Accountable Care Organizations and the
Medicare Shared Savings Program
David Newman
Specialist in Health Care Financing
November 4, 2010
Congressional Research Service
7-5700
www.crs.gov
R41474
CRS Report for Congress
P
repared for Members and Committees of Congress
Accountable Care Organizations and the Medicare Shared Savings Program
Summary
The provision of health care in the United States has been described as fragmented, with patients
seeing multiple unrelated providers. Fragmented care has been found to be, among other things,
both costly, since provider payments are not linked to performance or outcomes and services can
be duplicative, and of lower quality, since providers lack financial incentives to coordinate care.
Section 3022 of the Patient Protection and Affordable Care Act (P.L. 111-148, PPACA), as
amended, directs the Secretary of Health and Human Services (the “Secretary”) to implement an
integrated care delivery model in Medicare, the Medicare Shared Savings Program, using
Accountable Care Organizations (ACOs)—a model of integrated care formulated to reduce costs
and improve quality.
ACOs are modeled on integrated delivery systems such as the Mayo Clinic, Geisinger Health
System, Kaiser Permanente, and Intermountain Healthcare. While ACOs can be designed with
varying features, most models put primary care physicians at the core, along with other providers,
and emphasize simultaneously reducing costs and improving quality. The emphasis is on
physicians rather than insurers or hospitals because physicians influence almost 90% of all
personal health spending.
In the simplest case, the ACO contracts with payers to be accountable for the entire continuum of
care provided to a defined population, and if the costs of care provided are less than targeted
amounts, and certain quality measures are achieved, the ACO and the payer will share the savings
generated. Under the Medicare Shared Saving Program, the Centers for Medicare & Medicaid
Services (CMS) will contract for ACOs to assume responsibility for improving quality of care
provided, coordinating care across providers, and reducing the cost of care Medicare beneficiaries
receive. If cost and quality targets are met, ACOs will receive a share of any savings realized by
CMS. The Congressional Budget Office scored the Medicare Shared Savings Program as
reducing Medicare expenditures $4.9 billion in the FY2013 through FY2019 period.
PPACA Section 3022 leaves many of the design features to be determined by the Secretary, and
regulations governing Medicare ACOs are expected in the fall 2010. As is often the case, the
regulations will be fundamental to defining the program. For instance, while PPACA suggests a
fundamental role in ACOs for physicians and providers, it does not guarantee one. In addition,
PPACA leaves the contracting terms and beneficiary assignment rules to the Secretary. However,
for Medicare beneficiaries, the Medicare Shared Savings Program will continue to allow
Medicare beneficiaries enrolled in fee-for-service Medicare to continue to select any Medicare
provider.
The Medicare Shared Savings Program is slated to begin January 1, 2012. While ACOs hold out
the prospect of improving care, reducing costs, and raising quality, there are still gaps in
knowledge of what existing ACOs have achieved and whether they can be widely replicated.
Moreover, there may be unanticipated consequences from encouraging the formation of ACOs,
such as further health provider market concentration, that could adversely affect efforts to control
overall health costs.
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Accountable Care Organizations and the Medicare Shared Savings Program
Contents
Introduction ................................................................................................................................ 1
Section 1: What Is an Accountable Care Organization?................................................................ 1
Rationale for Accountable Care Organizations....................................................................... 2
How Will ACOs Form? ......................................................................................................... 3
Existing ACO Models and Are They Replicable .................................................................... 3
Which Providers Are Involved?............................................................................................. 6
Five ACO Delivery Models................................................................................................... 7
Section 2: How Are ACOs Supposed to Work? ............................................................................ 8
The Relationship Between the ACO and Payers..................................................................... 8
The Relationship Between the ACO and Providers .............................................................. 10
The Relationship Between the ACOs and Insureds .............................................................. 11
Section 3: Essential Provisions of § 3022 of PPACA ................................................................. 13
Section 4: Potential Advantages and Limitations of ACOs ......................................................... 15
Section 5: Discussion and Likely Impact of PPACA § 3022....................................................... 18
Scope of ACOs and Likely Savings ..................................................................................... 18
Actual Source of Potential Savings...................................................................................... 18
Limited Experience with Model .......................................................................................... 19
Informing Beneficiaries....................................................................................................... 19
Potential Market Consolidation ........................................................................................... 19
Tables
Table 1. Delivery Systems That Could Become Accountable Care Organizations......................... 4
Contacts
Author Contact Information ...................................................................................................... 20
Acknowledgments .................................................................................................................... 20
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Accountable Care Organizations and the Medicare Shared Savings Program
Introduction
A noted shortcoming in the American health care system is the fragmented care available to most
individuals.1 Fragmented care, where patients see multiple unrelated providers, has been found to
be, among other things, both costly, since provider payments are not linked to performance or
outcomes and services can be duplicative, and of lower quality, since providers lack financial
incentives to coordinate care.2 Research has suggested that integrated care delivery models can
reduce costs and improve quality.3 Section 3022 of the Patient Protection and Affordable Care Act
(P.L. 111-148, PPACA), as amended,4 directs the Secretary of Health and Human Services (the
“Secretary”) to implement an integrated care delivery model in Medicare, the Medicare Shared
Savings Program, using Accountable Care Organizations (ACOs)—a model of integrated care
formulated to reduce costs and improve quality.5
While the concept of an ACO is still evolving, “Section 1: What Is an Accountable Care
Organization?” describes generally what an ACO is, and “Section 2: How Are ACOs Supposed to
Work?” discusses how an ACO may operate. “Section 3: Essential Provisions of § 3022 of
PPACA” describes essential provisions of the Medicare Shared Savings Program created by
PPACA. “Section 4: Potential Advantages and Limitations of ACOs” explores some of the
arguments in favor and against ACOs, and the report concludes with a discussion of the likely
impact of Medicare ACOs. The discussion in sections 1 and 2 focuses on ACOs generally and
possibly offers insight into how the Secretary may implement the Medicare Shared Savings
Program.6 Sections 3, 4, and 5 more narrowly focus on the Medicare Shared Savings Program.
Section 1: What Is an Accountable Care
Organization?
While there are numerous definitions of an accountable care organization, the following captures
the essential elements:
ACOs are collaborations that integrate groups of providers, such as physicians (particularly
primary care physicians), hospitals, and others around the ability to receive shared-saving
1 Alain C. Enthoven, “Integrated Delivery Systems: The Cure for Fragmentation,” The American Journal of Managed
Care, vol. 15, no. 10 (December 2009), pp. S284-S290.
2 Institute of Medicine, “Aligning Payment Policies with Quality Improvement,” in Crossing the Quality Chasm: A
New Health System for the 21st Century (Washington, DC: The National Academies Press, 2001), pp. 181-195.
3 Laura A. Tollen, Physician Organization in Relation to Quality and Efficiency of Care: A Synthesis of Recent
Literature, The Commonwealth Fund, Commonwealth Fund pub. no. 1121, April 2008.
http://www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2008/Apr/
Physician%20Organization%20in%20Relation%20to%20Quality%20and%20Efficiency%20of%20Care%20%20A%2
0Synthesis%20of%20Recent%20Literatu/Tollen_physician_org_quality_efficiency_1121%20pdf.pdf.
4 Hereinafter, PPACA will refer to PPACA as amended.
5 Section 2706 of PPACA authorized a four-year Medicaid and CHIP pediatric ACO demonstration starting January 1,
2012. This report does not address the Pediatric ACO Demonstration.
6 CMS has indicated that it intends to provide more details in the fall 2010 as part of a Notice of Proposed Rulemaking.
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bonuses from a payer by achieving measured quality targets and demonstrating real
reductions in overall spending growth for a defined population of patients.7
The key elements of an ACO, highlighted in the definition, are that
• ACOs bring together and integrate, either actually or virtually, a broad range of
providers across care settings;
• they emphasize primary care;
• they can achieve savings for a payer by effectively integrating care across
providers;
• providers share with payers in the savings that providers generate;
• the savings are not at the expense of quality and providers are responsible for
reducing costs;
• providers are responsible for improving quality and reducing costs; and
• improvements are measured across a specified population.
