SummaryBlue Shield of California, Dignity Health (a hospital system), and Hill Physicians Medical Group jointly formed an accountable care organization that operates under an annual global budget reflecting total expected health spending for a defined population of individuals covered by the California Public Employees Retirement System. The budget sets targets for costs in each of five categories, with targets set at levels that anticipate a certain degree of savings versus established cost trends. These savings go back to the California Public Employees Retirement System at the beginning of each year in the form of a premium credit. At the end of the year, each partner shares in any deficits or surpluses in proportion to how much influence it has over costs in each category. These large financial incentives have encouraged the partners to embark on various initiatives to reduce costs and improve quality. During its first 2 years, the program has significantly reduced inpatient use and overall health care costs.Moderate: The evidence consists of pre- and post-implementation comparisons of key performance measures, including hospital use (inpatient days, average length of stay, 30-day readmission rate, number of extended hospital stays) and total and PMPM costs.
Developing OrganizationsBlue Shield of California; Dignity Health; Hill Physicians Medical Group
Dignity Health was formerly known as Catholic Healthcare West. The three organizations that developed the accountable care organization are located in Sacramento, CA.
Use By Other OrganizationsBlue Shield of California has created 10 ACOs across the state.
Date First Implemented2010
Problem AddressedTraditional models of health care financing and delivery often lead to ineffective or inefficient care.1 In particular, traditional fee-for-service (FFS) reimbursement creates incentives for providers to deliver more (but not necessarily higher quality) care, which increases costs and forces health plans to raise premiums. Accountable care organizations (ACOs) have the potential to effectively align incentives for health plan and provider partners and generate better quality at lower costs, but to date only approximately 10 percent of Americans receive care under this model.
- Misaligned incentives under FFS, leading to high costs: The FFS payment system creates a financial incentive to provide more services (regardless of whether they are needed), which leads to higher costs and insurance premiums, but not necessarily better quality.1,2 In California, health care costs have risen dramatically in recent years, with annual health insurance premiums increasing from 13.4 percent to 117.5 percent between 2002 and 2009; the California Healthcare Foundation projects that health care will account for 20 percent of economic activity by 2018.3
- Unrealized potential of ACOs: Providers and payers are developing alternative payment and delivery models to help align incentives for physicians, hospitals, and health plans, focusing them on improving quality and managing costs. Accountable care organizations or ACOs represent one such model. ACOs are alliances of health plans and providers that agree to take on responsibility for a defined population of patients, typically under a global budget in which partners share in any deficits or surpluses. Although this model has shown promise in reducing costs and improving quality,2 less than 10 percent of the U.S. population is served by ACOs. As of early 2013, roughly 330 ACOs were in existence, serving between 25 million and 31 million people; these include ACOs recognized by the Centers for Medicare and Medicaid Services that provide care to approximately 2.4 million Medicare beneficiaries and 15 million other individuals, as well as ACOs sponsored by commercial insurers, which serve an additional 8 million to 14 million individuals.4
Description of the Innovative ActivityBlue Shield of California, Dignity Health (a hospital system), and Hill Physicians Medical Group jointly formed an ACO that operates under an annual global budget reflecting total expected health spending for a defined population of individuals covered by the California Public Employees Retirement System (CalPERS). The budget sets targets for costs in each of five service categories, with targets set at levels that anticipate a certain degree of savings versus established cost trends. These savings go back to CalPERS at the beginning of each year in the form of a premium credit. At the end of the year, each partner shares in deficits or surpluses in proportion to how much influence it has over costs in each category. These large financial incentives have encouraged the partners to embark on various initiatives to reduce costs and improve quality. Key program elements include the following:
- Annual global budget, set below underlying cost trend: The ACO covers approximately 41,000 CalPERS employees and dependents enrolled in a Blue Shield health maintenance organization (HMO). Each year, an annual budget is set based on a global per-member, per-month (PMPM) cost target for five categories: facility services, professional services, mental health services, pharmacy, and ancillary services. Targets are set at a level that reflects the partners' commitment to reducing costs below current trends. In the first year, the partners agreed to a cost target that entailed no increase from the previous year, and in subsequent years they agreed to increases equivalent to one-half of underlying cost trends in the local market. At the beginning of each year, CalPERs receives an upfront premium credit that reflects the difference between the expected cost trend and the target budget. In the first year, this credit totaled $15.5 million and in year 2 it totaled $21.5 million; premium credits to CalPERS will continue to occur each year.
- No change to provider payments during year: The model does not alter Blue Shield’s payment structures or payment levels to providers. Throughout the year, providers continue to receive the same FFS or capitated payments previously negotiated with the HMO.
- Distribution of surpluses and deficits at year's end: All partners have a financial stake in ensuring that expenses do not exceed the targeted budget. If actual costs exceed the budget at year's end, the ACO partners write off that amount. If costs come in below target, ACO partners share in the savings. Allocation of deficits and surpluses is determined by each partner's ability to influence costs in a particular category. For example, Dignity Health carries a greater percentage of risk for facility costs (50 percent) than the other two partners (25 percent each), although Blue Shield carries more risk for ancillary services (50 percent) than its partners (25 percent each). The three partners carry roughly equal risk for professional services and pharmacy services, whereas Blue Shield carries all the risk for mental health services.
