Shepherd University

The Significance and Function of Accountable Care Organizations as a Vital Component of the Affordable Care Act and Health Care Reform

A Discussion of the Development, Performance, and Importance of ACOs

Philip McCarley

2/23/2015

Introduction

During the past century attempts to reform the basic structure, financing and delivery of

health care in the United States met with great resistance from political and business

stakeholders. Berkowitz provided a thorough historical review and analysis of “the

transformation of the idea behind national insurance during the period from 1900 to 1965”

(Berkowitz, 2008). Since the historic passage of Medicare and Medicaid in 1965 the complexity

and the cost of providing care has grown steadily and rapidly. With the increasing costs and

strain on the system, particularly with the demographic fact of the aging of the baby boom

generation, the necessity of addressing and reforming the health care system was not in dispute

by most political, economic and public policy observers. Despite the recognition that there

needed to be changes in the health care system, there was passionate, ideological and partisan

disagreement about what actions and changes were acceptable.

An analysis of the recurring historical pattern of attempts to reform health care and

insurance coverage showed that the issue came to the forefront of political and legislative debate

in a cyclical pattern across the entire 20th century (Berkowitz, 2008). The most recent chapter of

this repeated push for health care reform, prompted by ever increasing numbers of uninsured

Americans and ever increasing cost of health care and health insurance, culminated in the

successful passage of the Affordable Care Act (ACA) of 2010. In face of strong and persistent

opposition, the ACA continues to survive legal and political challenges and continues to move

forward with implementation of reforms.

With so much contentious debate about some of the other provisions of the ACA, there

has been relatively little focus by media and politicians on the sections of the ACA that

mandated the creation and development of Accountable Care Organizations (ACOs). Simply

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stated “the key idea is that the ACO has financial incentives to improve quality based on

predefined criteria and keep overall costs within a target budget” (Shortell, Wu, Lewis, Colla, &

Fisher, 2014, p. 1884). Summarizing the intent inherent in the inclusion of ACOs as an integral

part of reform, Devore & Champion observe that “the Affordable Care Act embraced ACOs as

one way to foster the transition from a disjointed, siloed health care system to one that is better

coordinated and aligned to provide far more value to patients, providers, and payers” (DeVore &

Champion, 2011). This paper will review the history and aims of the concept of ACOs, discuss

the provisions of the ACA related to ACOs, and consider development, significance and

performance of ACOs since the passage of the ACA in 2010.

History and aims of the ACO concept

The framework for the concept of accountable care organizations has precedents in

previous attempts to control costs through efforts such as health maintenance organizations

(HMOs) and through previous attempts to improve and integrate care such as integrated delivery

systems (IDSs).

Although similar in many respects, the function, structure, incentives and aims of these

precedents are not the same as the proposed function, structure, incentives and aims of ACOs.

In fact, the current manifestation of the Center for Medicare & Medicaid Services (CMS)

reforms under the Medicare Shared Savings Program (MSSP) mandated by the ACA, ACOs

have more kinship and direct relationship to the Physician Group Practice Demonstration Project

(PGP). The PGP was mandated by the Medicare, Medicaid, and SCHIP Benefits Improvement

and Protection Act of 2000, was conducted between 2005 and 2010, and was extended for two

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additional years through 2012. The final report on the PGP, published September 2013,

discusses the lessons learned from this project related to pay for performance and quality

improvement initiatives of CMS (RTI International, 2012). The timely 2012 overlap of the

ending of the PGP with the initiation of the MSSP allowed for a continuity and flow of programs

with nearly identical aims and philosophy with regard to the evolving pay models for Medicare

reimbursement.

Prior to the passage of the ACA and the implementation by CMS of the provisions

related to ACOs Berwick, Nolan, & Whittington contended:

Improving the U.S. health care system requires simultaneous pursuit of three aims: improving the experience of care, improving the health of populations, and reducing per capita costs of health care. Preconditions for this include the enrollment of an identified population, a commitment to universality for its members, and the existence of an organization (an ‘integrator’) that accepts responsibility for all three aims for that population. The integrator’s role includes at least five components: partnership with individuals and families, redesign of primary care, population health management, financial management, and macro system integration (Berwick, Nolan, & Whittington, 2008).

