Containing Healthcare Costs: A Commercial Integrated Care Model That Works

Accountable care organizations (ACOs) are being encouraged for Medicare recipients by the recent healthcare reform legislation. These are groups of providers who band together to take advantage of economies of scale, and agree to share both financial risks and financial gains in meeting health and cost metrics defined for Medicare recipients. The agreement to share risk is critical. It raises the incentive to save costs throughout the system, rather than casually passing them on to another provider. A physician is motivated to be consciously thinking of how to be efficient in his/her own activities, but must also worry about excessive use of hospitals, specialists, medications, and diagnostic tests. In other words everyone has skin in the entire operation. 

ACOs were discussed in Healthcare Costs, Accountable Care Organizations, and Kaiser Permanente. Kaiser, a fully integrated service provider, with its own physicians, hospitals, pharmacies, and clinics, was cited as the type of organization likely to be most efficient as an ACO. It is likely that many versions of integration will be put forth in the quest for greater efficiency.

A recent article posted on the Health Affairs Blog by Glenn Melnick and Lois Green discusses an experiment in integrated healthcare delivery that was initiated entirely in the commercial sector, and had its origins before the call from government for ACOs. In 2007, the projections of healthcare costs in California were already recognized to be unsustainable.

"Located in the competitive Sacramento market of northern California, the program has been receiving national attention as an example of an innovative shared savings model involving a large insurer—Blue Shield of California; a purchaser—the California Public Employees Retirement System (CalPERS); a physician group—Hill Physicians Medical Group; and a hospital system—Dignity Health (formerly Catholic Healthcare West). The population served by the virtually integrated health organization includes approximately 42,000 CalPERS employees and their families covered by Blue Shield."

After two years of planning, the program began to function in 2010. The commitment was made to deliver to CalPERS a zero percent 2010 premium increase by the participants with no decrease in the quality of service. They all agreed to share the risk if the metric was not reached, and they all agreed to share any profit if the goal was exceeded. The team kept existing cost structures in place and focused on efficiencies and on saving costs through better healthcare outcomes. Each participant also contributed to the upfront costs associated with generating this partnership.

This type of organization refers to itself as a virtual integrated service provider. It focused on five strategies to attain the necessary savings:

"....integrated discharge planning, care transitions and patient engagement, creation of a health information exchange, patient repatriation, and evidence-based variance reduction."

How successful was the first year of operation?

"The project has produced impressive year-one clinical, quality, customer and financial outcomes, including reductions in readmissions, inpatient utilization, and cost savings of approximately $20 million, $5 million above the target."

To put this in perspective, California insurance companies had been raising their premiums by about 11% per year. This experiment succeeded in cutting costs by more than 11% in one year.

What might the future hold? Daryl Cardoza, CEO of Hill Physicians Medical Group, provides this perspective:

"We’re not done yet. Halfway through the second year we were achieving similar results in an environment where we thought we were already best in breed. This tells you that there is more to get and what can be attained by working in a care-coordinated system....But it gets tougher to keep getting more and more savings. Though we sustained our gains in the second year and actually improved upon them some, the big initial gains are tougher to achieve at the same order of magnitude in subsequent years. That said, we do anticipate sustaining a moderated trend."

This type of organization can only squeeze out so much cost and diminishing returns soon set in. But the expectation is that a long-term lowering in the growth of healthcare costs will be attained.

This program was interesting in a number of ways. It demonstrated that "virtually" integrated groups of providers could attain significant cost savings at relatively little up-front cost; its methods and results will stand as examples for other organizations that might choose to follow; and it demonstrated that the commercial community could respond without an imposed mandate from a government agency.

One might be tempted to ask: What was the motivation of these providers to band together and address the cost and quality issues? One can be sure that being good citizens was part of the reasoning, but that is probably not enough motivation on its own.

True market-based solutions are not always appropriate when society’s requirements are involved, but healthcare has long been in need of some market pressure. The main motivation of the participants seems to have been the traditional market approach of lowering cost in order to recover income via increased volume. Juan Davilla of Blue Shield of California provided this input:

"If providers are to sacrifice margin and do the hard work to improve affordability, then they need market share for it to make sense."

"Blue Shield and its partners gained more than 1,500 members in the Sacramento market, which we attribute to the success of the integrated model."

Perhaps one should watch what one wishes for. True market competition will eventually drive down costs until near monopolies are formed and eliminate the market. If we had a true healthcare market, providers’ fees, salaries, and wages would be the next thing to cut. It is doubtful that anyone plans on going that far, but once you choose to play the market game you put yourself on a slippery slope.

Let us take our good news where we find it, and congratulate the participants on a job well done—so far.