What you need to know about accountable care organizations

One of the main ways the Affordable Care Act seeks to reduce health care costs is by encouraging doctors, hospitals and other health care providers to form networks that coordinate patient care and become eligible for bonuses when they deliver that care more efficiently.

The law takes a carrot-and-stick approach by encouraging the formation of accountable care organizations (ACOs) in the Medicare program. Providers make more if they keep their patients healthy. About 6 million Medicare beneficiaries are now in an ACO, and, combined with the private sector, at least 744 organizations have become ACOs since 2011. An estimated 23.5 million Americans are now being served by an ACO. You may even be in one and not know it.

[Also: See which shared savings ACOs earned payments in 2014 (Data)]

While ACOs are touted as a way to help fix an inefficient payment system that rewards more, not better, care, some economists warn they could lead to greater consolidation in the health care industry, which could allow some providers to charge more if they're the only game in town. 

ACOs have become one of the most talked about new ideas in Obamacare. Here are answers to some common questions about how they work:

What is an accountable care organization?

An ACO is a network of doctors and hospitals that shares financial and medical responsibility for providing coordinated care to patients in hopes of limiting unnecessary spending. At the heart of each patient's care is a primary care physician.

In Obamacare, each ACO has to manage the healthcare needs of a minimum of 5,000 Medicare beneficiaries for at least three years.

Think of it as buying a television, says Harold Miller, president and CEO of the Center for Healthcare Quality & Payment Reform in Pittsburgh, Pennsylvania. A TV manufacturer like Sony may contract with many suppliers to build sets. Like Sony does for TVs, Miller says, an ACO brings together the different component parts of care for the patient – primary care, specialists, hospitals, home healthcare, etc. – and ensures that all of the "parts work well together."

[Also: See how Pioneer ACOs performed in 2014 (Data)]

The problem with most health systems today, Miller says, is that patients are getting each part of their healthcare separately. "People want to buy individual circuit boards, not a whole TV," he says. "If we can show them that the TV works better, maybe they'll buy it," rather than assembling a patchwork of services themselves.

Why did Congress include ACOs in the law?

As lawmakers searched for ways to reduce the national deficit, Medicare became a prime target. With baby boomers entering retirement age, the costs of caring for elderly and disabled Americans are expected to soar.

The health law created the Medicare Shared Savings Program. In it, ACOs make providers jointly accountable for the health of their patients, giving them financial incentives to cooperate and save money by avoiding unnecessary tests and procedures. For ACOs to work, they have to seamlessly share information. Those that save money while also meeting quality targets keep a portion of the savings. Providers can choose to be at risk of losing money if they want to aim for a bigger reward, or they can enter the program with no risk at all.

In addition, the Centers for Medicare & Medicaid Services (CMS) created a second strategy, called the Pioneer Program, for high-performing health systems to pocket more of the expected savings in exchange for taking on greater financial risk.

In 2014, the 20 ACOs in the Medicare Pioneer Program and 333 in the Medicare Shared Savings generated $411 million in total savings  but after paying bonuses, the program resulted in a net loss of $2.6 million to the Medicare trust fund. That's far less than 1 percent of Medicare spending during that period.

[Also: ACOs mixed on Medicare Shared Savings Program final rule]

Still the program is expected to be expanded and Health and Human Services Secretary Sylvia Burwell has set a goal of tying 50 percent of all traditional Medicare payments to quality or value by 2018 through new payment models, including ACOs.

How are ACOs paid?

In Medicare's traditional fee-for-service payment system, doctors and hospitals generally are paid for each test and procedure. That drives up costs, experts say, by rewarding providers for doing more, even when it's not needed. ACOs don't do away with fee for service, but they create an incentive to be more efficient by offering bonuses when providers keep costs down. Doctors and hospitals have to meet specific quality benchmarks, focusing on prevention and carefully managing patients with chronic diseases. In other words, providers get paid more for keeping their patients healthy and out of the hospital.

If an ACO is unable to save money, it could be stuck with the costs of investments made to improve care, such as adding new nurse care managers. An ACO also may have to pay a penalty if it doesn't meet performance and savings benchmarks, although few have opted into that program yet. ACOs sponsored by physicians or rural providers, however, can apply to receive payments in advance to help them build the infrastructure necessary for coordinated care – a concession the Obama administration made after complaints from rural hospitals.

In 2014, the third year of the Medicare ACO program, 97 ACOs qualified for shared savings payments of more than $422 million.

How do ACOs work for patients?

Doctors and hospitals will likely refer patients to hospitals and specialists within the ACO network. But patients are usually still free to see doctors of their choice outside the network without paying more. Providers who are part of an ACO are required to alert their patients, who can choose to go to another doctor if they are uncomfortable participating. The patient can decline to have his data shared within the ACO.

Who's in charge -- hospitals, doctors or insurers?

ACOs can include hospitals, specialists, post-acute providers and even private companies like Walgreens. The only must-have element is primary care physicians, who serve as the linchpin of the program.

In private ACOs, insurers can also play a role, though they aren't in charge of medical care. Some regions of the country, including parts of California, already had large multi-specialty physician groups that became ACOs on their own by networking with neighboring hospitals.

In other regions, large hospital systems are scrambling to buy up physician practices with the goal of becoming ACOs that directly employ the majority of their providers. Because hospitals usually have access to capital, they may have an easier time than doctors in financing the initial investment, for instance to create the electronic record system necessary to track patients.

Some of the largest health insurers in the country, including Humana, UnitedHealth and Aetna, have formed their own ACOs for the private market. Insurers say they are essential to the success of an ACO because they track and collect the data on patients that allow systems to evaluate patient care and report on the results.

If I don't like HMOs, why should I consider an ACO?

ACOs may sound a lot like health maintenance organizations. "Some people say ACOs are HMOs in drag," says Kelly Devers, a senior fellow at the Urban Institute. But there are some critical differences – notably, an ACO patient is not required to stay in the network.

Steve Lieberman, a consultant and senior adviser to the Health Policy Project at the Bipartisan Policy Center in Washington, D.C., explains that ACOs aim to replicate "the performance of an HMO" in holding down the cost of care while avoiding "the structural features that give the HMO control over [patient] referral patterns," which limited patient options and created a consumer backlash in the 1990s.

In addition, unlike HMOs, the ACOs must meet a long list of quality measures to ensure they are not saving money by stinting on necessary care.

What could go wrong?

Many health care economists fear that the race to form ACOs could have a significant downside: hospital mergers and provider consolidation. As hospitals position themselves to become integrated systems, many are joining forces and purchasing physician practices, leaving fewer independent hospitals and doctors. Greater market share gives these health systems more leverage in negotiations with insurers, which can drive up health costs and limit patient choice.

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But Lieberman says while ACOs could accelerate the merger trend, consolidations are already "such a powerful and pervasive trend that it's a little like worrying about the calories I get when I eat the maraschino cherry on top of my hot fudge sundae. It's a serious public policy issue with or without ACOs."

Are ACOs the future of health care?

ACOs are already becoming pervasive, but they may be just an interim step on the way to a more efficient American health care system. "ACOs aren't the end game," says Chas Roades, chief research officer at The Advisory Board Company in Washington.

One of the key challenges for hospitals and physicians is that the incentives in ACOs are to reduce hospital stays, emergency room visits and expensive specialist and testing services -- all the ways that hospitals and physicians make money in the fee-for-service system, explains Roades.

He says the ultimate goal would be for providers to take on full financial responsibility for caring for a population of patients for a fixed payment, but that will require a transition beyond ACOs.

Kaiser Health News is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation.

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