Cover Story

The ACO Gamble

It has been tried again and again. But government and private payers are wagering on ACOs as a way to hit the health care jackpot: managed costs and high quality.


Robert Calandra

When HHS announced the launch of the Pioneer ACO Model program in 2011, naysayers were quick to predict that these risk-bearing newcomers would fizzle and possibly end up on the scrap heap with other assorted health care entities, programs, and policies sporting forgotten acronyms and initialisms.

At first, it looked as if the doubters might be right. ACOs, much like the ACA that helped bring them into being, stumbled out of the blocks (although to be fair, CMS and many commentators had a more positive spin). Nine out of the original 32 Pioneers dropped out of the program, and only 13 organizations beat their financial benchmarks by enough to earn shared savings payments. First-year results for the Medicare Shared Savings Program ACOs were more encouraging but hardly wrapped ACOs in glory. About half (54 out of 114) of the participating organizations beat their financial benchmarks, but only a quarter (29 out of 114) beat them by enough to get shared savings.

The vibe wasn’t all bad by any means. Commercial insurers were eagerly hopping on the ACO bandwagon. But as is so often the case with trendy developments in American health care, definitional fuzziness was—and remains—a problem. It was hard to figure out what was really going on when the ACO mantle was thrown over almost any payer–provider arrangement that shifts financial risk onto providers. Separating frothy aspirations and good public relations from reality is difficult when commercial payers don’t need to publicly report their ACO results, the way CMS—as a government payer—does.

Number of ACOs

Source: Oliver Wyman, ACO Update: A Slower Pace of Growth, April 2015.

ACOs are now players

But four years after the Pioneer program began, the transformation of ACOs from unfamiliar, unproven curiosities to important players in the delivery and financing of the most expensive health care system in the world is well underway. Two studies showed that the Pioneer ACOs actually did pretty well in reaching financial and quality goals. In March, the CMS Innovation Center—an ACA-created skunkworks for federal government health care programs—unveiled the Next Generation ACO Model program as a successor to the Pioneer program. Designed with the expectation that only about 20 organizations would participate, the new program will experiment with dangling incentives in front of beneficiaries to use ACO-affiliated providers, including the possibility of waiving the Part B deductible and coinsurance and making direct payments of up to $50 per year (research has shown that even small amounts of money can nudge people into making certain health care choices). The Next Generation ACOs will also have the option of moving to a capitated payment mechanism, whereby the providers submit claims to CMS as they ordinarily would, but the ACO, not CMS, is in charge of making the payments out of the per-beneficiary, per-month (PBPM) payment it receives from CMS (see diagram below).

How the Next Generation money might flow

CMS has suggested several different payment mechanisms for Next Generation ACOs. Population-based payments and capitation are two of them.

All providers/suppliers submit claims to CMS as normal. CMS pays Next Generation providers/suppliers participating in population-based payments reduced fee-for-service (FFS) rates and pays the PBPM payment with which the ACO pays Next Generation providers/suppliers according to written agreements.


All providers/suppliers submit claims to CMS as normal. CMS will pay the ACO a monthly PBPM capitation payment with which the ACO will be responsible for paying capitated entities. ACOs will receive claims and payment information from CMS to inform provider payment. CMS will continue to pay FFS claims for noncapitated entities as normal.

Source: CMS, Next Generation ACO Model Request for Applications.

Meanwhile, the process of generating new regulations for the Shared Savings Program has been slowly grinding away in the background. Under the rules finalized earlier this month, CMS will create a new Track 3 in the Shared Savings Program that will require participants to take on two-sided risk, which means facing the possibility of having to make a “shared losses” payment to the government if the ACO spends more than its financial benchmark, not just the upside risk of shared savings if it spends less. In exchange for taking on this downside risk, Track 3 ACOs will get 75% of shared savings, a larger cut than what other ACOs in the Shared Savings Program receive. ACO mavens see Track 3 as a successor to the Pioneer program, in which ACOs also shoulder two-sided risk.