- Allocation of risks and rewards: As stated above, the different organizations start with a standard model for total risk share among parties by expense category (facility, professional, pharmacy, ancillary, and mental health). The risk share is almost evenly split, with weight given to the entity that typically bears greater responsibility for that particular line item. This split is then negotiated up and down between the parties until all parties are in agreement that the split is fair. Risks and rewards are negotiated between parties to ensure that all parties have “skin in the game” and that the upside risk is equal to the downside risk. This encourages shared involvement and support for meaningful change.
- Initiatives to improve care quality and reduce costs: The global budget and risk-sharing formula create a strong incentive for the partners to identify and implement initiatives to reduce costs and improve quality. To that end, the partners created a joint "cost-of-health-care team" that reviewed the target population to identify drivers of high expenditures and establish benchmarks for quality improvement. The team consists of representatives from each partner organization, including personnel from clinical operations, finance, data analytics, marketing, program management, and the legal department. To date, the team has designed various initiatives to improve information sharing, better coordinate care processes, eliminate unnecessary care and variations in care, and reduce pharmacy costs; examples include the following:
- Clinical information sharing: The team evaluated clinical information-sharing capabilities and built interfaces to link electronic tools, enabling cross-partner access to existing and new systems.
- Appropriate care locations: The team has worked with the partners to put in place various strategies to ensure that patients receive treatment at the appropriate location. These include proactively mailing information to patients about available facilities, refining physician office telephone messages that explain where to seek care after hours, educating emergency department staff about how and when to refer patients to urgent care clinics, and ensuring that appropriate advice is given on 24-hour nurse telephone lines.
- Patient preparation for surgery: The team developed educational materials and presurgical checklists to ensure that patients undergoing elective surgery were prepared for their procedures, with the goal of reducing care delays and operating room scheduling gaps.
- Discharge planning: The team has worked to enhance pre- and post-discharge planning processes, including developing a post-discharge needs assessment and revamping the education given to patients and families about the discharge plan and self-care requirements. They are also working to better coordinate these processes within and across care settings, with the goal of preventing delays and reducing readmissions.
- Palliative care: The team is working with others to create an integrated palliative care program that features comprehensive patient/family education and physician training, along with more formalized referral processes.
- Home health for seniors: The team is implementing a home-based medical care program for frail seniors to address and mitigate the risk of falls, drug interactions, and other health problems and safety issues.
- Chronic pain center of excellence: The team developed a physical therapy center of excellence to address the needs of patients in chronic pain, with the goal of improving medication management and reducing unnecessary hospital use.
- Physician prescribing: The team is evaluating clinician prescribing patterns and promoting greater use of generic medications.
- Physician variation analysis: The team has evaluated differences in average length of stay and has improved best-practice sharing and education to reduce variation and improve adoption of best practices. Two specific focus areas were orthopedic surgery and hysterectomies.
Context of the InnovationBlue Shield of California is a not-for-profit health plan with nearly 3.5 million members and 5,000 employees; it has one of the largest provider networks in the country and generates approximately $9.7 billion in revenues each year. Dignity Health (formerly Catholic Healthcare West) is the largest hospital system in California, with more than 40 hospitals and care centers in California, Arizona, and Nevada. Hill Physicians Medical Group is the largest independent practice association in northern California, with more than 3,500 independent physicians practicing in approximately 900 locations and treating more than 300,000 patients.
Historically, Blue Shield reimbursed Dignity Health hospitals on a FFS basis and paid Hill Physicians Group on a capitated basis. Each year, the organizations bargained aggressively to set mutually acceptable rates. The impetus for the ACO arrangement came from rapidly rising health care costs in the Sacramento area, along with strong competition from Kaiser Permanente, a closely integrated health care system that serves 3.2 million members in Northern California.
ResultsIn its first 2 years, the ACO significantly reduced hospital use and overall health care costs.
Moderate: The evidence consists of pre- and post-implementation comparisons of key performance measures, including hospital use (inpatient days, average length of stay, 30-day readmission rate, number of extended hospital stays) and total and PMPM costs.
- Marked decline in hospital use: Among those covered by the ACO, inpatient days fell by 12 percent in the first year of the program, despite a 2.5-percent increase in the number of CalPERS members in the ACO. Over the same time period, average length of stay for these individuals fell from 4.05 days to 3.53 days, whereas the number of extended hospital stays (20 days or longer) dropped by 50 percent. Between 2010 and 2011 (the first year of program operation), the proportion of ACO participants readmitted to the hospital within 30 days of discharge declined from 5.4 percent to 4.0 percent.
- Significant overall cost savings: The ACO generated substantial reductions in overall health care costs, reducing both PMPM costs and total expenditures, as outlined below:
- Lower PMPM costs: The PMPM costs for ACO participants averaged $393.08 in the first year of the program, 1.6 percent lower than in the year before implementation. In contrast, average PMPM costs for CalPERS members in Northern California not served by the ACO averaged $435.94 in 2010, a 10-percent increase from 2009.
