to hire locally. We have such a model in development in Minnesota and Illinois through our client Gold Star Alliance for Health LLC.

Management Services Organizations

MSOs have actually expanded, offering overhead reduction programs for the network practices in areas of group purchasing, medical malpractice insurance reduction, staff leasing and insurance and property leasing. In short, giving the alignment of independent practices the look and feel of a group practice without walls.

Additional entrants being created by the ACA include single specialty ACOs that contract with larger ACOs for their services on a shared savings bonus plus fees basis, and high performance independent pharmacy networks. Not unlike the physicians, independent pharmacy is being threatened by the big box stores and chain drug stores, so forming a local network and contracting directly with employers as well as collectively bargaining with Insurers is an option to stay in the game.

In addition telehealth companies are being created as standalone enterprises to connect patients and clinicians via technology (Vivre Health and All HealthCare are examples). As health care has become more complicated, consumer literacy is relevant and standalone companies like Zest Health and Azumio are growing to help consumers make good decisions.

Throughout our update we have talked about streamlining process improvement. Companies like Dabo Health and Medisas are addressing this area.

The wellness industry is exploding as well, with industry estimates of $267 billion in potential market share for companies that offer insurance related wellness plans or standalone individual wellness programs for patients.


The ACA has driven many physicians and employers to rethink how and why they are making decisions to join various insurance schemes and are starting to look for new partners. Many markets have become frozen with many players locked out because they did not take the managed care onslaught seriously or they did not know they could be locked out. With new entrants and consolidation of older players we are seeing a rebirth of new options. While the market unfreezes there are opportunities to get back into contracts with new startups, and there is a need for physicians to sponsor new enterprises that meet the contemporary needs of employers and consumers.