Medicaid/Medicare Physician Compensation Supply of Medical Services

What are Accountable Care Organizations?

Accountable Care Organizations (ACOs) are the latest rage in the health policy world.  The question is, what are ACOs.  The Urban Institute’s Kelly Devers and Robert Berenson try to answer the following question: “Can Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?

The goal of ACOs is to pay providers in a way that encourages them to work together, to pay providers in a way that does not encourage supplier induced demand, and to create an organization that is rewarded for providing high quality care.  What kind of organizations are currently poised to evolve into ACOs. This chart evaluates the prospects.

One question is why doesn’t Medicare just use their current Medicare Advantage program to accomplish these goals.  In the Medicare  Advantage program, Medicare pays a lump sum to private insurers and holds them accountable for all the medical care the beneficiary needs.  However, there are three main differences between ACOs and HMOs.

  1. The “accountability” rests with the providers.  Providers or provider groups, rather than insurance companies, are evaluated on the quality and efficiency of care.
  2. Direct contracting with provider organizations without the reliance on a health plan intermediary.
  3. The ACOs allow for flexibility in the type of organization.  Some regions may prefer independent practice associations (IPAs) while others  may prefer a physician-hospital organization (PHO).

The physician-centered organization makes much sense to many policymakers because “the resources that flow from the decisions physicians make with patients account for a major portion of overall health care costs, regardless of where the care actually takes place.”

Medicare could pay ACOs with a “gainsharing” mechanism.  In the gainsharing framework, the fee-for-service payment structure remains, but a portion of patient cost savings gets passed through to the physician. On the other hand, Medicare could institute a partial capitation scheme.  This would be similar to Medicare Part D, where the prescription drug plans get a flat rate per person, but they also receive are involved in risk corridors, which “limit a prescription drug plan’s potential losses should the plan happen to experience much higher utilization and costs than expected.”

One problem with this framework is that physicians are good at treating patients, not at risk management.  Thus, many physicians may get stuck with high-risk patients and some ACOs may become insolvent unless there are adequate Medicare risk adjustment payments.

Secondly, patients may see ACOs as HMOs in disguise.  “[I]f beneficiaries believe that ACOs are essentially tightly managed ‘HMOs in drag’ that are going to restrict their choices, undermine the doctor-patient relationship, and result in cheaper but lower-quality care, the concept will be met with skepticism, if not overt opposition.”

Other obstacles to ACOs include possible FTC and DOJ desires to quash ACOs on anti-trust grounds.  Further, state governments may need to change laws related to insurance regulation as well as organizational and professional liability.


  1. ACO’s are another imaginative attempt to change the landscape without changing the landscape. That is, they do not address fundamental flaws in business models that also characterize existing financing mechanisms. For example, to be efficacious, they would require a very broad base of clientele or else successful managment of the risks is not viable. And they would require very long term contracts with providers that include penalties for early termination. Unless they can construct truly better business models, they are an exercise in futility.

  2. ACO’s do not address the two biggest fundamental problems with the health care marketplace:
    1) Providers should be competing on price first then quality; this simply must change or cost will continue to spiral upwards.
    2) Federal and state governments are too involved in providing services and coverage to a significant share of the market.

    Even if the ACO model can deal with some sort of capitation, the market should set the price thresholds, not some analyst based on some model.

  3. You can’t apply a two dimensional business model to a three dimensional health care system. In a business model there are buyers and sellers. In a health care model there are buyers, sellers, and payers. The third dimension, health insurers, is what makes the health care industry a whole other breed of animal.

    When doctors compete on prices (first) they don’t say “hey that doctor is charging $100 less than me so I better lower my price!” Rather, the other doctor says, “that doctor is charging $100 more than me I better raise my price!”

    While I agree that ACOs may just be the reimbursement flavor of the week, to argue that prices should be set by the market is naive. There have been severe market failures in the health care industry which is why prices are spiraling out of control and the federal government is trying to find new payment mechanisms.

  4. The cost containment assumptions for ACOs make sense but only if cost shifting, due to uncompensated care for the growing uninsured and under insured populations, is eliminated or significantly constrained. If it is not, ACOs will only serve insured populations. This would leave the 50+ million uninsured in a fee for service model (the ER as the primary point of care) that can only be supported by shifting their cost of care to those who have insurance and to Medicare and Medicaid. And, healthcare cost will continue to accelerate faster and faster each year overwhelming the savings that ACO in that reality may produce.

    The promise of ACOs— savings, compensation based quality drivers and competition—depends very much on a level playing field in which everyone (just about) is insured.

    Another element of the ACO discussion seems to anticipate that insurance or Medicaid/Medicare payments would cover 100% of the cost of care. But we know that patients will have significant out of pocket payment responsibility…20% for Medicare. Is current thinking that a patient will receive one bill from the ACO for balances after insurance and deductible, owed to all providers of services who participate with the ACO?

  5. ACO seems like a reasonable penacea for rising health care costs,however for providers to order less tests or procedures tocontrol costs,they would need some form of protection from malpractice suits.The very high expectation of patients that all responsibilities lie on the providers to make them 100 percent free of the disease with no personal accountability will have to change.A successful ACO will be one which needs accountability from the Insurance companies,the providers and the patients.

  6. In our ACO the answer for ordering fewer tests was strict management of testing based on protocols as well as reaching clinical consensus with our physicians.

  7. In our ACO the key to controlling unnecessary lab and radiology testing was developing standardized approaches to testing for many of our primary diagnoses. Close monitoring of utilization and data driven clinical discussions were also key.

  8. While ACOs aren’t perfect. The idea is a step in the right direction.
    I agree that the burden from cost of malpractice, especially from
    Need for defensive medicine will urgently needs to be addressed.
    A mechanism also needs to be in place to fine tune the process as
    we moved forward.

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