4 Ways to Think About ACO Strategy

We are in the midst of a full-fledged frenzy of activity around accountable care organizations (ACOs). Be wary of a frenzy—these are the times when action becomes separated from thought and we lose track of why we are doing what we are doing. There are good reasons to pursue becoming an ACO, and some bad ones too. Over the past several months I have talked to dozens of organizations to understand the logic behind their strategy—why they want to be an ACO. The following mind-sets capture the four predominant ways that Sg2 sees healthcare organizations thinking about ACO strategy.

Strategic Logic #1: "I don't understand ACOs, but I don't want to be late to the party."
Many organizations have not yet wrapped their heads around what it means to be an accountable care organization—either the internal competencies needed to be successful or the external strategic considerations of pursuing this path. But they recognize a rising trend when they see it and are determined not to be left behind, just in case ACOs turn out to be something important. So they join a study collaborative, or engage a consultant to perform an ACO readiness assessment.

There is nothing wrong with this line of thinking, even if there is very little thinking behind it. In fact, the CEOs of these organizations are perhaps more honest than the rest of us in admitting that the strategic logic underpinning their ACO strategy is vague because ACOs are vague. It is a hedge-your-bets approach in the face of great uncertainty. The key caution for this group is: How much time and money will you invest in an ACO strategy before you are certain about whether it makes sense for your organization? Be decisive about how many dollars and full-time employees you will dedicate, and the time frame for reopening the question about whether continuing that investment makes sense. If, in 6 or 12 months, you cannot articulate a clearer rationale for pursuing an ACO strategy, be ready to pull the plug.

Strategic Logic #2: "I will take advantage of this short-term opportunity to consolidate my position and seize market power."
Policy wonks talk about ACOs as vehicles to drive long-term improvement in clinical quality and cost reduction. But some health care organization CEOs view their ACO strategy through a lens that is much more short-term and slanted toward commercial considerations. These masters of the local market chessboard see ACOs as a way to lock in physician relationships and build their wallet share of health care services in the communities they serve. In this line of thought, ACOs very well may drive broader performance improvement and, if so, terrific! But that would be a happy by-product. The driver of these organizations' ACO strategies—how leadership convinced their chief financial officers and their boards—is rooted in more prosaic market power considerations. Fair enough.

My one caution to these organizations is that the ACO strategy they pursue for commercial reasons will likely one day lead to a risk contract that ties their payment to quality and cost performance. If their clinical enterprise is not up to the job, the financial losses they incur on an ACO risk contract at that point could easily swamp any market growth benefits.

Strategic Logic #3: "I see a fast-moving train that can help me accelerate what I need to do strategically anyway."
The savvy advocates of this perspective long ago put their organizations on a strategic path that emphasizes aligning with physicians, managing care transitions more effectively and driving cost out of the system. These CEOs have seen the future and have confidence in their strategic formula. They may or may not have confidence in the staying power of the ACO concept, or the importance of Medicare's 2012 Shared Savings Program. No matter, these CEOs reason. The ACO frenzy gives a jolt of momentum to a set of strategies that they know they need to advance in any case.

So these organizations are happy to jump aboard the ACO train and ride it as far it will take their reform readiness strategy. That's smart leadership. The one caution for these CEOs is that they must be ready to explain and sustain their organizational strategy if the ACO movement fades. It's a little like President Bush's challenge of explaining the Iraq War, after no weapons of mass destruction were found. They will need to remind their boards and management teams why it is still important to take 20% of cost out of delivering clinical care, even if they are not ultimately going to become an ACO.

Strategic Logic #4: "I want to be the market aggregator for both growth and clinical performance reasons and I welcome the opportunity to take on risk."
Finally, there are those organizations that have an appetite for risk and like to blaze trails. They believe they have created a better clinical mousetrap and want to shape a new market and financial structure that rewards what they have built. In his chairman's letter published earlier this month, Michael Sachs wrote about the ACO-like contract that Advocate Health Care has established with Blue Cross and Blue Shield of Illinois. Advocate's strategy is an exemplar of this type of formula behind an ACO strategy.

Core to this approach is the ability to demonstrate that your clinical enterprise delivers better results at a lower cost. Also vital to this strategic approach is a willingness to move forward in the face of great uncertainty. As another example, participants in Medicare's Shared Savings Program in 2012 will make the decision to be a part of the program with many questions left unanswered and details left undefined. They must be able to live with that ambiguity.

Where Do I Fit In?
I have now seen half a dozen times the animated YouTube video—you know the one—of the befuddled health care executive trying to figure out what an ACO is. It is played regularly, for comic relief, at board and management meetings. Laugh along, but don't be that guy. You need to decide whether your organization will be an ACO trailblazer or whether you will let others do the early experimentation while you focus on improving your System of CARE (Clinical Alignment and Resource Effectiveness) performance.

Either tack is valid, but be explicit and thoughtful about the strategic logic that leads you down your chosen path. In the final analysis, there is no one "right" way to approach the health care changes to come. Not everyone will, or should become an ACO, but every organization must build high-performance Systems of CARE.

Stephen Jenkins is vice president of SG2, a healthcare information company that provides advanced analytics, business intelligence, education and publications to hospitals and healthcare organizations in the US and around the globe.