Understanding the Fundamentals of Accountable Care Organizations

November 13, 2023 - The healthcare payment process is undergoing a dramatic transformation as payers and providers shift from volume to value. While stakeholders are currently piloting many value-based care models, accountable care organizations (ACOs) are among the most popular and successful models to date. 

According to the Centers for Medicare and Medicaid Services (CMS), ACOs are groups of physicians, hospitals, and other healthcare providers who voluntarily coordinate care for patients with the goal of delivering high quality care. 

ACO participants also agree to take on responsibility for the total costs of care for their patients. ACOs that reduce the total costs of care for their patient populations can share in the savings with the payer. In certain models, they may also be liable to pay back losses if their costs exceed their spending benchmarks.

Policymakers and healthcare leaders believe tying financial incentives to care quality, patient outcomes, and care coordination through ACOs is a key solution for fixing the inefficient fee-for-service system.

What exactly are accountable care organizations? How do providers get paid? Have the organizations been successful at reducing costs and improving quality? And what are the strategies for succeeding under the model?

WHAT IS AN ACCOUNTABLE CARE ORGANIZATION?

Stakeholders have likened ACOs to the health maintenance organizations (HMOs) that were popular in the 1990s.

An HMO is an insurance plan that limits coverage to services performed by providers who work for or contract with the plan. HMO providers generally receive a fixed monthly or annual payment to deliver care to beneficiaries.

ACOs and HMOs share similar goals; both want to be an alternative to fee-for-service and promote integrated care. But the concepts are not the same.

ACOs bring together different components of patient care to improve coordination. When done correctly, providers in an ACO can bring down costs and improve care quality while earning incentive payments. HMOs, on the other hand, seek to cut costs by setting fixed prices for services, which may encourage providers to reduce utilization or skimp on care in an effort to stay under the cap.

The Affordable Care Act (ACA) officially introduced ACOs to support the healthcare industry’s overarching goal of achieving what was formerly the Triple Aim: improving care quality, enhancing the patient experience, and decreasing healthcare costs.

More recently, healthcare stakeholders have built on the Triple Aim to better support the people delivering care to attributed patients. This expanded Quadruple Aim includes improving provider wellbeing—something ACOs have also helped achieve. Transitioning from fee-for-service models to value-based care can alleviate challenges that lead to physician burnout. 

As of the first quarter of 2022, there were 1,010 ACOs, with 1,760 public and private ACO contracts covering more than 32 million patients nationwide. Medicare’s flagship ACO model, the Medicare Shared Savings Program (MSSP), accounts for many of those organizations, with 456 ACOs in 2023. There are also 132 ACOs in the ACO Realizing Equity, Access, and Community Health (REACH) model, a newer ACO model from CMS that specifically aims to address health equity in addition to traditional ACO goals.

RISKING REVENUE TO ACHIEVE HIGHER CARE QUALITY AT LOWER COSTS

Under the traditional method of paying for healthcare, providers receive payment for every test, procedure, and service they perform. While this fee-for-service model provides a reliable income for providers — when they are able to deliver services — it can also incentivize providers to deliver more care regardless of its medical necessity or appropriateness. 

ACO contracts aim to counteract the incentive to deliver “sick care” and instead emphasize prevention and wellness through incentive payments and financial risk arrangements.

In other words, ACOs can earn more for delivering care that improves population health, shortens lengths of stay, reduces hospital readmissions, prevents emergency department visits, and ultimately results in care that keeps patients out of the hospital or exam room when appropriate.

At the base of the ACO payment structure are incentive payments. According to the National Association of ACOs (NAACOS), providers in the ACO generally receive fee-for-service payments throughout the performance period. At the end of the period, payers adjust the payments based on the ACO’s quality performance on specified metrics. 

Quality performance also dictates whether an ACO qualifies for shared savings payments under financial risk arrangements.

A key component of the ACO payment structure is financial risk. ACOs take value-based reimbursement to a new level by not only tying payments to quality but also holding providers financially accountable for the care costs of their patient population.

Financial risk in ACO contracts can be “upside” or “downside.”

In upside-risk arrangements, providers can earn all or a percentage of any savings they accrue during the performance period relative to a financial benchmark set by the payer. The minimum savings rate (MSR) tells ACOs how far below the benchmark they need to keep their costs to qualify for shared savings payments.

