In this article, we will cover Accountable Care Organizations (ACOs) in detail.

This article is Part 5 of our 6-part series simplifying alternative payment models in healthcare.

If you missed earlier articles in this series or want to jump around, here are the links:

  1. Alternative Payment Models Made Simple – Overview (Part 1 of 6)
  2. Alternative Payment Models Made Simple – Pay for Reporting (PFR) (Part 2 of 6)
  3. Alternative Payment Models Made Simple – Pay for Performance (PFP) Part 3 of 6)
  4. Alternative Payment Models Made Simple – Bundled Reimbursements (Part 4 of 6)
  5. Alternative Payment Models Made Simple – Accountable Care Organizations (ACOs) (Part 5 of 6) (THIS ARTICLE :))
  6. Alternative Payment Models Made Simple – Patient Centered Medical Homes (PCMH) (Part 6 of 6)

Introduction to Accountable Care Organizations (ACOs)

In this article, we are going to talk in more detail about Accountable Care Organizations, or ACOs.

Accountable Care Organizations were birthed out of the 2010 Affordable Care Act (ACA) as one of the attempts for the Centers for Medicare & Medicaid Services (CMS) to control rising healthcare costs.

The Accountable Care Organization has been conceptualized to drive healthcare costs down through one primary mechanism – improved coordination of care.

Coordination of care means that all healthcare providers that a given patient accesses are aware of and informed about what is going on with that patient. As such, two things happen: 1) waste is reduced (e.g., duplicate tests) and 2) better treatment decision-making. All of it should improve ultimate patient outcomes which could have its own downward impact on medical cost through healthier patients and populations.

While Accountable Care Organizations are incredibly diverse, there are a few components they all share:

  1. Provider groups and/or institutions that join together to provide coordinated care
  2. Attributable patients
  3. Shared risk, upside or downside

Joint Provider Groups in Accountable Care Organizations

The first component of the Accountable Care Organization is a group healthcare providers and/or hospitals that self-elect to form an ACO.

In doing so, they agree to share medical and financial accountability for the set of patients treated within their walls. Savings are ostensibly generated through improved coordination of care that reduces waste and promotes better clinical outcomes for patients.

There are now hundreds of Accountable Care Organizations in the US. They are quite diverse. Accountable Care Organizations have include only primary care provider groups, primary care plus specialty provider groups, provider groups plus a single hospital, provider groups plus multiple hospitals, provider groups plus hospitals plus insurance providers.

While they all have a common goal – reduced spending through coordinated care – their methodologies for organizing and achieving that goal are independent.

Broadly, implementation includes aspects such as the following:

  1. Increased care management services
  2. Investment in IT infrastructure

The lowest hanging fruit for Accountable Care Organizations has been in reducing their most expensive line items – 1) emergency room (ER) utilization, and 2) hospitalizations.

One of the simplest ways to do this is to utilize care management services provided by nurses to direct patients to alternate sites of care. For example, a nurse on call can guide a patient having a non-emergency to an office visit during open office hours and avoid an unnecessary ER visit. Or that nurse can guide a patient having an emergency to an urgent care instead of the more expensive ER.

As such, investing in care management services has been a key feature for most Accountable Care Organizations.

In addition, keeping track of patients and their treatments across multiple sites of care is no simple task. Specifically, this effort demands some level of IT infrastructure to store and share information, appropriately.

Many Accountable Care Organizations find themselves needing to invest in IT infrastructure to make their system work.

Ideally, all provider members of an Accountable Care Organizations would have the same IT infrastructure – the same electronic health record (EHR) system, the same billing system, etc.

In practice, this rarely occurs. In addition, as Accountable Care Organizations grow they absorb new providers with different IT systems. They can either work to convert those new providers or build new IT systems that allow cross-talk between the systems. Both are costly… both in terms of stress on staff and in terms of dollars.

Attributed Patients in Accountable Care Organizations

One of the biggest operational issues with the Accountable Care Organization concept is the attribution of patients.

Attribution is the assignment of patients to a specific provider.

In aggregate, these individual patients comprise what becomes the covered population. The Accountable Care Organization is held accountable for the medical and financial health of the population at the end of the day.

Most providers will express their limited control over the enduring health of any given patient. Sure, they can examine, diagnose, and establish a treatment plan. But once the patient leaves the office, the patient bears much of the responsibility to following through with the treatment plan – even if it is as simple as taking their full course of antibiotics for a sinus infection.

Now consider the other providers any given patient is seeing simultaneously.

