Flight To Quality: The PPACA


Now that the Patient Protection & Affordable Care Act (PPACA) has seemingly weathered all challenges, the questions are numerous. Among them include what impact the Act will have on driving healthcare cost containment, and the effect it will ultimately have on the overall quality of healthcare delivery. Providers are wise to sit up and take notice, as those who are most willing to embrace and lead the change, are the most likely to benefit.

The law is not going away. The emphasis by the government on cost is already apparent in the increased enforcement of Medicare/Medicaid overbilling and fraud through such mechanisms as Recovery Audit Contractor (RAC) audits, Medicare Secondary Payer reporting requirements under the Medicare, Medicaid, and SCHIP Extension Act of 2007, ICD-10 Clinical Modification (CM) conversion, etc. These are not only designed to promote efficiency, but to mandate and enforce it.

Accountable Care Organizations (ACO’s)

In addition to the regulation identified above, PPACA authorizes Medicare to contract with Accountable Care Organizations (ACO’s) with the goal in mind of improving the quality of care delivered and reducing costs. The premise of the ACO model is that coordinated care among physicians, hospitals, and provider networks will lead to cost reductions and eliminate service duplication. The primary difference between an ACO and an integrated health system is that the ACO will be able to operate across systems and networks, enabling patients the flexibility to use different providers while not being tied to a particular group or health system. Also, at least initially, patients will not be formally enrolled in the ACO. Although the legal status of ACO’s is still uncertain, eligible organizations under the ACO model are required to be formal, legal groups or organizations, and must be able to demonstrate an ability to capture relevant reporting data as required by the secretary of Health and Human Services. Currently, the ACO model is focused on Medicare recipients, but it is not difficult to anticipate that Medicaid is likely not too far away.

Because the ACO model is new, there are many more questions than answers today. Additionally, any impact on cost, efficiency, and quality will realistically not be determined for years to come. What is obvious, however, is that the cost containment discussion in healthcare is not going to dissipate any time soon. There is little question that the trajectory of healthcare cost, and the U.S. government’s portion of the tab, is unsustainable. According to the Organization for Economic Cooperation and Development (OECD), the U.S. spent more than 17% of its GDP on healthcare in 2010. That is nearly one fifth of the entire U.S. economy. The next highest country was the Netherlands at 12%, and the Netherland’s system is a universal system. In other words, the U.S. spent over 40% more on healthcare than the next highest expenditure country, and yet the U.S. system leaves more than 50 million people uninsured, according to 2009 U.S. Census Bureau data. Also, despite the significantly higher expenditure on healthcare, Americans do not consume more healthcare, or live longer, than in other countries according to OECD data. Without any action to curtail them, these costs will continue to burden the U.S. economic system, and place companies at a competitive disadvantage in the world economy.

In the process of promoting cost and quality efficiencies, ACO’s will generate another set of challenges for healthcare providers and organizations. Since the precise legal structure of the ACO is unknown, providers may find themselves struggling to identify their individual legal exposure related to medical malpractice, HIPAA privacy issues, cyber liability (as a result of increased electronic communication and data sharing), contractual liability, other errors and omissions related to the care provided or the coordination of that care, etc. Additionally, the ACO will need to have committees comprised of providers/administrators from each of the participating entities. It is unclear what liability these committee members will assume for their roles in such capacities.

Piloting the Cost Curve

Whether or not you agree with the law, it is undeniable that the healthcare cost debate is a substantial one, wrought with political pitfalls. Its contribution to US expenditure has quickly emerged as the biggest political hot potato of our time. Most agree that the problem exists, but few, on either side of the political aisle, have demonstrated the political courage to tackle the issue. The unfortunate problem, however, is that inaction is not tenable without significant consequence. If healthcare providers are to avoid the political fallout, they need to be perceived as leaders of the solution. Without action, healthcare providers and organizations may easily become the pariahs in the debate since they deliver and administer the care. Healthcare consumers, pinched by tightening budgets and rising costs of care, are beginning to pay attention in ways they have not previously. Since Medicare represents a significant portion of reimbursement for many healthcare providers, it wields considerable leverage in shaping the conversation. If the political tide turns and the government decides to get out of the business of healthcare, or substantially reduces its contribution, where does that leave healthcare providers? Far from implausible, I actually had the CFO of a multi-billion dollar health system pose this question to me. He indicated that he, and others in the industry, needed to be pondering that possibility in order to proactively identify efficiencies and drive down costs. This was prior to PPACA. Simply put, healthcare providers cannot afford to be passive.

