The Affordable Care Act encourages the formation of accountable care organizations (ACOs) that can accept bundled payments for hospitalization and outpatient care. Most ACOs use an organizational structure, the foundation model, which has a serious shortcoming: It limits the extent to which an ACO’s practicing physicians must commit themselves to the goals of performance improvement and cost containment.

For that reason we advocate an alternative: the partnership model, which relies on shared leadership among hospitals, insurance plans, and medical groups. This is the leadership structure needed to improve physician performance and overcome the tendency of doctors to try to maximize their individual compensation. Although the partnership model has not yet been tried for ACOs, it has allowed a variety of multi-specialty medical groups — including the Mayo Clinic, Kaiser Permanente, and the Geisinger Health System — to achieve superior quality outcomes, outstanding service, and increased affordability. We are confident it will allow ACOs to do the same.

The Foundation Model’s Flaws

The Affordable Care Act does not specify an ACO’s organizational structure but it does say that sooner or later the ACO must be able to accept financial risk. This provision requires the ACO to obtain and reserve enough capital to offset the risk. For this reason, well-capitalized hospital systems and insurance companies have taken the lead in setting up ACOs. Physicians provide medical care, lead clinical departments, and advise the organizations on clinical and, at times, administrative decisions. However, hospital or insurance executives in these hospital-based ACOs retain ultimate decision-making power.

But a hospital-led system will fail when it tries to increase physician productivity or modify individual compensation. Physicians resist change, especially when they see their physician leaders in subordinate roles.

To remedy this flaw and to accommodate states that prohibit the corporate practice of medicine, hospital systems have created nonprofit foundations that contract with health plans and hospital groups. Most foundation models define one or several medical groups to care for patients. Physicians own and operate these medical groups and hold seats on the foundation’s governing body. Physicians decide their own compensation and working conditions and have a voice in expressing the foundation’s mission. Foundations can coordinate care better than the disorganized fee-for-service practices found in many communities, but their structure insulates physicians from strategic decisions and adds a layer of administrative cost.

The Partnership Model’s Advantages

The partnership model improves physicians’ confidence and trust in their leaders. Here’s how it works:

The ACO is structured as a not-for-profit entity with a governing body that includes representatives from the hospital, health plan, medical group, and community. No single entity has a majority of directors. This board sets strategy, contracts with purchasers of health care, contracts with hospitals and the medical group for the provision of medical care for a defined patient population, and accumulates and allocates the enterprise’s capital. Although the initial funding of the ACO may come from a hospital or insurance company, the ACO repays this investment by generating an operating margin. Hospital, health plan and medical group share in the organization’s economic risks and rewards.

Making the Model Work

For the partnership model to work, the medical group, the insurance company, and the hospital must be independent entities, each with a board of directors and a unique leadership structure. The medical group must be owned and operated by its physicians. Unlike the ACO board, the majority of the medical group’s board of directors is comprised of practicing physicians and includes the medical group’s chief executive officer. The medical-group board accepts responsibility for the care-delivery system, selecting the chief executive officer and appointing practicing physicians as formal department heads accountable for recruitment, quality, patient satisfaction, work expectation, and individual salaries. To accomplish this, the board and CEO oversee leadership development and selection.

The partnership model differs from the foundation model in that the medical group works with, not for, the hospital or health plan and shares the performance risk of the enterprise’s decisions. Practicing physicians have equal representation on the enterprise’s governing body, where they can represent their interests and those of their patients. Physicians participate in decisions about pricing, cost, capital generation and expenditure, and brand management. In this way, physician leaders in the medical group share responsibility for all aspects of the enterprise; practicing physicians will embrace operational changes when they have a voice in deciding strategy and improving medical care.

The principal advantage of the partnership model of leadership in ACOs is that it aligns the goals of patients, hospitals, health plans, purchasers, and physicians. No entity can benefit at the expense of the others. Attaining this alignment produces high morale and commitment to improved performance among the ACO’s physicians.

A successful ACO must decide the correct number and mix of physician participants, a potentially disagreeable task. Similarly, physician leaders must determine the relative compensation among medical and surgical specialties. They can demand that all physicians use electronic medical records and offer patient conveniences such as secure e-mail and video visits. Without an independent medical group owned and operated by physicians, accountable for clinical outcomes and rewarded for improved performance, these changes will not happen.

The partnership model facilitates the transition from episodic, bundled payments to a system of prepayment for all medical services. Prepayment allows the ACO to predict its revenue and divide it rationally, including the accumulation of required capital. Sharing accountability for revenue and expenses creates an incentive for physicians and hospitals to work together. Prepayment also allows the cost of different approaches to be compared. Financial success or failure becomes transparent.

Forming and operating a partnership with physicians in leadership positions is not easy. At present, few physicians have formal leadership training and are traditionally autonomous. But they chose medicine because of their commitment to health, and the partnership model can rekindle this mission-driven spirit. By making physicians fully accountable for success and failure, it will create ACOs that maximize quality, service, and affordability.

By Robert M. Pearl , MD, Executive Director and CEO, TPMG.
Published on November 1, 2013 on the Harvard Review blog: