How Accountable Care Organizations Work

Accountable care organizations (ACO Model) could transform U.S. healthcare system, and we want to make sure you understand how they work and why they are so wildly disruptive to the traditional fee for service healthcare model.

For more than a decade, a debate has been growing about the state of healthcare in America.  The issue has intensified even more as baby-boomers seek higher levels of care, putting more stress on the nation’s healthcare system than ever before.  Costs continue to escalate, taking a much larger share out of the nation’s economy, and forcing an urgent discussion between the healthcare providers and government about how to find a better model to deliver quality care in a fiscally responsible way.

From these discussions, one of the most viable solutions gaining traction across the board has been a move toward value-based healthcare and the creation of accountable care organizations.

In this article we’re going to explain to you the importance of Accountable Care Organizations and why they are playing a critical part in the positive overhaul of US based healthcare.  Simply choose from any of the links below to learn more about how accountable care organizations work:

Quick Navigation: Guide to Accountable Care Organizations

An Overview of Accountable Care Organizations.

To better understand accountable care organizations (ACO) and how they could have a major impact on how healthcare is delivered in the future, it’s best to back up a bit and take a broader look the health of the American healthcare system.

What Are Accountable Care Organizations?

Accountable care organizations are groups of doctors, hospitals and related healthcare providers who have joined together to provide a coordinated system of care.

The overall goal is to provide a higher quality healthcare experience for patients; providing the right care at the right time and avoiding unnecessary duplications of services while also reducing treatment errors through better communication among providers.

There are three primary stakeholders in accountable care organizations.

  1. Providers. The size and scope of an accountable care organization will dictate how many and what kind of healthcare providers are in the ACO.  All ACO providers include hospitals and physicians but depending on the other providers, may include health departments, social security departments, home care services and others depending on the type of services they provide and the size of the ACO.
  2. Patients. Because accountable care organizations were originally conceived by the Centers for Medicare and Medicaid Services, the majority of ACO patients are Medicare beneficiaries.  In larger and more integrated accountable care organizations, patients may also include uninsured and homeless people.  More and more, private accountable care organizations are also expanding their patient populations.
  3. Payers. Medicare is the primary payer to accountable care organizations.  In some instances, private insurance companies and employer-purchased insurance programs are also payers as well.  Payers are an integral part of ACOs because they play a key role in helping set higher quality standards and striving for lower costs.  Payers may collaborate with each other to make sure payout incentives are aligned and create consistent financial incentives for providers to achieve their quality care goals.

Back to Top

Accountable Care Organizations vs Fee For Service

Currently, the clear majority of Americans pay for healthcare under a fee-for-service model. This traditional model pays healthcare providers based on the quantity of tests and procedures so that a patient is exposed to multiple options to receive the best care.  The downside is that patients are often burdened with tests and procedures they don’t need, weighing down a system with unnecessary treatments, and more important, with unnecessary costs.

The fee-for-service model has been effective with patients receiving quality care and the treatments they need. However, the emphasis on quantity over quality is not a sustainable model for the healthcare industry.

Enter value-based healthcare with a promise to radically transform the way healthcare will be delivered in the future. Under this new model, the emphasis is on healing a patient as opposed to just managing their healthcare problems.

It’s an exciting concept worth digging into here.

Back to Top

Value-based Healthcare is the Concept — Accountable Care Organizations Are the Execution of That Concept.

To deliver on the concept of value-based healthcare, a new type of healthcare delivery system needed to be put in place.  This led to the creation of Accountable Care Organizations (ACO).

The actual physicians and team that implement the strategy of value based care to improve the patient experience and have better cost containment.

When Did Accountable Care Organizations Start?

The term was first introduced a decade earlier and was later included in the Affordable Care Act (ACA).  When the ACA was signed into law in 2010, the Medicare Shared Savings Program was created.

This program pioneered the launch of ACOs and spelled out the broad terms of value-based healthcare, making providers jointly accountable for the health of their patients and providing financial incentives to save money by cooperating with each other.

In 2011, the U.S. Department of Health and Human Services proposed an initial set of guidelines for accountable care organizations under the Medicare Shared Savings Program.  Administered by the Centers for Medicare and Medicaid Services, three core principles guided the development of ACOs:

  1. Provider-led organizations with a strong base of primary care that are collectively accountable for quality and per capita costs across the continuum of care;
  2. Payments linked to quality improvements and reduced costs;
  3. Reliable and increasingly sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through care improvements.

