ACOs is the hottest four-letter word in health care

Accountable care organizations take up only seven pages of the massive new health law yet have become one of the most talked about provisions. This latest model for delivering services offers doctors and hospitals financial incentives to provide good quality care to Medicare beneficiaries while keeping down costs. 

What is an accountable care organization? An ACO is a network of doctors and hospitals that shares responsibility for providing care to patients. In the new law, an ACO would agree to manage all of the health care needs of a minimum of 5,000 Medicare beneficiaries for at least three years. 

Why did Congress include ACOs in the law? As lawmakers search for ways to reduce the national deficit, Medicare is a prime target. With baby boomers entering retirement age, the costs of the program for elderly and disabled Americans are expected to soar. ACOs make providers jointly accountable for the health of their patients, giving them financial incentives to cooperate and save money by avoiding unnecessary tests and procedures. For ACOs to work they have to seamlessly share information. Those that save money while also meeting quality targets would keep a portion of the savings. Providers can choose to be at risk of losing money if they want to aim for a bigger reward, or they can enter the program with no risk at all.

How would ACOs be paid? In Medicare’s traditional fee-for-service payment system, doctors and hospitals generally are paid more when they give patients more tests and do more procedures. That drives up costs, experts say. ACOs wouldn’t do away with fee for service but would create savings incentives by offering bonuses when providers keep costs down. Doctors and hospitals would have to meet specific quality benchmarks, focusing on prevention and carefully managing patients with chronic diseases. In other words, providers would get paid more for keeping their patients healthy and out of the hospital. If an ACO is not able to save money, it could be stuck with the costs of investments made to improve care, such as adding new nurse care managers, and also may have to pay a penalty if they don’t meet performance and savings benchmarks. ACOs sponsored by physicians or rural providers, however, can apply to receive payments in advance to help them build the infrastructure necessary for coordinated care – a concession the Obama administration made after complaints from rural hospitals.

Who’s in charge — hospitals, doctors or insurers? Hospitals, primary care providers and other physicians are in charge of an ACO, but insurers can also play a role. Some regions of the country, including parts of California, already have large multispecialty physician groups that may become an ACO on their own, likely by networking with neighboring hospitals.

What can go wrong? Many health care economists fear that the race to form ACOs could have a significant downside: hospital mergers and provider consolidation. As hospitals position themselves to become integrated systems, many are joining forces and purchasing physician practices, leaving fewer independent hospitals and doctors. Greater market share gives these health systems more leverage in negotiations with insurers, which can drive up health costs.