Brian and Garrett Fahy

Against the backdrop of the forthcoming Supreme Court challenge and GOP nomination process, where the candidates debate the best policies for the “replace” plank of the GOP’s “repeal and replace” agenda, emerges the third dimension of the national health care debate: state-based health care reform. Though an admirable exercise in Tenth Amendment experimentation, at least one such proposed “reform” is anything but. Rather, it aims to import into Medicaid a misguided Obamacare mandate for Medicare. This so-called reform deserves special scrutiny.

Accountable Care Organizations (“ACOs”), the Orwellian-named entities spawned by section 3022 of Obamacare, are gaining attention and traction in several states. In theory, ACOs will be aggregated groups of health care providers that will work together to manage and coordinate care for Medicare’s fee-for-service beneficiaries, and meet federally-mandated care standards. Through a “shared savings” incentive program, ACOs will receive a cut of the savings they generate if they reduce costs and improve the quality of care provided. The result: improved care, cost savings, more money for doctors, and the usual refrain about ending “waste” in the system. Mission accomplished? Not so fast.

The Obama administration recently released a hefty 696 page regulation that governs the implementation of ACOs. Even a cursory review reveals there is ample cause for concern. The regulation fails to specify how the “shared savings” will be distributed among providers, jeopardizes the participation of specialists in health care decisions, and leaves the most crucial details undefined, and thus subject to bureaucratic rule-making. Further, as structured by the Administration, ACOs do nothing to encourage the kind of consumer cost-consciousness, financial transparency, or physician-central approach that is critical in any health care equation. Instead, as recently noted by the head of the Federal Trade Commission, ACOs may lead to higher costs and worse care as they encourage provider consolidation/less competition and a shifting of costs onto private insurers.

The ACOs’ chief ailment is their premise: that removed federal bureaucrats at the Centers for Medicare and Medicaid Services (“CMS”) in Washington, rather than a free and competitive healthcare market, can effect innovation in cost control and quality. Indeed, the recently-released regulation contains over 1,000 requirements for ACOs. Though well-intentioned, ACOs are simply the latest route to government-dictated price controls, and they don’t belong in Medicaid. Those who support ACOs, Republican or Democrat, should reevaluate their position for the following reasons.

Implausible Capital Requirements - For ACOs to work, they must bear risk. To bear risk, ACOs must be adequately capitalized, which requires sufficient fees from patient services. This is especially problematic in programs like Medicaid, where the hospital reimbursement rate averages 62 percent compared to private payers. The result is a devil’s bargain: either the states (many of which are broke) pay more or the patients (who are not the 1%) pay more to ensure the ACOs’ risk-capitalization. The American Health Association recently released a report which noted that actual ACO start-up costs will be ten times those projected by the Administration. A federal government with a $15 trillion dollar debt simply has no credibility (or constitutional) authority to tell states – many of which face crippling debts of their own – to shoulder additional financial burdens.

Illusory Savings - Proponents claim that ACOs are vital to health care savings. The non-partisan Congressional Budget Office (“CBO”) disagrees. CBO estimates that ACOs will garner savings of $4.9 billion out of the more than $31 trillion that our country will spend on health care over the next ten (10) years. Such savings appear large, but amount to a paltry 0.00016 percent of total health care expenditures over that time. This is less than half of what Americans spent on bottled water in 2010. Further, for five years CMS has run a test model of ACOs, Physician Group Practice Demonstration, and the majority of the tested providers have achieved no cost savings employing the ACO model. If these same illusory “savings” are realized on the state level, the consequences for patients will be devastating.

Serious concerns about the ACO model have been raised by the Billings Clinic (MT), Mayo Clinic (MN), Sutter Health (CA), the Marshfield Clinic (WI) and other respected healthcare providers. Unfortunately, enthusiasm for health care central planning of this kind has spread to states across the country and politicians across the political aisle.

One state courting a fiscal embolism is Utah. In April of 2011, Governor Herbert signed Senate Bill 180, which implements ACOs for a portion of Utah’s Medicaid recipients. SB 180, which was pushed by GOP state senator Dan Liljenquist and based on rosy cost savings predictions, contains a “failsafe” trigger that activates an Oregon-style rationing program when the savings fail to materialize. Such rationing will permit state bureaucrats to target certain health care services for elimination. Those in favor of free markets, quality health care, and smaller government should be cautious about ACOs and see them for what they are: a veiled attempt to impose greater government control over the health care sector, which comprises approximately 18 percent of the economy.

Yet it is important to not only be against something, but to be for something better. Indeed, there are far better – and less costly – ways to improve health care, and they don’t require 696 pages of explanation: decoupling insurance from employment, block-granting Medicaid funds to states, creating and promoting health savings accounts, removing barriers to interstate plan competition, and disincentivizing medical malpractice suits. Politicians who pursue these and other meaningful reforms risk alienating the AARP, but they will be doing their citizens a great service by promoting health care reforms that will produce better services at cheaper cost.

The late Apple visionary Steve Jobs, who was not a health care expert, was famous for his belief that consumers did not know what they wanted until they were shown it. Such belief rings true in health care, where health care consumers (patients) will not understand and demand the benefits of true reforms until they are given them. Now is the time to start.


Brian and Garrett Fahy

Brian and Garrett Fahy are attorneys from Los Angeles who previously worked in the White House and Senate Republican Conference, respectively. They write on national legal and political affairs. They can be reached at BGTownhall@gmail.com.