The treatment these three aims as interdependent and pursued as a whole and unified strategic

purpose is essential (Berwick, Nolan, & Whittington, 2008). Furthermore, Donald Berwick, the

lead author of the above referenced article, served as Administrator of the Centers for Medicare

and Medicaid Services (CMS) from July 2010 to December 2011 through a recess appointment

by President Obama. His expressed ideas regarding the aims, intent, and potential significant

role of ACOs match the intent of the law and reveal alignment with the way that CMS and the

Department of Health and Human Services (HHS) are implementing the ACA with regard to

ACOs. Berwick noted that “the creation of ACOs is one of the first delivery-reform initiatives

that will be implemented under the [Affordable Care Act]. Its purpose is to foster change in

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patient care so as to accelerate progress toward a three-part aim: better care for individuals, better

health for populations, and slower growth in costs through improvements in care” (Berwick D.

M., 2011).

Also prior to the passage of the ACA, the proposal for Medicare to move toward this type

of “payment reform model” was expressed clearly by Elliot Fisher, director of the Center for

Health Policy Research at the Dartmouth Institute for Health Policy and Clinical Practice, joined

by other scholars and experts:

To succeed, health care reform must slow spending growth while improving quality. We propose a new approach to help achieve more integrated and efficient care by fostering local organizational accountability for quality and costs through performance measurement and “shared savings” payment reform. The approach is practical and feasible: it is voluntary for providers, builds on current referral patterns, requires no change in benefits or lock-in for beneficiaries, and offers the possibility of sustained provider incomes even as total costs are constrained. We simulate the potential expenditure impact and show that significant Medicare savings are possible. (Fisher, et al., 2009).

In fact they cite the use of the term “accountable care systems” by Shortell & Casalino to refer to

delivery systems that simultaneously organize “processes for improving quality” and are “held

accountable for quality and costs” (Shortell & Casalino, 2008). Over the course of just a few

years the concept of accountable care has grown dramatically in acceptance, use, and application.

Devore & Champion describe the goals and potential of ACOs in this way:

Overall, the goals of an ACO are to empower people to take charge of their health and engage in shared decision making with providers; eliminate waste and unnecessary spending while also meeting patients’ preferences for care; increase preventive care and other strategies that could help keep people well; and increase overall satisfaction with care. ACOs could also provide incentives for clinical integration by offering financial rewards to caregivers who work cooperatively to provide a continuum of care and achieve agreed-upon measures of success (DeVore & Champion, 2011).

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With these ideas and proposals giving context and providing guidance to both the

formation and the implementation of the ACA, CMS summarized the three objectives of MSSP-

ACOs with the following specific description:

Better overall care in a safe environment, equitable to all who seek it, and always available when needed.

Improved health accomplished through the practice of proactive, preventive medicine and chronic care coordination.

Lower per capita cost aimed at reducing the trending of medical costs associated with the Original Medicare population (often referred to as "Medicare Fee-for-Service") (Triple Aim Objectives, 2012).

Within this broader framework of objectives CMS has focused on four key areas of emphasis for

quality standards: patient satisfaction, care coordination, preventive health, and care for chronic

illness.

The role of ACOs in the reforms of the ACA

Title III of the ACA carries the heading and contains provisions related to “Improving the

Quality and Efficiency of Health Care.” Section 3022 of Title III directed the Secretary of the

Department of Health and Human Services (HHS) to “establish a shared savings program that

promotes accountability for a patient population…and encourages investment in infrastructure

and redesigned care processes for high quality and efficient service delivery” (Patient Protection

and Affordable Care Act, 2010). Through the Medicare Shared Savings Program (MSSP)

created by HHS, eligible health care providers and suppliers serving Medicare beneficiaries who

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meet specified requirements and who agree to participate in the program must agree to be

“accountable for the quality, cost, and overall care of the Medicare fee-for-service beneficiaries

assigned to it” (Patient Protection and Affordable Care Act, 2010). A participating ACO is

required to “define processes to promote evidence-based medicine and patient engagement,

report on quality and cost measures, and coordinate care, such as through the use of telehealth,

remote patient monitoring, and other such enabling technologies” (Patient Protection and

Affordable Care Act, 2010). In addition to receiving the payments of the original fee-for-service

program, participating MSSP-ACOs become eligible to receive additional shared payments for a

portion of demonstrated savings. Once savings reach designated, benchmarked levels, the

created performance and practice savings are essentially “shared” by the MSSP-ACO and the

