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Accountable Care Organizations (ACOs)

As the nation prepares to implement the new healthcare reform law, there is broad agreement that we must fundamentally reform the healthcare delivery and payment systems used in the United States. At the same time, there is an urgent need to provide more coordinated and cost effective care to all Americans and particularly to the growing number of people with chronic illness. As the Affordable Care Act (ACA) expands health insurance coverage to nearly all Americans and legal immigrants, the challenge of reforming the delivery system becomes increasingly important.[i]

Under the ACA, there are incentives for the healthcare industry to innovate to improve quality, cost and care by creating Accountable Care Organizations (ACOs).  Today, there are numerous demonstration projects testing ACOs, with an initial emphasis on Medicare and pediatric populations.

At a Glance

At a Glance

The Affordable Care Act discusses Accountable Care Organizations in two sections:

  • Title III, Subtitle A, Part III, Sec. 3022 MEDICARE SHARED SAVINGS PROGRAM. (pages 313-318)

This section briefly describes how ACOs are expected to transform the delivery of healthcare to improve efficiency, quality and cost. It also provides an overview of the requirements for participation in the demonstration project and savings program funded through the Affordable Care Act. The following areas are discussed:

ACO Characteristics

Characteristics of ACOs

ACOs have the potential to simplify the care process for patients, enhance quality and reduce costs by coordinating and integrating patient-centered care.

Under the new healthcare reform law, ACOs are defined as groups of providers, which may include hospitals that have the legal structure to receive and distribute payments to participating providers to provide care coordination, invest in infrastructure and redesign care processes, and reward high quality and efficient services.[ii]

The National Committee for Quality Assurance (NCQA) defines ACOs as “…provider-based organizations that take responsibility for meeting the healthcare needs of a defined population with the goal of simultaneously improving health, improving patient experience and reducing cost.”[iii] The NCQA also notes the method providers use to organize themselves is expected to vary widely with the components of care delivery but that there is sufficient evidence that ACO’s must include  a group of physicians with a strong primary care base and sufficient other specialties that support the care needs of a defined population of patients. These ACO providers will need to be clinically integrated to seamlessly coordinate care for assigned patients. They will also need an administrative infrastructure to manage budgets, collect date, report performance, make payments related to performance and organize providers around shared goals.

Pediatric ACO Demonstration Project

Pediatric ACO Demonstration Project

The Pediatric ACO demonstration will run from January 1, 2012 until December 31, 2016 and will authorize participating states to recognize pediatric providers as ACOs to receive incentive payments providing they meet the following specified requirements:

  • The Secretary shall establish performance guidelines, in consultation with States and providers, to ensure that the quality of care delivered by a pediatric ACO is commensurate with other pediatric providers.
  • All participating states, in consultation with the Secretary, shall establish an “annual minimal level of savings in expenditures” for covered services needed for the organization to receive an incentive payment.
  • Providers are required to fulfill a minimum participation period of at least three  years.

States will apply to the Secretary to be included, although parameters of this application have yet to be determined. The incentive payment amounts will be determined by the HHS Secretary, and may be subject to annual caps.[iv]

Medicare Shared Savings Program

Medicare Shared Savings Program

By January 1, 2012, the Secretary will establish a shared savings program to promote accountability for the coordination of items and services under Medicare Parts A and B for a specified population, and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Under this program, groups of service providers meeting criteria (yet to-be-determined) may work together to manage and coordinate care for Medicare Fee-for-Service patients through an ACO, and ACOs that meet quality performance standards will be eligible to receive payments from shared savings.

Eligible providers will include professionals in group practices, networks of individual practices of ACO professionals, partnerships or joint venture arrangements between hospitals and professionals, hospitals employing professionals, and other entities with the Secretary may deem appropriate. All ACOs must have established a mechanism for shared governance. The Secretary may give preference for participation to ACOs that are participating in similar pilots with private payers.

