How ACOs creatively destroy fee for service medicine

The U.S. Department of Health and Human Services (HHS) advocates the “creative destruction” of the traditional system of U.S.physicians practicing solo or in small groups operating as small businesses.

Republicans and Democrats approve of ACOs in concept. The Affordable Care Act of 2010 calls for shifting from fragmented care provided by uncoordinated health care professionals to integrated treatment by “accountable care organizations” (ACOs). While still evolving in terms of definition and regulations, the HHS’ model of ACOs would consist of primary care providers, specialists, and possibly hospitals with professional healthcare management personnel.

Unlike the fee-for-service system, an ACO-based  health care system would supposedly not depend financially on the volume of consultations, tests, treatments, and days in hospital delivered. Funding of ACOs would be “prepaid” from some combination of government insurance (e.g., Medicare, Medicaid, etc.) and patient and/or employer insurance premiums supplemented, if needed, by social safety net funds.

ACO-employed providers and managers would be financially at risk for cost overruns and would receive bonuses for providing “quality care” at a low cost. Proponents of this proposed health care sea change argue that ACOs will offer a system that financially rewards good health outcomes and reasonable prices.

Opponents of ACOs see little or no difference between ACO-style cost control and the health maintenance organization (HMO) method of saving money that caused a consumer backlash in the 1990s. Unknown is whether ACOs will return us to the infamously inflexible managed-care “gatekeepers”backed up by narrow networks of specialist providers all moving at an institutionally defined slow pace calculated to enhance the medical corporations’ financial bottom lines.

The HHS’ emerging ACO business model seems to center around increasingly coercive HHS-imposed financial incentives and regulations for doctors and hospitals. The resulting “health care reform” is designed to costless money for the HHS, private insurance companies, and employers. Operationally, the HHS’ requirement for “quality health care” is defined by the HHS with plans for monitoring by universal electronic medical records, documenting the compliance of health care professionals with HHS-sanctioned “evidence-based” clinical practice guidelines. In the new scenario, whether doctors or hospitals play the dominant role and earn the most profits depends on which group best performs according to the HHS’ cost and quality targets.

In the midst of the already underway creative destruction of the fee-for-service health care system, a battle between hospitals and physicians is developing over the structure and ownership of the evolving new ACO-based health care system. At stake for hospitals is their dominant role in the health care system and for physicians the issues are income, autonomy,and work conditions. Whoever controls the ACOs will capture the largest share of any profits from efficiencies. Hospitals appear to be winning the ACO ownership war by rapidly purchasing physician practices, relegating doctors to the role of employees.

What is wrong with this picture?

Do we want physicians to receive bonuses for providing HHS defined “quality care” at a very low cost? Do we want ACOs that provide what patients consider exceptionally good care but what the HHS deems too costly to suffer financially or go bankrupt?  Do we want an ACO industry dominated by hospital administrators, relegating physicians and other health care providers to employees with little clout to advocate for patients? I don’t think we want any of these kinds of options. Patients, not the HHS, should be defining “quality care” and “reasonable cost.”

To reconcile the flaws with the HHS model of ACOs,consider having ACOs constituted as nonprofit “accountable care cooperatives”(ACCs) owned by all the patients enrolled. Additionally, think about having clinical practice guidelines and benefit packages defined, not by the HHS, but by the ACC physicians and managers with the consent of the patient owners. With this scenario, ACC managers employed by the ACC patient owners would hire primary care physicians and selected specialists. ACC managers and physicians would contract with hospitals and other health care service and product providers based on value to patients rather than HHS mandates.

With prepaid funding adjusted for the health risks of patients, ACC physicians would have incentives to eliminate waste in tests, treatments, specialists consultations, and hospitalizations balanced by strong motivations to provide excellent care to their bosses—patients. Specialists and other health services providers not employed by ACCs or hospitals would compete for referrals from ACC physicians with input from patients. Instead of bonuses to physicians and hospitals that meet HHS targets, savings from eliminating unnecessary medical interventions, as defined by individual ACCs, would go back to the patients in the form of reduced premiums and enhanced beneficial health services. Government social safety net funds could be channeled to ACCs to provide funding for premiums for people unable to pay. Patients could choose between competing ACCs based on quality of care and cost of premiums, changing ACCs if they become dissatisfied.

The private insurance company of each ACC would collect the medical premiums from enrollees and health risk adjusted funds from the federal government—in lieu of Medicare, Medicaid, etc. They would then distribute the funds according to the dictates of the ACC staff. Close monitoring and reporting on each ACC’s allocated services and the associated health outcomes would drive changes in benefits offered and assure continuous quality improvement.

