Graduate Business Education for Physicians

Request Information
BlogRX - Taking the Pulse of the Healthcare Industry

ACOs vs. HMOs: Are They Really Different?

At present, yes, though the difference is likely to narrow significantly in the future. 

 Health Maintenance Organizations (HMOs) experienced rapid growth in the 1980s and 1990s as payers sought to restrain rapidly rising healthcare costs.  HMOs required members to select a primary care provider who also served as a gatekeeper to specialists and costly medical services.  The theory was that the gatekeeper would improve quality by coordinating care and contain cost by reducing utilization. 

 HMO enrollment peaked in 1999 and has been diminishing ever since, and today is approximately half the enrollment in preferred provider (PPO) plans.  The relative shift reflects the high value consumer’s place on their ability to move freely about the healthcare system with no constraints.

 The latest talisman of cost control is the accountable care organization (ACO).  The foundation of the ACO model—similar to the HMO—is provider accountability for care coordination and the ability to restrain an unsustainable cost trend.  Providers are reimbursed on both their ability to generate efficiencies that reduce costs and to meet certain quality metrics. 

 The biggest difference between the two models is that ACOs don’t utilize a primary care gatekeeper.  Patients are free to seek care from any provider they choose, whether a member of the ACO or not.   Therefore, in order to assess performance, patients must be attributed, or assigned, to an ACO provider based upon an analysis of claims data.  There are several attribution algorithms, but the most common is retrospective attribution based on a plurality of primary care.  The patient is attributed to the provider with the highest percentage of that patient’s primary care visits or costs over some historic period, subject to some minimum percentage threshold (sometimes as low as 25%).  The operative assumption is that patients will continue to utilize the same provider in the future.

 That assumption is highly problematic, particularly if the attribution is based on a plurality of care.  A Milliman analysis of 2008 Medicare and commercial claims data revealed that fewer than 30% of high-utilizing Medicare patients received more than 70% of their primary care from their plurality provider.  The comparable figure for similarly high-utilizing commercial patients was less than 10%.  Clearly, the ability of patients to freely choose their provider undermines the ability of the assigned provider to effectively manage the cost and quality of care. 

 Those who say there’s a significant difference between the HMO of old and its modern incarnation, the ACO, claim that the former was simply looking to cut the expensive low-hanging fruit of excess utilization, while the latter is aiming higher to improve overall system performance to restrain costs.  Notwithstanding the lofty rhetoric, in practice both models have to ration care to control costs.  The HMO did it through a gatekeeper; the ACO, however, lacks that resource and must rely on voluntary patient acquiescence. 

 It’s well-established economic theory that a rational purchaser will consume an economic good to the point its marginal value to the purchaser is equal to its marginal cost, i.e., will demand medical services to the point that their marginal value to the patient is equal to the patient’s low out-of-pocket cost.  This results in a level of utilization demand well in excess of what can reasonably be considered cost-effective care from a larger societal point of view. To be successful, ACOs are eventually going to have to find a way to ration care by restricting their patients’ incentives or desire to seek care outside the network.    

 Two ways of achieving this objective are emerging: narrow and ultra-narrow provider networks; and reference pricing.  A narrow network is a limited group of doctors and hospitals selected based on their demonstrated ability to deliver cost-effective care.  A health plan sponsor of a narrow-network ACO will not cover medical services obtained out-of-network or it will charge substantially higher copayments or higher coinsurance rates, providing a strong financial incentive to patients to stay in the ACO.

 A second strategy, reference pricing, is designed to guide enrollees to hospitals that provide expensive medical procedures below a certain price threshold.  Rather than limiting the provider network, reference pricing maintains access to a broad network. The enrollee is given provider cost information, then decides whether to be treated at a lower-cost provider with no out-of-pocket expense beyond typical cost sharing, or seek care at a higher-price facility with additional out-of-pocket above the reference price.

 The economic effect of narrow networks and reference pricing is to limit consumer choice, not unlike the role of HMO gatekeepers.  As ACOs begin to construct barriers to out-of-network care, the difference between ACOs and HMOs will effectively disappear.  In both cases, limiting consumer choice is necessary to control costs and keep premiums affordable.

 Today it’s simply assumed that consumers who once rejected the gatekeeper restrictions of HMOs will accept a new model of care that employs different methods to achieve the same end.  That assumption hasn’t yet been tested, and it may—or may not—turn out to be true.

John McCracken, PhD