Two goals drive health care reform and the dramatic changes now reshaping our health care system: cutting costs and improving care. Accountable Care Organizations are one cost-saving measure rolling out across the U.S., a change pushed by the Affordable Care Act. But how much they will save – and when savings will start – remains an open question.

Accountable Care Organizations, usually composed of a group of doctors, a hospital and often a health insurance plan, agree to meet quality standards and cost savings for a particular group of patients. If they meet their goals, they share in the savings. These organizations now provide health care for an estimated 5.4 percent of Californians and for 6 to 7 percent of the nation, said David Muhlestein, director of research at Leavitt Partners, a health-care consultant company based in Salt Lake.

But so far, savings have been modest and using the new model for the business of medicine has been challenging for hospitals, physicians and insurance companies alike.

When the City and County of San Francisco Health Service System saw increases of 13 percent and 9 percent in health insurance rates for city and county employees in 2010 and 2009, the health system awarded insurance provider Blue Shield of California a new contract to start two ACOs.

San Francisco turned to accountable care organizations as a cost savings measure for a few reasons – it wanted to keep the insurance market for city and county employees competitive, since more than half of employees signed up with one insurer, Kaiser Permanente HMO. And they also wanted to monitor how well the health care providers were meeting their goals.

“We’re the largest employer in Northern California after the state and federal government,” said Catherine Dodd, director of San Francisco’s Health Service System. “We’re the third largest purchaser of health-care services. We wanted to make our market voice heard.”

Now San Francisco has a seat at the table. While some people read the stock market page every morning, Dodd catches up on bed days and hospital admissions from the three participating ACO hospitals.

So far, the approach has worked for the city and county – the ACOs offer more access to health care and savings on health-care costs. The ACOs’ hospital bed days have decreased, hospital re-admittance rates are down, urgent care facilities and extended physician hours are now available and doctors are writing more generic prescriptions, Dodd said. The medical groups have created 24-hour phone lines staffed with advice nurses, who report back to physicians about their patients.

The hospitals also share a social worker who connects patients in the emergency room with social services, like housing and food assistance and health care clinics, which helps cut down on repeat visits to the ER.

These measures have resulted in a large part of the $40 million reduction in health-care costs from July of 2011 through 2013, Dodd said.

But San Francisco has also reduced costs by taking on more risk. They became partially self-insured.

In San Francisco’s Blue Shield plan, doctors get a flat fee per member per month, paid by the insurance company. Then the city pays the actual cost of hospital and outpatient claims. If the ACO partners do a good job at coordinating care and managing patients’ health to prevent unnecessary hospitalizations and costs come in under budget, then those savings go back to the city and the ACO partners. Before the ACO, the insurance company would have profited from those savings. Also, by taking on the risk of paying those hospital and outpatient claims itself, the controls premium increases. Blue Shield doesn’t have to pad premiums as a hedge against risk.

Unlikely Partners

Health-care providers form ACOs hoping that by working together – sharing data, budgets, resources and ideas for better delivery of health care – they can drive down costs and increase revenue and the quality of care.

The learning curve in forming an ACO is steep, and trust and transparency between parties that may be used to interacting cautiously are essential to their success. Sharing information isn’t always comfortable for hospitals and doctors and insurance groups.

Blue Shield of California, for instance, has 15 ACOs and was working on a project with one group to reduce the number of hospital bed days. The ACO partners needed detailed information on specific cases, but the hospital wouldn’t disclose it.

“They were afraid Blue Shield would go back and use that information to start denying claims,” said Kristen Miranda, vice president of strategic partnerships and innovation at Blue Shield of California.

Understanding the costs of care is key to figuring out how to bring costs down. But getting that information from insurers, physician groups and hospitals is difficult, Dodd said.

Hospitals at the heart of savings

Although ACOs are looking across the board for ways to save, many in the industry agree that the bulk of the savings will have to come from hospitals.

“Hospitals are the biggest driver of health-care costs,” Miranda said. “They are going to have to get more efficient and maintain a margin on less revenue.”

“Hospitals will have to make the greatest change, no question about it,” said Stephen Shortell, Ph.D., professor of health policy and management at UC Berkeley’s School of Public Health.

Increasing market share and efficiency will be key for hospitals, and some will either go out of business or downsize, he said.

Physicians lead the majority of ACOs in the U.S., Shortell explained. Hospitals are slow to adopt the ACO model because it cuts into their traditional business of filling beds. One radical possibility for hospitals would be to rent space like airlines rent terminals, he said.

“We know health care has to reform as far as cost and overuse and we’re certainly learning a lot about how to do that,” said Nancy Greenstreet, M.D., medical director for Physicians Medical Group of Santa Cruz, which launched an ACO with Blue Shield of California and Dominican Hospital in 2013.

That ACO has formed a collaborative with six skilled nursing facilities that could accept patients not sick enough for hospital care. They’re working on facilitating after-hours admittance, coordinating medication with the hospital and transportation for patients needing cancer treatment, Greenstreet said.

“Once you get going on this efficiency work,” she said, “it becomes very apparent it’s what’s best for patients. It taps into this moral issue for doctors and hospitals and staff.”

Getting patients healthy faster and getting them out of the hospital and ambulatory sooner cuts down on their risk of infections and blood clots, Greenstreet said. Reducing bed days and medical procedures means that hospitals and doctors lose revenues, but it can be much better for the patient.

Another initiative the medical group has taken on is calling every patient who visits the emergency room to gather information on why they went, who sent them and to educate them about other options, Greenstreet said.

“We’ve seen a marked reduction in ER usage, which is down 3.8 percent in the last 18 months,” she said. That may not seem like much, she added, but it’s a hard number to move.

One way the San Francisco ACOs have reduced hospital costs is through a reduction in scheduled cesarean sections, by targeting the procedures done for convenience rather than medical need, Dodd said.

“The minute we started monitoring it,” Dodd said, “behavior changed.”

While to date the overall savings have been small, many in the industry agree that lessons from ACO experiments will help reform health care eventually.

Earlier this year the Centers for Medicare and Medicaid released an analysis of its ACO initiatives for the first year of the program, between 2011 and 2012. The report showed mixed results. Of the 32 ACOs that originally signed up to serve Medicare patients under CMS’s “Pioneer ACO” program, only eight generated significant savings, Muhlestein said.

“That’s not a huge success,” he said. But, he adds, it does suggest that there are “some models that are definitely working.”