Mr. President, Mr. Governor, please explain

I have raised some questions below about the concept of "accountable care organizations," an idea that has gained prominence in both federal and state discussions. The idea, in short, is to combine a capitated form of reimbursement with a restricted network of providers across the spectrum of care. In its most expansive form, each of us citizens would have an annual health care budget, and your ACO would manage your care -- from primary care to secondary and tertiary care, and perhaps further to skilled nursing facilities or rehab, and maybe even through hospice if that was how far things went for you. Short of that, there might be "bundled" amounts of payment to cover acute care episodes of certain types or chronic disease extended care.

Let me now pose a different question. What would be the public policy incentive created by the government to cause institutions to band together to create an ACO? Presumably, health care institutions and physicians would want to know that it would be financially advantageous to combine under a single care management structure. So, first, someone would have to create insurance products that are attractive to consumers and employers. What would make it attractive to tell people that their choices of service providers will be limited to those contained in a given ACO? Well, at a minimum, they would have to be offered a lower price for their insurance coverage.

But, let's now turn back to the medical providers who were thinking of banding together to create an ACO. To garner customers who would pay less, you would have to be confident that your new group could deliver services at a lower cost than you previously would have expected individually and as a group. You would also have to be willing to take some portion of the actuarial risk previously born by the insurance companies or the government. You could do the latter by purchasing re-insurance or by building up your balance sheet to provide a financial buffer against miscalculations.

So, not only would you have to be confident of delivering services at a lower cost, but you also have to do so net of your new cost of absorbing greater risk.

When it comes to business planning, I am pretty simplistic. If the government wants to encourage ACOs, it seems to me that this construct will require the government to be co-investors in them. Either the government will need to create a mechanism to absorb risk, or it will have to offer direct subsidies to make it financially attractive for the the ACOs to agree to lower payment rates for the same services previously offered.

What am I missing? Well, you could argue that those who are contemplating the construction of an ACO could be confident of reducing their overall cost of health care delivery. They would also be confident that the consumer and employer market will rise to greet their new product offering. The two thoughts combined would make this an attractive business model. These market leaders would be willing to take that pricing risk for the sake of getting a foothold in the new world order of health care delivery.

It is hard for me to imagine this as a widespread phenomenon -- independent hospitals and physician groups and skilled nursing facilities and rehab centers having the wherewithal to do the business planning, the relationship building, the decisions about risk allocation, the construction of interoperable medical records, and the like that would be necessary to even evaluate the proposition -- especially in the face of a void in insurance products that would have been tested in the marketplace for their attractiveness to consumers and employers.

So, the question for President Obama and for Governor Patrick is, "What are you planning to offer to make this an attractive proposition for the medical professions and the institutions that provide care?"