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Accountable Care Organizations: Past Performance and Future Trends

December 13, 2017

Healthcare spending accounts for just under one-fifth of the US economy, amounting to an enormous $3.4 trillion in 2016 [1]. Politicians from both sides of the aisle have tried their hand at passing cost containment measures to slow its growth, which has consistently outpaced GDP growth rates. With the passage of the Affordable Care Act in 2010, the Center for Medicare and Medicaid Services (CMS) attempted to cut costs by reshaping the way providers are paid to manage care. As a result, it began to recognize and reward a new hybrid structuring of providers: Accountable Care Organizations (ACOs). As ACOs become more popular under new payment schemes, it is essential to track their ability to reduce costs and improve quality. The Trump administration’s policy changes stand to shape not only providers’ care coordination, but also the trajectory of the healthcare industry.

What Are ACOs?

ACOs are groups of physicians, hospitals, and other providers working together to coordinate patient care. Different forms of coordinated care existed before Obamacare as well, but they were less common and not systematically rewarded. These were the innovators who first entered the new program and showcased its financial rewards to others.

The idea of coordinated care operates like auto shops. When a car breaks down, rather than going to specialists for each part that needs fixing, it is more efficient to pay a single auto shop to coordinate all the repairs. Unlike specialists, auto shops make sure that all the parts work well together to get the car running again. By communicating patient needs to others within the system, providers optimize patient health and costs by preventing unnecessary tests, visits, and complications.

The term accountable in accountable care organization relates to the financial risk shared by the network to lower costs and provide better care quality. If the CMS spends less money on patients in an ACO than it would otherwise, then it allows the ACO to share in the savings [2]. Although most ACOs only share in savings, a handful of ACOs operate under two-sided risk, meaning that they also compensate CMS for a share of any losses.

Tools for Reform

Policymakers use Medicare payments as the primary tool for pushing cost-controlling practices. There are three general payment types that can be modified with links to quality: fee-for-service, bundled payments, and population-based capitation. Fee-for-service has been the traditional form of compensation, and it pays providers to perform and bill per procedure, which incentivizes extra care. This system has virtually no cost-control mechanisms. Bundled payments are set price tags on all the services needed for specific treatments, like predictable surgeries. Setting a price tag challenges physicians to treat patients under budget by not compensating them for extra expenses. Capitated payment expands on those incentives of shared stakes by setting compensation rates based on the number of people treated. It is essential for these measures to be tied to quality requirements to prevent cost savings from meaning worse care.

Affordable Care Act (2010)

The Affordable Care Act expanded ACO growth by providing financial incentives to existing providers to coordinate care. It established two types of ACOs: Pioneer ACOs and Medicare Shared Saving Program (MSSP) ACOs. Only 32 pioneer ACOs were accepted by the CMS in 2012. They shared 60-75% of savings or losses beyond minimum thresholds of 2%, with the later option of receiving capitated Medicare payments instead of fee-for-service payments [3]. This program ended in 2016 with eight remaining pioneer ACOs, offering lessons for the future rather than large scale cost savings.

The MSSP allowed ACOs to receive fee-for-service Medicare reimbursements with the potential to share in cost savings above 2%. The program offers three tracks with various degrees of risk sharing, though 91% of the 480 Medicare affiliated ACOs are in Track 1, which shares 50% of the savings, but no loss. Whereas in Pioneer, Track 2, and Track 3 ACOs they receive 60%-75% but also share loss [4].

While there are 923 total ACOs active as of 2017, it is important to recognize that roughly half are privately operating without Medicare contracts and do not supply public data. Figures 1 and 2 below depict the distribution and impact of all types of ACOs as of Q1 2017.

(Image: ACO Presence by State, data from Leavitt Partners ACO database. Source: Health Affairs Blog)

(Image: ACO Presence by State, data from Leavitt Partners ACO database. Source: Health Affairs Blog)

Pioneer ACO Outcomes 

Data from the first few years of pioneer ACOs suggest that they saved money for Medicare while slowing spending growth and benefitting from shared-savings. Until the end of the second year in 2013, twenty-three pioneer ACOs generated $96 million in savings while earning $68 million in shared savings bonuses [5]. Savings were notably greater for ACOs with higher baseline spending [6]. More importantly, the CMS stated in the same report that they increased health care costs per capita by only 1.4%, which is 0.45% lower than for traditional Medicare payments [7]. By the end of year four in 2015, the twelve remaining pioneer ACOs generated $37 million in total savings, although shared savings bonuses were not reported [8].

An optimistic viewpoint would argue that savings are even more likely to be generated in the long-term since providers need time to adjust to new practices and spread administrative costs [9].  While the Pioneer ACOs continued to save more costs as the program developed, critics argued that they did so because relatively poorly performing ACOs dropped out of the program.

Pioneer ACOs definitively raised the quality of care provided to beneficiaries. Until the end of the fourth year, 2015, Pioneer ACOs improved their overall quality of care by an average of 21%, a measure which accounts for: patient and caregiver experience, care coordination and patient safety, preventive health, and care for at-risk populations [10]. However, it is interesting to note that 90% of the growth occurred within the first two years [11].