The emphasis is on physicians rather than insurers or hospitals since physicians “control (directly
or indirectly) 87% of all personal health spending.”8
Rationale for Accountable Care Organizations
The rationale for ACOs emerges from the recognition that the current medical system tends to
offer fragmented services across providers (an absence of coordinated care), pays for units of
service rather than outcomes, and holds no one organization or individual responsible for either
the quality or cost of care provided. ACOs are supposed to bring providers together under a single
organization and create incentives for them to coordinate care, improve quality, and lower cost.
Although ACOs may contract with any payer (Medicare, Medicaid, or private insurer) to provide
services and share in any resulting savings, the consequences for the health care delivery system
are assumed to be much broader. Proponents anticipate that ACOs will change both the culture
and practice patterns of providers and as these changes are institutionalized, all payers and all
patients will benefit from the delivery of higher-quality, lower-cost, and better integrated
services.9
7 This definition is a modified version of that developed in Aaron McKethan, Mark McClellan, Elliott Fisher et al.,
Moving from Volume-Driven Medicine Toward Accountable Care, Health Affairs, Health Affairs Blog, August 20,
2009, http://www.healthaffairs.org/blog.
8 Lawton Robert Burns and Ralph W. Muller, “Hospital-Physician Collaboration: Landscape of Economic Integration
and Impact on Clinical Integration,” Milbank Quarterly, vol. 86, no. 3 (2008), p. 377, citing A. Sager and D. Socolar
2005. Health Costs Absorb One-Quarter of Economic Growth 2000-2005. Boston: Boston University School of Public
Health.
9 A recent study by the Commonwealth Fund comparing the U.S. health care system to other countries found that the
U.S. system underperformed in part due to poor performance managing chronic care and coordinating care—two areas
directly addressed by ACOs according to proponents. Karen Davis, Cathy Schoen, and Kristof Stremikis, Mirror,
Mirror on the Wall: How the Performance of the U.S. Health Care System Compares Internationally, 2010 Update,
The Commonwealth Fund, Washington, DC, June 23, 2010, http://www.commonwealthfund.org/Content/Publications/
Fund-Reports/2010/Jun/Mirror-Mirror-Update.aspx?page=all.
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How Will ACOs Form?
Most ACO proposals assume that leaders in the provider community will come together to form
an ACO and the ACO will solicit other providers in the community to voluntarily join the ACO to
improve the quality of care provided and share in the resulting savings.10 While this is happening
to some extent, the enactment of PPACA has encouraged these efforts as various health care
providers seek to position themselves relative to newly formed ACOs.
Since ACOs are perceived as having the potential to alter the influence of primary care
physicians, specialist physicians, hospitals, and payers vis-à-vis one another,11 providers may be
motivated to participate in ACOs for a variety of reasons. These include a sincere interest in
improving quality of care and reducing costs, a desire to protect their place in the market or to
ensure that they have a role in any collective decisions, to share in any cost savings, and to
preserve their autonomy.
Existing ACO Models and Are They Replicable
ACOs are modeled on entities seen as quality leaders in health care, such as Kaiser Permanente,
the Mayo Clinic, the Cleveland Clinic, and Geisinger Health System.12 All of these exemplars are
highly integrated providers, generally with staff models where physicians are employees of the
health care organization. While the above entities are non-profit, there are for-profit models, such
as HealthCare Partners Medical Group, with both a staff model and affiliated independent
physician association (IPA),13 and the for-profit Permanente Medical Group that serves Kaiser
Permanente. These integrated providers are paid in a variety of ways, including fee-for-service,
capitation, and pay-for-performance,14 and the method of payment does not define the ACO.
It is important to recognize that proponents of ACOs have limited experience replicating the
formation and experiences of these integrated providers in more varied organizational
environments (see Table 1). The existing models for ACOs, Mayo, Geisinger, and Intermountain,
for example, may have had the benefit of physicians self-selecting into a staff model of medical
care where physicians are directly employed. New efforts may involve physicians being
associated with, but not employed by, the ACO or involve physicians who may not warmly
welcome the presence of ACOs but perceive pressure to participate. Such factors may influence
the impact of ACOs because providers may be more likely to deviate from directives when they
10 For instance, in New Hampshire, the New Hampshire Citizens Health Initiative in 2010 issued an Accountable Care
Organization Call for Proposal “to health care leaders in the State to ascertain interest and commitment to improving
the value of health care delivery systems.” http://www.unh.edu/chi/media/documents/NH-ACO-Call-for-Proposal.pdf.
11 Arlene Weintraub, “Community Hospitals Scramble To Survive, Stay Independent,” USA Today, September 9, 2010,
Web edition.
12 See Atul Gawande, “The Cost Conundrum: What A Texas Town Can Teach Us About Health Care,” The New
Yorker, June 1, 2009, and Alain C. Enthoven, “Integrated Delivery Systems: The Cure for Fragmentation,” The
American Journal of Managed Care, vol. 15, no. 10 (December 2009), pp. S284-S290.
13 A staff model is one in which the physicians are employees of the medical group. An independent physician group,
in this context, involves the medical group contracting with independent physicians to provide services on behalf of the
group as independent contractors rather than as employees.
14 There are a variety of mechanisms used to pay for medical services, including some hybrid models. In fee-for-
service, a provider generally bills uniquely for each service provided. In a capitated model, a provider is paid a single
amount for assuming responsibility for some or all of the care an individual or population may require. Pay-for-
performance models (P4P) seek to compensate providers for better outcomes rather than additional services.
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are either not directly employed or feel compelled to participate. Similarly, concern has been
expressed that existing examples of ACOs may have unique and potentially nonreplicable
characteristics such as an attractive patient population—generally less poor, healthier, and more
likely insured.15
Table 1. Delivery Systems That Could Become Accountable Care Organizations
Model Characteristics
Integrated delivery systems
• Own hospitals, physician practices, perhaps insurance plan
• Aligned financial incentives
• E-health records, team-based care
Multispecialty group practices
• Usually own or have strong affiliation with a hospital
• Contracts with multiple health plans
• History of physician leadership
• Mechanisms for coordinated clinical care
Physician-hospital organizations
• Non-employee medical staff
• Function like multispecialty group practices
• Reorganize care delivery for cost-effectiveness
Independent practice associations
• Independent physician practices that jointly contract with health plans
• Active in practice redesign, quality improvement
Virtual physician organizations
• Small, independent physician practices, often in rural areas
• Led by individual physicians, local medical foundation, or state Medicaid
agency
• Structure that provides leadership, infrastructure, resources to help small
practices redesign and coordinate care
Source: Health Affairs, Health Policy Brief: Accountable Care Organizations, Bethesda, MD, July 27, 2010,
http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=20.
ACOs also have somewhat limited experience in (1) dense urban areas, where insureds have the
ability to obtain services more easily from a non-ACO provider, and (2) large rural areas where
the ACO may be a virtual entity and there may be a limited sense of shared commitment across
providers spread over a large geographic area. Finally, failed similar efforts often recede into the
larger health care market and are rarely cited or studied.16
15 Alex MacGillis and Rob Stein, “Is the Mayo Clinic a Model or a Mirage? Jury is Still Out,” The Washington Post,
September 20, 2009, Web edition.
16 For instance, see Liz Freeman, “HMA to buy Cleveland Clinic,” Naples Daily News, January 25, 2006, Web edition
and Liz Freeman, “Physicians apply for medical privileges,” Naples Daily News, February 27, 2006, Web edition.
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Similar Organizational and Payment Efforts
While the term accountable care organization may have a short, recent history, related organizational and payment
efforts had been undertaken or were underway at the time of PPACA’s enactment. These include the following:
Organizational
Health Maintenance Organizations (HMOs). A model of health care delivery in which an organization provides
comprehensive healthcare to enrollees in a specific geographic area using a network of contracted physicians, often
with capitated payments, and limits referrals outside the network.17 An ACO has several features in common with an
HMO but the ACO does not limit out-of-network referrals and the insured’s relationship to the ACO is far more
tenuous than to an HMO.
