Accountable Care Organizations Aim to Fundamentally Change the Healthcare System

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Last Thursday, the Centers for Medicare & Medicaid Services (CMS) released the highly anticipated final regulations for accountable care organizations (ACOs) under Section 3022 of the Patient Protection and Affordable Care Act (PPACA) [1]. The PPACA requires accountable-care agreements to be offered under Medicare, starting in 2012.

Healthcare team

What is an Accountable Care Organization (ACO)?

An Accountable Care Organization (ACO) is a group of health care providers (doctors, hospitals, etc.) that work together to arrange all medical care for their patients. The general idea behind ACOs is that by establishing a continuum of care among providers who have incentives to focus on primary and preventive care, costs can be contained.

By allowing for care coordination and evidence-based care, healthcare systems and health professional performance will achieve significant quality improvements. Promoting preventive medicine in order to avoid costly acute episodes, especially as they relate to chronic disease, elder care, and within health disparity communities, will lead to better health outcomes for patients.

What’s wrong with healthcare today?

The problem with healthcare today is that patients are getting each part of their healthcare separately. Patients see primary care physicians for basic treatment, specialists for specific care, hospitals for tests, etc. An ACO brings all the components in the healthcare chain together. Imagine the Cleveland Clinic or the Mayo Clinic where care is highly coordinated. In an ACO, if you need a specialist, lab work or medication, it all comes from the same treatment team. An ACO also gives patients more time with doctors and less shuffling between offices filling out forms. By design, an ACO provides more efficient healthcare, is less prone to errors, and controls costs better than the traditional system.

And there is definitely an emphasis on cost control. ACOs will fundamentally change how doctors and hospitals get paid. ACOs will make providers jointly accountable for the health of their patients, giving them strong incentives to cooperate and save money by avoiding unnecessary tests and procedures.

For some, however, the picture isn’t all rosy. In a policy paper published by the Heritage Foundation, Why Accountable Care Organizations Won’t Deliver Better Health Care — and Market Innovation Will, Rita Numerof, Ph.D. argues that ACOs will most likely exacerbate the very problems they set out to fix, concentrating power in just a few organizations, allowing them to become “too large to fail” [2]:

Such a system undermines competition and entrepreneurship—the bedrock of innovation and job growth in this country. There is no evidence that supports the use of untested, complex organizational structures to improve quality of care and reduce costs. Creating incentives that focus on achieving higher quality of care, not quantity of medical procedures; providing choices to patients; and allowing real competition among health insurance providers is what will truly transform the health care system.

Judy Feder and David M. Cutler, senior fellows at the Center for American Progress, see things differently. In their report Achieving Accountable and Affordable Care, Key Health Policy Choices to Move the Health Care System Forward, they discuss how to deliver better healthcare quality at lower costs by promoting physician-led organizations [3]:

The Affordable Care Act highlights the potential role that physician-led organizations can play in reducing the unnecessary and costly use of the hospital through better primary care and care management. By mobilizing their skills and taking charge, physicians can call the shots in distributing the substantial savings that can result. Physicians can also encourage hospitals to compete for, rather than count on, their referrals, and thereby promote better quality at lower costs.

In markets with a single dominant hospital, however, it may be difficult to foster this competition. But forming ACOs should not become an excuse for promoting hospital consolidation by encouraging hospitals to capture physicians and foreclose rival hospitals. If physicians are able to take the lead in establishing care management organizations, then they will be far better positioned to capture savings than if hospitals are in control.

To encourage physicians to actually take the lead, ACO quality performance benchmarks and rewards for good care should emphasize health care delivery changes that depend on physician engagement in better care. Reducing preventable hospital admissions or readmissions should be a key quality metric, emphasizing the avoidance of ambulatory-care-sensitive use of hospitals in emergency settings or as an inpatient.

Will new ACO regulations help with healthcare costs?

Although some people believe that bringing doctors and hospitals together economically will make them too powerful, ACOs stand to dramatically reduce the number of tests that patients have to take, amounting to hundreds of millions of dollars in savings.

Medicare’s traditional fee-for-service payment system pays doctors and hospitals by the test and procedure. ACOs wouldn’t do away with fee-for-service but would create savings incentives by offering bonuses when providers keep costs down and meet specific quality benchmarks. The focus will be on prevention and careful management of patients with chronic diseases.

If patients show they like this new system, we could see a fundamental change in the American healthcare system.


  1. Medicare Program; Medicare Shared Savings Program: Accountable Care Organizations. Office of the Federal Register. Accessed 2011 Oct 25.
  2. Numerof, R. Why Accountable Care Organizations Won’t Deliver Better Health Care—and Market Innovation Will. The Heritage Foundation. 2011 Apr 18.
  3. Feder J and Cutler D. Achieving Accountable and Affordable CareKey Health Policy Choices to Move the Health Care System Forward. Center for American Progress. 2010 Dec.
About the Author

Walter Jessen is a senior writer for Highlight HEALTH Media.