For example, the MRS for Medicare ACO programs ranges from 0 to 3.9 percent, meaning some Medicare ACOs must have costs that are almost 4 percent lower than the financial benchmark to earn shared savings payments.

If ACOs in upside-only contracts incur costs higher than the benchmark, the organization does not qualify for shared savings payments. However, the payer does not financially penalize the organization as it would in a contract with downside risk.

Under downside risk contracts, ACOs can still share in the savings if costs are below an established benchmark. But the organization may also have to repay all or a portion of the financial losses if actual care costs exceed the financial target.

Downside risk arrangements spread the financial responsibility more evenly across stakeholders. In 2019, CMS began requiring MSSP ACOs to assume some level of downside financial risk within two performance years.

This change drove an increase in the number of Medicare ACOs in two-sided risk contracts in 2022, according to a study published in the American Journal of Managed Care. However, some ACOs remain in upside-only contracts.

Despite its benefits, downside financial risk may dissuade providers from participating in ACOs. The number of MSSP ACOs has continued to fall since 2018, leading CMS to pursue policies that may encourage participation. In the 2023 Medicare Physician Fee Schedule, the agency finalized policies allowing ACOs to stay in upside-only tracks longer.

Downside risk may present more challenges for providers, but it also offers the opportunity to earn significant shared savings while improving patient care.

HOW TO SUCCEED AS AN ACCOUNTABLE CARE ORGANIZATION

Over the past several years, ACOs have transformed their clinical and financial infrastructure to improve care quality and reduce costs. According to recent data, the organizations are moving the needle with both goals. 

In 2022, the MSSP generated savings and high-quality performance results for the sixth consecutive year. The program saved Medicare $1.8 billion, with 63 percent of ACOs earning shared savings payments. In addition, ACOs performed better on quality measures related to diabetes and blood pressure control, tobacco screening and smoking cessation, breast cancer and colorectal cancer screening, and depression screening and follow-up. 

Successful ACOs include a robust network of high-quality, cost-efficient providers so patients can access as many services as possible within the network.

ACOs are still on the line for the financial and clinical outcomes of attributed patients who seek care with non-affiliated providers. Therefore, developing a robust network will keep patients within the control of the ACO and increase the likelihood of coordinated low-cost care delivery.

ACOs should consider following the care continuum into post-acute care, which could significantly impact the likelihood of a hospital readmission or other patient setback.

Post-acute care facilities often exhibit significant variations in costs, jeopardizing the overall spending rates on an attributed individual.

For example, in 2021, total Medicare spending was $28.5 billion on skilled nursing facilities, $16.9 billion on home healthcare, $8.5 billion on inpatient rehabilitation facilities, and $3.4 billion on long-term care hospitals, according to an Urban Institute brief.

With a proper provider network, ACOs can ensure that patients are sent to quality providers after discharge, which can help reduce hospital readmissions or other complications. Additionally, involving post-acute providers in the ACO may help minimize Medicare spending on these services.

ACOs should also prioritize primary and preventive care, as primary care physicians often have the longest relationships with patients and can address health concerns before they become severe and expensive.

The ability to follow patients throughout their care journey is critical to ACO success, especially in risk-based contracts.

Successful ACOs must also have adequate data analytics and health information technology (HIT) capabilities. Data analytics can help ACOs identify high-risk patients and track and monitor patient care, aiding in care coordination. Data analytics can also streamline the reporting of quality measures.

HIT plays a role in data quality, as it can support data collection, analysis, and exchange. HIT, including EHRs and health information exchange (HIE) platforms, facilitates data sharing between clinicians across different care settings and between providers and payers.

Additionally, ACOs can leverage their EHR systems to improve population health management and keep track of clinical and financial data.

EHR dashboards allow providers to view critical patient information, such as risk scores and utilization rates. Dashboards can help each provider in the ACO reduce unnecessary utilization, prescribe the most appropriate treatment plan, and ultimately realize savings for the organization as a whole.

Developing the right clinical and technological infrastructure is key to achieving ACO success and continually identifying areas of opportunity to improve population health management, especially as ACOs continue to grow.

The future is bright for ACOs. The model has proved to be an effective strategy for moving the industry away from fee-for-service and to a care delivery and payment mechanism that promotes wellness.

As the healthcare landscape and provider needs evolve, CMS has revised ACO programs and introduced new ones. Although the agency is pushing for more participation, current ACOs have seen lasting impacts on care delivery, quality, and reimbursement.