Health Care Special Report: Trying to Untangle the Red Tape in Health Care

Many of today’s advances in medicine are obvious, such as cutting-edge imaging machinery or mobile apps that help diagnose ailments or schedule appointments. Others are less obvious, even bureaucratic in nature, but in some ways just as critical to the industry’s future. And so-called accountable care organizations are a prime example. Known as ACOs, the entities are a creation of the federal health care reform act and seek to squeeze out inefficiencies in care by having primary care doctors work together with hospitals, specialists and even pharmacies in treating patients. There can be good money in it, since the government pays ACOs a share of the savings in bringing down the cost of care compared to typical industry benchmarks. Three years ago, Apollo Medical Holdings Inc., a Glendale company that got its start managing hospital-based doctor groups, founded one called ApolloMed ACO. It bet several million dollars on its success and earlier this year, that bet paid off. Medicare announced ApolloMed had saved the government program for the elderly nearly $11 million and gave Apollo half that amount – a total of $5.4 million. “We put up several million dollars and recouped a nice investment,” said Gary Augusta, chairman at Apollo Medical. Accountable care organizations aren’t the only new care model being tried out with the twin goals of improving care and making it more efficient and less costly. Thousand Oaks-based Anthem Blue Cross, a unit of Indianapolis-based WellPoint Inc., has launched Vivity, a group of seven hospitals and affiliated doctor groups, to replicate the model of non-profit Kaiser Permanente, an integrated system of doctors, hospital and pharmacies. And UCLA Health System has opened several clinics in the area as it seeks to create a broader network that treats patients before they need costly hospitalization. “One goal of health reform is to create integrated delivery networks that are efficient,” said Martin Gallegos, senior vice president at the Hospital Association of Southern California, an L.A. trade group. “Kaiser has done a great job of building an integrated system, and you’ll see more Vivity-type programs.” Risk profile Daniel Frank is chief operating officer at several doctors groups owned by Heritage Provider Network Inc. in Northridge, which also owns Heritage California ACO, one of the 32 “pioneer” ACOs started two years ago in conjunction with passage of national health reform. Of those 32 original ACOs, only 19 remain, the others having dropped out for financial or operational reasons. Heritage California is the largest survivor with more than 100,000 Medicare patients. “The pioneer ACO is really a business partnership between us and the government. We share the savings and the risk,” Frank said. Heritage California ACO hasn’t qualified for a government refund because the government gets the first 2 percent of savings and the sheer size of the ACO has prevented it from crossing that threshold yet. Frank said hospitals participate in the ACO because they can learn how to save money but don’t bear any risk, because Heritage takes it. “We had lots of lessons to learn about managing patients in a new environment,” he said. “From the point of view, the program has given us rich dividends and paid for itself.” One challenge for ACOs and other integrated models is the zero-sum trap. Once all the inefficiencies are worked out of the system, if the government or insurance payments remain stable, then the various partners are fighting over a fixed sum of money. “The idea is if everyone is in the bundle, they lower the cost so everyone can make more money,” said Dr. Adam Singer, chief executive at IPC The Hospitalist Co. Inc., a North Hollywood company that the largest manager of hospital-based doctor practices in the country – which unlike Apollo has not started an ACO. “But at some point, somebody has to lose money for the others to win. If that’s the case, hospital costs could go up,” he said. Laura Jacobs, executive vice president at health care consultancy Camden Group in El Segundo, disagrees. She said hospitals, doctors and labs already fight the zero-sum game with insurance companies. The concept of an ACO or Vivity is to make the players more cooperative. “Now we are all at risk for the losing the top dollar,” she said. “If we are paid in a lump sum it means we have to collaborate, rather than everyone looking out for themselves.” Gallegos at the hospital association believes that if ACOs grow large enough, they could save money by eliminating the need for health insurance companies altogether. In this version of the future, ACOs would sell coverage directly to consumer via Covered California, the online insurance exchange and marketplace established under the health reform law. “You’ll have hospitals with integrated medical groups and clinics put their plans on the commercial market,” Gallegos said. “They could put together a small regional insurance plan and market it, maybe even on the exchanges.” But to Apollo’s Augusta, that day is a long way off. According to Medicare, of 220 ACOs that participated in its refund program, only 49 got money. To encourage their growth, he believes, the government needs to allow more ACOs to get money back. “In the future, cost-efficiency will longer be a bad word in health care,” he said. “But for large companies to go into it the reimbursement formula has to change.”