• A Three-Legged ACO Gets Off to a Running Start

    Lola Butcher Jan 31, 2013

    A California health system, payer, and physician group developed a risk-sharing agreement that holds them jointly responsible for hitting cost-saving targets—and allows them to share any savings above that target.

    California-based Dignity Health is committed to universal access to health care—and sees its pioneering partnership with Blue Shield of California and Hill Physicians Medical Group as central to its mission. Increasing access requires that healthcare costs be brought to heel, and that is why the partnership was formed. “If we care about our nation and its economic health, we need to be part of the solution,” says Dignity Health CFO Michael Blaszyk.

    The solution began to emerge in 2007 when California Public Employees Retirement System (CalPERS), one of the nation’s largest healthcare purchasers, made it clear to Blue Shield and Dignity that costs were becoming unsustainable.

    Both Dignity Health and Hill Physicians, which is the largest independent physicians association in California with more than 3,500 physicians and caregivers, had contracts with Blue Shield. So the CEOs and other senior leaders of the three organizations started searching for a new way of delivering and paying for medical care.

    The result: One of the first accountable care organizations (ACOs) in the nation. Launched in January 2010, the pilot ACO serves 41,000 CalPERS beneficiaries in the Sacramento, Calif., area who are enrolled in a Blue Shield HMO. By the end of 2011, the partnership had saved CalPERS a total of $37 million compared to what it would have paid without the ACO. In addition, the three partners had split $13 million, courtesy of the shared-savings contract, according to a September 2012 article in Health Affairs.

    “We are convinced that these types of three-legged stool partnerships with doctors, hospitals, and health plans are the way to go,” says Juan Davila, executive vice president for health care quality and affordability at Blue Shield. “We don’t think the quality is better and waste is reduced—we know. And the relationships are better. Everybody is still making money and winning.”

    Risk-Sharing Partners

    The term “accountable care” was barely in use in 2007 when the three partners hammered out the basic ACO model that many other healthcare partnerships are currently adapting for their own use. The partners started with a dual quality and cost agenda. They set a per-member-per-month global budget that required the three partners to collectively reduce costs by at least $15 million in 2010. However, they also agreed to maintain or improve the quality of health care provided: The partnership agreement stipulates that no cost-control initiative can be launched if it would hurt quality.

    The partners developed a risk-sharing agreement that holds them jointly responsible for hitting cost-saving targets—and allows them to share any savings above that target. To reduce their costs, the partners agreed to pursue five strategies:

    • Facilitate the exchange of patient information by integrating IT systems.
    • Reduce drug costs through patient education, drug purchasing, and contracting.
    • Educate physicians about the importance of affordable health care and using data analysis and interventions to reduce variation in physicians’ clinical quality and resource use.
    • Use chronic care management, patient education, palliative care, pain management, and home visits to reduce unnecessary healthcare utilization.
    • Work together to manage utilization by, for example, defining and implementing evidence-based guidelines that eliminate ineffective and marginal surgical procedures.

    A “cost of healthcare” team—composed of clinical, finance, data analytics, and other staff members from the three organizations—was assigned to implement those strategies. For example, the team developed a more proactive hospital discharge planning process. Within 48 hours of a patient’s admission, a summary of each patient’s essential medical issues is prepared, along with a post-discharge needs assessment. The team also redesigned patient education to help patients and family members better understand self-care instructions after discharge. The team’s efforts helped reduce the ACO’s 30-day all-cause readmission rate by 15 percent in one year.

    In addition to reducing readmissions in the first year, the partners also reduced inpatient admissions and total hospital days by 15 percent each. As a result, they reduced costs by $20 million, surpassing their first-year savings goal by $5 million.


    The ACO strategy is working out so well for the three partners that they are all pursuing it in other markets. The three organizations teamed up again to create an ACO for city and county employees in San Francisco. In addition, Hill Physicians Medical Group is pursuing another ACO in another city, and Blue Shield expects to have 20 contracts signed by late 2014.

    Should other providers follow suit? “I would like to just say, ‘Go ahead and do it—everything will work out fine,’ but I truly believe that unless you get the fundamentals right, it will be doomed. And the fundamentals are aligned incentives,” says Rosaleen Derington, chief medical services officer for Hill Physicians.

    Before the partners could align incentives, they had to understand how each of them made a profit. That required financial transparency, which did not come naturally. “Historically, we all fight about money, and one party wins only if the other party loses,” Davila says. “We had to get past that and start trusting each other.”