The typical Medicare patient in one year sees 7 different doctors, including 5 different specialists, working in 4 different practices.[1. Bach P. How many patients does it take to treat a patient. Available at: Accessed March 2016.] Now consider, which of these doctors is primarily accountable for that patient’s care? Which one should be accountable for that patient’s outcomes? Especially when all these doctors are not in the same Accountable Care Organization!

Shared Risk in Accountable Care Organizations

The last consistent component across all Accountable Care Organizations is an element of shared risk. Specifically, the providers become at risk for the financial aspects of the patients in their covered populations – thus, the need for providers to be good a population health management.

There are 3 programs for Accountable Care Organizations currently offered by CMS:

  1. Pioneer ACO
  2. MSSP
  3. Advanced Payment ACO Model

Pioneer ACO

The Pioneer ACO program has been created for organizations with some level of experience with care coordination.

It was first introduced as a pilot program from 2012 through 2014 with 32 organizations.

The initial participants tended to be sophisticated integrated delivery networks (IDNs) with much of the infrastructure already in place predicted to drive success with such a model – some of them with decades of experience already operating like Accountable Care Organizations. As such, the Pioneer program represented an opportunity for a new revenue stream with minimal additional investment.

Beneficiaries are aligned to a given Pioneer ACO. Then benchmark expenditures are established to which Accountable Care Organization expenditures are compared, annually, to determine savings or losses. In order to receive savings or owe losses in a given year, Accountable Care Organization expenditures must be outside a minimum corridor set by the ACO’s minimum savings rate (MSR) and minimum loss rate (MLR). If savings/loss is within this corridor, no payment is made to the Accountable Care Organization or owed to CMS. If the Gross Savings/Losses percentage is outside this corridor, then the Accountable Care Organization splits the overall savings/loss with CMS.

Despite their anticipated advantages, 9 groups dropped out after the first year and 3 more by 2014. Only 20 made it through all 3 years of the pilot. Some of the reasons for lack of success were cited to how CMS was asking for the data to be packaged and patient attribution issues (i.e., ACOs being held accountable for which aspects of which patients’ care).

After the pilot, while the program remains open for Accountable Care Organization participation, there are only 9 participants at the time of writing of this article. [2. CMS. Pioneer ACO Model. Available at: Accessed March 2016]

Most Accountable Care Organizations have opted to participate in another CMS ACO model – the MSSP.

Medicare Shared Savings Program (MSSP)

In contrast to the Pioneer pilot, the MSSP was open to any entity that organized itself as an Accountable Care Organization with at least 5,000 Medicare beneficiaries. [3. CMS. Shared Savings Program. Available at: Accessed March 2016]

The program was created to encourage provider groups to facilitate more care coordination in order to improve the quality of healthcare delivered.

Simply put, Medicare offers a bonus of part of the savings that result from their coordination of care for their Medicare-covered population.

The bonus amount is variable based upon how much risk the Accountable Care Organization decides to accept. Organizations deciding to take on  only one-sided risk – only sharing in savings and not risking payment back to CMS for loses – can receive a bonus of up to 50% of the shared savings. In contrast, organization choosing to take on two-sided risk – sharing in savings or paying money back to CMS for any extra losses – can receive a bonus of up to 60%.

In contrast to the Pioneer program with only a handful of participants, there are hundreds of Accountable Care Organizations that have signed up to participate in the MSSP model.

The lowest hanging fruit for participants has been reduction in ER and hospitalization visits. Tactically, many Accountable Care Organizations have done a couple of things to rapidly reduce Medicare’s spending with them and thus, create a savings pool for a bonus:

  1. Identify high utilizers
  2. Develop care management teams to manage high utilizers, moving them towards alternate sites of care

Of note, Medicare had established an “Advanced Payment ACO” model that is no longer active.[4. Available at: Accessed March 2016]  It was intended to allow Accountable Care Organizations that were relatively under-resourced to participate in the MSSP. Within this program, qualifying ACOs could receive an advance in the anticipated shared savings with Medicare that they could use for two primary purposes: 1) hire/develop staff for care coordination, and 2) infrastructure investments (e.g., IT).

Wrap-Up: Accountable Care Organizations (ACOs)

We’ve seen how Accountable Care Organizations are incredibly diverse. At the same time, they all share these components:

  1. Provider groups and/or institutions that join together to provide coordinated care
  2. Attributable patients
  3. Shared risk, upside or downside

There are tremendous technical challenges to organizing and operating as an Accountable Care Organization. But the financial incentives are alluring.

In the next article in this series titled “Alternative Payment Models Made Simple,” we’ll tackle another emerging alternative payment model in healthcare today – patient centered medical homes.

Read the next article in this series, “Alternative Payment Models Made Simple – Patient Centered Medical Homes (Part 6 of 6)” by clicking HERE.

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