A Big Week for ACOs

Given that this Friday is the deadline for applying for CMS ACO “Pioneer” status and is also the assumed release date for the final ACO regulations, this is sure to be a busy week for ACO news.

And as if we needed more proof that still no one knows how ACO adoption is going to shake out, we took note of the following last week:  on August 19^th, Forbes published a blog post titled “How ObamaCare is Destroying Accountable Care Organizations.”   (This was based on a post by noted healthcare policy analyst John Goodman: “Health Care Schizophrenia” )

As a key argument, the post cites how an innovative medical group in Texas called IntegraNet wouldn’t qualify for CMS ACO status, despite all the good work they are doing around measuring practicing evidence-based medicine and driving down costs because they rely on a Fee-for-Service model.

One week later, on August 26th, guess what happens?  IntegraNet became one of the first groups in the country to formally apply for ACO designation.  (To be completely fair to Goodman and to Forbes, IntegraNet clearly states that they are applying early in order to have some influence on the “burdensome rules” imposed in the regulation).

However this drama plays out, we here at TripleTree have been thinking a bit about the broader picture.  While most of the drama and headline news (and criticism!) is happening at the federal level of the CMS ACO program, there are a number of hospitals and physician groups that have quietly undertaken their own shared savings and bundled payments experiments.

In fact, Modern Healthcare published its first survey of accountable care organizations this week, identifying 13 ACOs respondents around the country (this despite the fact that CMS ACO program does not launch until 2012). To us, these experiments are the real market opportunity for ACOs, and one that has finally gotten some deserved attention on the back of the government’s healthcare reform legislation.

In fact, a great example can be seen here in our backyard with Fairview Health System’s developing relationship with the payer Medica.  A case study can be found here, but in short:  Fairview, a seven-hospital system with 49 clinics and 450 employed physicians, and Medica, with 1.6m members in the upper Midwest, decided that they could seek a more mutually beneficial relationship.  In 2009, they entered into a contract that pays Fairview based on the achievement of defined outcomes for quality and total risk-adjusted cost of care based on Fairview’s performance on certain diabetes and vascular care measures.  Essentially, if Medica members have better outcomes and lower costs than the community at large, Fairview shares in those savings.  Preliminary data is encouraging, though the relationship is requiring a “total cultural transformation” on the hospital system’s part, including a total redesign of workflow, compensation, and responsibilities. (Just think of what kind of transformation will be required to measure and achieve CMS’s 65 proposed quality measurements!)

While these quiet moves will never get the attention that Highmark’s acquisition of West Penn Alleghany that we profiled recently, this the real story of the ACO debate going on right now.  These experimental relationships between providers and payers are the ones that will prove if shared savings and bundled payments can truly bend the proverbial cost curve.

Let us know what you think.

Conor Green

Conor Green is a Vice President at TripleTree covering the healthcare industry, and specializing in revenue cycle management and tech-enabled business services. You can email Conor at cgreen@triple-tree.com.

Read Full Post »

As Tenet Digs in, Getting beyond the Headlines and into the Numbers is Illuminating

Community Health Systems [NYSE: CYH] and Tenet Healthcare [NYSE: THC] have squared off in what is turning into an ugly hostile takeover attempt of Tenet. Tenet has attempted to thwart the takeover by accusing Community Health Systems of Medicare fraud, and Community is denying the charges. The chain of events has rattled investors and jeopardized Community’s ability to complete the takeover.

Following Community’s offer back in November 2010, Tenet alleged that Community used unethical and illegal business practices to defraud CMS and private payers. According to Tenet, these practices have artificially inflated Community’s stock price and its being argued that Community’s offer (which at the time included cash and stock) was inadequate because of its artificially inflated earnings.

Both parties are tossing around pages of statistics to support their positions and win over Wall Street and investors, but regardless of Community’s defense and their ability to regain investor confidence, our team anticipates that until the dust settles, the potential financiers that could support the deal with favorable term will be spooked.

Tenet filed its Complaint in US District Court for Northern Texas. Tenet argues that:

• Tenet argues that Community’s use of their own proprietary admissions standards are overly aggressive and have led to the increased admissions rates above industry averages.  Tenet points to Community’s low observation rates as evidence that their admissions rates are abnormally high.
  

• Community’s aggressive admissions practices can be seen in studying the “synergies” realized by the hospitals it has acquired.  The chart below (from the complaint), helps demonstrate the significant reduction in Medicare Observation Rates following Community’s acquisition of Triad in 2007; showing Community’s practice of using aggressive admissions policies to artificially boost profit.
  

• The increased admissions generated an additional $280-$377M in Medicare revenue for Community from 2006-2009 (the compliant estimated that the total figure could exceed $1B if Private Insurance revenue and fines are included).

Tenet’s argument appears flawed in that it asks both the court and its shareholders to conclude that there is a direct correlation between low observation and high admission rates. Tenet fails however, to produce the evidence that Community’s admission rates are so high that fraud must be occurring.

The Office of the Inspector General (OIG) for HHS has also began investigating anomalies in Community’s admission rates based on multiple whistleblower complaints from Community employees.  The OIG investigation could quickly spill over into the DOJ for additional criminal investigations.

Community’s stock value has dropped 22 percent (based on its closing price on April 10 to April 27) and as continued questions are posed relative to earnings and potential adjustments, the ripple effect could be significant.    Community has denied the claims and has stated a willingness to cooperate with the OIG investigation.  In its Q1 earnings call, Community builds a good case that Tenet’s analysis selectively uses statistics and false metrics, and ignores data more favorable to Community to skew its findings.

Tenet’s allegations paint a negative spotlight and overhang on all hospital earnings quality, not just their own or that of Community.  Debt holders, it follows, may be gun-shy in lending to fuel acquisitions going forward. This is an industry that is rapidly consolidating as organizations attempt to scale operations and gain pricing power.  If access to the debt that’s fueling hospital-to-hospital acquisitions is curtailed, other players (i.e. Payers) will have an advantage as they look to vertically integrate.  This is critical advantage within the new realities of Accountable Care Organizations (ACOs).

Moreover, this ongoing dispute has weakened credibility on both sides of the debate. Wall Street has been reluctant to accept Tenet’s claims but also has placed considerable scrutiny on Community to provide closure on the issue. Given Community’s continued silence following their Wednesday’s earning announcement, it is likely that Community will need to provide Wall Street and especially debt insurers with a more detailed answer or face additional pressure in the near future.

Let us know what you think.

Joe Long & Scott Donahue

Joe Long is an analyst at TripleTree covering the healthcare sector, with a focus on the approaches and technologies surrounding health insurance exchanges.  You can email him at jlong@triple-tree.com.

Scott Donahue is a Vice President at TripleTree covering infrastructure and application technologies across numerous industries and specializes in assessing the “master brands” of IT and Healthcare. Follow Scott on Twitter or e-mail him at sdonahue@triple-tree.com

Read Full Post »