Medicare program. CMS reported the following update on the status and participation of ACO

established as part of the Medicare Shared Savings Program since the inception of this mandated

ACA program:

“Since passage of the Affordable Care Act, more than 360 Medicare ACOs have been established, serving over 5.6 million Americans with Medicare. Medicare ACOs are groups of providers and suppliers of services that work together to coordinate care for the Medicare fee-for-service (FFS) beneficiaries they serve and achieve program goals; Medicare ACOs choose a level of performance risk and receive financial incentives based on that choice and their quality performance” (Center for Medicare and Medicaid Services, 2014).

It is important to note that there is not simply one type or one model of ACO. In fact,

ACOs are formed and operate under different categories, use different models, and serve

different and distinct groups and populations of patients. Broadly speaking ACOs may be

formed in response to public policy and payer reforms such as has been described with MSSP.

Many are focused on primary care services, care of specialty populations, care of populations

with specific chronic diseases, Medicaid, underserved, and safety-net populations. There has

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also been observed some movement in state, commercial, and private payer programs toward

ACOs and principles intended to shift toward new health care payer models that reflect and

incorporate the goals of improved quality, better coordination of care and service, greater

engagement with patients in treatment planning and support, increased efficiency, and reduced

costs.

Although most attention has been focused on the ACOs related to the MSSP provision,

the CMS identifies other types of ACOs which are a part of the efforts and strategy of CMS.

In addition to MSSP-ACOs CMS also is working with the Pioneer ACO Model (designed for

selected integrated early participants in coordinated care models) and an Advance Payment ACO

Model (a supplementary incentive program for selected primary care, smaller, or rural providers

to provide support toward developing a model of accountable care). CMS has shown particular

focus on primary care service, prevention, management of chronic illness, specialty populations,

as well as at-risk and underserved populations. Title II Section 2706 of the ACA mandated a

Pediatric Accountable Care Organization Demonstration Project focusing on studying and

improving care for children with special medical needs. This particular project is scheduled to

run for a five year period that is set to end at the end of 2016.

Among the many types of ACOs that have developed over the past few years some are

focused on primary care, some on serving Medicare and/or Medicaid patients, some are focused

on serving specialty populations of patients with specific chronic health conditions, some are

focused on serving larger, general groups of patients and communities providing integrated

health care services across the care continuum. In addition to recently developing ACOs that are

formed around contracting with public payers such as Medicare and Medicaid programs

administered through CMS, ACOs are also developing which have established contractual

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relationship with private, commercial payers. Recent research reports indicate that

approximately half of existing ACOs had a contract with a private payer. Contracts with private

payers were usually set up as shared savings models, and most private contracts included

downside risk. This study also reported that ACOs with private contracts tended to be larger and

more complex organizations overall than the typical ACOs that did not have private contracts

(Lewis, Colla, Schpero, Shortell, & Fisher, 2014). The Accountable Care Implementation

Collaborative is a private project of the Premier healthcare alliance. Formed in 2010, this

collaborative “consists of health systems that seek to pursue accountability by forming

partnerships with private payers to evolve from fee-for-service payment models to new, value-

driven models” and to develop “best practices that can inform the implementation of accountable

care organizations as well as public policies” (DeVore & Champion, 2011).

Characteristics and taxonomies of ACOs

In attempting to understand the nature, distinctiveness, and effectives of ACOs,

researchers are beginning to classify ACOs according to particular characteristics. Following the

passage of the ACA, early observations about the development of ACOs noted the following 5

patterns:

1. Dispersion of ACOs varies by market.

2. Specific regions of the U.S. are lacking in ACOs.

3. Hospitals and hospital systems are the main backers of ACOs.

4. Investments in the ACO model exist independently of the Medicare Shared Savings Program.

5. The success of different ACO models is still unproven.

(McNickle, 2011).