For the accountable care organization concept to work, a system would have to be created to seamlessly share information.  Doing so would create efficiencies and save money while making it easier to hit quality care targets.  ACOs that accomplished these goals would get to keep a portion of the savings.

Back to Top

Accountable Care Organizations vs. Patient Centered Medical Home

With an accountable care organization, patients will have many providers that will serve as “homes” and provide them with healthcare services.  In other words, many providers will assume primary responsibility for the care of a patient.

As part of the overall need to reform healthcare, another value-based healthcare model has emerged that also focuses on the same goals as ACOs. The Patient-Centered Medical Home model (PCMH) also strives for improved care through coordination with healthcare professionals, but instead of many homes, the PCMH focuses on a primary care physician as the single home for a patient.  The primary provider takes a much more front and center role than under the ACO model.

The primary care physician provides continuous care and refers the patient to other specialists and hospitals as needed.  All selected providers collectively accept responsibility for the patient’s care. Under the PCMH plan, all providers may be given bonuses for improvements in primary care services for each patient, providing an additional incentive to offer quality care.

Back to Top

How Do Accountable Care Organizations Work?

The concept behind accountable care organizations is simple: Teams of healthcare providers come together to share patient data, focus on prevention and better coordinate patient care.  Following are the benefits for a patient:

  • Local healthcare providers voluntarily decide to work together to provide patients with coordinated care.
  • Doctors, hospitals and other healthcare providers will communicate with each other and partner with a patient to help make the best possible and most informed healthcare decisions.
  • Patients spend less time filling out paperwork because doctors across the ACO may already have medical history contained in a centralized electronic health record.
  • There will be less duplication of tests due to coordinated care because doctors and hospitals are sharing information.
  • The patient is made the center of the care and because of this, doctors do a better job of communicating with the patient and helping them make better choices.
  • For patients in Medicare ACOs, Medicare will share certain health information with the ACO about the care a patient is getting from their doctors and hospitals.
  • The privacy and security of a patient’s medical information is protected by federal law. Patients have the right to request that Medicare not share certain information with the ACO.
  • Doctors and hospitals will likely refer patients to hospitals and specialists within the ACO network. But patients can still choose to see providers outside the ACO network.  Healthcare providers who are part of an ACO are required to let patients know they are in an ACO network.  Patients are then free to opt out if they do not want to participate in an ACO.
  • Under the ACA, an accountable care organization must manage the healthcare needs of at least 5,000 Medicare beneficiaries for at least three years. In addition, all ACOs must meet a lengthy list of quality control measures to make sure they are not saving money by skimping on necessary care.

Back to Top

Do Accountable Care Organizations Save Money


The model for accountable care organizations places financial responsibility on the doctors.  With the goal of improving care and limiting unnecessary tests and procedures, ACOs can save money by giving incentives to doctors, hospitals and other providers to form connections and facilitate coordinated delivery of healthcare.

By coordinating care, unnecessary medical care and improved outcomes will reduce the overall amount of care a patient needs.  When this happens, cost savings are achieved.  By early measures under the ACO model, it was estimated that Medicare savings of about a half billion dollars were realized from 2012-2015.

Back to Top

How Do Accountable Care Organizations Make Money?

With a traditional fee-for-service model, doctors and hospitals are paid for each test and procedure, rewarding providers for doing more even when it is not needed and, consequently, driving up costs.

Accountable care organizations create incentives to be more efficient and meet specific quality of care benchmarks by focusing on prevention and more closely managing patients with chronic diseases.  ACO providers get paid more for keeping their patients healthier and out of hospitals.

Accountable care organizations are incentivized to save money and may have to pay a penalty if they do not meet their performance and savings benchmarks.  Most ACOs have not opted to take on that amount of risk yet, preferring smaller payouts in exchange for not participating in downside risk.  Some ACOs can actually receive payments in advance to help them build out their infrastructures that are necessary for coordinated care.

Back to Top

Are Accountable Care Organizations Only for Medicare?

Although ACO’s started out as a public option under Medicare, they have grown and expanded into the commercial payer market as well.  It is not unusual for an ACO to have multiple contracts with payers including several private insurance companies and Medicare.