The fact that the Shared Savings regulations are taking so long to finalize has furrowed some brows. Still, the new regulations, along with the Next Generation model, have put everyone who knows and cares about the details of health care on notice that the federal government is betting big on ACOs.

Multiple contracts

The commitment from the commercial sector isn’t quite as strong, but private insurers are also definitely at the ACO table. By Oliver Wyman’s count, there are now more than 580 ACOs in the country, and about three quarters of them are Medicare ACOs. But as the consulting firm points out in a research report it issued in April, drawing a sharp distinction between Medicare and commercial ACOs is misleading because most ACOs participating in the CMS programs also have contracts with commercial insurers and serve non-Medicare patients. In that way, ACOs are like any other providers that accept payment from private payers as well as Medicare and Medicaid. In fact, Wyman estimates ACOs in the CMS programs are responsible for 35 million non-Medicare patients.

Number of non-Medicare patients cared for by ACOs in CMS programs

In millions

Source: Oliver Wyman, ACO Update: A Slower Pace of Growth, April 2015

Leavitt Partners, the health care consulting firm founded by Michael Leavitt, the former governor of Utah and HHS secretary under President George W. Bush, has been tracking ACOs since 2010. In May, Leavitt published an impressive array of reports on ACOs from different perspectives—that of employers, hospitals, physicians, payers. The firm teamed up with different partners—the National Business Group on Health, the American Hospital Association, the AMA, the Blue Cross Blue Shield Association—to produce the report, and the Robert Wood Johnson Foundation provided financial support. This publishing effort speaks not only to the breadth of interest in ACOs but also to their Rashomon effect: People see them differently depending on where they sit in the health care system. As far as the counting game goes, Leavitt Partners’ tally is 744—considerably larger than Oliver Wyman’s and thus a reflection of the blurriness of the ACO definition outside the CMS programs.

But perhaps more important than the number of provider organizations hanging the ACO shingle is the number of payers willing to sign on the ACO dotted line and then send payments to these organizations. In the report on health insurers and ACOs that it developed with the Blue Cross Blue Shield Association, Leavitt Partners says public information shows that 136 unique payers have entered into accountable care contracts. Of these, 117 are commercial payers, and 19 are government payers (CMS is the main government payer but state-run Medicaid programs are also busy signing ACO contracts).

Payer-reported ACO, ACO-like, and other value-based payment arrangements
Name of payer Value-based payments (billions) Number of contracts reported Number of covered lives
Aetna $2.5 60 0.75 million
Blues plans $71 570 25.3 million
Cigna N/A 122 1.3 million
Humana N/A 900 1.2 million
United Healthcare $38 520 11 million
Source: Leavitt Partners, Health Insurers and the Accountable Care Movement, May 2015

Keeping tabs on the number of ACO contracts a provider organization has signed is a good way to gauge the momentum and staying power of ACOs, according to David Muhlestein, senior director of research at Leavitt Partners and coauthor of all six of the company’s ACO reports. Provider organizations often moved gingerly into becoming ACOs, beginning with a pilot project of some kind, he explains. But if after gaining some experience they sign additional contracts, Muhlestein says, that’s an indication they feel confident about ACOs and their fundamental proposition—possible financial reward in exchange for shouldering some financial risk while meeting certain quality standards. In 2014, 40.5% of the contracts signed by provider organizations were additional contracts (their second, third, fourth, and so on), compared with 31.9% in 2013 and 21.7% in 2012.

Getting out of the ACO conundrum

It’s not hard to assemble a cheerleading section for ACOs these days, and the naysayers are pretty much keeping their counsel. Understandably, consultants are among the biggest fans (it’s been said, but the joke is worth repeating: ACO may stand for “amazing consulting opportunity,” not “accountable care organization”).

“What we’re seeing now is ACO 2.0,” says Dennis Butts, director of value transformation at Navigant Healthcare, a business services and management consulting company in Chicago. “We’re moving toward a model that brings the right providers to the table to be more successful for the given populations they are beginning to manage.”

William Bithoney, MD

“I can’t name another model where the triple aim is so beautifully incented than the ACO,” says William Bithoney, MD, of BDO Consulting. Hospitals, physicians, and patients thrive under coordinated care.