    Blue Shield started by revealing how much it expected to pay Dignity Health and Hill Physicians over a year’s time, and how that influenced the premium price it charged to CalPERS. Dignity Health and Hill Physicians followed Blue Shield’s lead by showing how they made a profit in their contracts with insurers. That allowed the partners to identify opportunities for delivering care more efficiently. “Once you lay all the cards on the table, others can see what you’re driving at and can help you drive there,” Davila says.

    For example, reducing hospital use was essential to lowering costs across the ACO—but Dignity Health had to have revenue sources to make up for the lost inpatient days. So Blue Shield worked to ensure that patients who sought outpatient or emergency care out of network were redirected to Dignity Health facilities.

    Meanwhile, because the organizations were so different, they could not assume financial risk equally. The CFOs of each organization were tasked with figuring out how to spread risk across the partners based on their ability to influence costs in a particular area.

    A Three-Legged ACO Exhibit

    “You can imagine the shift in the CFOs’ thinking process—to not try and grab as much as they could for their own organizations,” Derington says. “Getting through that signaled a major shift in our respective relationships and how we go about our business.”

    Culture Change

    The ACO leaders who were interviewed for this article said the shift in their relationship required new ways of interacting, including the following.

    Relinquish oversight when appropriate. Under the traditional payer/provider dynamic, Blue Shield used to monitor the care that its patients received in the hospital. As an ACO partner, that should not be necessary, says Derington of Hills Physicians. “We said: ‘Hey, trust us to take care of that member. We’re in a different relationship. You don’t have to look over our shoulder to ensure that we’re doing the right job.’”

    Forget the past. The biggest barrier to success, says Blue Shield’s Davila, is “folks who bring up stuff that isn’t germane to today: ‘X years ago you said this, and it wasn’t true,’ or ‘You did this, and it wasn’t fair.’”

    Know yourself. Understand what your organization contributes to the partnership. In a risk-sharing partnership, that means detailed cost and quality data. “If you don’t truly know what your quality outcomes are—and if you don’t have a good cost accounting system to understand how much it is costing to deliver care and the variation among the different providers—then you’re going to have a difficult time when you get into the partnership,” says Dignity Health’s Blaszyk.

    Assign the right employees. All three ACO participants found that some of their staff members were unable to adopt the collegial mindset required in a partnership. “As we started to change work processes deep into the organization, we had to change out some of our leadership,” Derington says. “Some people come to collaboration and partnership very easily, and some don’t.”

    Use consultants strategically. A consultant facilitated the early discussions between the CEOs of Dignity Health, Hill Physicians, and Blue Shield but bowed out after the ACO vision was established. Davila compares their role to that of architects. “They can help you with what it looks like, but that same architect isn’t the guy that picks up the hammer and starts putting the house together,” he says. “We have to be the guys that take the hammer and the saw and put the house together piece by piece.”

    Mutual Trust

    In any healthcare partnership, the biggest challenge is replacing a competitive and perhaps adversarial relationship with one built on mutual trust. All three partners in the pilot ACO had worked together for many years and shared a mutual respect for one another’s expertise. However, their working dynamic had been one of “every man for himself.”

    The ACO is governed by a board of directors comprising CEOs and other top executives from each partner organization. This high-level leadership signals to staff members within each organization that they can pursue strategies that are good for the ACO, even if they are not always financially advantageous for a given partner.

    “In many ways, we are making it up as we go along because there has not been a sharing of data systems and economics like this heretofore,” Blaszyk says. “We have to be sure to do this in such a way that we can learn from our early experience, translate that learning to continuous improvement, and do this in a way that all partners share in the benefits.”

    It is a new way of thinking that other healthcare organizations must learn. “This is so very, very different than how we operated before,” Derington says. “We are basically all in it together, and we all make money or lose money based on the initiatives that we put in place and our success on those initiatives.” 

    Lola Butcher is a freelance writer and editor based in Missouri.

    Interviewed for this article:

    Michael D. Blaszyk is senior executive vice president, chief corporate officer and CFO for Dignity Health, San Francisco.

    Juan Davila is executive vice president for health care quality and affordability, Blue Shield of California, San Francisco.

    Rosaleen Derington is chief medical services officer, Hill Physicians Medical Group, San Ramon, Calif.