Recently, I had the opportunity to see a presentation by Captain Chesley B. “Sully” Sullenberger III, captain of the now infamous US Airways flight 1549, which he successfully landed in the Hudson River in 2009 without any loss of life. During the plane’s initial climb, both turbines became disabled after hitting a flock of geese. While reflecting on Captain Sullenberger’s speech, a couple of themes emerged which I found applicable to the healthcare scenario facing providers today. The first theme was “change before you are forced to change.” Given the passage of the healthcare law and its subsequent challenges, the law now has momentum. Healthcare providers, who demonstrate an ability to drive greater efficiency without compromising care, are likely to attract Medicare dollars; those who do not actually stand to lose reimbursements. In this emerging model, quality and efficiency will also be a magnet for the best talent. It is not a stretch to assert that, in the face of reducing reimbursements, the most efficient organizations will be able to differentiate themselves from their less efficient competitors. Organizations and providers who wait to fully understand the dynamics and the scope of the impacts, may find it difficult to survive.

The next theme I extracted from his presentation was that pilots have always been the “conscience” of the industry. After all, beyond the rhetoric, the positioning, and imaging, the pilots are the individuals who actually fly the planes. They have as much to gain from improvements in efficiency and safety as anyone. His contention was that pilots also have the most leverage in driving changes and improvements in safety. The safety record of airlines reflects heavily on the pilots. He emphasized that, in the airline industry, there was a balance between production and protection, and that learnings came at great cost (often to life), where failure to make advances based on those learnings would eventually be catastrophic down the line. Finally, he asserted that the stakes were high if the top standards of quality were not met daily. As I listened to him speak, I couldn’t help but draw a number of parallels within healthcare. Physicians have long represented the conscience of the healthcare industry. They “drive” the care that is provided and are viewed by the general public to be those most able to drive change within the system. Patients have relationships with their physicians, and physicians have the most to gain, and the most to lose, if healthcare cost efficiencies come at a sacrifice to the quality of care delivered. Healthcare providers will experience a squeeze in revenues, and this squeeze will inevitably impact the physician compensation model. Although, arguably, some providers and systems began moving to the quality versus production model years ago, the structure of paying for production (for those who have not changed) will be difficult to sustain under the weight of this new cost containment pressure. Organizations and providers that lead the change, and demonstrate better quality and efficiency, will benefit from higher compensation without the need to press for additional production. Quality and efficiency will be evaluated against standards established by CMS/HHS and also by consumers through evaluations/surveys. According to PwC Health Research Institute, customer ratings will hit the pocketbooks of healthcare companies. It has long been the goal of many healthcare institutions to rank highly with organizations such as Healthgrades; U.S. News & World Report’s Best Hospitals; Joint Commission on the Accreditation of Healthcare Organizations (JCAHO); etc, and there is evidence now that these rankings won’t simply be for bragging rights, but for remuneration. The Henry J. Kaiser Family Foundation’s research reports that Medicare members were eligible for more than $3 billion in bonus payments in 2012. The Medicare Advantage Five-Star Quality Rating system, administered by CMS, ties federal reimbursement rates for those administering Medicare Advantage products, to performance measured largely by customer satisfaction. Physicians and healthcare providers will be forced to strike the best balance between production and protection (quality), and will need to build on improvement gains they capture along the way.

Extrapolating from this, it is logical to envision a delivery system that markets and differentiates itself largely on quality metrics, and incents and pays its providers by utilizing these same quality measures. This structure will induce a trickledown effect that will ultimately impact others in the delivery chain, including distributors and suppliers, and will fuel additional analytics technology to precisely identify cost drivers. Just how far these analytics will go is anyone’s guess, but it is reasonable to conclude that even the efficacy levels of certain types of medical equipment and medicines are fair game. It only takes general observation to conclude that healthcare organizations have been leading the way in constructing new facilities and adding new equipment. As revenues are constrained, simple math necessitates transition. Despite the fact that, with the passage of PPACA, there will be more consumers (buyers) of healthcare, empirical evidence suggests that consumers are more discerning than ever regarding the healthcare they are willing to buy when there are considerable out-of-pocket costs involved. Consequently, not only will providers be facing the increased cost pressure of reduced Medicare reimbursements, but they will have to operate in such a way that consumers view the healthcare services they receive as both high-quality and affordable, or they will seek care elsewhere.

