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As health care providers look to find alternative ways to deliver better care to the nation's growing elderly population without busting the federal budget, Northridge-based Heritage Provider Network is ready to lead the way. Heritage - California's largest multi-specialty medical group with 700,000 patients, 2,300 primary care doctors and 30,000 specialists - was recently chosen by the Centers for Medicare & Medicaid Services (CMS) to test-run a new coordinated care and physician payment model that could save millions and deliver better care to some 150,000 Southern California Medicare recipients, including thousands in the San Fernando Valley.

The Pioneer Accountable Care Organization Model, a new initiative of the CMS Innovation Center, launches this month.

"Think of us as Louis and Clark," said Dr. Richard Merkin, founder, president and CEO of Heritage who has made revamping health care both a personal and business mission. "We are going to explore this (new) model and see if it can work for the country." Heritage was among 32 organizations nationwide and six in California chosen last month to participate in the program. CMS believes the pilot could save as much as $1.1 billion over five years by encouraging primary care doctors, specialists, hospitals and other caregivers to provide better, more coordinated care for people with Medicare who do not now belong to a managed care organization. The most innovative part of the pilot is that it allows health care providers that save CMS money to share in the savings, said Don Crane, president of the California Association of Physician Groups. If they succeed, they can eventually move to a different payment scheme in which doctors are paid a set sum for every patient, rather than a fee for each service.

But the providers chosen to participate in the pilot have to do more than reduce costs: they must improve care at the same time, which CMS will monitor with regular follow-up. CMS will make sure that patients enrolled in the ACOs receive not only annual physicals, but pneumonia and flu shots, have their vital signs monitored and are given advice about their diet, smoking or exercise. The ultimate goal is three-fold, explained Merkin: to improve access to care, advance health outcomes and reduce costs. If Heritage and its cohorts in the pilot succeed, they could pave the way for a totally new national physician payment model that has the potential to transform the health care system by providing health care providers with an incentive to save money rather than spend more. Some observers say it's a tall order and a risky bet for the providers. If the patients assigned to Heritage and the other providers wind up costing more than they currently do, the providers have to pay CMS the difference.

"There is a risk on the downside," explained CMS Regional Administrator David Sayen. "We can project what it should cost to take care of these people. From that, we have a benchmark. If they can reduce costs and maintain quality, we will share the savings with them. If they exceed that amount, they have to pay us."

A large part of the challenge is that the 144,000 Medicare patients that will be loosely assigned to Heritage don't belong to a managed care program, and have chosen specifically to not have a care coordinator or primary care doctor. "They can go to any doctor or hospital they wish," Crane said. "That's the rub. It will make is harder for Heritage to succeed." As the program launches this month, Heritage will receive the names of 146,000 Medicare recipients in Southern California who may have seen a Heritage doctor regularly or just once. It will be up to Heritage to reach out to these patients and bring them into the ACO by convincing them that they will be better off if they join the ACO and have their care coordinated and followed through an assigned physician or case worker, than if they continue to choose random doctors and hospitals. Heritage can do this by offering these patients special services, education, or simply better service.

Crane believes this alone is no small task. "This is a fee-for-service population," he said. "They are the people who shun HMOs. These six groups will have to work extra hard and smart to provide care that is attractive and sticky enough to keep these people coming back to them and engage with them." In other words, unlike an HMO, where patients have no choice but see a primary care doctor and then see approved specialists, under the ACO model, there is no gatekeeper. Patients have to voluntarily agree to have their care coordinated.

Merkin recognizes the challenge but is excited for the opportunity to potentially transform the health care delivery model. He believes his organization is uniquely qualified to bring these "fee for service" patients into the fold. When Heritage first launched in 1979 as a small practice in Lancaster, it was 95 percent fee-for-service, he said. As the organization grew, hiring doctors and buying multiple practices across Southern California, Arizona and New York, patients started to switch to managed care. "As the fee-for-service patients saw people in the waiting room seeing the same doctor and getting better service and no co-pays and deductibles, they'd ask, "What is this program?"

The next time they had a chance, they chose the managed care model." Today, at least 90 percent of the Organization's 700,000 patients - including 100,000 Medicare patients - are in a managed care plan, Merkin said. Merkin believes he can convince the new patients at Heritage to choose coordinated care over the ad hoc services they get today. He's starting by studying a company renowned for its customer service: The Ritz-Carlton hotel chain. "We have to be the best and act like the Ritz Carlton, he said. "We will have to make the experience we provide overwhelmingly desirable. We have to improve service and be service oriented. If someone has to wait two weeks for an appointment, we'll have lost the battle." And it's a high-stakes battle. CMS launched this initiative as part of its Innovation Center drive to understand the impact of different pay schemes. Sayen said the organization has known for quite some time that today's fee-for-service model is inefficient, driving up the cost of care while delivering less than optimal care.

Providers are incentivized to order more tests and diagnostics and to hospitalize people, sometimes unnecessarily, he said. Uncoordinated care can also lead to worse outcomes. Medicare recipients without some care coordination are twice as likely as those with coordinated care to wind up in the hospital for a repeat visit within 30 days of their first admission, Sayen said. Hospitalizations cost CMS twice as much as physician services, so unnecessary repeat visits drain the system of needed resources. "Much of hospitalizations can be avoided if someone is watching, making sure that patients take their medicine and keep their follow-up appointments," he said.

Heritage plans to do just those things, Merkin said. Case managers will be assigned to the new patients, who will make sure that patients "take their medicines in a timely manner; make sure they can afford their medicines; make sure they are keeping their appointments, and when they are discharged from the hospital, they are discharged with a plan and given a follow-up visit." Heritage has used these techniques and others to keep readmission rates among managed care patients down with success. Crane said he is confident Heritage will be able to deliver on the promise of the ACO. "Dr. Merkin is a seasoned pro at this. He is one of the most successful men in managed care in the nation. He started from a small office in Lancaster and built what may be the largest single medical group in the U.S. CMS was strategic in choosing Heritage and other large IPAs with experience in managed care, he added. "They wanted to demonstrate early success," Crane said. "I am sure that was part of it. They want to show the world that it can be done and how to do it." Heritage has reason to make the model work. If the organization can deliver better care and save money, it will be able to participate in the savings starting in year one, getting 50 percent of the shared savings. In year two, the provider's share can climb as high as 70 percent, with the rest of the savings going to CMS, and indirectly, tax payers, explained Sayen.

The real payoff will come in year three, when Heritage will be able to collect up front from CMS a lump sum payment for every patient. CMS will still process claims, but won't pay the providers anything additional, Sayen explained. If Heritage can keep its patients healthy, out of the hospital and reduce its costs, then that money is the organization's to keep. If, on the other hand, patients are readmitted to the hospital, get sicker or cost Heritage more than the lump sum CMS pays, Heritage will have to eat the cost." It's not only critical that we make it work - we have to make it work in a way that is scalable and easily replicable so other groups can do it," Merkin said.