David K. Cundiff is an internal medicine physician and author of Money Driven Medicine Test and Treatments That Don’t Work.

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  • soloFP

    Whatever plan exists in the future will allow physicians to find a way to still make money. My area has multiple subcontracts with private insurance companies capitated Medicare HMOs that pay nothing to the primary for inpatient care and pay a flat monthly fee based on number of patients with up to a 10 percent bonus for not overutilizing the system. This means pushing the limits on preventive medicine and talking patients out of doing prostate exams, mammograms, colonoscopies, excessive labs, CTs/MRIs etc but still trying to maintain a safe area where you don’t get sued. There are groups in town where each member is getting $50,000 bonuses at the end of the year for being efficient.
    Another Medicare plan in town is run by about 50 docs, primary and specialty. They limit the number of primary docs and actually run the Medicare HMO themselves with enough members to take the risk. This puts a large chunk of premiums into the docs hands and actually allows the docs to make more than fee for service Medicare. More care is done over the phone, and the docs get more time off. They make sure the patient average is less than two visits a year and work on discharging patients who come in too often, want too many studies done, or who come to the hospital ER or inpatient wise.
    Whatever system exists in the future will not necessarily hurt the docs, but it could limit patient care.

    • David K. Cundiff, MD

      A reformed health care system should do more that not hurting the financial status quo for physicians at the expense of limiting access to care for patients. Comprehensive health care reform should help the doctoring profession to better care for patients and help patients save money by better caring for themselves.

  • Marc Gorayeb, MD

    So amusing to see amateur economists and CEO’s conducting Rube Goldbergesque thought experiments on the health care system. All this in an effort to deny the power, raw efficiency and effectiveness of a market-based system in which services are valued by the patients/consumers themselves (keeping in mind that to value something is to actually be willing to pay what you feel its worth – i.e. willingly forego other things your own money could buy).

    One thing correctly identified by the author: hospitals are in the process of taking over physician practices, are willing to lose money on them for several years, and are planning to squeeze those physician-employees in the not-too-distant future. Just take a look at the article in this week’s NEJM, amazingly written by people who actually support the ACO model. If I were selling out to a hospital, I would negotiate a purchase price for my equipment and furnishings that is equal to replacement cost, place that money into a permanent contingency fund, and reject any non-compete provisions. An exit strategy would then be in place for the inevitable occasion when the squeeze becomes suffocating.

    • David K. Cundiff, MD

      Given what professional economists have offered the public lately, I am proud to be considered an “amateur economist.” Whereas, our current health care system exemplifies a Rube Goldbergesque mechanism (a “complex gadget that performs simple tasks in indirect, convoluted ways”), ACCs would remove government from medical decision making and greatly simplify the doctor patient relationship. My comprehensive proposal–described in my book, The Health Economy (–is about as market-based as you can get. All medical care is privately provided. All patients pay insurance premiums. ACCs rather than the government regulate health care standards.

  • Dave Chase

    Are there any such models in existence of is this just theoretical so far? I would love to hear how it is working.

    • David K. Cundiff, MD

      This model for health care reform depends on having clinical practice guidelines and benefit packages defined, not by the HHS, but by the ACC physicians and managers with the consent of the patient owners. Both improving care and controlling cost require the deregulation of medicine. The overall proposal is in my online book, The Health Economy:

  • pcp

    The irrational enthusiasm for ACOs, a model of health care that has never been tried and is completely lacking in supporting evidence, is truly stupifying. We know, from other industrialized countries, that a strong base of independent primary care docs can deliver quality, cost-efficient health care. We, instead, are choosing to go in the exact opposite direction, giving all the power not to patients, not to physicians, but to large corporate entities.

    • Melissa

      What is truly frightening is the behavior I have seen by my local “corporate entities” over the last 5-10years. They have used their newly ascertained power to steadily erode the agenda of maximizing patient health and replaced it with the agenda of maximizing corporate profits. Steadily, year by year, they become less and less shy and more and more aggressive about imposing their highest agenda. If you try to be an advocate for your patients, you eventually are “voted off the island.” It has taken from the physicians the clarity needed to “do no harm” towards the patient and created a more self preserving existence. How can we trust these corporate administrative minds who never encounter the patient’s face, story, concerns, personal health nuances, etc. to direct the face of medicine? Would we trust corporate minded entities to make decisions about how we can raise our children, structure our marriages, define our personal values? Some institutions in life can not thrive with maximizing profit as the highest goal.

