Perspectives

Since early 2012, a growing number of independent physician groups, physician-hospital organizations, hospitals and their employed physicians, and fully integrated health systems have entered into contracts with both CMS and commercial insurers to become accountable care organizations (ACOs). It is estimated that the health care of close to 20 million patients is now being provided under such arrangements [1].

ACOs are one manifestation of payment reform intended to slow the unsustainable cost of health care in the United States. While the details of the payment models vary widely, with many combinations of fee-for-service, bundled, and capitated arrangements, the underlying goal is consistent: ACOs are held accountable for both the cost and quality of care for a specific population. While some ACO models offer the promise of shared savings alone, others offer potential savings but also entail associated risk [2]. That pre-specified quality targets have to be met before savings can be accessed is presented as a safeguard against the perceived excesses of the managed care experience of the 1990s.

To succeed as an ACO, health care organizations face sobering structural, fiscal, and—perhaps most daunting—cultural challenges. Coordinating care between providers [3,4] and across episodes and sites of care—not a traditional strength of many provider entities—will become increasingly important. Creating equitable systems to distribute whatever savings are garnered may disrupt traditional relationships between primary care and specialist providers. Convincing organizations to make the necessary investment in an “evolved” primary care infra-structure—a prerequisite for accomplishing the goals of decreasing unnecessary and expensive health resource utilization—will be problematic in an era of shrinking overall reimbursement [5]. Finally, convincing clinicians that this model means that they are quite literally “in it together” will challenge long-standing and proud departmental and divisional identities and silos [6].

Recognizing that this grand experiment is still very much in its formative stages, we nonetheless thought that this was an opportune time to examine ACOs from several perspectives. Over the next few issues and beginning with this issue [7], we will sequentially hear from an expert in health care policy analysis, a clinician-leader working in a high-functioning patient-centered medical home practice, and a team in a large health care system charged with the overall success of population health management. We are confident that you will find these observations timely, interesting, and informative. We welcome your feedback.

Since early 2012, a growing number of independent physician groups, physician-hospital organizations, hospitals and their employed physicians, and fully integrated health systems have entered into contracts with both CMS and commercial insurers to become accountable care organizations (ACOs). It is estimated that the health care of close to 20 million patients is now being provided under such arrangements [1].

ACOs are one manifestation of payment reform intended to slow the unsustainable cost of health care in the United States. While the details of the payment models vary widely, with many combinations of fee-for-service, bundled, and capitated arrangements, the underlying goal is consistent: ACOs are held accountable for both the cost and quality of care for a specific population. While some ACO models offer the promise of shared savings alone, others offer potential savings but also entail associated risk [2]. That pre-specified quality targets have to be met before savings can be accessed is presented as a safeguard against the perceived excesses of the managed care experience of the 1990s.

To succeed as an ACO, health care organizations face sobering structural, fiscal, and—perhaps most daunting—cultural challenges. Coordinating care between providers [3,4] and across episodes and sites of care—not a traditional strength of many provider entities—will become increasingly important. Creating equitable systems to distribute whatever savings are garnered may disrupt traditional relationships between primary care and specialist providers. Convincing organizations to make the necessary investment in an “evolved” primary care infra-structure—a prerequisite for accomplishing the goals of decreasing unnecessary and expensive health resource utilization—will be problematic in an era of shrinking overall reimbursement [5]. Finally, convincing clinicians that this model means that they are quite literally “in it together” will challenge long-standing and proud departmental and divisional identities and silos [6].

Recognizing that this grand experiment is still very much in its formative stages, we nonetheless thought that this was an opportune time to examine ACOs from several perspectives. Over the next few issues and beginning with this issue [7], we will sequentially hear from an expert in health care policy analysis, a clinician-leader working in a high-functioning patient-centered medical home practice, and a team in a large health care system charged with the overall success of population health management. We are confident that you will find these observations timely, interesting, and informative. We welcome your feedback.

Since early 2012, a growing number of independent physician groups, physician-hospital organizations, hospitals and their employed physicians, and fully integrated health systems have entered into contracts with both CMS and commercial insurers to become accountable care organizations (ACOs). It is estimated that the health care of close to 20 million patients is now being provided under such arrangements [1].

ACOs are one manifestation of payment reform intended to slow the unsustainable cost of health care in the United States. While the details of the payment models vary widely, with many combinations of fee-for-service, bundled, and capitated arrangements, the underlying goal is consistent: ACOs are held accountable for both the cost and quality of care for a specific population. While some ACO models offer the promise of shared savings alone, others offer potential savings but also entail associated risk [2]. That pre-specified quality targets have to be met before savings can be accessed is presented as a safeguard against the perceived excesses of the managed care experience of the 1990s.

