The Promise of ACOs

As health care spending continues to rise to unsustainable levels, policymakers and leaders in the health care community are increasingly viewing the ACO model as a promising path for delivering better care at lower costs. 

What is an ACO?

The ACO model brings together coordinated networks of providers with shared responsibility to provide the highest value care to their patients. It does so by establishing a spending benchmark based on expected spending. If an ACO can improve quality while slowing spending growth, it receives shared savings from participating payers. 

Because providers receive a share of the savings beyond a predetermined threshold level, steps that achieve better outcomes with less resource use – such as care coordination services and wellness programs – result in greater provider reimbursement. These steps thus "pay off" and are sustainable in a way that current reimbursement systems are not. The shared savings approach provides an incentive for ACOs to avoid expansions of health care capacity that drive both regional differences in spending and variations in spending growth, and that do not improve health.

The ACO model was formally introduced into health reform through the Patient Protection and Affordable Care Act, and will officially become part of Medicare through the Medicare Shared Savings program in 2012. ACOs may exist outside of the Medicare Shared Savings program with both public payers – such as through pilots funded by the Center for Medicare and Medicaid Innovation – or private payers. 

Why ACOs?

The model offers a promising approach for achieving higher quality and lower cost health care without requiring radical change in the current payment system or referral patterns. Fee-for-service can remain in place, and most physicians already practice within referral networks around one or a few hospitals. By promoting more strategic integration and care coordination, the ACO model offers a potential win-win for providers, payers, and patients alike.

The ACO approach also builds on current reform efforts that focus on one key group of providers, as in the medical-home model, or on a discrete episode of care, as in bundled payments. On their own, these initiatives may help strengthen primary care and improve care coordination, but they do not address the problem of supply-driven cost growth. If adopted within a framework of overall accountability for cost and quality, as the ACO model envisions, both the medical home and bundled payment reforms would have added incentives to support higher-value care delivery. 

The ACO approach has already been implemented in programs such as Medicare's Physician Group Practice (PGP) Demonstration, which has shown significant improvements in quality and savings for large group practices.