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What is an Accountable Care Organization (ACO)?

As health care payment reform brings an onslaught of new options to the industry, the “accountable care” model has emerged as a popular change to the way providers are paid for delivering care. But what is an accountable care organization (ACO)?

An ACO is a group of doctors and/or hospitals that voluntarily assumes responsibility for both the quality and cost of health care, for a defined population of patients. Unlike the traditional fee-for-service reimbursement model, which pays providers for each care service delivered, an ACO model directly ties payment to outcomes and the providers’ abilities to deliver care in an efficient manner.

Those willing to provide payment (payers) to ACO participants establish an accountable care framework with predetermined benchmarks for cost and quality. The provider groups enter into the ACO agreeing to care for a patient population with the goal of reaching or surpassing those benchmarks.

If the ACO meets all the quality benchmarks, and the population’s cost of care is below the established threshold, there will be a cost savings (the difference between the actual cost and the benchmark cost) that the ACO can share all or part of, depending on the framework agreement. Some ACO contracts add additional incentives for reaching even higher quality goals.

ACOs have been, and can be, established by The Centers for Medicare and Medicaid Services (CMS) and private payers. In either case, providers are eligible for bonuses as described above, delivering both cost savings and quality outcomes.

Currently, ACO specifications are flexible enough to accommodate a large range of provider organizations, including fully integrated health care systems, multi-specialty group practices, physician hospital organizations and independent physician associations.

Since passage of the Affordable Care Act, the ACO model and number of accountable care organizations has grown dramatically. As of February 2013, one group estimates that there are 428 ACOs in 49 states, more than double the number at the start of 20111, with more than half of the U.S. population now living in areas served by an ACO. Additionally, at least 28% of U.S. patients live in areas served by two or more ACOs. All together, ACOs now cover 37 million to 43 million Medicare and non-Medicare patients throughout the country.2

Despite their proliferation, especially among physician-led organizations, ACOs are still in the early stages of development. There are important, unanswered questions about exactly how to measure quality within an ACO, how to calculate financial rewards for participating providers, and even how to determine if the ACO structure will be viable in the long term.

These are serious issues that need to be addressed. However, regardless of how issues ultimately get resolved, health care organizations must prepare to take on increasing amounts of financial risk as the health care industry shifts towards new payment models like this.

1 Leavitt Partners. (2013, February 20). Accountable Care Organizations have more than doubled since 2011. Available at: http://leavittpartners.com/2013/02/accountable-care-organizations-have-more-than-doubled-since-2011/

2 Oliver Wyman. Available at: http://www.oliverwyman.com/media/ACO_press_release(2).pdf.

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