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Several research groups have conceptualized and developed specific “taxonomies” that will

allow for more precise discussion, research, and analysis regarding the organization and

performance of ACOs (Fisher, Shortell, Kreindler, Van Citters, & Larson, 2012; Shortell, Wu,

Lewis, Colla, & Fisher, 2014; Colla, Lewis, Shortell, & Fisher, 2014; Muhlestein, Gardner,

Merrill, Petersen, & Tu, 2014). Recognizing early the rapidly shifting landscape caused by this

alternate care delivery and payment model, Fisher et al. discussed the need for a framework for

understanding, tracking, and monitoring the formation, development and performance of ACOs

(Fisher, Shortell, Kreindler, Van Citters, & Larson, 2012). As they tracked course of early

ACOs, they identified “the major factors—such as contract characteristics; structure, capabilities,

and activities; and local context—that would be likely to influence ACO formation,

implementation, and performance” (Fisher, Shortell, Kreindler, Van Citters, & Larson, 2012).

Through devising a framework for evaluating these pioneer organizations, they hoped to be able

to provide contextual information and guidance to decision-makers and policy makers that would

contribute to the success and effectiveness of succedent ACOs (Fisher, Shortell, Kreindler, Van

Citters, & Larson, 2012).

The work of analysis and study of ACOs has continued to advance along with the rapid

increase in the number and diversification in variety of ACOs. One way that ACOs can be

differentiated is by role of physicians in the administrative leadership of the organization:

physician-led versus non-physician led ACOs (Colla, Lewis, Shortell, & Fisher, 2014). In a

recent detailed study that analyzed current numbers, structures, characteristics and functions of

ACOs, Shortell et. al. used resource dependence theory and institutional theory combined with

analysis of the following eight specific measures:

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the ACO’s size, number of different types of participating provider organizations within the ACO (including nursing or postacute care facilities), the scope of services offered, whether the ACO belongs to an integrated delivery system (IDS), the percent of primary care clinicians, their institutional leadership model, the performance management system used for accountability, and the ACO’s prior experience with payment models other than fee-for-service (Shortell, Wu, Lewis, Colla, & Fisher, 2014).

From their extensive research and analysis they identified “a reliable and internally valid three-

cluster” taxonomy consisting of three broad categories of ACOs: “integrated delivery system

ACOs,” “smaller, physician-led ACOs,” and “hybrid ACOs” (Shortell, Wu, Lewis, Colla, &

Fisher, 2014). Most typically integrated delivery system ACOs “offer a broad scope of services

and frequently include one or more postacute facilities;” smaller, physician-led ACOs

generally were focused on primary care service delivery and were characterized by “a relatively

high degree of physician performance management;” and hybrid ACOs tended to be a mixture or

combination of “moderate sized, joint hospital-physician and coalition-led groups that offer a

moderately broad scope of services with some involvement of postacute facilities” (Shortell, Wu,

Lewis, Colla, & Fisher, 2014). They assert that this taxonomy can serve as a valuable tool “to

describe and understand early ACO development and to provide a basis for technical assistance

and future evaluation of performance” (Shortell, Wu, Lewis, Colla, & Fisher, 2014).

Furthermore, they suggest that the taxonomy may be useful to payers and to “provider

organizations considering ACO formation by accessing how their attributes match those of the

three clusters with regard to potential strengths and weaknesses for meeting the challenges

involved” with becoming an ACO (Shortell, Wu, Lewis, Colla, & Fisher, 2014).

Leavitt Partners also published a white paper proposing a taxonomy of accountable care

organizations. This report identifies six core types of ACOs: Independent Hospital and Hospital

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Alliance ACOs (both led by hospitals), Independent Physician Group, Physician Group Alliance,

and Expanded Physician Group ACOs (led by physician groups), and Full Spectrum Integrated

ACOs (led by integrated delivery systems) (Muhlestein, Gardner, Merrill, Petersen, & Tu, 2014).

They also identified two additional attributes can overlap with these six types: decentralized

decision maker ACOs which involves multiple organizations being involved in the ACO and

contributing to the decision-making structure and processes or previously unaffiliated

organizations joining to establish a new ACO and specialty ACOs that focus on a particular type

or group of patients such as a set of patients with a particular condition, illness, or disease

(Muhlestein, Gardner, Merrill, Petersen, & Tu, 2014, p. 6). They further advocated the value of

this type of information and analysis to ACOs, providers contemplating becoming an ACO,

suppliers who serve ACOs, and payers and policy makers that study and manage ACO contracts

(Muhlestein, Gardner, Merrill, Petersen, & Tu, 2014, p. 8).