Tort Reform Challenges

Although medical malpractice cost is viewed by some to be a significant factor in the healthcare cost containment debate, it is unlikely that healthcare providers and organizations will have much control in pushing these costs down for the near term. The likelihood that substantive tort reforms at the federal level will be implemented, is small. At the state level, medical malpractice tort reform is viewed as unstable due to the frail nature of reform in the face of constitutional challenges that invariably emerge whenever legislative composition shifts. The current tide of political gridlock appears to permeate the local landscape as well, suppressing political will to expend political capital on the tort reform issue at this time. Larger healthcare systems are also likely to be self-insured, giving them much greater control over their cost, and a comfortable level of predictability. Additionally, there appears to be little evidence that medical malpractice reform will have a considerable role in bending the healthcare cost curve. This seems to be borne out by the PIAA’s 2011 Claim Trend Analysis Report which shows average claim indemnity declining in the years 2006 – 2010. This same report reveals that the average indemnity cost increased an average of 4.6% per year over the past 34 years, for PIAA members, while average claim expenses increased by about 6.2% per year. Considering that healthcare inflation gets factored into malpractice indemnity payments, these costs changes over time appear largely incremental, and, if taken out, are small relative to overall cost. Medical malpractice cost only impacts providers to the extent that these costs are passed on to the providers in the form of higher premiums. General industry profitability, the economic environment, investment results, etc, all influence the timing, as well as how much cost is actually passed on to the provider.

The above being said, states that already have substantive tort reforms in place may find themselves with a competitive advantage. Jury verdicts for malpractice cases in parts of Texas used to be among the highest in the country. This history gave the state a proverbial black eye when it came to medical malpractice insurance cost, and was perceived by some to be causing physicians to leave in droves. While several studies suggest that tort reform has actually not impacted physician supply, it has clearly impacted the cost of medical malpractice cases and resulted in a precipitous drop in medical malpractice indemnity costs. Texas codified tort reform in 2003, and the claim frequency and severity both dropped dramatically post reform. As a result, insurance premiums fell. Few appear to disagree with this. Theoretically, then, the decline in cost should factor into the cost of providing healthcare, if the two (healthcare cost and medical malpractice cost) are strongly correlated. Studies appear largely inconclusive on this issue, and one study of Texas, post reform, concluded that Medicare expenditure in the state was relatively unaffected. Consequently, the significance of malpractice cost as a factor in the debate is far from certain, and providers cannot rely on it as a metric they can largely influence in this discussion.


Healthcare organizations and providers will benefit largely by being proactive in this climate. Although it is uncertain as to whether PPACA and other new regulation will curb the healthcare inflation trend, it is clear that there will be pressure on healthcare organizations and providers to reduce costs, provide efficiency, while enhancing quality. Those who get out in front of the changes by measuring and demonstrating efficiency and quality against established metrics, will be financially rewarded. This structure will be more attractive to investment, including top physician talent, and will also result in cost pressures on suppliers with emphasis being placed on efficiency and measurable outcomes in the supply chain. The need to differentiate based on quality will spur continued refinements in data gathering and should spawn innovations in technology designed to promote multi-level, drill down capability used to optimize capacity and drive efficiency for providers. Providers cannot afford to be cynical; whatever the ultimate verdict is in this model’s ability to alter the healthcare cost trajectory, the model appears to be moving forward, and evolving. Providers must not only embrace, but shape it, or find themselves on the outside looking in.


By Timothy Harris: Area Vice-President, Arthur J. Gallagher Risk Management Services, Inc.

Tim’s experience includes working for a Fortune 100 malpractice insurer for 12 years, and 5 years as the healthcare practice leader for a large, regional broker. Tim has experience providing malpractice solutions for physicians, hospitals, nursing homes, and other ancillary healthcare providers and organizations.

Tim has also served as past President of the Board of a Pennsylvania 501 (c) (3) healthcare organization which has been featured on the “Larry King Live” show, and the “Today Show.” He has strong market relationships and has negotiated and managed insurance programs for both global and national clientele.

Tim is a Chartered Property Casualty Underwriter, and was honorably discharged from the United States Army Reserve after fulfilling his obligation.

Tim is very active in the local community, currently serving as Vice-Chair of the Board of Directors for the Community Foundation of Lorain County.