What Is an Accountable Care Organization?

ACOs play an important role in a higher quality, more efficient healthcare system. Learn all about what ACOs do, why they exist and what you should know.
Clinical Value-Based Care

What is an Accountable Care Organization?

Coordinated, high-quality care at the right time—that’s what Accountable Care Organizations (ACOs) aim to provide to their patients.

As healthcare organizations shift their focus from volume to value, and as integration across specialties and facilities becomes more important, ACOs play an important role in creating a more efficient national healthcare system. So what is an ACO in healthcare exactly? Let’s break it down.

ACOs Defined

An ACO is a legal entity composed of medical providers—hospitals, physicians’ groups and regional health systems, among others—that work together and assume responsibility for a defined group of patients’ care.

The ACO’s goal is threefold. First, it encourages providers to lower healthcare costs by reducing unnecessary and duplicative procedures. Second, it emphasizes high-quality patient care with a focus on wellness. When both those goals are attained, the third aim of the ACO is achieved: a healthier population that requires fewer hospital visits and procedures, which reduces both Medicare and general healthcare spending.

Elliott Fisher, M.D., former Director of The Dartmouth Institute for Health Policy & Clinical Practice and a professor at Dartmouth’s Geisel School of Medicine, coined the term “accountable care organization” in 2006 during a Medicare Payment Advisory Commission discussion. In 2009, the Centers for Medicare and Medicaid Services (CMS) drafted an ACO definition that was included in the Affordable Care Act (ACA).

Although the ACO model originally formed as a Medicare payment option, ACOs also have expanded into the private payer market. A typical ACO may have contracts with Medicare and one or more private insurers as well.

How Do Accountable Care Organizations Work?

ACO-member doctors and hospitals agree to meet certain quality and cost benchmarks. Many of those benchmarks focus on preventive care and managing patients with chronic diseases. ACOs that meet or exceed those benchmarks receive financial incentives (reimbursement) from private and/or public payers.

Under the ACA, a qualifying ACO must serve a minimum of 5,000 Medicare beneficiaries for at least three years. Participating ACOs must also include enough primary care professionals to serve those beneficiaries.

 The ACO Payment Model

The ACO payment structure is based on shared risk. ACOs willing to take on more risk—in other words, set loftier goals—can receive greater rewards. ACOs that don’t hit their goals may miss out on shared bonuses or have to pay penalties—the amount of which depend on the structure of their particular model.

ACOs that participate in the Medicare Shared Savings Program‘s (MSSP) Pathways to Success enroll under one of two tracks for five years: BASIC or ENHANCED.

The BASIC track offers a five-year “Glide Path” that starts with two years in an “upside-risk” model that offers shared savings with no responsibility for losses. In years three through five, the path progresses to a “downside risk” model in which shared savings are greater, but losses are shared as well.

After moving through the BASIC track, low-revenue ACOs can either stay in the BASIC track’s highest level for another agreement period or move to the ENHANCED track. The ENHANCED track offers higher risk and potential for higher reward. High-revenue ACOs can either participate in the BASIC track for only one agreement period or start in the ENHANCED track, depending on its experience performance-based risk models.

The MSSP is a type of Alternative Payment Model (APM) under Medicare’s Quality Payment Program. Other Medicare APMs include the Next Generation ACO Model, which gives ACOs additional flexibility in exchange for taking on the highest levels of risk. Currently, 41 ACOs participate in the Next Generation ACO model.

Another example, the Bundled Payments for Care Improvement (BPCI) Initiative comprises four models of care. Those models link payments to the multiple services that beneficiaries receive during episodes of care. For example, an ACO might have a bundled payment arrangement for joint replacement surgery that covers surgery, hospitalization and rehabilitation services and facilities.

Private ACOs share CMS’ goals of lowering cost and improving quality. However, according to a report in The American Journal of Managed Care, they tend to offer more flexibility. Private ACOs may develop multiple contracts with multiple payers to extend coverage across a broader market. They also tend to have different reporting requirements and to offer different financial incentives.

ACO Pros and Cons

With U.S. healthcare spending expected to reach $3.6 trillion in 2019—a 4% increase from 2018—the industry faces enormous pressure from the federal government to control costs, especially Medicare spending and prescription drug costs. ACOs, with their focus on cost control, were designed to be part of that solution.

By focusing on quality care, avoiding unnecessary or duplicative procedures, and improving efficiency between ACO-member physicians, hospitals and clinics, ACOs may help reduce wasteful Medicare spending. ACOs also have incentives to keep patients healthy and out of the doctor’s office—a big win for patients.

Additionally, ACO participants can benefit financially from hitting quality and cost benchmarks. A study published in the New England Journal of Medicine found that physician-group ACOs received $327 million in bonus payments in 2015, saving Medicare $256 million.

However, ACOs aren’t a perfect care model. Providers that join or form an ACO have to restructure their business model from fee-for-service to value-based care. That transition can take several years and a significant investment to achieve.

New ACOs have a short transition period—two years—from upside-only to upside/downside risk under the MSSP’s Pathways to Success program, and established ACOs may have already assumed downside risk.

Participating in an ACO requires an information technology structure capable of managing larger amounts of data and integrating with other health systems, as well as supporting the processes and staff needed to meet necessary quality reporting and accountable healthcare objectives. This poses a significant cost burden for healthcare organizations operating with outdated technology.

If you’re part of a medical group or a health system that is considering joining or forming an ACO, research the Pathways to Success program and other APMs, and fully consider the risks and benefits of this growing model of value-based care.

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