Requirements for ACO status include:

  • A willingness to become accountable for the quality, cost, and overall care of the Medicare Fee-for-Service (FFS) beneficiaries it treats
  • Entrance into an agreement with the Secretary to participate in the program for not less than three years
  • A formal legal structure that allows the organization to receive and distribute payments for shared savings
  • The inclusion of primary care professionals that are sufficient for the number of Medicare FFS beneficiaries assigned to the ACO: “At a minimum, the ACO shall have at least 5,000 such beneficiaries assigned to it under subsection (c) in order to be eligible to participate in the ACO program”
  • Provision to the Secretary of information regarding the professionals who participate in the ACO (so that the Secretary may decide whether they are sufficient to support the care of the patients assigned), the implementation of quality and other reporting requirements, and the determination of the allocation of shared savings
  • A leadership and management structure that includes clinical and administrative systems
  • Defined processes that promote evidence-based medicine and patient engagement, reporting on quality and cost measures, and care coordination
  • Demonstration that the organization meets patient-centeredness criteria


The Secretary will determine appropriate measures for assessment of care quality and providers will be required to submit data on these measures.

Assignment of Medicare Beneficiaries:

The Secretary will also determine an appropriate method for assigning Medicare FFS beneficiaries to an ACO based on utilization of primary care services.

Provider Payment:

While Medicare provider payments will continue as usual, ACO’s will be eligible to receive payment for shared savings if quality performance standards are met and estimated and patient-characteristic-adjusted average per capita Medicare expenditures meet levels set by the Secretary. Benchmarks will be established for each ACO for every reporting period using its most recent three years of per-beneficiary expenditures for Parts A and B, adjusted to account for beneficiary characteristics.

The percent of payment will be determined by the Secretary, as will limits on the total amount of shared savings that can be paid. The Secretary will monitor the avoidance of at-risk patients, and has the power to impose sanctions on ACOs. The agreement between the ACO and the Secretary may also be terminated if the organization fails to meet performance standards.

The shared savings program is allowed to use partial capitation payments, or any payment model that is determined to improve the quality and efficiency of care while not resulting in additional program expenditures.


Risks to Consider

Many policy experts view ACOs as one of the best ways to control cost and improve quality of care over the long term and this has generated significant interest in both the public and private sectors. Because the ACO model requires infrastructure investments to actively manage and coordinate care across the continuum, it can pose three types of potential financial risks to providers: Insurance Risk, Revenue Risk, and Misalignment Risk.

Insurance Risk: Under a full or partial capitated ACO model, providers expose themselves to insurance risk. Obviously, the level of risk will depend on the degree of payment capitation. Although few organizations were able to successfully manage insurance risk during the 1990s, those that did reduced moral hazards (the risk that a party has not entered into a contract in good faith or has an incentive to take unusual risks to earn a profit) by ensuring that the economic incentives for all those involved in the provision of care were contractually aligned. They also had sufficient actuarial understanding of the populations for whom they accepted capitation to arrive at an economically viable payment amount, and they maintained sufficient risk-based capital to withstand adverse unanticipated financial events.

Revenue Risk: An ACO under the fee-for-service model is primarily exposed to revenue risk. If the ACO is successful, it will use coordinated, ongoing primary care to reduce the need for acute and ancillary services. Although this is the desired goal, if the bonus payments for quality and efficiency aren’t appropriately structured, the organization could see significant decreases in revenue. Organizations must understand this risk and develop a plan to either mitigate it or continue operating with decreased revenue.

Misalignment Risk: Under both models, ACOs are exposed to “misalignment risk,” which can occur in one of two ways:

  • A failure to align reimbursement from all payers to reward providers for delivering value in the care provided (as opposed to simply volume of care) could create conflicting economic incentives within the organization. This tension is one of the factors that ultimately contributed to the failure of capitated arrangements in the 1990s. Most providers did not have sufficient revenue at risk to drive cultural change and make the investments in technology and care delivery necessary to manage population health.
  • A more subtle form of misalignment arises with changes in care delivery and physician behavior. It is not reasonable to assume that such changes will be isolated to one payer’s patients. Improvements in care delivery will likely lead to a decline in utilization of acute and ancillary services across all payers, thereby decreasing revenue. As providers contemplate developing an ACO, they will want to consider strategies to bring additional payers on board sooner, rather than later.

Additional Resources

Additional Resources

Go Back to Health Reform Information: Health Providers Under Health Reform

[i] Implementing Accountable Care Organizations, Casalino, Fisher and Shortell, Berkeley Law, University of California, May 2010.

[ii] Implementing Accountable Care Organizations, Casalino, Fisher and Shortell, Berkeley Law, University of California, May 2010.

[iii] ACO Draft 2011 Criteria Overview, October 19 – For Public Comment November 19, 2010

[iv] Accountable Care Organizations Provisions in the Patient Protection and Affordable Care Act, Integrated Health Association, June 9, 2010. IHA_PPACAACOSummary.pdf.