Accountable Care Organizations Facing New Competency Challenges: The 8 Habits Required of US Health Systems

Published on: 
The American Journal of Accountable Care, December 2013, Volume 1, Issue 1

The US health system has undergone notable transformations over the last 2 decades. Independent community hospitals haveconsolidated horizontally with others to form hospital healthcare systems, with many of the larger ones covering wide-ranging geographies, generating billions of dollars in operating revenues.

The US health system has undergone notable transformations over the last 2 decades. Independent community hospitals haveconsolidated horizontally with others to form hospital healthcare systems, with many of the larger ones covering wide-ranging geographies, generating billions of dollars in operating revenues. Hospitals and physicians have consolidated their businesses through vertical integrations, stemming from hospital acquisition of private medical practice assets forming various models of integrated health systems. Integrated health systems are extending clinical programming beyond acute care to create a broader reach along the continuum of care and are standardizing clinical service line models and methods across sites and geographies.1

The next transformation is to accountable care, and while definitions may differ, the foundation of the accountable care organization (ACO) is its ability to assume the responsibility for the health of attributed populations, over time, for known allocations of funding (financial risk transfer).

ACO structural designs exist on a continuum from “less integrated” to “fully integrated,” with fully integrated defined here as all clinicians and related staff working for the same organization. The lesser integrated ACO is often aggregations of independent parties (eg, community hospitals and private practice physicians) holding stakes in a legal entity formed as the contracting mechanism between a third party payer (governmental or commercial insurer or other financial intermediary) and the participating providers.

With this transformation the business relationship between provider and payer changes fundamentally, as do related financial incentives. Systems of healthcare delivery are transformed from manufacturers of units of service sold to sick people on a per unit basis to systems of healthcare accountable for the health status of a population and all related current and future health services needed. This includes provision of preventive healthcare and care for the acutely ill. The principal difference in the financial model is the nature of the incentives: “more is better” shifts to “more is more costly to the provider.”

Over the last few years, I have been examining the implications of such organizational transformations through studies funded by MedPac2 and through unfunded work, including interviews with a number of leaders of larger, integrated health systems. What follows is a summary of that work expressed as a list of organizational competency challenges. These competency challenges represent the “where we need to go as an organization” thinking of health-system leaders.

Competency #1: Public Health Practice

Embedded or contracted competencies in the areas of: the epidemiology of attributed populations, including health cost risk profiles with evidence-based best practices applied; total costs of care for specific care episodes and for cohorts with chronic illnesses; health behavior intervention methods and models for specific populations at risk; and effective application of social media as a health behaviors management tool for specific, attributed populations. Many health-system leaders believe it is time for the convergence of principles of public health management with principles of health-system management.3

Competency #2: Interprofessional Team Care and Care Management

Given that skilled healthcare professionals are likely to remain in short supply for the foreseeable future, provider supply will be constrained, requiring more effective “leverage models,” meaning the applications of interprofessional team care. Our study of this area shows a number of important observations: (1) many of the more integrated health systems are experimenting with models for primary and specialty care and interprofessional team care, (2) “best practices” in this regard are not likely to emerge for wide pread industry consumption anytime soon, (3) many of the models in operation are designed to optimize productivity of physicians in a fee-for-service environment, and (4) what passes as interprofessional team care is often times physicians and physician extenders doing much the same work (especially for primary care).


Competency #3: Physician Compensation Design

Many of the compensation designs for integrated health systems (those that employ physicians) are productivity based with a compensable unit of effort the work relative value unit (RVU). The number of work RVUs produced by a physician multiplied by an internally derived value equals the cash compensation paid. The model is typically indifferent to type of patient seen, type of work performed, or whether the health system is paid for the work done. The raw incentive at play is the production of “more” work RVUs. The more integrated health systems are working on the options with the goal of paying market compensation for clinical productivity that aligns the incentives of the providers and their organization with those derivative of the types of financial agreements (risk contracts) executed with the payers. Health systems that have a history of salary-based compensation plans may have an easier time with this challenge.4

Competency #4: Facility Asset Investments and Utilization

Integrated health systems are principally in the outpatient business; ie, most of revenue earned and clinical activity delivered is not from the acute care setting. The size, design, layout, and functionality of larger, clinically sophisticated ambulatory healthcare facilities are a fast-moving area of health-systems asset planning, development, and financing.5 Many health-system leaders admit they are “behind the curve” with what is a new science for facilities design and application. Based upon examination of balance sheets of larger health systems there is a sizable latent demand for investments in ambulatory facility assets that serve the needs of changing health services delivery models.

Competency #5: Performance Metrics, Benchmarks, and ACO Performance Evaluations

“How do we know how we’re doing in a business model with reversed incentives?” Asked another way, “what counts” for healthcare organizations that assume the costs of latent and future health risk for attributed populations, within a contracting environment where the health services organization cannot fully control the health services demand behaviors of “covered lives,”including, for some, use of providers not within the identified ACO network.

Few US health systems, save for those that own health plans, possess the internal competencies, infrastructures, and required data sets to reliably forecast the health services consumption behaviors and costs of attributed, covered lives. Nor do many possess

the experience, capabilities, and models to forecast health services consumption behaviors and costs under accepted, evidence- based best practices. Consequently, many health services organizations that accept financial risk for attributed populations will be “flying blind.” A number of leaders of larger, more integrated health systems destined for financial risk on covered lives report the need to “buy, not make” such competencies.