Medicare Shared Savings (MSSP) ACO Outcomes

Medicare Shared Savings ACOs continued the trend of saving on health care spending, but did not improve quality as much as Pioneer ACOs. In 2015, 392 such organizations cut Medicare spending by $429 million, with 31% able to share in savings [12]. No MSSP ACO with risk sharing lost money [13]. Quality measures also improved by an average of 15% over the course of the program’s lengthier lifespan [14].

Part of the MSSP ACO program’s success lies in serving healthier and wealthier populations. Early results from a study by the Leonard Davis Institute reveal that ACOs more often form in regions that do not serve high concentrations of vulnerable and sick populations [15]. In areas with higher rates of physician participation in ACOs, there are proportionally fewer minority, uninsured, and poor residents.

MACRA to Bolster ACOs

In 2015, Congress made Medicare payments to ACOs more contingent on risk sharing and quality metrics under the Medicare and CHIP Reauthorization Act (MACRA). By shifting this burden onto providers, MACRA aimed to make them cost-efficient when providing healthcare. 

Set to adjust payments in 2019, the Act authorized a new payment track that further incentivized ACO loss sharing and high quality care [16]. Under the Alternative Payment Models (APM) track, providers in ACOs are compensated with a mix of bundled and fee-for-service payments, and are subject to stricter reporting requirements than under previous models, providers in ACOs that already share two-sided risk will receive additional 5% payment bonuses. These bonuses increase previously existing incentives for ACOs to take on two-sided risk [17].

To prevent cost savings from shoddy treatment, the program requires providers to report on four measures: quality, resource use, advancing care information, and clinical practice improvement activities [18]. Quality takes the largest share of the evaluation of each ACO physician, further emphasizing the need for effective care. By offering further financial incentives, MACRA strongly encourages the growth of ACOs that go even further to cut spending while delivering better quality care.

ACOs Under Trump

Secretary of Health and Human Services, Alex Azar, expressed his approval of ACOs and managed care [19]. However, Republicans are opposed to the limiting tracks and payment structures used to further incentivize cost containment. 

President Trump’s most direct impact on ACOs comes from a revamped market-driven approach at the Center for Medicare and Medicaid Innovation (CMMI) [20]. Trump’s appointed head of the CMS, Seema Verma, has already made previously mandatory bundled payment models voluntary, in order to address providers’ anxieties of rapid change [21].  However, according to CMS calculations, these particular scale backs will cost the government and additional $106 million over the next three years [22]. Undoubtedly, there exist market-driven approaches that can and have cut costs and improved patient care. However, the changes to date stand to slow the pace of cost-control.

Looking forward, ACOs will continue to thrive under the new administration for a variety of reasons. MACRA’s implementation over the next couple of years cements the foundation for their growth and compensation. Private insurance companies have also begun to develop their own contracts with ACOs and will continue the push for cost control even if the CMMI does not.

In addition, there is growing evidence to alleviate fears of ACOs driving provider consolidation. Consolidation had been a growing trend before the ACA, and threatened to decrease competition and raise health care prices. However, Dr. Hannah Neprash published findings in 2017 suggesting that while provider consolidation has accelerated since the ACA, there is insufficient evidence to suggest that ACOs cause it [23].

In their short life span, Accountable Care Organizations have proven their potential to cut spending and provide better care for patients. Their growth is complimented and encouraged by Obama-era policies, of which MACRA has yet to take effect. As newer ACOs settle into their new care models, it will be necessary to monitor and address issues with consolidation and access to care.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.


 [1] https://www.theatlantic.com/health/archive/2017/06/how-we-spend-3400000000000/530355/

 [2] https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Downloads/ACO-Providers-Factsheet-ICN907406TextOnly.pdf

 [3] https://innovation.cms.gov/Files/fact-sheet/nextgenaco-comparefactsheet.pdf

 [4] https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/Downloads/All-Starts-MSSP-ACO.pdf

 [5] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2014-Fact-sheets-items/2014-11-10.html?DLPage=1&DLEntries=10&DLFilter=aco&DLSort=0&DLSortDir=descending

 [6] http://www.nejm.org/doi/full/10.1056/NEJMsa1414929


 [8] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-08-25.html?DLPage=1&DLEntries=10&DLFilter=account&DLSort=0&DLSortDir=descending

 [9] https://khn.org/news/are-medicare-acos-working-experts-disagree/

 [10] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-08-25.html?DLPage=1&DLEntries=10&DLFilter=account&DLSort=0&DLSortDir=descending






 [16] http://www.modernhealthcare.com/article/20170526/NEWS/170529912

 [17] https://healthpayerintelligence.com/news/how-macra-requirements-impact-accountable-care-organizations

 [18] https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/MACRA-MIPS-and-APMs/MIPS-Scoring-Methodology-slide-deck.pdf

 [19] https://homehealthcarenews.com/2017/11/trump-hhs-pick-says-amen-to-home-health-benefits/

 [20] https://innovation.cms.gov/Files/x/newdirection-rfi.pdf

 [21] http://www.modernhealthcare.com/article/20171130/NEWS/171139986

 [22] http://www.modernhealthcare.com/article/20171130/NEWS/171139986

 [23] http://content.healthaffairs.org/content/36/2/346.full.pdf+html


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