Medical Homes. “A medical home is an approach to providing primary care where the personal physician has
responsibility for the ongoing care of the patient as well as providing and managing the patient’s health care needs
with other professionals.”18 ACOs are distinguishable from the medical home model which typically emphasizes
preventive and primary care or chronic care management and often excludes specialists and hospitals. ACOs typical y
manage the full continuum of care for its members.”19 The medical home model is compatible with the ACO model
and medical homes could affiliate with an ACO just like any other primary care provider or several medical homes
could form the nucleus for an ACO.
Organizational and Payment
The Medicare Physician Group Practice Demonstration. “Mandated by the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000 (P.L. 106-554), and started in 2005, creates incentives for physician
groups to coordinate the overall care delivered to Medicare patients, rewards them for improving the quality and cost
efficiency of health care services, and creates a framework to collaborate with providers to the advantage of Medicare
beneficiaries.”20 This demonstration is similar to an ACO model but the demonstration is limited to ten physician
group practices.
The Medicare Health Care Quality Demonstration. Established in 2003 by the Medicare Prescription Drug,
Improvement, and Modernization Act (P.L. 108-173, MMA), this demonstration was designed “to examine the extent
to which major, multi-faceted changes to traditional Medicare’s health delivery and financing systems lead to
improvements in the quality of care provided to Medicare beneficiaries, without increasing total program
expenditures.”21 Three demonstrations have been funded by the Centers for Medicare & Medicaid Services (CMS)
and each is similar in some manner to an ACO—for instance, the Gundersen Lutheran demonstration involves shared
savings.22
Payment
Pay for Performance. “Pay-for-performance schemes provide financial incentives to health care providers to
achieve specified performance/quality targets linking physician pay to the quality of care provided.”23 Unless bonuses
17 Modified definition from Stephen M. Shortell, Lawrence P. Casalino, and Elliott Fisher, Implementing Accountable
Care Organizations, Berkeley Center on Health, Economic and Family Security, Berkeley, CA, May 2010, p. 16.
http://www.law.berkeley.edu/files/chefs/Implementing_ACOs_May_2010.pdf.
18 Rural Assistance Center, Medical Homes Frequently Asked Questions: What is a Medical Home?
http://www.raconline.org/info_guides/medicalhomes/faq.php.
19 Baker & Hostetler, “Health Law Update,” June 24, 2010, http://www.bakerlaw.com/health-law-update-june-24-2010.
20 https://www.cms.gov/DemoProjectsEvalRpts/downloads/PGP_Fact_Sheet.pdf, July 21, 2010.
21 https://www.cms.gov/DemoProjectsEvalRpts/downloads/MMA646_IHIE_Fact_Sheet.pdf, July 21, 2010.
22 Descriptions of the three demonstrations can be found at http://www.cms.gov/demoprojectsevalrpts/md/
itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=3&sortOrder=descending&itemID=CMS023618&
intNumPerPage=10 for
23 Tim Doran and Catherine Fullwood, “Pay for performance: Is it the best way to improve control of hypertension?
“Current Hypertension Reports, vol. 9, no. 5 (October 2007).
24 Aaron McKethan, Mark McClellan, Elliott Fisher et al., Moving from Volume-Driven Medicine Toward Accountable
Care, Health Affairs, Health Affairs Blog, August 20, 2009, http://www.healthaffairs.org/blog.
25 Rand Corporation, Overview of Bundled Payment, Policy Options, http://www.randcompare.org/policy-options/
bundled-payment.
26 Baker & Hostetler, “Health Law Update,” June 24, 2010, http://www.bakerlaw.com/health-law-update-june-24-2010.
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are paid out of a withhold pool, they “often add to total costs by paying out incremental bonuses in exchange for
meeting certain benchmarks on process measures. ACOs place a much greater emphasis on measuring and rewarding
results at the level of a population of patients—not at the level of particular services or episodes that may or may not
add up to higher-value care.”24
Bundled Payments. “Bundled payment systems (also known as "case rates" or "episode-based payment") provide a
single payment for all services related to a treatment or condition, possibly spanning multiple providers in multiple
settings.”25 ACOs differ from the bundled payment such as the Medicare End-Stage Renal Disease Bundled Payment
Demonstration Project To Evaluate Integrated Care Around A Hospitalization, (MMA, § 623(e)) since ACOs seek to
“promote efficiency and care on a continuing basis rather than focusing on a single medical episode.”26
Which Providers Are Involved?
While there is general consensus that ACOs seek to integrate a range of providers, there has been
an evolution regarding which providers need to be brought into an ACO and whether hospital
participation is fundamental to ACOs. While the idealized list of participants from four often-
cited ACO proposals are presented below, current thinking is that the composition of ACOs may
vary geographically, reflecting local market conditions.27 However, regardless of which
organizations or individuals are involved, analysts have concluded that the effort needs to be
provider-led.28
• In an early hospital-centric model, from 2007, developed by Elliott Fisher and his
colleagues,29 ACOs were envisioned as a hospital medical staff model in which a
hospital and its extended medical staff (those individuals who work within the
hospital, those organizations which primarily refer to the hospital, and those
providers for whom a majority of their patients are admitted to the hospital), form
the basis of an organization responsible for system performance, improving
health care quality, and reforming payment.
• In 2008, the Congressional Budget Office (CBO) described a bonus-eligible
organization (BEO) model of ACO which was not hospital-centric. The BEO was
envisioned to be providers or physicians practicing in groups, networks of
discrete physician practices, partnerships or joint ventures between hospitals and
physicians, hospitals employing physicians, integrated delivery systems, or
community-based coalitions of providers.30
27 See Kelly Devers and Robert Berenson, Can Accountable Care Organizations Improve the Value of Health Care by
Solving the Cost and Quality Quandaries? Robert Wood Johnson Foundation and Urban Institute, Washington, DC,
October 2009, p. 3, http://rwjf.org/files/research/acobrieffinal.pdf and Alain C. Enthoven, “Integrated Delivery
Systems: The Cure for Fragmentation,” The American Journal of Managed Care, vol. 15, no. 10 (December 2009), p
289.
28 As discussed in section 4 below, PPACA specifies that physicians, physician assistants, nurse practitioners, clinical
nurse specialists (collectively referred to as “ACO professionals”) in either group practices or networks of individual
practices; partnerships or joint ventures of ACO professionals and hospitals; hospitals employing ACO professionals;
and other groups of providers of services and suppliers as the Secretary determines are eligible to participate as ACOs.
29 See Elliott S. Fisher, Douglas O. Staiger, Julie P.W. Bynum et al., “Creating Accountable Care Organizations: The
Extended Hospital Staff Model,” Health Affairs, vol. 26, no. 1 (January/February 2007) W44-W57. Elliott Fisher,
Director of the Center for Health Policy Research at the Dartmouth Medical School, and Mark McClellan, former CMS
administrator, formed the Dartmouth-Brookings Partnership and the Accountable Care Organization learning
Collaborative. Dr. Fisher is generally credited with the term “accountable care organization.”
30 Congressional Budget Office (CBO), Budget Options Volume I; Health Care, Washington, DC, December 2008, pp.
72-74, http://www.cbo.gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf.