    • David K. Cundiff, MD

      Since ACOs have not yet been definitively defined and are already under heavy attack by highly regarded integrated care system providers, I agree that enthusiasm for ACOs is premature. However, complete government control of health care as in Great Britain, even with a strong primary care base, is not a good fit for the U.S. This point of the post was that competing corporate entities, small or large, owned by patients rather than investors (physicians and/or hospitals), designing their own benefit packages without government interference, should be considered. This accountable care cooperative (ACC) model or “ACO 2.0″ might work better than the beleaguered government-issued “ACO 1.0.”

  • Kristin

    I have to disagree with this statement: “Patients, not the HHS, should be defining ‘quality care’ and ‘reasonable cost.’”

    If patients knew what quality care consisted of, the market for quack nostrums would disappear. Even with a doctor sitting in front of them explaining their illnesses and options in the clearest possible language, patients are perfectly capable of acting in profoundly irrational ways. The assumption that any kind of capitalism is going to work in a system where people don’t know what to buy (or, arguably, the worth of what they’re buying) is fundamentally flawed.

    “Reasonable cost” is also tricky. People won’t pay jack for a service they don’t immediately need, if they’re poor, which a lot of us are. However, as soon as they need it, they want it yesterday and they want it cheap. People have no idea what a medical procedure “should” cost. They can’t assess the cost of the materials, let alone the skill and training in the man-hours that go into it. Additionally, they have no idea how differences between patients will affect the difficulty level of the procedure. The RUC may be crappy, but at least there’s an effort there to meaningfully quantify some pretty tough concepts. And by the time someone needs an urgent medical procedure, setting a price is pretty much extortion–they have no choice but to agree. They don’t have time to shop around looking for a better deal.

    It’s interesting that the definition of “coercion” is so different between clinical study ethics in emerging countries and health care in our own.

    • ninguem

      “……patients are perfectly capable of acting in profoundly irrational ways……..”

      So is government.

      • David K. Cundiff, MD

        So are physicians at times.

        A reformed system must manage irrationality on all fronts and not contribute to it.

    • Marc Gorayeb, MD

      I can’t let this one slide. We are witnessing the same old trite arguments for why markets can’t work in medicine. First, we all understand that people still need insurance if they don’t want to be impoverished by the medical services they consume. An insurance back-stop needs to be available, which, by the way, is a perfectly reasonable vehicle to help find a market price for any service. Second, the vast majority of services are elective or only semi-urgent, allowing people ample time to shop around and to obtain second opinions. Third, if you let the market set the price for procedures in elective cases, then the price for those procedures in an emergency is set as well. Just like any other consumer good, it is reasonable to regulate behavior to prevent price-gouging when no alternatives are available to a consumer.
      And finally, the contemptible elitist attitude that the average person is “capable of acting in profoundly irrational ways.” We must live in different worlds, because when it comes to spending money for goods or services that they may need, most people I know behave rationally.

      • Margalit Gur-Arie

        Just wanted to point out that in every other market where markets are relatively uninhibited by big bad government, the market has consolidated and has eliminated small private artisans. Most everything is corporate and investor owned, and most every professional is employed. Not sure that is exactly what you would want, but I could be wrong.

        On a lighter note, see the recent post on Greg Mankiw’s blog

        • John Ryan

          I disagree, this “market dominance by chains” is only true when the commodity being offered is identical by the small business and the large, and the economies of scale favor the big business. There are plenty of small florists, art galleries, photographers, classy restaurants, software developers, accountants and so on, who regularly thrash the available offerings by Sears & Walmart. But for physicians, survival as independent practitioners depends on government not fixing the rules to favor an unproven model like the ACO.

          • ninguem

            @ john ryan or margalit or anyone else for that matter.

            I’s add dentists to that list.

            the MGMA says as a primary care physician, I need 4.5 employees. I have three. There is an automatic IN-efficiency of large primary care practices.

            The big box places to, indeed, do well.

            they also charge significantly more. If not from the individual patient, they do extract the higher payment from insurers and government.

          • David K. Cundiff, MD

            I agree that to the extent that health care is commodified by the government, the big chains will prevail. However, with this ACC concept, each individual ACC defines its benefit package and health care premium. ACCs and not the government will set the rules, so independent practitioners can prosper to the extent that they provide good care to patients.

        • David K. Cundiff, MD

          If ACCs were instituted without decentralizing the regulation of medical care (i.e., shifting the determination of clinical practice guidelines and benefit packages from the government to individual ACCs), then consolidation with less competition and higher prices would be a problem. However, wide variation of patient benefit packages associated with different premiums would assure a large number of ACCs and real competition on quality of care and price.