- Lower overall costs: An analysis of first-year results found that the ACO saved more than $20 million overall, including the $15.5 million premium credit distributed to CalPERS and $5 million in savings shared by the ACO partners. In the second year, total savings approached $30 million, including $21.5 million to CalPERS and shared savings of $8 million among the partners.
Planning and Development ProcessSelected steps included the following:
- Discussing alternative financing mechanisms: Senior leaders from Blue Shield, Dignity Health, and Hill Physicians Medical Group met to discuss alternative financing mechanisms. Blue Shield leaders emphasized that the health plan wanted to share risk, not just shift it to the other organizations. The representatives agreed that forming an ACO would be the best opportunity to align incentives to manage costs while still allowing them to offer high-quality care.
- Conducting needs assessment: The potential partners conducted an assessment of the needs of the CalPERS population to confirm that it could be well served by an ACO.
- Forming governing board: The senior leaders created a governing board for the ACO; members included the chief executive officer, chief operating officer, senior vice president of networking management, and chief medical officer from each organization. The board’s responsibilities include formulating strategy and serving as the final decisionmaker regarding funding and contracting issues.
- Designing agreement: The cost-of–health care team designed a memorandum of understanding to formalize the partnership. This agreement outlined partner responsibilities related to both clinical and financial integration, presented a global budget, and set utilization goals.
- Communicating with stakeholders and patients: Each partner communicated the ACO’s mission to its own employees and other important stakeholders.
Resources Used and Skills Needed
- Staffing: Blue Shield of California employs a director and two full-time staff who oversee its ACO-related efforts. The other partners may reassign or hire new staff (such as a program manager or care coordinators/case managers devoted to the ACO population) to help ensure quality and manage use. Senior leaders within each of the partner organizations devote some time to the ACO on an ongoing basis, primarily related to development of program-related strategies.
- Costs: Data on program-related development and operating costs are not available.
Funding SourcesHill Physicians Medical Group; Blue Shield of California; Dignity Health
Getting Started with This Innovation
- Confirm that community can support ACO: An ACO typically works best in an area with a relatively large population. Furthermore, an ACO partnership works best in a region with well-established referral patterns between large physician groups and one or two hospitals.
- Ensure senior leadership support: Senior-level engagement and support are critical to the successful development of an ACO in a timely manner. Typically, senior leaders see these kinds of partnerships as a key survival strategy in today’s environment, and hence can be effective in communicating their importance to key stakeholders in their organization. Senior leadership support is particularly important in convincing providers to trust the health plan partner(s).
- Include a health plan: Although some providers may be reluctant to work closely with a health plan, the plan’s involvement becomes critical, particularly when it comes to analyzing cost information across the entire spectrum of care. Health plans typically have the data and capacity to identify cost and use trends at a detailed level (e.g., by diagnoses, physician, etc.), and these data help inform the development of budgets, initiatives, and best practices.
- Create formal governance structure: The ACO should be formalized so that each partner can participate in defining the financial relationship between participants, delineating ongoing roles and responsibilities, and setting strategic direction.
- Start small: Implement relatively easy, obvious cost savings initiatives first, allowing early successes to build partner trust and enthusiasm for the more difficult projects that will come later.
Sustaining This Innovation
- Be vigilant in continuing new processes: New initiatives should be carefully monitored on an ongoing basis to ensure that old patterns of care do not resume.
- Expect challenges: Cutting costs is relatively easy during the early years, as partners pursue “low-hanging fruit.” Over time, it typically becomes more challenging to identify and implement strategies that can yield additional meaningful cost savings.
Use By Other OrganizationsBlue Shield of California has created 10 ACOs across the state.
Contact the InnovatorAnaLisa Luippold
Program Director, Accountable Care Organizations
Blue Shield of California
4205 Town Center Boulevard
El Dorado Hills, CA 95762
Innovator DisclosuresMs. Luippold reported having no financial interests or business/professional affiliations relevant to the work described in the profile.
References/Related ArticlesMarkovich P. A global budget pilot project among provider partners and Blue Shield of California led to savings in first two years. Health Aff. 2012;31(9):1969-75. [PubMed]
Markovich P. A global budget pilot project among provider partners and Blue Shield of California led to savings in first two years. Health Aff. 2012;31(9):1969-75. [PubMed]
Landon BE. Keeping score under a global payment system. N Engl J Med. 2012;366:393-5. [PubMed]
3 Data from the California Healthcare Foundation. Presented by Luippold A (Accountable Care Organizations. Blue Shield of California). PowerPoint presentation.
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Original publication: May 08, 2013.
Original publication indicates the date the profile was first posted to the Innovations Exchange.
Last updated: June 04, 2014.
Last updated indicates the date the most recent changes to the profile were posted to the Innovations Exchange.
Date verified by innovator: April 22, 2014.
Date verified by innovator indicates the most recent date the innovator provided feedback during the annual review process. The innovator is invited to review, update, and verify the profile annually.