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• MedPAC described an option for a hospital-centric model of an ACO in
2009 as one that “would consist of primary care physicians, specialists, and
at least one hospital. It could be formed from an integrated delivery system,
a physician-hospital organization, or an academic medical center.”31
• By 2010, the earlier Fisher proposal had been transformed from a hospital
medical staff model to a non-hospital-centric model that “involves broad
participation and encourages hospitals to participate” but one in which
“hospital participation is not an absolute requirement.”32 In this proposal
an ACO can include a variety of provider configurations, ranging from
integrated delivery systems and primary care medical groups to hospital-
based systems and virtual networks of physicians such as independent
practice associations.33
Five ACO Delivery Models
Table 1 illustrates the various delivery systems that could form the basis for an ACO, however,
there is not an archetype organization that one could name associated with each of the model
types. In addition to the models listed in Table 1, insurers are now entering the market and
evaluating the role they may play within the ACO framework. For instance, both Blue Cross Blue
Shield of Massachusetts and Anthem Blue Cross have contracted as ACOs with provider groups
in their service regions.34 In other markets, insurers such as Cigna are working with physician
groups to form ACOs.35
These five models, and even entities within a model type, are likely to vary by the degree of
integration, the role of hospitals, the mix of staff and non-staff physicians, and the sense of a
shared commitment to the goals and aspirations of the ACO. In addition, other models may
emerge as specialist physicians, who often provide primary care as well as specialty medical
services, seek to maintain or improve their market position vis-à-vis other providers and payers.36
There are several reasons to believe that hospitals are likely to be integral to ACOs. Given that
over 30% of all health care expenditures in 2008 were hospital expenditures,37 it may be difficult
for an ACO to control costs without having a hospital as a participant. In addition, ACOs may
31 See Medicare Payment Advisory Commission, “Report to Congress: Improving Incentives in the Medicare
Program,” Washington, DC, June 2009, p. 39, http://www.medpac.gov/documents/Jun09_EntireReport.pdf.
32 Mark McClellan, Aaron N. McKethan, Julie L. Lewis et al., “A National Strategy to Put Accountable Care into
Practice,” Health Affairs, vol. 29, no. 5 (May 2010), p. 983.
33 An independent physician association is a group of independent physicians that contract with one or more insurers to
provide medical care for a population of insureds.
34 Ken Terry, “’Accountable Care Organizations’ Promise Better Medicine for Lower Cost - If They Work,” BNET The
CBS Business Network, June 11, 2010, http://www.bnet.com/blog/healthcare-business/-8220accountable-care-
organizations-8221-promise-better-medicine-for-lower-cost-8212-if-they-work/1432.
35 Leigh Page, “12 Points on Private Payor CIGNA’s Plans for ACOs ,” Becker’s Hospital Review, September 30,
2010. http://www.beckershospitalreview.com/hospital-physician-relationships/12-points-on-private-payor-cignas-
plans-for-acos.html.
36 Despite the emphasis on primary care providers, depending on how the regulations are drafted, there is likely to be
considerable interest among specialty groups to form ACOs even if they need to assume responsibility for the entire
continuum of care.
37 https://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf, Table 2.
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require a significant capital investment in their formative years, prior to earning any shared
savings, and hospitals are a potential source for these funds.38 For instance, ACOs are likely, at a
minimum to need to (1) hire staff; (2) acquire unique health information technology, beyond the
$22 billion contained in the American Recovery and Reinvestment Act and other investments
(P.L. 111-5), that can monitor performance and document improvements in quality across ACO
participants; (3) retain legal counsel to contract with the Secretary to participate in the program
and to recruit and contract with providers; and (4) develop and disseminate care protocols.39
Again, those hospitals which are large sophisticated organizations are potentially well positioned
to lead these efforts since they can exert some control over a sizable part of health care
expenditures and they have capital.
Section 2: How Are ACOs Supposed to Work?
Just as there are different notions of which providers are essential to an ACO, there are different
ideas of how ACOs should work. The discussion below focuses on the simplest arrangements to
highlight the features of an ACO and on the several relationships that exist involving ACO and
payers (Medicare, Medicaid, and private insurers), ACO and providers, and ACO and insureds
(referring generally to either beneficiaries under Medicare or Medicaid or individuals covered by
private insurance).
The Relationship Between the ACO and Payers
An ACO’s principal function is to take responsibility for some or all of the medical care delivered
to a population of patients.40 For an ACO to take responsibility for a defined population of
patients, it is assumed that the ACO will contract with payers on behalf of its affiliated
providers41 and that the ACO will not get to pick and choose individual patients from within the
defined population based on health status. For example, a payer and an ACO may agree that the
ACO will take responsibility for all of the payer’s insureds who received more than 50% of their
primary care from a physician or group of physicians affiliated with the ACO. In this example,
the ACO and payer need to agree on the following:
38 The potential capital costs are sufficiently large that Miller has suggested that ACOs may require loans or front-
loaded payment arrangements to deal with these investments. Harold D. Miller, How to Create Accountable Care
Organizations, Center for Healthcare Quality and Payment Reform, Pittsburgh, PA, September 7, 2009, p. 35.
http://www.createhealthcarevalue.com/data/blog/HowtoCreateAccountableCareOrganizations1.pdf.
39 Some proponents anticipate that ACOs may have costs marketing to and communicating with patients of its affiliated
providers. Others have suggested that ACOs be paid for demonstrating “sustained savings” (see the comments of Dr.
Stuart at the September 13, 2010, MedPAC Public Meeting, http://www.medpac.gov/transcripts/913-
914MedPACfinal.pdf, p. 72). The more regulations require ACOs to do up front (marketing or compensating insureds)
or the longer any process defers bonus payments, the more difficult it may be to form ACOs.
40 The more care the ACO is responsible for, the less likely the ACO is in the position to shift costs beyond its areas of
responsibility. Hence, many ACO descriptions refer to the “entire continuum of care.”
41 Kaiser Permanente, and other insurer based models, would be exceptions since the payer and ACO may be the same
entity.
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• the historic cost of care for this population (referred to as the “benchmark”);
• a formula to calculate anticipated changes in health care costs for this population
due to such factors as increases in medical care costs, aging, or changes in health
status;
• a targeted savings rate that will trigger payments to the ACO; and
• certain quality measures that the ACO will need to demonstrate have been met.
In this example, the ACO is responsible for all medical care, and therefore the ACO would be
responsible for coordinating the entire continuum of care from primary to post-acute. To the
extent that one entity is responsible for all care, responsibility is unambiguous and care can be
fully coordinated.
If actual medical expenditures are less than the benchmark, adjusted for changes in costs, savings
exceed the target, and quality measures are met, the ACO, and either directly or indirectly its
providers, will share in the savings realized by the payer.
In its simplest form, using Medicare fee-for-service as an example, an ACO would take
responsibility for a defined population of patients—in this example, all Medicare beneficiaries in
the region who received a majority of their primary care in the prior year from providers affiliated
with the ACO would be assigned to the ACO. The ACO and Medicare would agree on a
benchmark amount of total medical expenditures that reflected historic patterns of spending
adjusted by any forecast growth in costs over the agreement period and any other risk adjustments
that the ACO and Medicare agreed to, such as age, gender, or the population’s health status. In
addition, the ACO and Medicare would identify quality measures that either needed to be met or
improved upon.42 Providers would continue to file claims with Medicare on behalf of their
patients, and Medicare would pay those claims as if the ACO did not exist. If quality measures
were achieved and actual Medicare expenditures were less than anticipated expenditures, by at
least the targeted amount, the ACO would be eligible to share in Medicare’s saving according to
some agreed formula.
In the example above, the ACO and its providers assume no risk related to either the amount that
they receive for provided services or the total cost of medical services provided. That is, the ACO
is not penalized in any manner if no savings are achieved and providers are paid the full Medicare
fee-for-service payment regardless.
There are other payment models that payers and ACOs could adopt that could involve risk
sharing. In order to include risk sharing in the above example, Medicare could pay providers 95%
of the fee-for-service payment and set aside the difference, a 5% withhold, to be paid later, along
with a proportion of the shared savings, if quality and expenditure targets were reached. The
withhold and savings would be paid to physicians who elected to participate in the ACO, and
their share of the savings would be governed by the ACO’s internal policies and its agreements
with participating physicians. This model creates greater incentives for providers to achieve
42 There are competing perspectives on whether ACOs should be required to meet absolute quality objectives or
demonstrate improvement relative to their own past performance. See “Negotiations Over ACO Rule Heat Up As
Quality Coalition Urges Changes” InsideHealthPolicy.com Daily News, August 19, 2010,
http://insidehealthpolicy.com/201008192049189/Health-Daily-News/Daily-News/negotiations-over-aco-rule-heat-up-
as-quality-coalition-urges-changes/menu-id-212.html.