Early expectations and early indicators of performance of ACOs

In the initial period after the passage of the ACA, opinions about the likely success of

ACOs in the context of health care reform ranged across a wide spectrum from strong negativity

to skepticism, to cautious optimism, to strong enthusiasm. The provisions of the ACA dealing

with ACOs did not escape a certain share of criticism and negative commentary. Certain

analysts with a critical bias have lamented the inadequacies of the concept of ACOs and

predicted their failure to accomplish their goals. Some critics doubted the model, some doubted

the government’s capacity to manage such a shift in care delivery with positive effect, and some

doubted that the concept could produce progress in cost reductions without concurrently

sacrificing quality and patient satisfaction. Early evidence suggests that this particular concern

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may not be supported based on surveys of the initial experience and perception of patients. One

initial study of patient satisfaction comparing baseline and comparative control data found that

“patients’ experiences were improved or preserved in provider organizations participating in

ACO programs despite incentives to limit health care use” (McWilliams, Landon, & Zaslavsky,

2014).

Some critics have argued that ACOs will face the same obstacles and the same fate as

these precedent attempts to change healthcare delivery and financing in the U.S. Shi & Singh

expressed the sentiment that ACOs “may well turn out to be nothing more than ‘old wine in new

bottles’” (Shi & Singh, 2015, p. 367). By this they suggest that ACOs may simply be another

manifestation of earlier failed attempts to control costs including through development of

integrated delivery systems (Burns & Pauly, 2012). Countering the premise of this criticism and

prediction of ACOs sharing the same fate as earlier attempts of managed care, Berwick contends

“the core of the ACO idea is coordinated care with free choice for beneficiaries. I think it’s a

brilliant idea… because it pulls one of the two fangs out of managed care: loss of choice. The

other fang is skimping, and that’s going to require strong monitoring of ACOs’ performance”

(Berwick, 2012, p. 722). Although the use of ACOs to transform the payment model of

Medicare and Medicaid is not a simple, easily implemented reform attempt and is not a panacea

for our serious health care financing challenges, they do hold promise for bringing about

significant savings and simultaneous improvement in quality of care and services provided

(Berwick D. , 2012). While the longer-term success of ACOs may still be uncertain, early

evidence and indicators show promising and hopeful results regarding the experience of patients

and the costs (Greene, 2015; McWilliams, Landon, & Zaslavsky, 2014).

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With the backdrop of these predictions and in the context of passionate ideological,

political, and legal confrontation, the experience and success of ACOs have varied over the past

two years. Casalino assesses “the performance of ACOs to date has been promising but not

overwhelming” (Casalino L. , 2014). Still he acknowledges that ACOs “represent the best

attempt to date to move away from business as usual toward health care that will improve

patients’ health and will not bankrupt the country” (Casalino L. , 2014). Despite the contention

and uncertainty surrounding health care reform and the effects of these particular reforms for the

long-term, broadly and fairly considered ACOs have demonstrated some early measured positive

results in patient satisfaction, health outcomes, and cost savings. In particular, one important

population of patients, medically complex patients, “reported significantly better overall care

after the start of ACO contracts” in one study (McWilliams, Landon, & Zaslavsky, 2014). In

discussing how ACOs have performed with regard to cost savings, Perez provides a detail

specific analysis of cost savings already achieved by ACOs. As demonstrated by the results of

Medicare Shared Savings Program (MSSP) ACOs, Pioneer ACOs, Medicaid ACOs, and

Commercial ACOs, results varied for individual ACOs related to cost savings while at a macro

level results broadly showed return on investment for ACOs as providers of care and significant

cost savings for payers. Once cost savings have reached specified goals, ACOs generally benefit

financially through revenue returned form shared-savings incentives (Perez, 2014).

Specific performance results of ACOs that are part of CMS programs, including the

MSSP, are publicized regularly. In late 2014 CMS reported:

Last year, many ACOs had higher quality and better patient experience than published benchmarks. This year, compared to previous year performance, the ACOs improved significantly for almost all of the quality and patient experience measures demonstrating that these organizations improve care. ACOs in the Pioneer ACO Model and Medicare Shared Shavings Program (Shared Savings

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Program) also generated over $417 million in savings for Medicare. At the same time, ACOs qualified for shared savings payments of $460 million. (Center for Medicare and Medicaid Services, 2014).