          ACCs would be owned by patients and not by hospitals, physicians, or outside investors.

      • David K. Cundiff, MD

        As noted above, this ACC proposal privatizes all medical care and eliminates all government health care programs (e.g., Medicare, Medicaid, etc.). I believe that a health care free-market is the only way to reform medical care. See the full proposal:

    • David K. Cundiff, MD

      This ACC proposal is not for patients to dictate to their physicians what tests and treatments to order for them. Rather, at the point of choosing between competing ACCs, patients can look at benefit packages, clinical practice guidelines that vary from orthodoxy, health outcomes, etc. to see where to invest their health care premium dollars.

      While I agree that “patients are perfectly capable of acting in profoundly irrational ways,” medical orthodoxy in many instances has acted and continues to act irrationally. Controversy is inseparable from medicine and health. Prescribing socialism rather than capitalism our health care conundrum potentially allows the government to make health care decisions rather than doctors and patients.

      With the proposed ACC system replacing Medicare, Medicaid and other government programs, “reasonable cost” for health care interventions would be determined by each patient’s PCP and the ACC management. Government-issued RUCs would be out of the picture.

  • buzzkillersmith

    The whole point of ACOs is to save money. They will fail to do this and will go the way of the Dodo. Unfortunately a lot of people will get hurt before then. Then we’ll be onto the next idiotic attempt to square the circle.

    • pcp

      “Save money”

      That means someone is paid less. I don’t see anyone volunteering to fill that position in the ACOs!

    • David K. Cundiff, MD

      I agree that government health care policy wonks conceived of ACOs to save the taxpayer money. I see little difference between the old HMOs and the emerging ACOs.

      This ACC model (i.e., ACO 2.0) is different.

  • Dave Chase

    PCP – As I mentioned in my earlier KevinMD piece –, the place to cut the fat first is with insurance. I wrapped up that piece with this: “As an interested, but outside, observer to tension within the physician community let me also speak to the elephant in the room. I regularly hear of the unspoken compensation-related tension where specialists and PCPs are at odds as well-paid specialists see it as a zero sum game if the PCPs are better compensated. I think physicians’ energies would be better spent getting the insurance fat out of their system rather than fighting within their profession. Physicians have ceded far too much control to insurance companies as compared to the norm 30+ years ago. As a former management consultant, I don’t believe that the relationship of value-add to compensation has been in alignment. In other words, insurance companies don’t add enough value in day to day medicine to warrant the big chunk that gets taken out of the PCPs’ and patients’ hide.”

    PCPs, in particular, should seize control back from insurance companies. Primary care models such as Medlion, Qliance and Symbeo are showing that primary care can be provided affordably (and profitably) if you cut out the insurance fat. From what I’ve seen, I have much more confidence that the Patient Centered Medical Home concept will have more benefit than ACOs. IBMs global study showed quite clearly that more primary care = better health outcomes and lower costs and thus why IBM is spearheading the Patient Centered Primary Care Collaborative.

    • David K. Cundiff, MD

      I agree that a “Patient Centered Medical Home” is crucial for health care reform. I also agree that health care insurance and overall bureaucracy is an “elephant in the room.” The ACC proposal in my book The Health Economy ( would shift control of the allocation of health care resources from insurance companies (private and public) to ACCs. ACCs would dictate to their contracting insurance companies what interventions to cover and what to pay.

    • pcp

      “the Patient Centered Medical Home concept will have more benefit than ACOs. IBMs global study showed quite clearly that more primary care = better health outcomes and lower costs and thus why IBM is spearheading the Patient Centered Primary Care Collaborative”

      The problem is that the PCMH is based on the assumption that the primary care doc will gladly do lots more work for no increase in pay. Count me out.

      You may want to scroll back and find some posts here from one of IBM’s leading policy wonks that were deeply offensive to me and other physicians (and worked the wonderful Dr. Kevin overtime!).

      • Dave Chase

        I don’t recall seeing the “assumption that the primary care doc will gladly do lots more work for no increase in pay” in the principles of the PCMH – The example of a PCMH that I’ve personally observed (Qliance) has the PCP happy as they are getting fairly compensated, working a sane schedule and having incredibly satisfied patients. Best of all, they are showing how a PCMH can improve outcomes while lowering costs. It almost sounds too good to be true as the patients pay less in the hybrid PCMH-HDHP model than a traditional insurance-based model that has proven to lead a large percentage of PCPs wanting to get out. It’s hard for me to imagine a PCP visiting a Qliance clinic and not walk away wanting to do that approach. They make more money, the patient pays less and the only one not happy is the insurance company (though they can still do well selling a wrap-around policy).