To succeed as an ACO, health care organizations face sobering structural, fiscal, and—perhaps most daunting—cultural challenges. Coordinating care between providers [3,4] and across episodes and sites of care—not a traditional strength of many provider entities—will become increasingly important. Creating equitable systems to distribute whatever savings are garnered may disrupt traditional relationships between primary care and specialist providers. Convincing organizations to make the necessary investment in an “evolved” primary care infra-structure—a prerequisite for accomplishing the goals of decreasing unnecessary and expensive health resource utilization—will be problematic in an era of shrinking overall reimbursement [5]. Finally, convincing clinicians that this model means that they are quite literally “in it together” will challenge long-standing and proud departmental and divisional identities and silos [6].

Recognizing that this grand experiment is still very much in its formative stages, we nonetheless thought that this was an opportune time to examine ACOs from several perspectives. Over the next few issues and beginning with this issue [7], we will sequentially hear from an expert in health care policy analysis, a clinician-leader working in a high-functioning patient-centered medical home practice, and a team in a large health care system charged with the overall success of population health management. We are confident that you will find these observations timely, interesting, and informative. We welcome your feedback.

From the Harvard Medical School and the Department of Medicine, Massachusetts General Hospital, Boston, MA.

In recent years, the growth of health care spending has climbed to the top of the domestic policy agenda. Medicare spending growth is now recognized as the biggest driver of the federal debt [1,2].Medicaid spending growth puts similar pressure on states. In the private sector, employee health care costs increasingly weigh on company balance sheets, affecting business operations and employee wages. All the while, individuals and families face insurance premium growth that far outpaces real income growth.

Out of this recent history emerged a broad recognition that health care spending growth is unsustainable at current rates. If Medicare spending continues to exceed gross domestic product (GDP) by 2.5 percentage points per year—the traditional gap over the past 4 decades—a greater than 160% increase in individual income taxes would be needed to pay for it [3].Even if the gap was 1 percentage point, the increase in income taxes needed would still be over 70%, with consequent contraction in GDP of 3% to 16% by 2015 [4,5].Other consequences, such as significant cuts in Medicare benefits or shifting of costs onto patients, are equally undesirable [6,7].

Policy options for slowing health care spending are varied. Some focus on changing the provider’s incentives, while others focus on changing the patient’s incentives. Some are based on federal solutions [8],while others are based on market solutions [9].In the current policy landscape, payment reform for physicians and hospitals has emerged as a leading candidate for addressing health care spending. Public and private payers are increasingly changing the way that providers are paid, moving away from fee-for-service towards bundled or global payments for populations of patients. Physicians and hospitals are in turn forming integrated provider organizations to take on these new payment systems. The pace of this change has been growing.

Key Features of the ACO Concept

An accountable care organization (ACO) is a group of providers—that can include both physicians and hospitals—that accepts joint responsibility for health care spending and quality for a defined population of patients. The ACO concept can be considered an extension of the staff-model health maintenance organization (HMO) [13,14].It also shares features with the patient-centered medical home (PCMH) model in its focus on a robust primary care nexus that serves to coordinate a patient’s care [15,16].Three key characteristics are embedded in this definition.

The first is joint accountability. In an ACO contract, incentives for providers are agreed upon at the organizational level. Physicians and hospitals bear the financial risks and rewards of the ACO contract together. Shared savings, quality bonuses, and other incentives are determined by how the organization performs as a whole rather than any individual physician, practice, or hospital. In this way, physicians across specialties and care settings are incentivized to approach patient care collectively and coordinate care more effectively.

Third, an ACO is responsible for the care of a population of people. Each year, spending and quality are measured for the population attributed, or assigned, to the ACO. Attribution of patients to organizations can take place in two ways. It can be prospective, meaning that before the start of a contract year, the ACO knows exactly the patients whose spending and quality it is responsible for. This is typically more feasible in commercial ACO contracts, especially in the HMO population, where patients designate a primary care physician at the beginning of the year. Otherwise, attribution is typically retrospective, such as in the Medicare ACO programs, where beneficiaries are assigned to organizations at the end of a contract year based on the organization which accounted for the plurality of a patient’s medical spending or primary care spending.

