Code Red: Two Economists Examine the U.S. Healthcare System

October 1, 2010

Northwestern Memorial Hospital Faces a Brave New World

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 2:04 pm

If you have read my earlier blogs, you know that I am writing a book about the organization of healthcare delivery. A recent story in the Chicago Tribune reminds me that I need to keep my nose to the grindstone. The article told of changes underway at Northwestern Memorial Hospital. In order to prepare for new payment models, the medical staff and hospital want to create something along the lines of an Accountable Care Organization. The ACO will accept an “all-in” fee for treatment of specific conditions. The ACO makes money if it can keep costs under the fee and receives bonuses if quality objectives are met. The ACO model, or versions of it, have floated around for some time, and prepayment is certainly not new. What is new is that payers will now prepay for all costs associated with episodes of care, as opposed to prepaying hospitals for inpatient stays, or prepaying primary care physicians for a year of primary care.

The ACO model tries to better align the payment modality with the “product” that patients would naturally purchase. This should, in theory, lead to a matching of incentives with production. Hospital prepayment leads to a shift to outpatient care. Primary care physician prepayment leads to too much hospital care. Episode of illness prepayment should eliminate these gaming incentives.

Northwestern Memorial and its medical staff still face a dilemma. Should they create a new third legal entity to accept the prepayment, or should the prepayment go directly to the hospital or medical foundation? More importantly, should the hospital and medical foundation become partners in the new venture, or, more radically, unite into a single entity without creating the new entity? Healthcare executives have not always approached this question in the most thoughtful manner, as this short film painfully shows. (Painfully funny if you approach it with the right mindset.)

Integration has many positive connotations, and executives who create new integrated organizations can usually keep their boards at bay. This may explain why so many executives are eager to integrate. But integration comes with numerous challenges. It will take an entire book to make this argument clear, but consider the following two questions. First, what happens when physicians switch from being entrepreneurs to being employees? Second, accepting all-in capitated payments turns the ACO into a de facto insurance company. Will the ACO have the capabilities to be an effective insurer? I hope that Northwestern Memorial does not face the future with its eyes wide shut. Many hospitals have fared quite poorly by jumping on the integration bandwagon without understanding the risks.

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