The process of reform and of changing the mechanisms, financing, and culture of health care

delivery and service will be slow to change. Even if criticism comes that the reforms and

changes in the system are not enough and even if it is too early to tell what the impact and import

of broader ACA and more precise ACO reform initiative will be, there is no question that the

demonstration projects and the activity around new ACOs, both commercial and public payer

related, are cause for innovation and hope. HHS, CMS, and the recently formed Center for

Medicare and Medicaid Innovation, have demonstrated skill at assessing, listening, adapting, and

revising policies, guidelines and regulations during the development and implantation of these

reforms and projects. In efforts to continue to nurture and encourage the development of ACOs

as a part of reforms to transform health care delivery and payment models, CMS announced and

sought public comment on several proposed adjustments intended to improve the Medicare

Shared Savings Program. The categories of these proposed adjustments were “providing more

flexibility for ACOs seeking to renew their participation in the program,” “encouraging ACOs to

take on greater performance-based risk and reward,” “emphasis on primary care,” “alternative

methodologies for benchmarks,” and “streamlining data sharing and reducing administrative

burden” (Center for Medicare and Medicaid Services, 2014). These proposed adjustments are a

positive sign of a allowing for nimbleness, flexibility and setting a tone to signal current and

future ACOs that there can be an open dynamic process for negotiating and adjusting the

payment and incentive models and sensitivity to the burden of the administrative and reporting

requirements of participating ACOs.

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Despite a climate of caution and uncertainty across much of the health care system over

the past several years, the growth in number of ACOs over the past several years has been

significant. According to one monitor of ACO growth and development the number of ACOs

increased from 82 in 2011 to 626 in the summer of 2014. This report breaks down this total in

the following way: “Of these 626 ACOs, 329 have government contracts, 210 have commercial

contracts, and 74 have both government and commercial contracts. The remaining 13 ACOs

have not made specific announcements about the nature of their accountable care contracts or are

in the process of finalizing contracts that are not yet active” (Petersen, Gardner, Tu, &

Muhlestein, 2014). This report notes that this growth in ACOs means that the total number of

“ACO-covered lives” as of June 2014 was approximately 20 million (Petersen, Gardner, Tu, &

Muhlestein, 2014).

Discussion of the potential and promise of ACOs

Analyzing the current state of health care reform implementation and the likely impact of

reforms on the healthcare system, a recent Robert Wood Johnson Foundation report asserts that

“more than any other policy change in the ACA, nothing has more potential to influence the

future of nearly every health care sector than Accountable Care Organizations (ACOs)” (2015

Accountable Care Organization Outlook: Implications for Suppliers and Providers, 2014).

From a broader analysis of the potential of ACOs to have a significant and positive role

in making progress toward the triple aims of increased quality, improved health outcomes, and

reduced costs, Perez concludes that “ACOs are an aggressive, innovative means of shifting the

business of health care from the well-entrenched fee-for-service model to a fee-for-value

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approach. They are an example of practicing the art of the possible, effecting fundamental

change in a large, capitalist society where the healthcare system is a complex web of public-and

private-sector involvement” (Perez, 2014). “If ACOs succeed, they will be a critical and lasting

legacy of the Affordable Care Act” (Casalino L. P., 2014).

Conclusion

Although there is still much uncertainty about the long-term meaning and significance of

the advent of accountable care organizations as alternate way of delivering and financing health

care, there is ample evidence that this phenomenon is growing and showing signs of sustainable

viability. Describing the promise and prospects of ACOs altering the framework and landscape

of health care delivery in the United States, DeVore & Champion made the following

observation several years ago:

ACOs represent a dramatic departure from the status quo of health care delivery. They have the potential to overcome the fragmentation and volume orientation of the fee-for-service system so that the right incentives are in place to foster health and wellness, instead of payment for treating illness. Unlike previous efforts under the “managed care” rubric that were mainly designed to reduce costs, a properly designed ACO would balance that need against the need to improve outcomes and improve the care experience. (DeVore & Champion, 2011).

Even with all the uncertainty and stress confronting health care providers over the past few years

with the implementation of the ACA, the hope and expectations of many health policy observers

regarding ACOs has remained high. Hopefully all the stakeholders involved in providing health

care in the U.S. can go forward with a spirit of cooperation and openness to working together to

improve the efficiency and the quality of health care in the U.S.

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