More praise: “I don’t think there is another model of health care where all the incentives align,” says William Bithoney, MD, a managing director with BDO Consulting and chief physician executive for the company’s health care practice. “The hospitals do well when the patient is healthy. The physicians do well when the patient is healthy, and the patient does well by definition. I can’t name another model where the triple aim is so beautifully incented than the ACO.”

And a prediction: “If you are not investing in this trend and momentum, you are going to be left behind,” says Eric Heil, cofounder and CEO of RightCare Solutions, a Philadelphia company that makes software that risk-stratifies patients. “The major national health systems are moving headfirst into value-based ACOs. So this is clearly the direction we are headed in.”

But ACOs can’t make the mistake of believing their own publicity. The math of ACOs remains difficult and sets up conflicting motivations. On the one hand, these are provider organizations that still realize much, if not most, of their revenue through fee-for-service payment mechanisms. The forces of volume and “heads in beds” are still at play, especially for the Medicare population. On the other hand, their ACO contracts use financial benchmarking, shared savings, and the various shades of capitation that are designed to work against fee-for-service payment and the culture of more-is-better health care it engenders. So to some extent, it’s a-damned-if-you-do, damned-if-you-don’t scenario. If providers succeed as ACOs, they might hurt themselves as organizations that depend on fee-for-service revenue.

There are a couple of ways out of this conundrum. Payers can make ACO incentives rewarding enough to offset fee-for-service payments and incentives. If shared savings are the payment mechanism, payers must set financial benchmarks that are ambitious yet obtainable and shared savings percentages that are sufficiently generous. One of the points of contention in the new Shared Savings regulations was CMS’s proposal to cut the shared savings rate for Track 1—the track that has only upside risk—from 50% to 40%. CMS backed down and agreed to keep it at 50%.

Another way out of the conundrum puts the onus on the providers: They have to excel at being ACOs. That means providers must play an A-game at managing costs while also hitting quality metric marks—the sine qua non of enjoying the fruits of their cost-­management labors and getting a cut of whatever money is saved. The tools in the cost-management toolbox are familiar enough: care coordination, narrow networks, patients who are aware and sensitive to cost, IT in sundry manifestations. “You are seeing a lot more investment in case managers and IT infrastructure to really allow ACOs to manage a population,” observes Butts, the Navigant Healthcare executive. Heil, at RightCare, says that the more personalized the technology—patient portals, engagement apps, remote monitoring—the more engaged people will be. And if all the research on engagement is correct, that will lead to lower costs, which is good news for ACOs.

Dennis Butts

“We’re moving toward a model that brings the right providers to the table to be more successful for the given populations they are beginning to manage,” says Dennis Butts of Navigant Healthcare.

Veterans of the ’90s managed care wars may grit their teeth (or roll their eyes) when they hear all the happy talk about ACOs coordinating care and engaging patients. Haven’t we seen this all before? As Muhlestein, at Leavitt Partners, and others have pointed out, it’s not just the tool but who is wielding it that matters—and with ACOs, providers are wielding them, not payers. “It is very different when it comes from the provider,” Muhlestein says. The other major edge that ACOs have over the payer-driven managed care of two decades ago is cheaper, faster, and better-connected information technology. The technological infrastructure needed to continually measure quality and monitor cost just didn’t exist in the previous era, notes Muhlestein. Today’s technology also means provider organizations can ramp up to take on the responsibilities of managing care at a speed that would have been unimaginable before. But just because it’s cheaper doesn’t mean it’s cheap. According to a National Association of ACOs survey of its members, the average first-year startup cost for an ACO is $2 million (granted, not all of that is IT), and the average operating cost in subsequent years is $1.5 million. That’s not much money for a hospital system, but for the small or midsized physician group, it is. Regardless of the relative effect on budgets, setting up shop as an ACO does create another layer of costs for providers that cuts into shared savings and other financial carrots that payers might use.