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targeted reductions. Additional risk and incentives can be transferred to the ACO under other
models, such as capitation—where a provider is paid a fixed amount per person and is responsible
for the cost of all of the care required to be provided.43
The ACO model explicitly couples quality and savings and generally requires providers to
achieve savings while maintaining or improving quality. For instance, in the CBO’s description
“[ACOs] would be eligible to receive a bonus only if they met a set of quality performance
measures and expenditure saving targets.”44 The linking of quality and savings in this manner
may assume that as quality increases, costs decline. However, there are likely to be desirable and
costly quality improvements that do not produce savings which may need to be paid for directly.
While it is likely that initial quality measures may be relatively limited process-oriented
measures, such as compliance with screening and preventive service guidelines, payers are likely
to ratchet-up quality improvements and reporting requirements over time if they anticipate a
financial return or as validated outcome measures become more readily available.45
The Relationship Between the ACO and Providers
While there is no requirement that providers affiliate with an ACO, any relationship between an
ACO and its providers more than likely will be governed by a contract that specifies the
obligations of both parties and how providers share in any savings. There can be multiple ACOs
in a community, and conceivably a provider could be a member of one with respect to the
practice’s Medicare beneficiaries and a member of another with respect to a private insurer’s
population of insureds.46 Once a provider affiliates with an ACO, the provider brings all of his or
her patients from the defined population (be it Medicare, Medicaid, or a private insurer) to the
ACO. It is further assumed that the ACO will be composed of providers that tend to refer to one
another (either admitting to the same hospital or referring to a common set of specialists).
43 MedPAC has analyzed issues associated with risk sharing and the implications of varying sizes of ACOs. See
Medicare Payment Advisory Commission, Transcript of Public Meeting, September 13, 2010, http://www.medpac.gov/
transcripts/913-914MedPACfinal.pdf.
44 See Congressional Budget Office (CBO), Budget Options Volume I; Health Care, Washington, DC, December 2008,
pp. 72-74, http://www.cbo.gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf, for the CBO’s calculation of shared
savings.
45 Some proponents have suggested that one area where quality can readily be monitored and improved is
rehospitalizations. While not all claims associated with rehospitalizations are avoidable and there are costs to avoiding
a rehospitalization, “the cost to Medicare of unplanned rehospitalizations in 2004 was $17.4 billion.” If ACOs had
greater responsibility for a longer interval surrounding hospitalizations, from 4 days prior to a hospitalization to 30 days
following a hospitalization, the interests of physicians and hospitals could be better aligned and the two may be better
able to coordinate post-acute care and reduce the high rate of rehospitalization (19.6% within 30 days) among Medicare
beneficiaries. See CRS Report R40972, Medicare Hospital Readmissions: Issues, Policy Options and PPACA, by Julie
Stone.
46 There is insufficient experience to know the optimal size for an ACO or the optimal number of ACOs in any region.
MedPAC and others have suggested that an ACO should have more than 5,000 Medicare enrollees to reduce the
random variation in year to year health care expenditures in any pool of patients that might complicate the calculation
of both a baseline level of expenditures and actual expenditures. Hussey et al., (“Episode-Based Performance
Measurement and Payment: Making It A Reality,” Health Affairs, vol. 28, no. 5, p. 1406-1417) suggest that 5,000 may
be appropriate to hold organizations accountable for more common conditions but larger numbers would be required to
hold organizations accountable for rarer events such as heart failure. MedPAC analysis suggests that 5,000 Medicare
enrollees may not be adequate to avoid mistakenly paying some ACOs for reductions in costs that occurred by chance
(see David Glass and Jeff Stensland, Medicare Shared Savings Program for ACOs, Medicare Payment Advisory
Commission, prepared for the September 13, 2010, public meeting, Washington, DC).
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To generate shared savings, the ACO, working with its affiliated providers can, among other
things, seek to47
• reduce the unnecessary or duplicative use of services;
• develop or adopt existing care protocols to improve coordination of care and
management of diseases, increase preventive services, and encourage early
diagnosis;
• improve information flows within the ACO;
• promote lower-cost treatment options;
• benefit from economies of scale in the purchase of goods and services;
• reduce preventable emergency department visits and rehospitalizations;
• coordinate the purchase and use of expensive equipment; and
• coordinate the hiring of some specialists to optimize organizational efficiency.
Because an ACO includes a range of providers, some large and potentially influential (such as
large medical groups or hospitals) and some smaller and less prominent (such as sole practitioners
and small practices), some proposals envision that the ACO will be a separate and distinct legal
entity with a shared decision-making structure to ensure that some providers, hospitals, or large
practice groups do not dominate internal decision making. Others envision hospitals or physician
groups morphing into ACOs.48
An unresolved issue at this point is how these shared savings would be distributed to providers
within the ACO after it has covered its costs and any return of capital from the organizers. For
instance, how much of the savings associated with better primary care/specialist treatment are
attributable to the actions of the primary care doctors as compared to the actions of the
specialists? In an integrated staff model of health care organization, these potential disputes
generally are muted somewhat by the employment relationship and certainty of salary, but in a
virtual ACO or less integrated ACO, these divisions are likely to be more contentious. In addition,
the ACO may need to decide who can affiliate with it and which cost savings efforts should be
pursued. Since these types of decisions touch on earnings and livelihoods, they are also
potentially contentious.
The Relationship Between the ACOs and Insureds
For proponents of ACOs, one attractive feature of the ACO model is that it does not place a new
entity between providers and patients since patients continue to deal with the health care system
through their regular sources of care. The provider, in turn, now has a relationship with the ACO,
and the ACO has a relationship with the payer. While the ACO is accountable for the total cost of
medical care consumed by those for whom it has assumed responsibility, insureds in most ACO
models are not constrained by the ACO as to where they get their care (either primary care
47 Some ACO activities may have antitrust or other legal and regulatory constraints, which are beyond the scope of this
report.
48 Section 3022(b) provides that the ACO have a “formal legal structure that would allow the organization to receive
and distribute payments for shared savings.”
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providers or specialists) or to which hospitals they can go. The ACO is not a closed network or
gatekeeper and the insured, in most models, never affirmatively enrolls in the ACO.49
As described above, a provider brings patients to an ACO when the provider affiliates. Under this
model, the insured is essentially automatically enrolled in the ACO as part of the provider
affiliating.50 Since the activities of the ACO do not constrain the choices of the insured
(individuals may continue to see any provider), nor do they alter the costs to the insured (there are
no differential prices for in-ACO or out-of-ACO providers), the insured has no basis for selecting
an ACO or for opting-in or opting-out of an ACO. Moreover, in some models, annual assignment
to an ACO takes place retrospectively, based on actual patient-provider associations, so insureds
are not in an ACO at the time that they receive services. The retrospective assignment of
individuals to an ACO also means that a group of providers will generally not be held responsible
for individuals who were not actually affiliated with the ACO because they received most of their
care from other providers. In addition, retroactive assignment encourages physicians to treat all
patients in a cost-effective manner since they will not know until later whether any particular
patient will be assigned to their ACO.
Finally, some suggest that if there are savings to be realized, the consumer should share in these
along with the insurer and providers.51 Others maintain that while the insurer and provider benefit
monetarily, consumers benefit from improved quality of care and no further benefit needs to be
conferred on the consumer. If consumers insists on receiving a share of savings, or ACOs want to
share savings with Medicare beneficiaries, a whole host of issues emerge, including the effect of
anti-kickback provisions of Medicare,52 as well as questions about when beneficiaries should
receive payments and the size of payments necessary to align beneficiaries’ interests to conform
to care protocols or accept lower-cost equivalent quality services. It should be noted that while
the Medicare program, through Medicare Advantage, already offers a form of shared savings to
enrollees when plans reduce cost sharing below the 20% coinsurance generally found in
traditional Medicare, the decision as to whether to enroll in Medicare Parts A or B or enroll in a
Medicare managed care plan are likely to be made based on a variety of factors. However,
sharing savings with Medicare beneficiaries may blur some of the distinctions between ACOs and
Medicare Advantage.53
49 In the private sector, the insured is still governed by the insurance contract between the insurer and the insured, and
this contract may impose constraints such as differential coinsurance depending on whether an insured sees an in-
network or out-of-network provider.