Evidence to Date

While formal results from most ACOs today are not yet available, several notable ACO experiments have been evaluated. These include early results from the Medicare ACO programs, previous evaluations of the Medicare Physician Group Practice Demonstration (a predecessor of today’s ACO contracting model), and early results from commercial ACO contracts, such as the Blue Cross Blue Shield of Massachusetts global budget contract.

In interpreting lessons from these evaluations, several questions are worth keeping in mind. If a new payment system is correlated with changes in medical spending, is this explained by underlying changes in prices or in quantities? Since medical spending is the product of prices of services and quantities (volume) of services, an intervention that affects spending must affect either the prices or the volume of care. In the Medicare program, where prices are standardized, a global budget contract that works off of the underlying physician fee schedule would only affect spending through volume. In the private insurance sector, however, an ACO contract may affect spending through both volume and prices, since variations in prices across providers creates an opportunity for savings if care is obtained through a less expensive provider.

Separate from its relationship to medical spending, which is measured through the claims submitted by providers, what is the connection between a new payment system and total payouts from the insurer to the provider? An ACO contract contains a variety of incentives to providers that may generate additional payments from the insurer (most notably shared savings and quality bonuses). These non-claims payments may partially or entirely offset savings obtained through medical claims, making them an important dimension in the evaluation of the contract. Yet they are also different from medical claim dollars in a meaningful way. Changes in medical spending reflect underlying physician (or patient) behavior—what care is delivered and how much of it is delivered—whereas non-claims payments reflect the incentive structure of the contract.

On the quality dimension, it is worth noting whether a new payment system has similar effects on process and outcome measures. Process measures, which have been widely used by health plans, are operationally similar to additional items on a fee schedule, whereby the delivery of a service effectively generates a payment. Clinical outcome measures, such as blood pressure or cholesterol, and patient experience measures, on the other hand, cannot be fulfilled by simply checking off a box. Therefore, these measures may represent quality in a more meaningful way.

Early Results from Medicare ACOs

Thirty-two provider organizations entered the Pioneer ACO program in 2012, with about 669,000 Medicare beneficiaries attributed to these organizations. According to CMS, medical spending growth for ACO beneficiaries was 0.3% in the first year, compared to 0.8% for similar beneficiaries outside of these organizations [18].This generated a gross savings of $87.6 million in 2012, of which $33 million were returned to the Medicare trust fund. These savings were driven by 13 ACOs, with another 17 ACOs not reporting statistically significant changes in spending and 2 ACOs garnering losses with spending above the target of about $4 million total. Lower rates of admissions and readmissions largely explained the savings. A separate analysis comparing these ACOs to their local markets estimated a higher year 1 savings of $147 million dollars, driven by 8 ACOs whose savings ranged from $396 to $1224 per beneficiary per year [19].

Pioneer ACOs also earned over $76 million for quality. In the first year, quality bonuses were awarded for the reporting of quality measures rather than for performance, and all 32 ACOs successfully reported. According to CMS, Pioneer ACOs on average performed better than fee-for-service Medicare beneficiaries on 15 clinical quality measures for which comparison data were available, including blood pressure control and cholesterol control for diabetic patients. A complete analysis of quality performance is not yet available.

In the Medicare Shared Savings Program, interim results from CMS for the first 2 cohorts of ACOs showed that 29 of the 114 organizations lowered spending sufficiently enough to generate shared savings while 2 organizations had shared losses [20].This suggests that the great majority of ACOs spent close to their target. Final results on spending and quality are pending.

Results from the Medicare Physician Group Practice Demonstration

Ten provider organizations entered one-sided ACO-type contracts with Medicare in 2005 via the Physician Group Practice Demonstration. In this contract, organizations shared in savings provided that their spending was at least 2% below target and they achieved threshold performance on certain quality measures, most of which were process metrics.

In year 1, only one organization decreased spending enough to earn a shared savings, but after 3 years, five organizations had generated shared savings, although half of the savings were awarded to one organization [21].A recent analysis showed that 4 organizations sustained shared savings by the end of the program, with savings concentrated in acute care, readmissions, and beneficiaries who are dually eligible for Medicaid. Across the 10 organizations, financial performance ranged from average savings of $866 to increased spending of $749 per beneficiary per year [22].In total, about $78 million in savings were generated by this demonstration. Although a positive finding, this is a relatively small amount in the context of total Medicare expenditures [23,24].

On quality, all organizations met threshold performance on at least 29 of the 32 measures by the end of 5 years [21]. Most of these were process measures focused on coronary artery disease, diabetes, heart failure, hypertension, and preventive care [25].