Speed bumps, not stop signs

At the end of this month, health care as we have come to know it under the ACA may be upended. If the Supreme Court rules in favor of the plaintiff in King v. Burwell, the tax subsidies for purchasing health insurance may end in many states, and thus the ACA’s main purpose—expanding health insurance—would be thwarted. A ruling against the administration is likely to put a damper on all things related to American health care reform. It won’t, though, have any direct bearing on ACOs. Heil says he expects bumps in the road as ACOs continue to evolve, and the Supreme Court’s ruling might be one of those bumps. “But there is enough momentum,” continues Heil, “particularly with commercial payers who are much farther down this path, that a negative ruling will cause some delays—but ultimately, change is happening.”

Eric Heil

The Supreme Court striking a blow against the ACA in King v. Burwell won’t mean the end of ACOs, says Eric Heil, CEO of RightCare Solutions. ACOs have gained too much momentum and “change is happening.”

A problem more integral to ACOs is changing the risk arrangements so that ACOs are taking on both up- and downside risk. The thinking is that carrots without sticks may not be all that effective—in other words, without the possibility of being penalized for exceeding financial benchmarks instead of just being rewarded for beating them, ACOs will not bring down spending enough. Also at issue is the ideal of accountability that gave ACOs their name. Exposing providers to downside risk holds them accountable for the cost (and quality) of health care in a way that upside risk alone does not. But the providers participating in the CMS’s Shared Savings program have avoided downside risk like the plague. By CMS’s count, just three choose Track 2 and two-sided risk compared with the 401 who elected to be in Track 1 and face only upside risk.

CMS is trying to induce more organizations into two-sided risk by creating the new Track 3. It remains to be seen how many organizations can be lured into trying it. Why the reluctance? Judging from comments on the new regulations, even gung-ho ACOs feel that investing in the staffing and infrastructure needed to be an ACO is risky enough. Also, memories of the ’90s die hard. Here is an excerpt of comments by Trinity Health, a health care system in Livonia, Mich., on the new Shared Savings regulations when the regulations were at the proposal stage: “It would certainly be easier for CMS to have all ACOs move to tracks with downside risk exposure. However, the reality of the provider marketplace is that as a result of the managed care experience of the ’90s, many providers, both hospitals and physicians, view downside risk as an absolute contradiction to being in the program.”

Public relations may be the biggest problem facing ACOs. They are hard to understand and even more difficult to explain, and that’s partly because the ACO label gets slapped on so many different types of payer–provider arrangements. The National Committee for Quality Assurance is considering accrediting ACOs, as they do with patient-centered medical homes. That might help clarify what counts as an ACO and what doesn’t. It might also help businesses get behind ACOs. The Leavitt Partners report says a survey of larger employers found that while 26% had health plans that included ACOs, only 1% used incentives to encourage employees to use ACO-affiliated physicians.

You don’t need to poll to know that the public has little if any understanding of ACOs. Even in rarefied health wonkery circles, ACOs are a niche interest. But ACOs may soon start to leak into the public consciousness—at least the name, if not a full understanding. CMS has proposed that Medicare beneficiaries be allowed to “attest” that they want their care coordinated by an ACO. The Next Generation ACO waivers of Part B deductibles and coinsurance may also boost their name recognition. But do we really need to fret about the fact that the public doesn’t understand or even know about ACOs? Muhlestein doesn’t think so. He compares ACOs to the operating systems on our computers, laptops, and phones. Do we need to understand how they work? No. It’s the applications that we care about and use. “Let consumers focus on what they can understand—narrow networks, cost, some quality measurements,” says Muhlestein. “We shouldn’t try to drag people into payment models.”

Robert Calandra is a freelance writer in Philadelphia with more than 20 years of experience writing about health care.

ACOs: What are they?

ACOs are provider-led organizations that have taken on some degree of financial risk for the cost of health care while also meeting quality standards. The amount of risk and the payment mechanism varies, ranging from modest pay-for-performance contracts to shared savings (and losses, if it’s two-sided risk) to full capitation. Financial risk and quality metrics are supposed to work as incentives to coordinate care, improve health information technology, and make other advances. Some ACOs were started from scratch, but many are simply existing provider organizations that have signed contracts with payers that involve taking on financial risk.