50 PPACA provides that the Secretary shall determine the process for assigning Medicare beneficiaries to an ACO and
draft regulations have not been released as of the date of this report. During the public MedPAC meetings, several
MedPAC commissioners have spoken in favor of giving Medicare beneficiaries the right to opt-out of participating in
any Medicare ACO that their provider may choose to join.
51 Jeff Goldsmith, “The Accountable Care Organization: Not ready for Prime Time,” Health Affairs Blog,
http://healthaffairs.org/blog/2009/08/17/the-accountable-care-organization-not-ready-for-prime-time/print/, August 17,
2009.
52 “Under the federal anti-kickback statute, it is a felony for a person to knowingly and willfully offer, pay, solicit, or
receive anything of value (i.e., ‘remuneration’) in return for a referral or to induce generation of business reimbursable
under a federal health care program. The statute prohibits both the offer or payment of remuneration for patient
referrals, as well as the offer or payment of anything of value in return for purchasing, leasing, ordering, or arranging
for, or recommending the purchase, lease, or ordering of any item or service that is reimbursable by a federal health
care program.” See CRS Report RS22743, Health Care Fraud and Abuse Laws Affecting Medicare and Medicaid: An
Overview, by Jennifer Staman.
53 If Medicare ACOs are required to enroll Medicare beneficiaries into an ACO (see Section 5) and in some manner
potentially share savings with beneficiaries, the line between ACOs and Medicare Advantage plans may erode and
(continued...)
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Section 3: Essential Provisions of § 3022 of PPACA
Section 3022 of PPACA directs the Secretary to establish a Medicare Shared Savings Program by
January 1, 2012. The goals of this section of the law are, in part, to promote the formation of
ACOs and “encourage investment in infrastructure and redesigned care processes for high quality
and efficient service delivery” (§ 3022(a)(1)).54 The section applies only to items and services
provided under Medicare Part A (hospitalization insurance) and Part B (medical insurance).55
PPACA delegates the formulation of many of the details concerning ACOs to the Secretary,
including which entities can be an ACO, what requirements will be imposed on ACOs, and what
they will need to achieve prior to receiving their share of any shared savings. Section 3022(c),
however, does specify:
The Secretary shall determine an appropriate method to assign Medicare fee-for-service
beneficiaries to an ACO based on their utilization of primary care services provided by ACO
professionals.
First, the CBO, in its discussion of ACOs (referred to as BEOs prior to the passage of PPACA),
estimated that within two years of implementation, 20% of fee-for-service Medicare beneficiaries
would be assigned to participating primary care physicians and that 40% would be assigned by
2019.56 Therefore, while a large number of Medicare beneficiaries are likely to participate in an
ACO, the majority, for a variety of reasons, likely will not. Second, the statute directs the
Secretary to determine a method to assign beneficiaries to ACOs. While the Secretary has the
authority to determine a method that permits Medicare beneficiaries to elect to participate,
participation does not otherwise appear to be voluntary. Finally, the statute is silent as to whether
the assignment is prospective, with Medicare beneficiaries each year being assigned for the
following year based on last year’s patterns of utilization, or retrospective, with Medicare
beneficiaries assigned this year for the prior year based on actual patterns of utilization in the
prior year. There are advantages and disadvantages to both prospective and retrospective
assignment, as discussed below.
The following groups of providers of services or suppliers which have established a mechanism
of shared governance are eligible to participate in the Medicare Shared Savings Program:
• Physicians, physician assistants, nurse practitioners, clinical nurse specialists in
either group practices or networks of individual practices.
• Partnerships or joint ventures of physicians, physician assistants, nurse
practitioners, clinical nurse specialists and hospitals.
(...continued)
CMS may want to consider whether ACOs need to be subject to regulations similar to those applicable to Medicare
Advantage plans.
54 ACOs are not limited to Medicare and can offer their services to other payers, including Medicaid and private
insurers, that may be willing to contract with them.
55 The Affordable Health Care for America Act, H.R. 3962, would have allowed the Secretary to include Medicare Part
D services, if appropriate.
56 Note that the CBO assumed that the program would begin January 1, 2013, whereas PPACA directs the Secretary to
establish the shared savings program by January 1, 2012, hence the timeframe for the CBO estimates does not align
perfectly to PPACA, nor does it incorporate all of the other elements contained in PPACA.
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• Hospitals employing physicians, physician assistants, nurse practitioners,
clinical nurse specialists.
• Other groups of providers of services and suppliers as the Secretary determines.
The requirement that the ACO have a mechanism for shared governance may be an attempt to
keep physicians, physician assistants, nurse practitioners, and clinical nurse specialists at the core
of the ACO and not have it be dominated by the larger health care providers in a community.
Unless addressed by the Secretary, this requirement, however, may be muted by hospitals
acquiring primary care practices or health plans adopting staff models that convert physicians,
physician assistants, nurse practitioners, clinical nurse specialists into employees.57
In addition, the statute specifies that an ACO must, among other things,
• be accountable for the quality, cost, and overall care of the Medicare fee-for-
service beneficiaries assigned to it;
• agree to participate in the program for not less than three-years (the “Agreement
Period”);
• have a formal legal structure that would allow the organization to receive and
distribute shared savings to providers of services and suppliers;
• include primary care physicians, physician assistants, nurse practitioners,
clinical nurse specialists in sufficient numbers to serve assigned ACO
beneficiaries;
• have at least 5,000 fee-for-service Medicare beneficiaries assigned to it;
• establish a leadership and management structure that includes clinical and
administrative systems; and
• develop processes that promote evidence based medicine, patient engagement,
report on quality and cost measures, and coordinate care.
Providers of services or supplies may be paid in the same manner as other Medicare providers of
services or supplies but share in any savings resulting from reduced utilization. PPACA directs
the Secretary to establish a savings requirement, the amount that the ACO has to reduce average
per capita Medicare expenditures by, before the ACO can share in the savings. Actual spending is
compared to a benchmark, established by the Secretary, that is based on the “most recent
available 3-years of per-beneficiary expenditures for Parts A and B services for Medicare fee-for-
service beneficiaries assigned to the ACO.” In addition, the benchmark is adjusted by beneficiary
characteristics and the projected absolute growth in national per capita expenditures for Parts A
and B services. Again, the requirements relating to quality and the exact formula for bonus
payments still need to be developed by the Secretary.
Alternatively, Section 3022 of PPACA, as amended by Section 10307 of the Health Care
Education and Reconciliation Act of 2010, P.L. 111-152, authorizes the Secretary, as appropriate,
to use a partial capitation model for ACOs that are highly integrated and capable of bearing the
57 Noam N. Levey, “Healthcare law has more doctors teaming up,” Los Angeles Times, July 28, 2010,
http://www.latimes.com/news/health/healthcare/la-na-health-doctors-20100728,0,2722731.story.
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risk.58 In addition, Section 10307 allows the Secretary to use other payment models that improve
the quality and efficiency of items or services furnished to Medicare beneficiaries. These
alternative payment mechanisms, which may include payment withholding and other forms of
risk-sharing, are designed to fund larger financial incentive payments that encourage greater
support for ACO initiatives.
Section 4: Potential Advantages and Limitations
of ACOs
Perhaps the most commonly made argument in support of ACOs begins with the premise that the
current medical system offers fragmented services across providers (an absence of coordinated
care), pays for units of service rather than outcomes, and holds no one organization or individual
responsible for either the quality or cost of care provided. The ACO model highlights the need for
change that simultaneously alters the financing and delivery of care to align incentives among
providers. For instance, there is some evidence to suggest that when fees for services are reduced
without altering models of delivery, providers compensate by rendering more units of services
and less savings are realized.59 Similarly, introducing new models of care, such as medical homes,
requires changes in payments to encourage providers to implement these new service models.
