Publisher’s Letter: November/December 2010

Accountable Care Organizations – 9 Observations; Increased Integration Efforts; Increased Mergers and Acquisition Efforts; Call for Speakers: 9th Annual Orthopedic, Spine and Pain Management Driven ASC Conference & 2nd Annual Hospital Conference — Improving Profits, ACOs, Physician Hospital Integration and Key Specialties

Currently, there is a great deal of discussion relating to Accountable Care Organizations (ACOs) and physician-hospital initiatives. The movement by some systems to embrace ACO-type efforts is accelerating catch-up efforts by other systems to compete with such systems including an increase in the acquisitions of practices by hospitals. The ACO efforts are also raising concerns regarding the long-term independent practice of medicine. On a separate note, we are seeing increased merger and acquisition activity in the ASC area, the physician-owned hospital industry and the dialysis industry. We are also seeing an increased number of healthcare industry qui tam/false claims cases.

This letter provides brief observations regarding the development of ACOs. The letter also includes a call for conference speakers and a note regarding signing up for E-weeklies.

(I) ACOs
1. ACOs were established by the Health Care Reform Act to encourage greater coordination of care under Medicare. The concept is that different providers join together to coordinate care, share clinical information and report on quality measures and are financially rewarded for meeting certain performance guidelines and cost-saving benchmarks. The intended result is that greater coordination will lead to improved quality of care, prevent costly hospital visits and ultimately produce a more cost-effective healthcare system.

While ACOs have been promoted as part of the Healthcare Reform Act for Medicare patients, and pilot programs are being established, the real movement with ACOs seems to be with commercial payors at the moment. Further, the accelerated efforts by some systems to pursue ACO-type contracts is leading to a reaction by competing systems who are attempting to then accelerate the development of their own ACOs and integrated delivery systems. We are just starting to see very aggressive actions between integrated delivery systems and payors using the phraseology of ACOs to try and develop substantial steering of business by one system away from another.

2. Integrated delivery systems that control both the physician and the hospital side of care seem to be best situated to approach payors with ACO types of deals (in essence, deals that allow a system or ACO to share in savings below a baseline as long as certain quality targets are met). Because an ACO needs to contract with a broad range of parties to be successful, an integrated delivery system that already includes a lot of the needed components will be able to get to market quicker. Because the ACO movement favors integrated delivery systems as a cornerstone piece of the effort, it is likely to cause a further acceleration of the acquisition of practices and employment of healthcare practitioners by hospitals and other health systems. ACO efforts will also put a new premium/value on primary care physicians who control patient populations. A key challenge in accelerating integration efforts relates to whether systems can aggregate resources/providers in a manner than makes sense in both a fee-for-service model and in a shared risk environment.

3. The ability to actually measure and control utilization depends on significant information systems, great nurse and physician leadership, tracking capabilities as well as having a good number of the medical coverage costs under control. To the extent an ACO has contracts with a great number of the providers that are necessary to provide healthcare services, the better it should be able to control costs. ACOs that truly invest in services and in infrastructure and provide a true value in managing costs will have a much greater likelihood of long term success.

4. The political proposition in the Healthcare Reform Act, as well as rhetoric from Washington, D.C., tends to favor the development of ACOs over Medicare Advantage plans. The overall concept of pushing down responsibility for the entire cost of care is a very similar concept in Medicare Advantage plans as it is in ACOs. Thus, it is no surprise that organizations like Humana that were major players in the Medicare Advantage plan business are now examining ways to be in the ACO business with partners.

5. An ACO can be co-owned by multiple parties or it can be owned by one party. Moreover, an ACO can be developed by a wide range of healthcare provider groups from multispecialty physician groups to integrated physician hospital organizations. This flexibility extends into payment arrangements, which may take the form of the traditional fee-for-service with a percentage return on savings or a flat rate per patient, among others. Whether an ACO is managed by one party or co-owned by multiple parties, it will need contracts with providers that will allow for controlling costs, utilization and quality. Providers who contract with ACOs will be skeptical of the potential financial benefits to them and how closely these financial benefits relate to their own efforts. The ACO model may start to remind providers of the HMO and PPO withhold contracts of a decade ago.

6. In the ACO environment, surgery centers, like many other providers, are more likely to simply be a cost center rather than a manager of patients and costs. If an ACO is really driven by a hospital system, notwithstanding the lower costs of surgery center services, there is a high likelihood that the hospital system will gravitate towards using or rewarding its own operating rooms as a strong preference and reward providers who steer business to its operating rooms rather than towards surgery centers.

7. There is no real proposition currently in healthcare reform as to single- specialty ACOs. However, we will likely see significant developments around chronic high-cost diseases.

8. Where two competitive systems contract together to either form an ACO or offer services through an ACO (or an ACO includes both independent and employed physicians), there is a risk (reality) of sharing pricing information and/or a risk of price-fixing allegations. This risk is prompting the discussion of the need for an anti-trust exemption for ACOs. While the Association of Health Insurance Plans discourages an anti-trust exemption for ACOs, providers are pushing for such an exemption. Absent this exemption, many efforts will fall into an anti-trust gray area and further encourage complete consolidation and less competition.

9. The financial arrangements that are used in ACOs, such as shared savings, raise the possibility of impermissible payments under the Anti-Kickback Statute or the Stark Act. ACOs can attempt to structure their relationships to meet the personal services or fair market value exceptions or other exceptions under the Stark Act. However, these exceptions are often not a perfect fit for these financial arrangements. There is also not a simple ability to take advantage of safe-harbors under the Anti-Kickback Statute. The integrated delivery system model generally provides greater legal comfort from an antitrust, Stark and Anti-Kickback perspective.

(II) Save the Date; Call for Speakers
1. 9th Annual Orthopedic, Spine and Pain Management Driven ASC Conference — June 9-11, 2011. Should you have a suggestion for a speaker or topic or if you have an interest in speaking, please e-mail me at sbecker@ mcguirewoods.com.

2. 2nd Annual Becker’s Hospital Review Improving Profits, ACOs, Physician Hospital Integration and Key Specialties Conference — May 19-20, 2011. Should you have a suggestion for a speaker or topic or if you have an interest in speaking, please email me at sbecker@mcguirewoods.com.

3. 18th Annual Ambulatory Surgery Centers Conference – Improving Profitability and Business and Legal Issues — October 27-29, 2011.

4. E-Weeklies. If you would like to be added to any of the following free electronic publications, please email sbecker@mcguirewoods.com and specify which E-weekly.

• Becker’s ASC Review;
• Becker’s Hospital Review;
• Becker’s Orthopedic and Spine Review;
• Becker’s ASC Quality, Safety and Infection Control; and
• Becker’s Spine Review.

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Should you have any questions or comments, please feel free to contact myself at (312) 750-6016 or at sbecker@mcguirewoods.com.

Very truly yours,

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