Accountable Care Organizations (ACOs)

What Are Accountable Care Organizations (ACOs)?

Accountable Care Organizations (ACOs) are networks of healthcare providers who collaborate to provide improved and more cost-effective treatment to patients. These organizations were established under the Medicare Shared Savings Program, a portion of the Affordable Care Act (ACA) of 2010.

ACOs were originally designed to support Medicare participants but have grown to include private payer networks as well.

Key Takeaways

  • Accountable Care Organizations (ACOs) are collaboratives that provide Medicare patients comprehensive healthcare coverage, formed as part of the Affordable Care Act (Obamacare).
  • ACOs were created to cut out redundancies for Medicare patients by incentivizing providers to share information and provide cost-effective treatment services.
  • The system was initially geared toward Medicare patients but has expanded to include private payer networks.
  • Critics argue it ultimately promotes consolidation, which may lift costs, and that it could leave consumers feeling they are forced to work within a network that they don't like.

Understanding Accountable Care Organizations (ACOs)

Accountable care organizations were designed to share information, provide more cost-effective treatment services, and eliminate redundancies for patients in the Medicare system. ACOs are structured around a patient’s primary care physician (PCP), but should also include hospitals, pharmacies, specialists, and other service providers to achieve optimal efficiency.

The ACO model was introduced through the Medicare Shared Savings Program, a component of the 2010 Affordable Care Act (ACA). The ACA mandates that an approved ACO manage the healthcare of a minimum of 5,000 patients over a three-year period. ACOs are overseen by the Centers for Medicare and Medicare Services (CMS).

The ACO system has grown beyond the Medicare environment to include private payer networks and has retained the fee-for-service payment model of Medicare. The major adjustment to this model under the ACO system is a set of incentives designed to reward providers for more efficient care.

How ACOs are Incentivized

The ACA incentive matrix is designed to counteract the tendency of costs to rise unnecessarily under the traditional Medicare fee-for-service model. ACO providers are graded against a series of quantitative benchmarks that are adjusted to account for regional cost differences. These benchmarks are spread across four categories: Patient/Caregiver Experience; Care Coordination/Patient Safety; Preventative Health; and At-Risk Population.

The Electronic Health Record (EHR) system collects data on a group of criteria in each category, and providers are ranked against their peers on each criterion. Hospital readmission rate is one example of a grading criterion. Points are awarded to those providers based on their percentile ranking as well as an ACO’s improvement over the performance in previous years. Rewards for high performance come in the form of increased reimbursement rates.

CMS introduced a new tier of ACOs in 2016, known as the Next-Generation ACO (NGACO). This program is available to established ACOs willing to accept greater financial risk but rewards those organizations with stronger financial rewards. It is also a useful testing mechanism for CMS to experiment with more sophisticated grading criteria.

Drawbacks of the ACO System

Critics of the ACO system have expressed concerns that it will lead to consolidation among providers which could lead to higher costs as a smaller number of health systems hold greater negotiating power over insurers. Early research suggests that this has taken place to some extent and that the cost of resources needed to comply with the reporting system is a major factor driving providers toward mergers.

For consumers, the potential downside of the ACO model is the feeling of being stuck in an undesirable network. ACOs are designed to minimize this risk by eliminating the structural obstacles of the HMO system, but some healthcare economists worry that consolidation could limit options open to a consumer.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Kaiser Family Foundation. "Accountable Care Organizations, Explained." Accessed July 27, 2021.