Early Results from Commercial ACO Contracts

One of the early commercial ACO contracts to be evaluated was the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract (AQC) [26].Initially implemented in 2009, the AQC is a multi-year contract that pays provider organizations a risk-adjusted global budget over the continuum of care. Seven organizations in Massachusetts entered the contract in the first year, and 4 more entered in 2010. Enrollees in HMO plans were prospectively attributed to their ACO by their designation of a primary care physician. The AQC is a two-sided contract that offered an additional 10% of an organization’s budget as a bonus for performance on 64 quality measures, half outpatient measures and half inpatient. Budget growth rates were tied to inflation and terms of its growth were negotiated with the organizations [27].

Over the first 2 years, the contract was associated with a decrease in medical spending of about $90 per enrollee per year, a –2.8% change (–1.9% in year 1 and –3.3% in year 2) [28].These savings were concentrated in procedures, imaging, and tests in the outpatient facility setting, and were largely explained by lower prices achieved by referring patients to less expensive providers. They were also concentrated in organizations that entered the AQC from fee-for-service, rather than prior risk contracts, and driven by enrollees with the highest expected spending. Over the second year, decreases in volume for certain services, such as percutaneous coronary interventions, began to contribute more to the savings [29].However, medical savings in the first 2 years were exceeded by non-claims payments, including shared savings and quality bonuses [27,28].The AQC was also associated with improvements in outpatient quality, including chronic care management measures (3.7 percentage points increase per year), adult preventive measures (0.4 percentage points per year), and pediatric quality measures (1.3 percentage points per year). Outcome measures such as hemoglobin A1c, LDL cholesterol, and blood pressure also showed an upward trend in the early years [28].Inpatient quality measures have yet to be examined.

Elsewhere in the country, Cigna’s Collaborative Accountable Care model was rolled out in 2009 with provider organizations in New Hampshire, Texas, and Arizona. A one-sided shared savings contract, it features a care coordination fee that is counted towards a practice’s medical spending, helping fund registered nurses who work as care coordinators. Interim results in 2012 suggested cost savings and quality improvements, but they were not statistically significant [30].A two-sided contract between Blue Shield of California and the California Public Employees’ Retirement System slowed medical costs by shortening admission and reducing readmissions [31].Most recently, an accountable care partnership between Anthem Blue Cross and HealthCare Partners physician group in California claimed $4.7 million in savings in the first half of 2013 for 55,000 patients in preferred provider organization (PPO) plans [32].These savings were driven by an 18% reduction in inpatient days, 4% reduction in overall admissions, and a 4% reduction in visits for radiology and lab tests, although specific price and volume contributions are yet unknown. Similar to the AQC, the Anthem contract is a 5-year agreement. Unlike the initial AQC contract, shared savings were tied to meeting a quality threshold and HealthCare Partners did not bear downside risk in year 1 [33].

Lessons Learned

Strengths of the ACO Model

Evidence to date points to both the potential of ACOs to slow spending and improve quality, but also the significant obstacles that they face. One of the encouraging lessons so far is that quality of care need not be threatened by a contract that rewards savings, provided that meaningful incentives for quality are in place. In both public and private two-sided contracts, process quality seemed to consistently improve. However, less is known about performance on outcome measures, which is ultimately a more meaningful metric for patients.

Broadly speaking, ACO contracts may be able to induce changes in physician behavior that could lead to medical savings. The low hanging fruit in Medicare seems to be admissions and readmissions, while that in commercial contracts may be lower prices obtained by changing referral patterns. While these medical savings reveal changes in clinical decision-making, it is still poorly understood whether clinical choices geared towards higher value can extend to areas of utilization where wasteful care may be concentrated. Little is also known about whether an ACO’s physicians and hospitals are in agreement over these changes in utilization or referral patterns, given their consequences for referral business and admissions. Moreover, there has yet to be evidence suggesting that medical savings can be larger than non-claims payments (rewards and bonuses to the ACOs) in a given year, generating net savings to the health care system. This may well take time to materialize given the initial investment costs and inducements for provider participation embedded in the early year incentives, but it is an important metric of success.

ACOs serve as a vehicle for payment reform and organizational reform among providers. They bring physicians across specialties and hospitals together under the same contractual roof, allowing the organization to determine how it allocates its resources under the spending target. Historically, policies aimed to slow health care spending have focused on either cutting prices (provider fees) or constraining volume (gatekeeping, prior authorization, and utilization review, etc.), but both types of strategies have been complicated by unintended consequences. Medicare fee cuts have traditionally been followed by compensatory increases in utilization or intensity of coding, offsetting the intended savings to a significant degree [34–37].Managed care techniques have met resistance from both physicians and patients [38,39].A spending target or budget takes an alternative approach; rather than controlling prices or quantities directly, it seeks to control total spending. Although the underlying fee schedule is retained for accounting, a spending target or especially a global budget pushes the organization to decide what care is high or low value.

