What is an Accountable Care Organization (ACO)?

My Folder

As the concept of healthcare value becomes more prominent, healthcare providers will increasingly need to focus on the whole patient or on populations of patients, encouraging and requiring teamwork among clinicians across specialties, as well as coordination among clinical care units and healthcare organizations of all types across the continuum of care (e.g., physician groups, hospitals, health systems, payers, and vendors). This will require all parties to relinquish their traditional siloed views and adopt a more expansive and collaborative model of care delivery — respecting the talent and experience brought to the table by all stakeholders. The need for this level of collaboration and coordination has led to the concept of the Accountable Care Organization (ACO). What is an ACO?

The Origin of Accountable Care Organizations

The term Accountable Care Organization was first coined in 2006 by Elliott Fisher, MD, Director of the Center for Health Policy Research at the Dartmouth Medical School. The ACO concept immediately sparked a great deal of interest and debate. Interest gained additional momentum in 2009 when the Affordable Care Act (ACA) used a specific CMS-drafted definition of an ACO. The following discussion focuses on the general ACO concept as defined by Fisher and others rather than the specific ACA definition.

The ACO concept is one that is still evolving, but it can be generically defined as a group of health care providers, potentially including doctors, hospitals, health plans and other health care constituents, who voluntarily come together to provide coordinated high-quality care to populations of patients. The goal of coordinated care provided by an ACO is to ensure that patients and populations — especially the chronically ill — get the right care, at the right time and without harm, while avoiding care that has no proven benefit or represents an unnecessary duplication of services.

Payment Models for ACOs

An ACO may use a range of payment models (e.g., fee for service — with or without shared savings arrangements, capitation for specific defined populations (e.g., diabetes), or global capitation — based on a payment per person, rather than a payment per service provided, etc.). The traditional transaction-based payment model does not provide the incentives required to support ACOs and population health. As the reimbursement model migrates toward payment for value, this will change. It is anticipated that ACOs will increasingly be reimbursed under a capitated model that incentivizes optimal quality, safety, efficiency, and health outcomes for populations of patients.

ACOs are accountable to the patients they serve and to third-party payers for the quality, appropriateness, efficiency and safety of the healthcare they provide. In addition to attending to the ill and injured, providers who work under these plans need to focus on preventive healthcare since there is greater financial reward in prevention of illness than in treatment of the ill. These plans dissuade providers from the use of expensive, newly developed treatment options that may be less effective or have only a marginally higher success rate versus time-honored alternative choices.

Under capitation, healthcare providers assume part or all of traditional insurance risk. Revenues are fixed and each patient enrolled in a capitated plan makes claims against the total resources of the provider. By accepting a fixed payment, participating physicians essentially become the enrolled patients’ insurers by resolving patients’ claims at the point of care delivery. In doing so, physicians assume the responsibility for the patients’ unknown future healthcare costs.

Large providers have a bigger population than smaller providers. The increased population size of large providers allows them to more effectively manage variations in service requirements and costs — and, hence manage risk better. However, even large ACOs may not be able to manage global risk as effectively as a large insurer. The populations managed by large insurers typically dwarf the population of existing provider-sponsored ACOs. As a result, the insurers’ annual costs as a percentage of annual cash flow fluctuates far less than an ACO managing a much smaller population. In the case of ACOs with smaller patient populations, the potential variation in annual costs is greater, and the risk that costs could exceed a provider’s annual revenues is larger. The smaller the population under a capitated agreement, the more likely that a relatively few number of costly patients can significantly affect a provider’s costs and increase the provider’s risk of insolvency.

An ACO consisting of physician groups and hospitals generally lacks the requisite accounting, actuarial, underwriting, and financial experience, and capability for managing risk. However, their most significant issue is the greater degree of variation in estimates of annual average patient costs. This leaves the ACO at a significant financial disadvantage in comparison to insurers whose estimates of a population’s risks and costs are far more accurate due to a larger sample size. Because their risks are inversely related to the size of the population under their care, ACOs will inevitably try to increase the number of patients under their care in a capitated plan. This will incentivize mergers, acquisitions, and growth. The only way an ACO can manage populations as effectively as a larger insurer is to achieve populations the size of a typical large insurer and incorporate the level of expertise and risk assessment characteristic of a large insurers.

ACOs could potentially be sponsored by a variety of existing types of healthcare provider organizations including large physician groups, physician and hospital alliances (i.e., Physician-Hospital Organizations or PHOs), integrated delivery networks (IDNs) and independent practice associations (IPAs). All of these organizational entities possess management and organizational elements that are necessary to form an ACO. However, each of these organizations typically falls short of the full expertise and infrastructure needed to assume the risk of managing populations and to achieve the cost structures required to succeed as an ACO.

