Understanding the Fundamentals of Accountable Care Organizations

What are accountable care organizations?

According to CMS, accountable care organizations are "groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to the Medicare patients they serve."

The CMS definition is specific to Medicare -- the largest sponsor of ACO models -- but other payers, including Medicaid and commercial insurers, have also adopted the ACO model to apply to their patient populations. Integrated care is emphasized, ensuring that healthcare providers work collaboratively to achieve improved health outcomes.

ACOs bring together different components of patient care to improve coordinated care. When done correctly, providers in an ACO can bring down costs and improve care quality while earning incentive payments. This collaborative practice among doctors, physicians, and other healthcare providers is vital to achieving value-based care's goal of higher quality care at lower total costs.

ACO participants also agree to collectively take on responsibility for the total costs of care for their patients. ACOs that reduce the total costs of care for their patients can share in the savings with the payer through shared savings models. In certain models, they may also be liable to pay back losses if their costs exceed their spending benchmarks.

Accountable care organization payment models

Policymakers and healthcare leaders believe tying financial incentives to quality performance and care coordination through ACOs is a key solution for fixing the inefficient fee-for-service system.

Under the traditional method of paying for healthcare, providers receive payment for every test, procedure and medical service they perform. While this fee-for-service model provides a reliable income for providers, it can also incentivize providers to deliver more care regardless of its medical necessity or appropriateness.

ACO contracts aim to counteract the incentive to deliver “sick care” and instead emphasize prevention and wellness through incentive payments and financial risk arrangements.

According to the Medicare Payment Advisory Commission, doctors and other providers in ACOs generally receive fee-for-service payments throughout the performance period, unless in newer models that provide capitated payments. Providers have the opportunity to earn bonus payments known as shared savings payments based on their quality performance. Additionally, ACOs provide support for doctors and other healthcare providers to meet performance requirements efficiently.

Financial risk and shared accountability are also key components of the ACO model. This type of risk can be upside or downside, sharing both benefits and risks.

In upside-risk arrangements, providers can earn all or a percentage of any savings they accrue during the performance period relative to a financial benchmark set by the payer. The minimum savings rate tells ACOs how far below the benchmark they need to keep their costs to qualify for shared savings payments.

Under downside risk contracts, ACOs can still share in the savings if costs are below an established benchmark. However, the organization may also have to repay all or a portion of the financial losses if actual care costs exceed the financial target, depending on the agreed-upon minimum loss rate.

How to succeed as an ACO and support healthcare transformation

Successful ACOs include a robust network of high-quality, cost-efficient providers so patients can access as many services as possible within the network.

Primary care is at the heart of a successful ACO model. ACOs need a robust network of primary care providers to coordinate care and manage conditions for attributed patients, resulting in more appropriate utilization.

But ACOs should also consider following the care continuum into post-acute care, which could significantly impact the likelihood of a hospital readmission or other patient setback. Post-acute care facilities often exhibit significant variations in costs, jeopardizing the overall spending rates on an attributed individual.

With a proper provider network, ACOs can ensure that patients are sent to quality providers after discharge, which can help reduce hospital readmissions or other complications. Additionally, involving post-acute providers in the ACO may help minimize Medicare spending on these services.

Successful ACOs must also have adequate data analytics and health information technology (HIT) capabilities that support integrated care. Data analytics can help ACOs identify high-risk patients and track and monitor patient care, aiding in care coordination. Data analytics can also streamline the reporting of quality measures.

HIT plays a role in data quality, as it can support data collection, analysis, and exchange. HIT, including EHRs and health information exchange (HIE) platforms, plays a part in supporting integrated care, facilitating data sharing between clinicians across different care settings and between providers and payers.

Additionally, ACOs can leverage their EHR systems to improve population health management and keep track of clinical and financial data.

EHR dashboards allow providers to view critical patient information, such as risk scores and utilization rates. Dashboards can help each physician in the ACO reduce unnecessary utilization, prescribe the most appropriate treatment plan, and ultimately realize savings for the group.

Developing the proper clinical and technological infrastructure is key to achieving ACO success and continually identifying areas of opportunity to improve population health management, especially as ACOs continue to grow.

Recent ACO trends and future directions

Over the past several years, ACOs have transformed their clinical and financial infrastructure to improve care quality and meet reporting requirements while reducing costs. According to recent data, these organizations are advancing both health care goals successfully.

CMS reported that its largest and permanent ACO model, the Medicare Shared Savings Program, yielded $2.1 billion in net savings in 2023, the most recent year for which it had complete data. This is the most significant net savings since the Shared Savings Program launched in April 2012.

Medicare ACOs participating in the Shared Savings Program that year also earned a total of $3.1 billion in shared savings, another record-high for the program since its inception. CMS also noted that ACOs scored higher on many quality measures than other types of physician groups and demonstrated quality improvement.

What's more, participation in the Shared Savings Program remained robust. As of January 2024, 480 Medicare ACOs engage with the program. Those ACOs include over 608,000 clinicians caring for almost 11 million Medicare beneficiaries.

CMS expects ACO participation to grow, with a goal of every Traditional Medicare beneficiary being in an accountable relationship by 2030.

However, recent ACO participation trends may signal some trouble ahead. A recent Health Affairs Scholar research letter found two key trends. First, ACO and beneficiary participation in the Shared Savings Program stagnated from 2018 to the present. Second, attrition of ACOs and clinicians is high, with only about half of ACOs remaining in the Shared Savings Program for six or more years, or two contract cycles.

The level of financial risk ACOs continuing in the Shared Savings Program may be to blame. ACOs must take on downside risk and sooner under Pathways to Success, an approach the Trump administration took to the program to revitalize cost savings.

The complexity of ACO contracts and some hesitancy around opportunities to reduce costs and improve quality have also stopped private payers from widely adopting the ACO model.

Despite some trepidation, payers and providers continue to embrace ACOs as a way to improve quality and cost savings. Recently, CMS launched several ACO models that are building on the successes of the Shared Savings Program. Those include the ACO Investment Model, Advance Payment ACO Model and the Vermont All-Payer ACO Model.

The CMS Innovation Center also offers several ACO models, including the ACO Primary Care Flex Model and the ACO Realizing Equity, Access, and Community Health, or REACH, Model.

Researchers also acknowledge that the plateauing of Shared Savings Program participation may be due to these other ACO models, as providers shift or join these programs.

Evolving ACO models point to a bright future for ACOs and value-based care. The model has proved to be an effective strategy for moving the industry away from fee-for-service and to a care delivery and payment mechanism that promotes wellness. ACOs are continually adapting to meet the evolving needs of the healthcare landscape, creating lasting impacts on care delivery, quality and reimbursement.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.