What Are ACOs - and What Can They Mean for Pharma?

The Obama administration wants to encourage the growth of accountable care organizations (ACOs) as a means of changing the revenue incentives for providers and the cost exposure of insurers.  The thinking is that different incentives would end the choice between high quality, accessible care on the one hand and continually rising costs on the other.  The possibility of ending that Hobson's choice is why ACOs became a cornerstone of Obamacare.

Yet earlier this month the American Medial Association claimed that 93% of its members wouldn't enroll in ACOs as currently defined by the government's Center for Medicare and Medicaid Services (CMS).

Under today's fee-for-service arrangements, providers receive more revenue for performing more services.  The ACOs, loosely defined, are practices, hospitals and other provider groups whose revenues would be based on the cost-effectiveness of their work, rather than the number of services they perform.  If the outcomes in terms of patients' health improve, while the associated costs decline, payors, providers and patients would all benefit because insurers under the new system would share a portion of the costs they save with the professionals who efficiently provided those favorable results.

So it goes in theory.  But providers claim that the requirements for gaining ACO certification (e.g., adopting 65 quality measures) are too onerous and the start-up costs too high, even as the revenue incentives are inadequate.

Despite this larger rejections of ACOs as currently configured, a high proportion of the largest provider organizations express interest in a separate ACO initiative that would allow a limited number of these big provider groups to partner with private insurers.  They claim that the big-with-big partnering arrangement offers them better revenue incentives, together with regular monthly payments based strictly on their number of Medicare beneficiaries.

One might reasonably ask what role pharma will seek to play during the two-plus years that provider groups and federal officials try to work out the details?  If recent history offers a guide, the answer lies somewhere between none and wait-too-long-to-see.

As a general posture, the reflexive line from the pharmaceutical industry's political lobby, PhRMA, has consisted of an effort to exclude itself from all cost considerations.  For years the industry claimed there was little it could do to reduce overall costs because pharmaceuticals account for only 8-12% of the total health care bill.  If other stakeholders want to reduce cost increases over the long term, pharma advised them to simply eat cake by using more drugs and using them earlier.

As a business consideration, pharma has also not wanted to stray too far from its core operation of developing and selling branded therapies because the profit margins there were higher than those of almost any other legal venture.

Both of those default responses worked well for several decades, during which time drug costs remained affordable and the benefits were readily discernible.  As the industry increasingly tries to peg more of its new drugs at annual, per patient costs between $50,000 and $200,000, the claim that they're just a small piece of health care loses credibility.  The same applies as more top drugs have gone generic, thereby conferring therapeutic benefits for one-tenth the cost of a premium brand.

So can pharma just sit back, wait to see how the ACO tussle plays itself out, and then dip its beak into whatever system emerges to extract enormous profit margins from me-too pills?  While the industry may want to do just that, the prospects appear questionable.

An alternative approach involves pharma diving into the debate to enhance cost-effective outcomes with programs that may not even involve drugs.  As researchers continue to learn more about the preventive and restorative potentials of lifestyle changes (e.g., diet, exercise, sedentary versus active time), patient education assumes greater importance as a contributing factor to outcomes.  Even programs that monitor and encourage patients to comply with their medication regimens improve results.  The communication possibilities of smart phones and IT/telecom media can make important contributions to wellness.  

In the past, most compliance and patient education efforts from pharma have been promotional "pull-through" programs designed to enhance the sales of particular drug brands.  By working with provider and payor groups to create and manage non-brand initiatives, however, pharma can also avail itself of a new revenue source based on cost-effectiveness contingencies.  In short, pharma can do well by doing some good until the laboratory sciences enable a profitable return to the core mission of regularly launching breakthrough medications.

Granted, the margins from communication programs may not be as large as those from breakthrough drugs, but pharma's declining ability to develop truly better therapies at this time means prospects for such big-inning scoring appear unlikely anyway.  Instead, some of the big drug companies are tacitly admitting that they must learn to play small-ball by earning money from drugs as investors, financiers and marketers for biotechs and startups that are more adroit at developing breakthroughs.  So if part of pharma's future involves competing against hedge funds and venture capital, another part might involve partnering with Steve Jobs to provide media content.

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