Accountable care organizations: The next big thing in health care

Kaiser Health NewsJanuary 19, 2011 

WASHINGTON — Accountable care organizations take up only seven pages of the massive new health care law, yet they've become one of the most talked about provisions.

This latest model for delivering services offers doctors and hospitals financial incentives to provide good quality care to Medicare beneficiaries while keeping down costs. A cottage industry of consultants has sprung up to help even ordinary hospitals become the first ACOs on the block.

Yet the concept is still short on details. ACOs have been compared to the elusive unicorn: everyone seems to know what it looks like, but nobody's actually seen one.

Exactly how ACOs would work in practice remains to be seen, though that hasn't stopped the health care industry from embarking on a frenzied quest to create them as quickly as possible. The Centers for Medicare and Medicaid Services is expected to release detailed rules on ACOs in a few weeks.

Here is a brief guide to what we know about ACOs so far.

Q: What is an accountable care organization?

A: An ACO is a network of doctors and hospitals that shares responsibility for providing care to patients. In the new law, ACOs would agree to manage all of the health care needs of a minimum of 5,000 Medicare beneficiaries for at least three years.

Think of it as buying a television, said Harold Miller, the president and chief executive of the Network for Regional Healthcare Improvement and the executive director of the Center for Healthcare Quality and Payment Reform in Pittsburgh.

A TV manufacturer such as Sony may contract with many suppliers to build sets. Like Sony does for TVs, Miller said, an ACO would bring together the different component parts of care for the patient — primary care, specialists, hospitals, home health care, etc. — and ensure that all of the "parts work well together."

The problem today, Miller said, is that patients are getting each part of their health care separately.

"People want to buy individual circuit boards, not a whole TV," he said. "If we can show them that the TV works better, maybe they'll buy it," rather than assembling a patchwork of services themselves. "But ACOs will need to prove that the overall health care product they're creating does work better and costs less in order to encourage patients and payers to buy it."

Q: When will ACOs begin operating?

A: The ACO initiative is scheduled to launch in January 2012, but the race to form ACOs already has begun. Hospitals, physician practices and insurers across the country, from New Hampshire to Arizona, are announcing their plans to form ACOs, not only for Medicare beneficiaries, but also for patients with private insurance as well. Some groups have already created what they call ACOs.

Q: Why did Congress include ACOs in the law?

A: As lawmakers search for ways to reduce the national deficit, Medicare is a prime target. With baby boomers entering retirement age, the costs of the program for elderly and disabled Americans are expected to soar.

ACOs would make providers jointly accountable for the health of their patients, giving them strong incentives to cooperate and save money by avoiding unnecessary tests and procedures. For ACOs to work, they'd have to share information seamlessly. Those that save money while also meeting quality targets would keep a portion of the savings.

The Congressional Budget Office estimates that ACOs could save Medicare at least $4.9 billion through 2019. That would be far less than one percent of Medicare spending during that period, but if the program is successful it can be expanded by the Secretary of Health and Human Services.

Q: How would ACOs be paid?

A: In Medicare's traditional fee-for-service payment system, doctors and hospitals generally are paid more when they give patients more tests and do more procedures. That drives up costs, experts said.

ACOs wouldn't do away with fee for service, but would create savings incentives by offering bonuses when providers keep costs down and meet specific quality benchmarks, focusing on prevention and carefully managing patients with chronic diseases. In other words, providers would get paid more for keeping their patients healthy and out of the hospital.

If an ACO isn't able to save money, it would be stuck with the costs of investments made to improve care, such as adding new nurse care managers, but would still get to keep the standard Medicare fees.

The law also gives regulators the ability to devise other payment methods, which would likely ask ACOs to bear more risk. For example, an ACO could be paid a flat fee for each patient it cares for.

Q: How will an ACO be different for patients?

A: Patients may not even know that they're part of an ACO. Although doctors will want to refer patients to hospitals and specialists within the ACO network, patients will still be free to see doctors of their choice outside the network. ACOs also will be under pressure to provide high quality care because if they don't meet standards, they won't receive savings bonuses — and could lose their contracts.

Q: Who's in charge?

A: Hospitals, doctors and insurers are all vying to run ACOs. Kelly Devers, a senior fellow at the Urban Institute, a liberal policy organization, explains that the question was left purposely vague to be flexible. "We know there are a range of provider organizations" that could manage an ACO, "but we don't know which one is superior."

Some regions of the country, including parts of California, already have large multispecialty physician groups that may become an ACO on their own, likely by networking with neighboring hospitals.

"A lot of health care organizations are going to dust off the existing structures they had in place" in the past, Devers said.

In other regions, large hospital systems are scrambling to buy up physician practices with the goal of becoming ACOs that directly employ the majority of their providers. Because hospitals usually have access to capital, they may have an easier time than doctors in financing the initial investment required by an ACO.

Some of the largest health insurers in the country, including Humana, United Healthcare and Cigna, already have announced plans to form their own ACOs. Insurers said they can play an important role in ACOs because they track and collect data on patients, which is critical for coordinating care and reporting on the results.

Q: If I don't like HMOs, should I consider an ACO?

A: ACOs may sound a lot like health maintenance organizations. "Some people said ACOs are HMOs in drag," Devers said. But there are some critical differences — notably, an ACO patient is not required to stay in the network.

Steve Lieberman, a visiting scholar at the Engelberg Center for Health Care Reform at the center-left Brookings Institution and the president of Lieberman Consulting Inc., explains that ACOs aim to replicate "the performance of an HMO" in holding down the cost of care while avoiding "the structural features that give the HMO control over (patient) referral patterns," which limited patient options and created a consumer backlash in the 1990s.

Q: What can go wrong?

A: Lieberman cautions that ACOs aren't a panacea.

"ACO has become the three-letter health acronym of the year, if not the decade," he said. The health industry tends to operate with "kind of a herd behavior," rushing to implement an idea "without working through the detailed business questions of how they'll work."

Many health care economists fear that the race to form ACOs could have a significant downside: hospital mergers and provider consolidation. As hospitals position themselves to become integrated systems, many are joining forces and purchasing physician practices, leaving fewer independent hospitals and doctors. Greater market share gives these health systems more leverage in negotiations with insurers, which can drive up health costs.

But Lieberman said that while ACOs could accelerate consolidations, it's already "such a powerful and pervasive trend that it's a little like worrying about the calories I get when I eat the maraschino cherry on top of my hot fudge sundae. It's a serious public policy issue with or without ACOs."

Q: Are there any possible legal concerns?

A: Doctors, hospitals and others in the health care industry have raised concerns that ACOs could run afoul of antitrust and anti-fraud laws, which try to limit market power that stifles competition and drives up prices. One concern is that ACOs, particularly those in rural markets, could grow so large that they would employ the majority of providers in a region.

To help providers avoid legal problems, the Federal Trade Commission said it is trying to clarify antitrust guidelines for ACOs, and the U.S. Justice Department's antitrust division has offered to provide an expedited antitrust review process for ACOs.

(Kaiser Health News ( is an editorially independent news service of the Kaiser Family Foundation, a nonpartisan health care policy organization that isn't affiliated with Kaiser Permanente.)


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