Competency #6: Balance Sheet Performance

There is a strong argument for the deterioration of balance sheet liquidity for US health systems.6 Reasons included the dilutive effects associated with integration of physician practices with hospitals and mergers of hospitals with larger health systems, especially those with weakend balance sheets, massive investment requirements in information systems, including the electronic health record, and the negative balance sheet effects of the financial risk contracting “learning curve.” An examination of the balance sheets of several of the larger US health systems shows deteriorating free cash flow productivity. Such effects bear negatively on balance sheet liquidity, restricting future investment potential. The “new” competency required is strategies to regenerate balance sheet liquidity during a transformative market cycle. Not-for-profit health systems especially may need to venture out of the traditional approaches to capital formation, especially tax-exempt debt financings, and consider alternative financing opportunities for future strategies aimed at balance sheet regeneration.7

Competency #7: Health-System Governing Boards as Learning Organizations

Senior leaders of US health systems, especially those with “community boards,” are challenged with managing board members along a very steep learning curve. Health-system chief executive officers and board chairs will need to become students of the disciplinesrelated to the development of “learning organizations.”8 Here, form will follow function. As US health systems transform to highly integrated organizations in the business of managing the health of attributed populations, board structure, composition, and function will necessarily change, as will required competencies of individual board members. The more integrated health systems will have employed physicians as members. Community representatives will need to bring relevant competencies to the board room. The disciplines of strategy maps and balance score cards are used by a growing number. Rapid cycle decision making is required.

Competency #8: Medical Practice Management

As community hospital systems integrate physicians with their business models most will reach a point where virtually all physicians required for missions, clinical models, financial performance, and strategies are employees of integrated systems of care delivery. Such integrations will facilitate clinical models that are conducive to the incentives and dynamics derivative of financial risk-sharing and related quality and total costs of care management.

Integrated health systems require an organized approach to the design, leadership, and operation of the physician enterprise. Optimal performance is not possible when physicians show up to work and operate on individualized practice plans. The medical enterprise is integral to the success of the integrated health system. There are 2 common organizational designs with a few viable variations on these themes. The first is the unified, multispecialty group practice with a physician-led leadership structure supported by a dyad co-management partner.9 The alternative is an embedded “divisional model” where the integrated health system operates several wholly controlled practice entities held corporately as divisions of hospitals, the larger physician enterprise, or as controlled corporate subsidiaries.

With either organizational design, the “behaviors” of the integrated health-system physician enterprise must align with the needs of the integrated health system overall to harmonize incentives that affect overall performance mission, clinical care,strategic, and financial. Integrated health systems developed from serial acquisitions of small, independent medical practices need to determine how they will acquire or develop the required competencies of high-functioning large-scale medical practices, including the competencies related to interprofessional team care.


So, while few senior executives of US health-systems will argue the market demands for transformative leadership, the practical question of which competencies are required when is a debatable and debated issue. The 8 competencies presented here are not representative of an exhaustive list, but the relevancy of one and all should not be in question, or underestimated in importance, at least not according to those health system leaders queried on the topic. The practical questions are: which first, and when, how, and at what costs to other competing organizational developmental requirements and related investments.Author Affiliation: From MHA and Executive Studies Programs, University of Minnesota, Minneapolis, MN.

Author Disclosure: The author reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Address correspondence to: Daniel K. Zismer, PhD, Wegmiller Professor and Director, MHA and Executive Studies Programs, University of Minnesota, D-262 Mayo Memorial Bldg, 420 Delaware St SE, MMC729, Minneapolis, MN 55455. E-mail: Zismer DK. The promise of the brand: how health system leaders are guiding the transition to health services integration. J Healthc Manag. 2013;58(1):12-14.

2. Christianson JB, Zismer DK, White KM, Zeglin J. Exploring alternative approaches to valuing physician services: a report by staff from the University of Minnesota, Division of Health Policy and Management for Medicare Payment Advisory Commission (Med PAC), Washington, DC, June 2011.

3. Zismer DK. An argument for the integration of healthcare management with public health practice. J Healthc Manag. 2013;58(4):253-257.

4. Zismer DK. Physician compensation in a world of health system consolidation and integration. J Healthc Manag. 2013;58(2):87-91.

5. Zismer DK, Fox J, Torgerson P. Financing strategic healthcare facilities the growing attraction of alternative capital. Healthcare Financial Management Organization. Published May 2013.

6. Zismer DK. How might a reforming US marketplace threaten balance sheet liquidity for community health systems? J Healthc Manag. 2013;58(3):168-172.

7. Zismer DK. Sterns JB, Claus. Capital efficiency and the integrated health system design: does the business model design predict capital efficiency performance in community health systems? Healthcare Financial Management Organization. July 2011.

8. Zismer DK, Cerra FB. High-functioning, integrated health systems: governing a “learning organization.” A Governance Institute White Paper. San Diego, CA: The Governance Institute; Summer 2012.

9. Zismer DK, Brueggemann J. Examining the “dyad” as a management model in integrated health systems. Physician Exec. 2010;36(1):14-19.