Medicare offers three main accountable care organization options, each with varying degrees of risk for the ACO:

  1. The Medicare Shared Savings Program (MSSP) was rolled out in 2012 and was the first ACO option put into place for Medicare fee-for-service providers. At inception, it was intended to improve the quality of care, connect providers and encourage savings.
  2. The Pioneer ACO Model was also introduced in 2012 and was specifically targeted to work with early adopters of coordinated care who had already developed high performing healthcare networks. Because of the pre-existing infrastructure already in place, the Pioneer ACO assumed higher risk and shared savings than the MSSP ACOs.
  3. The Next Generation ACO Model was designed for experienced ACOs and allows them to assume an even higher degree of risk and reward than the other two Medicare models. The Next Generation model is tasked with testing to see if larger financial incentives combined with a larger network of data and delivery of services can lead to even better patient outcomes and lower costs.

End-Stage Renal Disease Care a Growing Model for ACOs

Medicare also has a targeted Comprehensive End-Stage Renal Disease Care ACO Model which is focused exclusively on dialysis facilities, nephrologists, and other kidney care professionals.  Large dialysis organizations with more than 200 facilities can receive shared savings payments, but also are liable for shared losses. They also share in greater levels of risk than their smaller counterparts.

Originally, small dialysis organizations could receive shared savings payments, but were not liable for shared losses. Beginning in 2017, they were able to include the option of assuming downside financial risk, accompanied by the opportunity for greater shared savings.

Based on the success of the Medicare ACOs, private healthcare systems began to realize there could be benefits and efficiencies found in shared data as a means of rewarding cost control and benchmarked quality healthcare.

Based on an American Journal of Managed Care study, it was determined that the private sector had three primary motivations for developing their own accountable care organizations.  These included the opportunity to improve the quality and efficiency of healthcare services, to jumpstart population health improvement, and to accept that changes in how medical payments are going to be made was an inevitable change coming to the healthcare marketplace.

In many markets, private ACOs are now starting to engage patient populations as the trend toward value-based healthcare gains wider acceptance.

Back to Top

What are the Pros and Cons of Accountable Care Organizations?

Accountable care organizations and the concept of value-based healthcare are a significant departure from the fee-for-service model.  While there are many reasons to like the ACO model, there are also several challenges to overcome.

10 Accountable Care Organization Pros

1: A Collaborative Delivery of Services

When all healthcare providers in an accountable care organization work together to ensure a better outcome for patients, they can combine their resources and analytics to create a single and comprehensive snapshot of care that results in better care.

2: Reduced Errors

ecause a collaborative approach means that healthcare providers are no longer working in provider silos, it is easier to implement checks and balances that rely on the combined skills and talents of providers.  With a greater collective approach, errors are less likely to happen.  Costs can be further reduced if better care reduces malpractice suits.

3: Greater emphasis is placed on prevention

Because there is a shift to improving the baseline health of patients backed by financial incentives, providers in accountable care organizations are more likely to implement preventative strategies instead of managing illnesses and conditions.

4: Patients spend less money overall

Because efficiency is the goal, patients will only receive the medically necessary treatments and procedures they need.  This means they’ll spend less on co-pays and meeting deductibles while their overall treatment arc should be shorter than under a fee-for-service model.  Less doctor visits, fewer and more targeted treatment protocols and fewer prescription medications go great lengths to not only reduce the patient’s financial burden, but the system’s financial burden as well.

5: Greater efficiency means more satisfied patients

When an accountable care organization meets its goals of delivering more efficient treatment with a greater emphasis on wellness, patients have a better healthcare experience and are more satisfied with their healthcare.

6: Healthcare providers are viewed more favorably

When patients are happy with their treatment, that translates into the healthcare industry being seen in a more positive light.

7: Payer’s costs are reduced

When ACO’s deliver better care at a reduced cost, payer’s costs are reduced and that lessens the bottom line impact that can put pressure on premium pools and investments.  When it all works, the healthcare industry is more fiscally solvent and healthy as well.

8: Society benefits as a whole

When people spend less money on healthcare, this frees up money that can be put back into the economy for other purposes.

9: Accountable care organizations are part of a solution that will make healthcare sustainable over the long term

The current fee-for-service model is rapidly becoming outdated.  Value-based healthcare is the preferred model for the future, and accountable care organizations will deliver that model in a way that best provides for a healthy and sustainable healthcare industry. Private healthcare providers are coming to this realization and they have started to embrace value-based healthcare and ACOs as a long-term viable solution.  Many providers have started pilot programs on their own, and others are seeking guidance from Medicare to make sure there is a coordinated effort.

10: Accountable Care Organizations vs. HMO

ACOs are a lot like HMOs.  To many people, accountable care organizations sound much like health maintenance organizations.  But the biggest difference with an ACO is that a patient is not required to stay in the network.  ACOs are trying to replicate the HMO model but without limiting patient options that created a consumer backlash a few years back.  ACOs are also required to meet a long list of quality measures to make sure they are not saving money by delivering substandard care.

