Understanding ACOs

On March 31, 2011, the proposed rules for creating and operating Accountable Care Organizations (ACOs) were released by the Centers for Medicare and Medicaid Services (CMS). The legislative requirements for these rules are contained in the PPACA under Section 3022: The Medicare Shared Savings Program. The 60 day period for comments on these proposed rules will end June 30, 2011 and can be submitted to the HHS.    


The concept of the ACO was originally proposed by Elliot Fisher, et al in a 2006 Health Affairs article, “Creating Accountable Care Organizations: The Extended Hospital Medical Staff.” Looking for a means to increase coordination and communication amongst medical care providers, the authors proposed changing the informal “virtual” organization of independent practitioners functioning within a locality into a formal organization which could then be held accountable by government for cost and quality performance via payment incentives and penalties. Detailed oversight of numerous independent practitioners is a costly, cumbersome bureaucratic task. Fewer, larger organizations are easier to monitor and control. The elimination of small, private practices and independent health care providers is an explicit goal of the ACO model.

Brief Synopsis

ACOs are designed in order to implement the central goals of the PPACA’s Medicare Shared Savings Program. ACO’s are government-approved organizational structures within which health care providers can coordinate the management of an individual Medicare patient across care settings – including doctor’s offices, hospitals and long term care facilities—in order to improve reimbursement from Medicare.  A stated purpose of this structure is to spare patients from retelling their story and medical history to each separate provider. Another purpose is to improve care by eliminating the duplication of services, medication errors, unnecessary procedures and medical mismanagement. Ultimately, the function of the ACO structure is to simplify the government’s ability to monitor and control the cost and quality of medical care. ACOs which succeed in lowering costs (as determined by HHS) while meeting performance standards on quality of care (as determined by HHS) will receive back a portion of the “shared savings” with the remainder retained by the government.

Patient and provider participation in an ACO is nominally voluntary. Although providers must apply to participate and commit to a minimum of three years, patients will be assigned by the HHS to an ACO and must actively opt out if they do not want their medical information shared with other providers. (NB: beneficiaries can not opt out of having their claims data used for purposes of cost and quality management.)  ACOs are designed to function for Medicare patients and providers participating in the fee-for-service segment of Medicare, not Medicare Advantage.

Pursuant to PPACA, an ACO must, among other things:

The ACO program is slated to begin January 1, 2012. Providers participating in an ACO will be required to post signs in their facilities, to offer standardized information about the ACO-- including how the ACO will improve the care received, as well as separately notify each Medicare patient at the first possible encounter.

 For accounting purposes, Medicare beneficiaries will be retrospectively attributed by CMS to a particular primary care provider based on the previous year’s pattern of health care. Even though a beneficiary is “attributed” to a particular provider and ACO, the patient may still seek health care wherever he or she chooses. ACOs will be prohibited from trying to control costs through the use of managed care techniques such as limiting choice of providers, utilization management, or requiring prior authorization for services for Medicare beneficiaries.

Expenditure benchmarks (targets) and actual expenditures will be calculated from the claims data generated by patients’ medical care.  If the actual expenditures of an ACO fall below the HHS-determined benchmark, “savings” are created which may then be divided between the ACO and the government. In order to qualify for its portion of the “savings”, an ACO must also satisfy quality standards set and judged by the HHS.

The benchmark is an estimate of what the total Medicare fee-for-service Parts A and B expenditures for ACO beneficiaries would have been in the absence of the ACO. This benchmark will be updated for each performance year within the three year performance period.  

CMS is proposing a choice of two types of risk-sharing models:  a one-sided risk model (sharing of savings only for the first two years and sharing of the savings and losses in the third year) and a two-sided risk model (sharing of savings and losses for all three years.) Smaller, less experienced organizations can begin with the lower risk-lower reward one-sided model, while larger more experienced ACOs can start immediately with the higher risk-higher-reward potential two–sided model.

Official Documents:

1. Seven pages of legislation in the PPACA have been turned into 649 pages of regulation.

   The relevant parts of the ACA can be found here:

   Title III: Subtitle A: Part III: Sec. 3022  pg 395-399; 940-941

2. The complete set of proposed rules is in two parts and is available here:

    Medicare Shared Savings Program:  Accountable Care Organizations

3. Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care

   Organizations Participating in the Medicare Shared Savings Program

Detailed Summaries

1. Congressional Research Service report on ACOs

2. National Law Review    Proposed ACO Rules Summary

3. Commonwealth Fund    Proposed rules for ACOs Participating in the Medicare Shared  Savings Program: What Do They Say?

From the Department of Health and Human Services on the proposed ACO regulation:

Written and copyrighted May 2011 by Beth Haynes, MD, Docs 4 Patient Care, Senior Health Policy Analyst and Marion Frank, Docs 4 Patient Care, National Alliance Co-chair