Accountable Care and Population Health Management

The best companies who implement accountable care will need to become very proficient at two important capabilities — population health management and accountable care administration, financing and risk management. Population health management must include the capacity to do the following:

  1. Create a care delivery network which can service a population of patients in a defensible area by assembling the appropriate provider resources (primary care physicians, specialists, hospitals, etc.).
  2. Clinically defining the populations of patients for which the organization is willing and able to assume risk.
  3. Systematically improving the quality of the care being delivered to those populations and ensuring the appropriate amount of care is delivered.
  4. Systematically eliminating waste within the care delivery process, thus reducing the cost per member per month.

Becoming excellent at population management can be compared to acquiring and cutting a diamond. These capabilities become the ACO’s most valuable asset — represented by the diamond as shown in the illustration below. In addition, the ACO also needs to package and effectively market its capabilities to payers of various types using a combination of analytic, financial, marketing, risk assessment and negotiation tools and methods. This can be compared to placing the diamond in a gold setting and placing the completed ring in a velvet lined box as shown below. To be an effective ACO, both the diamond itself and the setting for the diamond are important.

What is An ACO

How to Become an Effective ACO

An effective ACO needs to become a true system of care delivery capable of achieving high quality medical outcomes in an efficient manner. This necessitates a level of alignment and integration among various constituents that has not historically been characteristic of healthcare. Realizing this goal requires overcoming a variety of significant barriers and challenges:

  • Cultural. An effective ACO needs to be patient-centric and highly focused on the process of care. This requires that ACOs be clinician-led, or at least have a very strong patient and clinician voice. They also need to be self-reflective, focused on continuous improvement, and flexible enough to manage a complex adaptive system like a large ACO. Accomplishing full integration of the different cultures and services of the various constituents that comprise an ACO is not an easy task.
  • Organizational structure. A successful ACO must have an effective structure capable of managing governance, provider recruitment and relations, enrollment, member services, population health, legal issues, costs and reimbursement.
  • Clinical staff. An adequate number of primary care providers (PCPs) is essential. Given the national shortage of PCPs, this is difficult to achieve. Disparate medical specialties need to be aligned into a single medical group which, in close collaboration with their primary care peers, manages large populations of patients across the care continuum over many years. The large income disparities between specialties pose a challenge in this regard. Finally, a highly collaborative, multi-disciplinary team approach to care delivery is needed.
  • Administrative resources. An effective ACO needs to have adequate staff, time, and money to assume the responsibility for managing large populations of patients. A high degree of alignment and effective, efficient service delivery models need to be developed. ACOs need actuarial, underwriting, and financial expertise to manage risk.
  • Legal. Some initial ACOs may try to form and operate on a contractual basis. However, without migrating to a complete, fully integrated legal business entity, it will be difficult for these organizations to overcome the anti-trust, anti-kickback and self-referral laws, and regulations that currently exist.
  • Size. Successful ACOs have to achieve a critical mass, expertise, and operating efficiency needed to manage the outcomes and risks of the large populations required for financial viability.
  • Prioritization. In order to effectively focus scarce resources, ACOs need to be able to prioritize needs based on identifying high risk patients and high volume areas of inappropriate variation that significantly drive costs. Prioritization will help ACOs understand the areas that significantly impact costs as well as help them develop an effective payment structure strategy.
  • Market expertise. Because healthcare markets can vary considerably, an effective ACO needs to fully understand its market position and competition. It must also be able to target customers, evaluate risk, establish appropriate provider networks, and manage network access agreements.
  • Referral management. An ACO needs a structure and process to effectively manage referrals to specialists, academic centers and other high cost specialized care units.
  • Utilization management. An ACO needs to effectively manage utilization including patients with the highest utilization and costs, which usually means patients with chronic conditions.
  • Source data acquisition. An ACO must acquire and integrate data from all participating constituents including hospitals (EHRs, financial, operational, patient satisfaction and other source systems), employed physicians, affiliated physicians (not employed by the ACO), post-acute care (e.g. SNF, IRF/LTCH, Home Health, Hospice) and payers (claims, utilization and cost data).
  • Quality metrics and analytics. ACOs need to develop meaningful metrics for individual patient conditions (especially for chronic diseases) and for population health and wellbeing. This requires a highly sophisticated and flexible analytic system.

In order to be successful, an ACO must address these challenges. Innovative, highly integrated delivery systems based on the ACO concept offer a great deal of promise, but achieving the future vision of improved patient satisfaction, improved population health, and reduced costs will take time, thought, and hard work.

Learn key things to look for in an ACO analytics solution or see the five critical information systems for ACOs.

Loading next article...