Are bigger health-care networks better or just creating a monopoly?

By Alec MacGillis
Washington Post Staff Writer
Monday, August 16, 2010; A03

ROANOKE -- Railroads put this city on the map, but the king of the domain is now health care -- or rather, the Carilion Clinic.

Carilion owns the two hospitals in town and six others in the region, employs 550 doctors and has set off a bitter local debate: Is its dominance a new model for health care or a blatant attempt to corner the market?

Carilion says it represents an ideal envisioned by the nation's new health-care law: a network that increases efficiency by bringing more doctors and hospitals onto one team, integrating care from the doctor's office to the operating room. The name for such networks, which the new law strongly promotes with pilot programs, is accountable care organizations, or ACOs -- providers joining together to be "accountable" for the total care of patients, with incentives from insurers to keep people healthy and costs down.

"We need to fundamentally get off a transaction system where you're paid for what you do to patients to being paid to care for them," says Carilion chief executive Edward Murphy.

But skeptics apply a more old-fashioned term to networks like Carilion: monopolies, which they say will make health care even more expensive.

"The only way to decrease costs that truly works is increasing competition, but for some reason in health care, we're supposed to believe that competition drives up costs," said ophthalmologist Frank Cotter.

The gap between those two views is at the heart of whether the law succeeds in controlling costs. Meanwhile, the question is creating a schism in the Roanoke Valley, a region of more than 250,000 people that depends on Carilion's 12,300 jobs but also worries about health-care costs out of proportion to the area's cost of living.

Hospitals merge

Roanoke's two hospitals joined forces under the Carilion name in 1989 (after a failed effort by the Justice Department to block the merger). In 2006, Carilion converted to a nonprofit multi-specialty clinic, modeled on the Mayo Clinic. The system bought up many independent practices, adding 200 doctors to its payroll.

To integrate care, Carilion spent $100 million on electronic medical records. Nurses provide immediate follow-up when patients are released from the hospital in an effort to prevent costly readmissions. And the clinic is turning its 37 primary-care practices toward the "medical home" model: "Care coordinators" reach out to people with diabetes, hypertension and other chronic conditions who have gone too long without a checkup; and physicians meet nightly with nurses to review the next day's appointments to ensure the visits are productive.

Primary-care practitioners praise the new approach for being more organized, but today's payment system penalizes this method because it results in fewer lucrative procedures later.

"The better primary care gets, the less money for the hospitals. And for a system with eight hospitals, that's some concern," said John Wendland, a former Toyota manager hired by Carilion to lead the shift toward ACOs.

The approach is also evident in the new office building for Carilion's specialists, opposite the even newer medical school that it is opening with Virginia Tech. To forge a team mindset, Carilion made all offices the same size.

"We tend to be attractive to [doctors] with a different kind of personality," said chief medical officer Mark Werner. "You'll never get into it if you're someone where it's 'all about me.' "

But some local doctors have resisted Carilion's overtures, producing a rift in the formerly collegial community. In 2006, dozens of doctors and employers formed a group to protest Carilion's ambitions. And last year, they cheered when the Federal Trade Commission forced Carilion to sell an imaging center and ambulatory surgery center it had bought because the purchases would result in higher prices.

Independent doctors say Carilion is urging its employees to refer patients only to providers within the Carilion network, cloaking its expansion in the lingo of health-care reform.

"Now, they say, 'ACOs, that sounds good, let's graft onto that,' " said radiologist James Blackwell. "But the germ of the idea was really, 'How can I get a bigger system with more control, without all these fractious doctors to deal with?' "

Whether Carilion's sway has inflated costs is a matter of dispute. Colin Drozdowski, vice president of insurer WellPoint, says Carilion's rates are "among the most expensive" in Virginia. A state database, however, shows that Carilion charges more than average for only a handful of common procedures.

Carilion officials counter the monopoly charge by noting that there is a 500-bed hospital in Salem, adjacent to Roanoke, owned by the national health-care chain HCA and that only half of family physicians in the Roanoke Valley are employed by Carilion. They argue that the real problem is consolidation on the insurer side, where WellPoint's Anthem controls most of the market.

Murphy, Carilion's chief executive who earned $2.3 million in 2008, acknowledges that providers holding excessive leverage over insurers is cause for concern but argues that ACOs can be a corrective.

"If [leverage] is not addressed forthrightly by the provider community, that's going to come back to bite us," he said. "But . . . that leverage has already gone on for years."

Concern over spending

Underlying the debate is a broader one about health-care spending. The new health-care law reflects the view of many experts that the problem lies in overuse of care -- when providers are motivated to do unnecessary procedures by the "fee for service" payment system. This camp says the system should encourage doctors to receive a salary instead of being paid piecemeal and reward them for reducing the need for costly procedures. In that regard, the ACO model resembles HMOs, except that the coordination of care is led by providers, not insurers.

"This is a path to giving doctors and health professionals more resources for doing what they think is right for patients," said the Brookings Institution's Mark McClellan, who ran Medicare under President George W. Bush.

But another group of health economists says that by many measures, Americans do not use medical care more heavily than people in other developed countries. The real difference is that people in the United States pay much more for the care they get.

Expanding networks might allow providers to cut back on unnecessary care, this group says, but the savings could be canceled out if the networks drive up prices. The answer, they say, lies in reducing providers' leverage -- perhaps with a Medicare-like "public option" for people younger than 65 that could push for lower prices or by public rate setting of hospital prices, as is done in Maryland.

"The problem of provider market power is not just about ACOs, but ACOs may make it worse," said Urban Institute economist Robert Berenson. "Hospitals everywhere want to become ACOs. Whether they see this as a potential for raising prices, I don't know, but some of them would."

Employers echo this warning.

"When the same organization that sincerely wants to be an ACO also has an 18 percent price increase, that's a gigantic disconnect," former General Electric executive Robert Galvin said at a recent conference in Washington on ACOs.

Murphy argues that the debate could be transcended if providers document the total cost of care in a given community, taking into account volume and price -- and commit to only small increases in that sum.

For now, Carilion is focused on negotiating a new payment model. It proposes that insurers reward it if it meets cost-saving markers such as reducing emergency room visits, but insurers also want penalties for missing benchmarks.

As WellPoint's Drozdowski sees it, the pressure is on Carilion to make its care more efficient.

"They sort of bet the farm on that," he said. "And now they have to demonstrate to employers and citizens of the Roanoke Valley that this model can work."

View all comments that have been posted about this article.

© 2010 The Washington Post Company