Definition

accountable care organization (ACO)

Contributor(s): Tayla Holman

An accountable care organization (ACO) is an association of hospitals, healthcare providers and insurers in which all parties voluntarily assume financial and medical responsibility for Medicare patients. The purpose of an ACO is to enable care coordination that allows a patient to receive the right care at the right time while reducing the risk of medical errors and duplicate services.

ACOs are part of the broader concept of population health management, which seeks to improve patient engagement and clinical proficiency while reducing costs. While ACOs don't entirely move away from a fee-for-service payment model, the focus shifts to creating savings incentives by offering providers bonuses for keeping healthcare costs down and meeting quality benchmarks. Conversely, healthcare providers who participate in an ACO and fail to meet the standards for cost control and patient care receive lower payments from Medicare.

The Centers for Medicare and Medicaid Services (CMS) measure quality of care using 33 metrics in four categories: patient or caregiver experience, care coordination or patient safety, preventive health and at-risk population. Some of the metrics include how well providers communicate, screening for future fall risk and shared decision making.

The creation of ACOs

Elliott Fisher, M.D., director of the Dartmouth Institute for Health Policy and Clinical Practice in Hanover, N.H., was one of the originators of the term "accountable care organization" in 2006. Fisher and his colleagues conducted research on the ACO concept and worked with members of Congress to include ACOs in the Patient Protection and Affordable Care Act. President Barack Obama signed the act, more commonly known as the ACA, on March 23, 2010. The ACA called for CMS to administer an ACO program by January 1, 2012.

Healthcare providers who participate in an ACO can still receive fee-for-service Medicare payments, and the providers are eligible for bonuses if they meet specified quality and savings requirements through the ACO. A provider can also participate in a Medicare ACO and a commercial ACO (from a private payer) at the same time, but a commercial ACO typically sets its own quality measures.

How ACOs affect patients

If patients see healthcare providers that are part of an ACO, they benefit from coordinated care that allows each member of their healthcare team to communicate with each other. If, for example, a primary care provider and specialist prescribe the same medication, they are alerted to the duplication.

Similarly, if a provider and specialist prescribe conflicting medications, they are alerted immediately to prevent any harm. Patients also spend less time filling out medical paperwork because all the healthcare providers have access to electronic health records.


In this video from UCLA Health,
learn how ACOs benefit patient care

All of a patient's appointments and tests are completed under the same healthcare umbrella, provided by members of that particular ACO. If a primary care physician treats a patient and needs additional insight from a specialist, the physician refers the patient to a specialist within the ACO, which keeps costs down. If patients seek additional care outside of the ACO, they have to pay more.

Fee-for-service Medicare patients who see a healthcare provider who is participating in a Medicare ACO maintain their Medicare rights.

How ACOs affect hospitals

Research suggests that hospitals that participate in an ACO do not necessarily see improvements in all Medicare value-based purchasing programs. Hospitals that participated in an ACO performed better than non-ACO hospitals in CMS' Hospital Value-Based Purchasing (HBVP) program, but not in the Hospital Readmissions Reduction Program (HRRP) or Hospital Acquired Conditions (HAC) Reduction program, according to the American Journal of Managed Care.  

Under the HBVP program, CMS provides incentive payments to hospitals based on how closely the hospital follows best clinical practices and how well it enhances a patient's experience during a hospital stay. Quality payments are provided based on how well the hospital performs on a measure compared to the national average (achievement) or by how much the hospital improves on a measure compared to its baseline (improvement).

In the HRRP, hospitals receive a financial incentive based on their ability to reduce preventable readmissions. The HRRP specifies certain conditions for which readmissions should be reduced, such heart attack and heart failure, pneumonia and chronic obstructive pulmonary disease.

Under the HAC program, a hospital receives a penalty if it performs poorly in regard to conditions that are acquired in the hospital, such as an infection. The goal of this program is to improve the safety of inpatients.

Differences between ACOs and HMOs

Although ACOs and health maintenance organizations (HMOs) share some similarities, such as managing risk and controlling costs by promoting the health of its members, there are a few key differences. Patients who have an HMO plan can only choose a physician from a list of approved providers. In an ACO, however, patients may see any physician. A patient can also decline to have protected health information shared within the ACO.

Unlike an HMO, an ACO is not an insurance company. HMOs are insurance programs that provide healthcare to a defined patient population for a fixed price. An ACO cannot change a patient's Medicare benefits.

Benefits of ACOs

So far, one of the major benefits of ACOs is their ability to reduce healthcare spending. As of 2017, ACOs that participated in CMS' Medicare Shared Savings program reduced spending by about $1 billion in three years, according to the Office of the Inspector General.

ACOs also slightly outperformed fee-for-service providers and improved the quality of care provided to patients (82% vs. 81%) based on the quality measures set by CMS.

Drawbacks of ACOs

One of the drawbacks of an ACO is that there may be differences of opinions when it comes to decision making and how to split a patient's bill. This can lead providers to feel like they no longer have autonomy over how they care for their patients. There may also be restrictions as far as how referrals can be made.

Funding and cost distribution

ACOs can choose how to divide any savings, and there may be some differences in distribution from one ACO to another. One way savings may be distributed is based on merit-based contribution.

Other ACOs use fixed allocation that distributes savings similar to fee-for-service payment rations. This model does not consider who in the ACO generated the savings.

This was last updated in December 2017

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