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Customer Experience and Design

Will ACOs drive up costs for patients?

I was recently talking with one of my colleagues about a strange situation that happened to her when her local hospital and healthcare provider merged with a larger healthcare system. As a result of the merger, she no longer had a local healthcare provider in her town that took her insurance plan. In essence, she was a victim of healthcare merger mania and had to find a new healthcare insurance plan for coverage. Healthcare organization mergers are part of a broad national trend that is driven by accountable care and the tremendous pressure to cut costs, improve productivity and improve outcomes.

As a result of this merger trend, medical care is being concentrated in fewer institutions, and concern about the impact on higher prices is increasing. A hospital merger boom in the 1990s increased patient costs by 5 to 40 percent in areas where only a few hospitals dominate, according to the Robert Wood Johnson Foundation. Large healthcare organizations with multiple hospitals tend to charge higher prices in communities where they outnumber their rivals, says health economist James C. Robinson of the University of California, Berkeley. This information contradicts the usual arguments for accountable care that merging or affiliating with generate greater efficiencies, higher quality of care and increased savings. More than 100 hospital merger deals took place in 2012, double the number of only three years earlier. Here is the scary statistic: Of the 5,724 hospitals in the United States, about 1,000 will have new owners in the next seven years or so, according to Gary Ahlquist, a senior partner with the consulting firm Booz & Company.

In a sense, the days of the community hospital as a stand-alone operation are coming to an end like the family farm was pushed out by corporate farming. With the recession and higher deductibles causing people to put off medical treatments, the hospital is faced with empty beds and a pressing need to consolidate to lower costs. As patients seek lower costs, many of them opt for out-patient surgery or procedures conducted in the doctor’s office versus the hospital. One irony is that hospitals that hire physicians or acquire physician practices then see an increase in patients as they come to see their doctors.

The Affordable Care Act will flood millions of new patients into the health care system with a goal of promoting competition and lowering the cost of care. To lower costs, the law reduces the rate of growth in Medicare payments to hospitals. In addition, the law provides incentives for hospitals to form Accountable Care Organizations. Instead of separate fees for each procedure, ACOs will receive a lump sum payment, called a bundled payment, to care for patients. The bundled payment is designed to make hospitals work harder to provide good care, control costs and keep patients healthy. The ACO concept is encouraging these mergers or consolidations rather than driving more competition. As a result, less competition will drive up costs for patients, especially in a regional area.

A system of multiple hospitals formed as an ACO creates a collective bargaining unit that is better positioned to bargain with health insurance companies. As a result, the ACO can demand higher prices for its services and, potentially, remove healthcare access for patients that have healthcare plans that won’t meet these new demands. The statistics from James C. Robinson, the health economist from Berkeley, show that prices for six major cardiac and orthopedic surgery procedures, in hospitals in eight states, were 13 to 25 percent more than in areas where there was less competition. Ultimately, the patient pays the higher prices in insurance premiums, deductibles, co-payments and hospital bills when the ACOs win out over the health insurance companies.

Where is the oversight on these hospital mergers and the examination of the loss of real competition in a regional area? The Federal Trade Commission, the Justice Department and some states require oversight of mergers and a few hospitals mergers have been blocked. More care must be taken by these regulatory bodies to avoid regional mini-monopolies that can be created by ACOs and the subsequent loss of healthcare access experienced by people with the “wrong” health insurance company. In addition, a broader scrutiny beyond Medicare and Medicaid needs to be instituted around the impact of ACOs on the medical costs to patients. It is fair to say that hospitals and physician practices are in a tough squeeze with more patients and cost reduction pressures, but ACOs need more focus on the downstream impacts of driving up costs for their patients or potentially removing their access to local healthcare.

Are ACOs causing unintentional consequences on costs for patients? What’s your opinion?

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Martin Sizemore

Enterprise Architect with specialized skills in Enterprise Application Integration (EAI) and Service Oriented Architecture (SOA). Consultant and a trusted advisor to Chief Executive Officers, COOs, CIOs and senior managers for global multi-national companies and healthcare organizations. Deep industry experience as a consultant in manufacturing, healthcare and financial services industries. Broad knowledge of IBM hardware and software offerings with numerous certifications and recognitions from IBM including On-Demand Computing and SOA Advisor. Experienced with Microsoft general software products and architecture, including Sharepoint and SQL Server. Deep technical skills in system integration, system and software selection, data architecture, data warehousing and infrastructure design including virtualization.

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