Healthcare Costs, Accountable Care Organizations, and Kaiser Permanente

Much discussed within the healthcare industry, but little mentioned in the popular media, are Accountable Care Organizations (ACO). In its simplest form an ACO is a group of providers who band together with the goal of providing better healthcare results at lower costs. The Patient Protection and Affordable Care Act (ACA), encourages the formation of these entities by offering financial incentives to those that can demonstrate cost savings and improved care to Medicare patients. A good general reference can be found here.

“An accountable care organization (ACO) is a type of payment and delivery reform model that starts to tie provider reimbursements to quality metrics and reductions in the total cost of care for an assigned population of patients. A group of coordinated health care providers form an ACO, which then provides care to a group of patients. The ACO may use a range of different payment models (capitation, fee-for-service with asymmetric or symmetric shared savings, etc). The ACO is accountable to the patients and the third-party payer for the quality, appropriateness, and efficiency of the health care provided. According to the Centers for Medicare and Medicaid Services (CMS), an ACO is ‘an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it.’ While the ACO model is designed to be flexible, Dr. Mark McClellan, Dr. Elliott Fisher and others defined three core principles for all ACOs: 1) Provider-led organizations with a strong base of primary care that are collectively accountable for quality and total per capita costs across the full continuum of care for a population of patients; 2) Payments linked to quality improvements that also reduce overall costs; and, 3) Reliable and progressively more sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through improvements in care.”

That all sounds good. Service providers will at least be pushed to economies of scale, and they will have to justify their treatments as being “best practice.” The Centers for Medicare and Medicaid Services will insist that an ACO be large enough to cover at least 5,000 patients and commit to at least three years of operation. The industry seems to be taking this new model seriously. Several ACOs are already in operation and others are in the planning stage.


However, one gets the feeling that they will be nibbling at the edges. We already have examples of how best to organize and incentivize healthcare in this country. There are already several outfits who have adopted this model successfully. The largest and most familiar is Kaiser Permanente (KP). We had occasion to talk about Kaiser when The Economist wrote an article about how U.K. healthcare experts were so impressed with some of Kaiser’s accomplishments.


One can think of Kaiser as an example of an ACO taken to its logical conclusion. KP is referred to as an integrated service provider. This means it provides the hospitals, doctors, clinics, and laboratories as a part of a single package. A clinic is basically a hospital without an emergency room or overnight care. When you make an appointment to see a doctor you have the labs, radiology, pharmacy, and access to a large suite of out-patient procedures all under one roof—one stop shopping.


KP’s organization provides enormous advantages of scale. They have a large enough patient population to be able to perform their own research on treatment outcomes. With multiple facilities within convenient driving distance, they do not have to duplicate expensive, but not fully utilized devices at all facilities. Nor do they have to provide a full range of specialists at each facility. They can scale their facilities to the actual needs of their population. I have at least six facilities within an hour drive.


KP also tends to have long-term patients. With less churning of subscribers than most insurers, it has the financial motivation to provide wellness assistance and encourage healthy lifestyles.


KP also provides the best cost incentive model around. As an insurer it has a fixed income and what is not spent is profit. But it is also the provider, so it can eliminate the evils of the fee for service model that is so dominant in this country. All the doctors are on salary. That means they are ranked according to patient satisfaction rather than how many patients they can squeeze into an hour. Since all of the work is in-house, there is little marginal cost whether a bed is filled on a given night, or if a procedure is deemed necessary or not. You encounter doctors who work eight hours a day and have lives. They can be medical care providers and not financial entrepreneurs.


With KP’s computerized system you can make appointments with your doctor on-line. If you leave the doctor’s office and think of several things you wished you had asked, you go home and send him, or her, an email with carefully thought out questions. Usually you will have a reply the same day. If you have blood work done in the morning, by evening you will be getting emails saying the results are available on-line. All your results are stored on line so you can view the information yourself.


To bring focus on the potential for cost savings consider this chart.

The U.S. spends about twice as much of its GDP on healthcare as the U.K. and produces worse healthcare outcomes. I discovered this report that was published in the British Medical Journal in 2002: Getting more for Their Dollar: A comparison of the NHS with California’s Kaiser Permanente. The NHS is the U.K.’s National Health Service. The report concludes:

“The per capita costs of the two systems, adjusted for differences in benefits, special activities, population characteristics, and the cost environment, were similar to within 10%.....Kaiser achieved better performance at roughly the same cost as the NHS because of integration throughout the system, efficient management of hospital use, the benefits of competition, and greater investment in information technology.”

So—Kaiser provides healthcare that is at least as good as that of the British, and at the same cost as the British. That would imply that Kaiser provides better than average healthcare at better than average cost in this country—perhaps much better than average. Why experiment with less ambitious models when we have had a demonstrably better approach available for decades? Because medical providers are desperately trying to hang on to their fat incomes. Until we eliminate the excessive incomes and profits from the system we will continue to do a tap dance around the real problem.