Joseph Burns
Contributing Editor

Accountable care organizations and patient-centered medical homes are unlikely to succeed. Those are two predictions from Regina E. Herzlinger, a professor at the Harvard Business School who has successfully predicted some of the most powerful trends in health care since the 1990s. Arguably, most of her predictions about health care have come true or are about to.

The Nancy R. McPherson professor of business administration at the Harvard Business School, Herzlinger is the author of several widely read books on health care, including Consumer-Driven Health Care: Implications for Providers, Payers, and Policymakers (Jossey-Bass, 2004), and Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry (Addison-Wesley, 1997). Here’s how she assesses the current health insurance marketplace.

Feeling threatened

“Health plans are very threatened now because, if it succeeds, the movement to accountable care organizations will disintermediate them,” she says. “Many ACOs either have an insurance arm or are buying one, such as Partners Healthcare in Boston, which bought a commercial plan license.

“I hope I’m wrong about this, but I believe that with some exceptions, ACOs will not succeed,” she says. “ACOs will implode just as capitated HMOs imploded in the 1990s. People say that won’t happen because we have better data now. Wish it were true, but we don’t have better data now. The electronic medical record systems don’t talk to each other and the public health insurance exchanges are largely a dream waiting to happen, rather than a reality.

“Another reason ACOs will implode is that it will be difficult for anything but an organization that has been at it for a long time to develop the team culture needed to be an ACO,” she adds. “Kaiser Permanente can do it because it has operated that way for decades.”

In addition, Herzlinger says, ACOs will create severe antitrust problems. “If there are a lot of price increases from an oligopolistic ACO, then how could that be termed a success?” she asks. “Having said that, insurers still fear that ACOs will succeed, perhaps because they think the government will be asleep at the wheel on anti-trust. Even though, in my opinion, those fears are groundless, they still feel they must confront them. One way they are confronting those fears is by buying providers, which is not going to work. The idea that insurers can manage providers is just as unrealistic as the idea that providers can manage insurance.”

Another model of care delivery that will fail is the patient-centered medical home (PCMH), she says. “The reason PCMHs will not succeed is that health care follows the 80/20 rule — 20 percent of patients generate 80 percent of the costs,” she says. “Those 20 percent are the chronically ill, and I don’t see how primary care physicians serving these patients add value to their care. I’m a huge fan of primary care physicians and they have a vital role in making health reform succeed, but, if I were a class-three CHF patient, I would see a heart failure specialist. If I were an advanced type II diabetic, I would go to the Joslin Diabetes Center, not a primary care provider.“

Herzlinger would like to see “focused factories” of care. “That is the term I use for provider organizations that deliver highly specialized care for a certain group of patients, such as those who have diabetes, cancer, or congestive heart failure. You need specialists for that. They are the opposite of organizations, such as ACOs, that do everything for everyone.

“For all these reasons, insurers are in a hard place right now,” she continues. “One response has been to buy providers, which cannot succeed, and another response is to go abroad, which is a smart move. Insurers are developing a presence outside of the United States, helping to boost insurance competence, which is needed in developing countries. There’s a huge demand for health care around the world. China and India would be great markets for U.S. insurers. Even countries that have single-payer systems also have private insurance. Ireland, France, and Spain all have private insurance and represent opportunities for U.S. insurers.”

Risky ventures

Health insurers also face a threat from the health insurance exchanges. A variety of organizations will run the exchanges, including health insurers. “The exchanges are risky for insurers for two reasons. One, they will want to run exchanges that offer only their products, but the customer is likely to want a lot more choice. Second, in their history, they have primarily sold their products to businesses, but these exchanges demand a consumer focus. To serve consumers, health insurers will need to shift their marketing focus or leave that business to others.”

Regina E. Herzlinger

Health Plan 2020


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