6 Accountable Care Organization Cons

1: Resistance to change.

Many providers are profiting nicely from the current fee-for-service model and are apathetic when it comes to implementing a new system that may put less money into their pockets.

2: Changing over is a massive task.

The U.S. healthcare system is huge and that means any switch in how healthcare services are delivered is going to be a massive task, one that will take years to implement in a best-case scenario.  This will require significant time, resources and financial commitments to remake a system and integrate accountable care organizations into the healthcare fabric.

The other big challenge facing a makeover is trying to set policies that everyone in the system can agree on.  Accountable care organizations are already in place and operating on a somewhat limited basis.  They are continuing to gain traction but sharing patient information on a global scale among ACOs will be problematic given the fractured nature of American healthcare.

3: Financial concerns.

Changing to value-based healthcare and creating many more accountable care organizations is expected to save money in the long-term, but short-term it is expected to cost quite a bit more.  Providers will only see it as a hit to their bottom line since they won’t be able to bill payers as they have in the past.  Although they will be rewarded in a better way after the transition period, getting through that period will be a cause for concern.

The other big cost will be implementing a new billing system, because bundling payments will be the new norm in the future instead of payments for individual services.  In other instances, deciding which healthcare provider is responsible for which part of a patient’s treatment could prove problematic, creating questions about who should receive payment and who should be held accountable.

There are also concerns when trying to decide what costs of services should be among various providers because there will be varied structural costs based on each individual provider.

4: Creating measurement systems for patient outcomes.

Accountable care organizations will be judged and paid based on patient outcomes. Determining how to measure those outcomes is sure to cause debate until standards can be put in place.

5: ACOs are not familiar with evidence-based outcomes and quality measures.

The criteria to judge success for doctors and hospitals under a fee-for-service system is quite different than under a value-based system.  Accountable care organizations will need to implement different criteria based on a new kind of measured outcome to be able to get paid.  A lack of experience with this type of measurement system will create reluctance to implement value-based healthcare among some current providers.

6: Mergers and patient consolidation.

Private practice doctors are finding it necessary to consider joining ACOs as a means of having their private practice survive.  Many fear this consolidation could have a long-term negative effect on the healthcare industry.

Back to Top

Who Owns Accountable Care Organizations?

Private physicians own accountable care organizations.

They may be regional or as in the case of United Healthcare and Aetna, they have created a nationwide ACO serving many markets throughout the United States.

Back to Top

How Are Accountable Care Organizations Funded?

In many cases accountable care organizations are funded by the providers, but in some instances, as an incentive to create more ACOs, Medicare will fund them through its ACO Investment Model.

This is a model of a pre-paid shared savings that builds on Medicare’s experience with the agency’s Advance Payment Model.  The goal is to make the barrier to entry into an accountable care organization much lower, providing funding to build coordinated care infrastructure, especially in rural and underserved areas.  It is also designed to encourage current Medicare Shared Savings Program ACOs to transition to arrangements with greater financial risk.

Back to Top

How Many Accountable Care Organizations are There in the U.S.?

In a study conducted by Leavitt Partners, in January 2016, there were 838 public and private accountable care organizations in the United States.  These covered service areas in all 50 states and the District of Columbia and indicated an increase of almost 13% from the previous year.  In 2016, almost 240,000 physicians participated in Medicare ACOs across the country.

It is also estimated that in 2017, between Medicare and private accountable care organizations, there were more than 28 million patients who were enrolled in ACOs.

The Center for Medicare & Medicaid Services has enrolled 561 Accountable Care Organizations (ACO) in the Medicare Shared Savings program in 2018, an increase from 480 in 2017. The number of beneficiaries in these ACOs in 2018 is 10.5 million.  Shared Savings ACOs receive a portion of any financial savings if they meet quality and cost benchmarks. Providers can also choose to share in losses in exchange for receiving a higher percentage of savings. For 2018, 101 ACOs have chosen these higher risk/reward payment tracks.

CMS also announced that 58 ACOs will participate in the Next Generation ACO model which gives participants the opportunity to take on even higher levels of financial risk, up to 100 percent. In exchange, Next Generation ACOs receive a greater share of potential savings.

While many challenges remain, the promise of the ACO model represents a big step forward in providing sustainable healthcare for millions of Americans in the future.  There will be growing pains as ACOs take hold but in the long-term this is a viable solution that will have a number of positive impacts on Americans and their health for years to come.

Back to Top