        • David K. Cundiff, MD

          In this ACC model, PCPs would receive compensation based on the number of patients they cared for and the complexity of the problems. With insurance coverage dictated by ACCs rather than by the government or insurance companies, there would be fewer bureaucratic hassles. All providers would compete on quality of care and cost.

        • pcp

          The AAFP is urging practices to invest the time and money to become PCMHs, and hope, pray, plead that they get included in some insurance company’s demonstration project. Not a viable financial model.

          Look at the National Demonstration Project: it was a financial disaster for the practices involved. And patient satisfaction went down (Hmm, maybe patients want their doctors to be doctors, not glorified team leaders/data entry clerks/social workers).

          Each of the six insurers I contract with love the PCMH, and they will pay me zero dollars and zero cents for the services involved. I know. I’ve asked. Multiple times.

          Three of those insurers cover the IBM employees in my area. The IBM policy wonk told me it was “immoral” not to provide PCMH services to his fellow employees, even though I won’t get paid for doing so.

          Give me a break.

          • Dave Chase

            What I’ve seen with my own eyes hasn’t been a “demonstration project”. It’s the real world with results that are good for patient and PCP alike. I don’t know the details of the National Demonstration Project. I’d caution that demonstration projects can sometimes be the equivalent of putting wings on cars and calling them planes. Alternatively, they are doomed to fail as their design point is to preserve the profit margins of who is running the project (e.g., insurance company). After all, it’s a *patient* centered medical home, not *insurance* centered medical home or even *physician* centered medical home. Email me at dave [at] avado {dot} com if you want to review the data. It’s impressive. It’s also worth googling “qliance seattle yelp review” to see patient reaction. Not scientific, but still interesting.

          • David K. Cundiff, MD

            The ACC concept under discussion from my book, The Health Economy, is not an endorsement of the PCMH model in the IBM plan or any other existing model. Let me know if you think the compensation proposed in this plan for primary care physicians (Chapters 2 and 8, is unfair.


      • David K. Cundiff, MD

        I do not defend ACA concept of ACOs. I agree that more primary care is needed. One important thing that differentiates the ACCs proposal from previous plans is that ACCs would be self regulating–no government mandates or minimum standards. There are a number of other differences detailed in The Health Economy (

        • David K. Cundiff, MD

          After Googling “qliance seattle”, I concede that it provides relatively good primary care services. Excellent primary care in a medical home is necessary but not sufficient for health care reform.

          The ACC plan under discussion also has many other components including the decentralization of the regulation of health care from the government to the ACCs. Do you agree that patient care should be coordinated (ACOs, ACCs, or whatever) and that the care coordinating entity rather than the government should define the practice guidelines and patient benefit packages?

          • Dave Chase

            Certainly the PCMH isn’t the 100% solution. I’m simply keen on the notion of increasing primary care as the results are so clear cut at both a county by county and country by country basis. I’ve yet to see someone argue that an ounce of prevention isn’t worth a pound of cure yet we haven’t created incentives to support that.

            I confess I haven’t had time to read the 400+ page ebook you created. It sounds like it has intriguing concepts. Unfortunately, I can’t comment on ACCs until I’ve read more. I’m all for creative new models. Cooperatives have worked well in other arenas outside of healthcare.

  • Harvey S. Frey

    This is very similar to the “Risk Sharing Fellowship” idea I proposed about 12 years ago, which has been posted at

    It’s an even better idea now than it was then, given the level playing field that may be provided by the Insurance exchanges of PPACA.

    • David K. Cundiff, MD

      After reviewing your “Risk Sharing Fellowship” idea, I find that you were far ahead of me in many of the components of my ACC model. Did you flesh our your RSF concept further than in your concise well-written statement?

      Perhaps we should work together.

      Many thanks.

    • mikailov

      Wow, Dr. Cundiff is right, you were very far ahead 12 years ago. Did you go anywhere with those ideas?

      A medical student

      Also, Dr. Cundiff, Your responses in the comment thread is very well done! Makes your arguments clear.

      • David K. Cundiff, MD

        We are collaborating.

        Mikailov, you are welcome to offer your perspective on the draft proposal. It requires input from the next generation of physicians that want a system of affordable patient care that works. Chapter 1 of The Health Economy gives an overview of the plan:


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