ACO proponents, in essence, say that there is a need to change both care and payments at the
same time—we need to bring together Medicare providers of services and supplies, hold them
accountable for the services they provide, and reward them for reducing costs and good
performance.
A second argument in support of ACOs is that introducing accountability and integration in the
health care system may improve access to care; increase efficiency by reducing unnecessary
investment, testing, referrals, and medication; improve quality, outcomes, and patient experience;
and reduce costs. For ACO proponents, the current system is not sustainable, new models of
delivery are needed, and the ACO model is one that many stakeholders appear to be willing to
initially embrace.
Another argument in favor of ACOs is that they have been designed to avoid at least three
features of health care delivery systems that often concern the public:
• First, a perception that insurance companies are positioned between patients and
their health care providers. While health plans owned by insurance companies
conceivably could form the basis of an ACO, the ACO model is:
really designed to shift some of the responsibility for costs from health
insurers to health care providers. Insurance plans would retain responsibility
58 In a partial capitation model, a part of a provider’s compensation is a function of a fixed-flat rate per patient and a
part is based on another payment mechanism.
59 See for example, Suzanne M. Codespote, William J. London, and John D. Shatto, Estimated Volume-and-Intensity
Response to a Price Change for Physicians’ Services. Memorandum to Richard S. Foster, Chief Actuary, Centers for
Medicare & Medicaid Services, 1998, http://proquest.umi.com/pqdweb?index=6&did=1970670331&SrchMode=3&
sid=1&Fmt=6&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1281357481&clientId=45714&aid=1.
For a contrasting perspective, see Jack Hadley, James Reschovsky, Catherine Corey et al., “Medicare Fees and the
Volume of Physicians’ Services,” Inquiry, vol. 46, no. 4 (Winter), p. 372–390.
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for insurance risk—the risk that a pool of insureds will need medical care and
the severity of their needs while the ACO is responsible for performance
risk—the variability in the costs of treating individuals with the same level of
disease severity.60
Therefore, within the ACO model the role for insurers is not expanded; however,
as noted, insurers may form ACOs.
• Second, a return to the 1980s and that era’s model of managed care and health
maintenance organizations. Since many Americans prefer to remain outside of
organized health plans, particularly seniors in Medicare,61 the ACO model does
not require that Medicare beneficiaries actually join a health plan. Rather, since
Medicare beneficiaries will be assigned by a mechanism developed by the
Secretary, there is no necessary requirement that beneficiaries be informed that
they are part of an ACO and in fact they may never know that they are assigned
to a panel.62
• Third, closed panels of providers with potentially differential pricing depending
on whether a provider is in or out-of-network. Many Americans have expressed a
clear preference for open panels of providers, where they can select their own
doctors, without any difference in copayments, rather than closed panels with
lower coinsurance when one sees an in-network provider and a higher copayment
when one goes out-of-network. While physicians and other health care providers
and suppliers may be aware of which providers are in-network and which
providers are out-of-network, the Medicare beneficiary assigned to an ACO can
pick and choose his or her providers without regard to either a network or
differential cost.63
ACOs have detractors and ACOs have raised concerns among policy analysts. Randall Brown of
Mathematica Policy Research, for instance, has described ACOs as
much like an HMO, but without any real authority. Medicare Advantage plans (HMOs and
PPOs) have generally shown themselves to be poor role models for efficiency or delivering
higher quality than fee-for-service, despite the appeal of having one entity being responsible
for delivery of the full range of health care services to a defined population of patients. Other
forms of Medicare Advantage plans, such as private fee-for-service (PFFS) plans, are even
less efficient. Furthermore, the logistics of how such a system would or could work
60 Harold D. Miller, How to Create Accountable Care Organizations, Center for Healthcare Quality and Payment
Reform, Pittsburgh, PA, September 7, 2009, http://www.createhealthcarevalue.com/data/blog/
HowtoCreateAccountableCareOrganizations1.pdf.
61 In 2010, about 24% of Medicare beneficiaries have elected to join a Medicare Advantage plan. http://www.kff.org/
medicare/upload/2052-14.pdf.
62 The House Tri-Committee’s proposal, the America’s Affordable Health Choices Act of 2009, required that
beneficiaries be informed of their assignment to an ACO, whereas the Senate Finance Committee’s America’s Healthy
Future Act of 2009 did not stipulate that beneficiaries be informed. See Kelly Devers and Robert Berenson, Can
Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?
Robert Wood Johnson Foundation and Urban Institute, Washington, DC, October 2009, p. 6, http://rwjf.org/files/
research/acobrieffinal.pdf.
63 While a private insurer could offer different incentives for insureds to use in-network providers, these incentives
would come from the insurer and not the ACO. It may be the case that a private insurer employing an ACO to control
costs and improve quality would coordinate its efforts such that the ACO network and in-network providers were
similar.
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anywhere, except perhaps in a small community where physicians are salaried (and therefore
have no financial incentive to overuse services), are unclear. As Fisher and colleagues note,
there are significant cultural, legal, and practical obstacles to this model. Saving money will
require reducing hospital use and unnecessary services provided by physicians; the pie has to
shrink. Battle lines will quickly form on which provider’s piece will take the biggest hit, and
it is unclear who will wield the actual authority in making those decisions. The failure of
HMOs to achieve similar promise should be a warning sign, and how accountable health
organizations will avoid the same fate is unclear.64
While the ACO needs to implement an internal governance structure, as directed by statute, there
are concerns on the part of some critics, including University of Virginia professor Jeff
Goldsmith, as to whether primary care doctors and specialists practicing in varying arrangements,
hospitals, and other providers truly share enough in common to coordinate care and reduce
costs.65 Goldsmith also notes that
• past efforts at forming integrated networks of providers, real or virtual, had the
consequence of concentrating provider networks (either hospitals or physicians)
that can effectively raise prices when negotiating with private insurers; and
• consumers have repeatedly and strongly expressed their preference for open
networks rather than hospital/physician based risk bearing organizations.
A recent study by Berenson, Ginsburg, and Kemper (2010) of the California health care market, a
location where ACOs are common, warns that while Medicare may benefit from the introduction
of ACOs, the larger health care system could be negatively affected because the consequences of
ACOs may not be limited to Medicare. They conclude, based on their study of California, that “if
accountable care organizations lead to more integrated provider groups that are able to exert
market power in negotiations—both by encouraging providers to join organizations and by
expanding the proportion of patients for whom provider groups can negotiate rates—private
insurers could wind up paying more, even if care is delivered more efficiently.“66
A potential limitation of the Medicare Shared Savings Program is that it addresses items and
services only under Medicare Parts A and B. Medicare Part D prescription drug benefits in 2010
are estimated to be slightly more than 11% of all Medicare benefits, and ACOs are not initially
responsible for these expenditures as part of the Medicare Shared Saving Program. As Crosson
has suggested, “it may be useful to consider models in which Part D benefits are incorporated into
payment design,”67 particularly as there may be instances where there is the appearance of cost
64 Randall Brown, Strategies for Reining in Medicare Spending Through Delivery System Reforms: Assessing the
Evidence and Opportunities, The Henry J. Kaiser Family Foundation, Washington, DC, September 2009, p. 5.
http://www.kff.org/medicare/upload/7984.pdf.
65 Jeff Goldsmith, “The Accountable Care Organization: Not ready for Prime Time,” Health Affairs Blog,
http://healthaffairs.org/blog/2009/08/17/the-accountable-care-organization-not-ready-for-prime-time/print/, August 17,
2009. Also note the fractious environment between the hospital and physician group at City of Hope National Medical
Center has been held out as “a harbinger of things to come under health care reform.” Patrick J. McDonnell, “City of
Hope’s reorganization plan creates rift with doctors group,” Los Angeles Times, September 22, 2010,
http://www.latimes.com/news/local/la-me-city-hope-20100922,0,5277469.
