A New way of Looking at Hospitals

by Kim Bellard, February 22, 2011

I’ve been worrying about Accountable Care Organizations (ACOs).

What is there to worry about?  I mean, what could possibly be wrong with entities whose purpose is to be accountable for the cost and quality of care of patients, and who are rewarded for doing a better job of delivering that care?  Aside from the pesky facts that no one is quite sure what an ACO actually is or how to make it effective, the concept is surely what our health care system – and perhaps other nations’ – needs. 

Some skeptics look at ACOs with a jaded view – been there, tried that – thinking back to the PHOs/IPAs of the 1990s or even the original concept of HMOs, especially the staff model HMOs (e.g., Kaiser Permanente or Group Health Cooperative of Puget Sound) that used to dominate the field.  Still, optimists are sure this time it will be different. 

I tend to believe that it will, indeed, be different, but in ways that are the source of my concern.  Of the many changes in health care since we last made a serious run at controlling costs in the 1990s, two are most problematic for ACOs: hospital consolidation and hospital ownership of physicians.  I’ve touched upon those in a previous blog (Saying No to Choice), citing studies of increased hospital market consolidation and estimates that over half of physicians are now employed by hospitals.  Those changes have radically changed the competitive landscape, giving hospital systems much greater negotiating power.  Last November The Center for Studying Health System Change issued a report “Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power” that illustrates even in supposedly competitive markets certain providers can virtually dictate pricing. 

Regulations for ACOs may give providers even more ability to band together, citing the need for increased clinical integration as a rationale.  This may, though, just further open the door to anti-competitive behaviors, and various experts are already raising concerns (see, for example, the recent New York Times article).  If ACOs have the effect of extending hospital control in already non-competitive markets or sub-markets, we may or may not get improved quality of care but it is unlikely we will achieve improved cost control. 

What is different with hospitals than with physician practices or most other health care entities is that it simply is too expensive to build new hospitals in most markets.  I.e., expecting to interject new hospitals into non-competitive marketplaces is not realistic.  In that sense, hospitals enjoy advantages similar to those that the utility, telephone, or cable companies once enjoyed.  In those cases, no one wanted to pay to connect new lines to all the potential customers, so regulators for those industries either regulated pricing or forced competition, such as when AT&T was ordered to allow other long distance carriers to use its lines.  Instead of increasing the number of hospitals, imagine if hospitals were required to lease out beds or entire floors to competitors.  That could go a long way to diminishing the kind of local geographic monopoly many hospitals currently enjoy. 

I think we may have the wrong conceptual model for hospitals.  In a retail analogy, one can view the hospital as a department store – trying to sell as many things to as many kinds of customers as it can.  Within the department store, as with the hospital, there are specialized departments targeted at specific types of customers.  Department stores often have boutique areas featuring well-known designers, and along the same lines some hospitals feature well-known specialists; both strategies aim at further improving market appeal.  Department stores once ruled the retail world; think of the huge, blocks-long Macys, Marshall Fields, or Hudson’s that once lined downtown shopping districts.  They might remind one of the huge, blocks-long urban hospitals that still dominate many cities. 

I would argue that our health care system might be better served if hospitals were less like department stores and more like malls. 

In the mall analogy, the hospital is the “landlord.”  It provides the physical space and shared services, which in the health care world would include not just rooms, light and heat but also a basic level of medical devices as well as electronic connectivity to EHRs and/or billing services.  Their “tenants” would be various ACOs, which lease the space for their patients who need inpatient care and add any differentiated equipment or staff the ACOs deem necessary.  The hospital in this model does not deliver care and does not own practitioners who deliver care, although its “lease” agreement should give the hospital an interest in assuring that their tenants are effectively providing care.  The hospital would want to ensure that it contracts with a wide variety of quality ACOs, so as to be attractive to a wide patient constituency. 

For this new approach to hospitals to work, it may be necessary to separate out the hospital-as-physical plant from hospital-as-intellectual property.  The latter may be the entities that create or partner with ACOs, while the former provides the platform for inpatient care to multiple ACOs.  Innovations developed in specific service lines could help give an ACO a competitive advantage, without locking other ACOs out from other approaches using beds in the same location.  The transition to this new model would not be simple, but hospitals would not be the first industry to have monopoly providers split up to ensure competition, so it could be done.

We still would face the core issue of how to ensure that there are sufficient numbers of ACOs to give consumers meaningful choice, as well as that those ACOs are capable of being responsible for the cost and quality of care.  Multi-specialty physician groups would seem to be one obvious solution, but they are not widely prevalent, nor easy to create or to run.  ACOs are likely to still require capital and management partners, which may include hospitals, and will take some time to develop and mature.  However, I don’t think the challenge of developing effective ACOs is any worse under the proposed approach, and not having the “Big Brother” hospital systems in the picture may actually make the challenge easier.

One alternative to making hospitals compete through a more open model would be to move to a regulated, all-payor hospital rate system, as proposed by Uwe Reinhardt and others.  This approach is certainly an option, although one that was tried in a number of states in the 1970’s and 1980’s but which only survives in Maryland.  The challenge for such systems is how well they can resist the various pressures, political and other, that seek to undermine the neutrality of the approach, especially as state and federal budgets are increasingly strained by Medicare and Medicaid expenditures. 

Personally, I prefer interjecting more competition into the system, but doing so would require a radical change in our concept of what hospitals are and how they compete.  Hospitals have always been essential community institutions, and my guess is that they are going to remain so.   We just need to make sure they don’t become monopolies, whether that is as health systems or as ACOs.