66 Robert A. Berenson, Paul B. Ginsburg, and Nicole Kemper, “Unchecked Provider Clout in California Foreshadows
Challenges to Health Reform,” Health Affairs, vol. 29, no. 4 (April 2010), p. 700.
67 Francis J. Crosson, “Medicare: The Place to Start Delivery System Reform,” Health Affairs, Web Exclusive January
27,. 2009, pp. W232-W234.
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savings as a result of providers unduly relying on Part D prescription medicines over other forms
of care.
Section 5: Discussion and Likely Impact of
PPACA § 3022
Scope of ACOs and Likely Savings
The CBO scored the Medicare Shared Savings Program as reducing Medicare expenditures $4.9
billion over the FY2013 through FY2019 period.68 The CBO also estimated, in 2008 and prior to
PPACA, that within two years of implementation of an ACO-type program, 20% of fee-for-
service Medicare beneficiaries would be assigned to participating primary care physicians and
that 40% would be assigned by 2019.69 The CBO assumes that the savings to Medicare from
BEOs would decline over time, in part because as quality improved, more ACOs would be paid
their share of any resulting savings. While these projected savings are perhaps an argument in
support of ACOs, the size of these savings are also a caution. ACOs have the potential to
significantly change the structure of health care markets, with potential unintended consequences,
and consolidation around ACOs in the publicly financed part of the health care market may
increase costs in the private, non-government, part of the health care market because of
consolidation among providers.
Actual Source of Potential Savings
MedPAC maintains that “the financial incentive in a large ACO for physicians to change their
individual decisions affecting a single patient are likely to be small.”70 Rather, the real savings
from the ACO model are projected to come from the incentives that physicians as a group have to
constrain the growth in capacity and growth in the supply of specialists while adopting care
protocols and other mechanisms to reduce the growth in Medicare spending.71 For instance,
providers within an ACO may decide to share an imaging machine across entities rather than
having each entity purchase its own machine. Since the savings “stem from group rather than
individual decisions,” ACOs will need a mechanism for collective decision making and the
member organizations (physician groups and hospitals) will need to restrict their autonomy and
transfer authority to the ACO in order for the ACO to enforce collective decisions. This type of
coordinated decision making, across entities, may be difficult to foster.
68 Letter from Douglas W. Elmendorf, Director, Congressional Budget Office, to Honorable Nancy Pelosi, Speaker,
House of Representatives, March 20, 2010, http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf.
69 Note that the CBO assumed that the program would begin January 1, 2013, whereas PPACA directs the Secretary to
establish the shared savings program by January 1, 2012, hence the timeframe for the CBO estimates does not align
perfectly to PPACA.
70 Medicare Payment Advisory Commission, “Report to Congress: Improving Incentives in the Medicare Program,”
Washington, DC, June 2009, p. 51, http://www.medpac.gov/documents/Jun09_EntireReport.pdf.
71 Medicare Payment Advisory Commission, “Report to Congress: Improving Incentives in the Medicare Program,”
Washington, DC, June 2009, pp. 49-52, http://www.medpac.gov/documents/Jun09_EntireReport.pdf.
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Limited Experience with Model
An additional concern, as noted earlier, is that the ACO model has a limited track record beyond a
handful of integrated health care providers. It remains an open issue as to whether less integrated
providers can come together, achieve savings, and internally govern an organization with
potentially highly fractured sets of interests. For example, in the start-up phase, which could last
several years, ACOs will need to generate operating capital to cover the costs of contracting,
developing health information technology (HIT) monitoring and reporting systems, and building
compliance programs to report to CMS. This is in addition to any costs associated with
implementing care protocols or other cost-reduction or quality improvement efforts. Moreover,
ACOs may have some difficulty monitoring which providers are responsible for any savings
achieved and avoiding tension over which providers should be compensated and how much, when
responsibility may not be clearly attributable. Finally, quality improvements do not always result
in savings and some improvements in quality may prove costly.
Informing Beneficiaries
As noted earlier, some proponents and some critics have suggested that Medicare beneficiaries
should be informed of their physician’s participation in an ACO, and some suggest that Medicare
beneficiaries should have the right to either opt-in or opt-out of their physician’s ACO panel.
Prior notice to a beneficiary implies that assignment to an ACO is prospective rather than
retrospective. As a practical matter prospective enrollment, where Medicare beneficiaries are
informed of their assignment ahead of time, may be somewhat problematic. First, it requires that
CMS base the current year’s enrollment on the prior year’s utilization, whereas retrospective
assignment would allow CMS to assign beneficiaries based on actual utilization. Second, since
assignment can change from year-to-year, Medicare may have to inform beneficiaries each year
of their assignment and offer to allow beneficiaries to either opt-in or opt-out of the ACO. While
an opt-out option would not be dependent on Medicare beneficiaries actually responding, if there
is concern about automatic enrollment, an opt-in strategy may be more desirable since
beneficiaries would not be assigned to an ACO unless they affirmatively indicated their desire to
enroll. As with many CMS communications to beneficiaries, while each is intended to inform,
these communications may also give rise to potential confusion and increased call-center activity.
Potential Market Consolidation
Returning to the concerns of Berenson, Ginsburg, and Kemper (2010) and Goldsmith, the actual
impact of ACOs may depend on how they potentially change local market competition and
whether these disparate local interests (including primary care physicians, specialists, hospitals,
payers, and other health care professionals including, but not limited to, nurse practitioners,
physical therapists, home health care agencies) can work together cooperatively to achieve and
share savings. One could find that ACOs offer the Medicare program savings compared to current
practices, but that ACOs also raise prices for other payers as providers consolidate under the ACO
structure and become potentially more formidable negotiators vis-à-vis other payers.72 In
addition, one may find in some locations ACOs have difficulty reaching agreement regarding
which individuals or entities were responsible for generating the savings, and hence should share
72 CMS has acknowledged potential unintended consequences in the market for health care. http://news.bna.com/hdln/
HDLNWB/split_display.adp?fedfid=17792088&vname=hcenotallissues&fn=17792088&jd=a0c4d7x7v4&split=0.
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Accountable Care Organizations and the Medicare Shared Savings Program
in any distribution, or that the overhead and program costs of operating the ACO reduce the
impact of the limited financial incentives such that some participants drift away from the ACO
over time.
Finally, and building on the Berenson et al. (2010) conclusion, since hospitals are likely to be a
critical component of any ACO, perhaps essential to controlling costs, hospitals may end up being
the prime movers in creating ACOs and the hub around which other providers gravitate.73
Hospitals may find that once they form an ACO, they have little incentive to assist other ACOs
but significant incentives to bring specialists and other providers into the ACO either as staff or
affiliates. In addition, in the past, when hospitals have increased their negotiating leverage vis-à-
vis payers, they have used their leverage to obtain higher payment rates.74 It is an unresolved
issue, and one that is likely to play out differently in different markets, as to whether hospitals
will aim to achieve savings that will need to be shared with their partners.
Author Contact Information
David Newman
Specialist in Health Care Financing
dnewman@crs.loc.gov, 7-1277
Acknowledgments
Julie Stone, Specialist in Health Care Financing at CRS; Amanda Sarata, Specialist in Health Policy at
CRS; and Geoffrey Hoffman, formerly at CRS, provided substantive comments on this report.
73 Jeff Goldsmith has suggested that the ACO legislation has prompted hospital consolidation already,
http://news.bna.com/hdln/HDLNWB/split_display.adp?fedfid=17792088&vname=hcenotallissues&fn=17792088&jd=
a0c4d7x7v4&split=0.
74 Kelly J. Devers, Lawrence P. Casalino, Liza S. Rudell et al., “Hospitals’ Negotiating Leverage with Health Plans:
How and Why Has It Changed,” Health Services Research, vol. 38, no. 1 (February 2003), pp. 419-446.
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