A two-sided contract imposes stronger incentives on the ACO than a one-sided contract, which is both a strength and a weakness. While ACOs facing downside risk may respond earlier to the incentives, as some of the evidence thus far suggests, this risk may also propel ACOs to abandon this contracting model. In the Medicare Pioneer ACO program, for example, 9 of the 32 organizations exited the contract after year 1, which was allowed given the voluntary nature of participation. Seven organizations opted for the one-sided Medicare Shared Savings Program in year 2 and two left the ACO programs altogether. Downside risk was thought to be a principal concern for these organizations [40].Massachusetts providers in the AQC have thus far remained in the contract, but the AQC was a multi-year agreement to begin with.

Spillovers are another potential strength of the ACO model. Given that organizations care for patients across multiple payers, strong payment incentives in one payer population may affect care broadly. In the AQC, for example, recent evidence showed slowing of spending for Medicare beneficiaries associated with the contract in similar settings and categories of care as for the Blue Cross Blue Shield patients [41].

Weaknesses of the ACO Model

Still in its nascent stages, the ACO paradigm faces a number of challenges. Some relate to inherent weaknesses of the model, while others relate to the institutions and economics of the broader health care economy. At a contractual level, a key challenge is setting the target growth rate of the budget. If too low, providers may be overly constrained; if too high, providers may not have enough incentive to change practice. In an extreme case, if the target is set above what spending would have been under the old arrangement, an ACO contract can in fact be cost increasing on claims spending alone. Financial rewards such as shared savings and quality bonuses can help offset the risk, but they also make it more difficult for the ACO contract to generate net savings.

Achieving the right balance of risks and rewards is difficult. As noted above, a one-sided contract may not be strong enough to induce behavior change [42,43],but a two-sided contract may be too risky, driving providers who are unable to align incentives and coordinate care to exit the model [44].Although the percentage of shared risk borne by payer versus provider can be negotiated, putting financial risk on providers in a palatable way will be a key challenge. Financial risk can be more daunting if ACOs do not know in advance which patients they are responsible for, as in contracts with retrospective attribution rules and enrollees in unmanaged plans. A payer can help providers handle risk by sharing data on spending and identifying potential areas of overuse and low value care. Payers can help further by implementing risk corridors, providing reinsurance, or improving risk adjustment of the organization’s global budget. But with all that said, it remains to be seen whether providers around the country will be willing to bear substantive risk.

Within the ACO, a primary challenge is dividing up risks and rewards among constituent providers. How much shared savings are given to the hospital, to primary care physicians, or to specialists? What share should each specialty receive? What about shared losses, should spending exceed the target? In a two-sided ACO contract, these questions are particularly salient as global budgets change the business model for providers. Revenue centers under fee-for-service become cost centers. Organizations are confronted with difficult tradeoffs. The ability of providers across specialties to find common ground will be crucial, and leadership from providers will be key [45].Physicians have established themselves as leaders of the majority of ACOs today [46].It remains to be seen whether these organizations can keep providers together through the tradeoffs.

Patient trust in the ACO model has yet to be established. The managed care backlash of the 1990s suggests that patient buy-in will be crucial for the sustainability of ACOs. ACOs can have similarities to the HMO that traditionally produce negative associations, including downside risk, gatekeeping, or managed care techniques. To earn patients’ trust, ACOs will need to prove their value, such as through delivering better preventive care, less expensive care, more holistic care through stronger teams of providers, or smoother transitions of care across settings. The task of primary care medical homes to provide patient-centered care and coordinate across specialists effectively will be crucial. While today’s ACOs may be better positioned because of risk sharing, quality bonuses, risk adjustment, electronic medical records, or other innovations, the patient’s experience may ultimately be the arbiter.

Broader Challenges

While clinical integration is a central tenet of ACOs, consolidation between providers is simultaneously a chief concern for policymakers. Consolidation generally reduces competition and drives up prices, which is at odds with the goals of cost containment [47,48].Across the nation, physicians are consolidating with hospitals and health systems at an increasing rate, with recent surveys reporting that the proportion of independent physicians has steadily declined to below 50% [49–52].Increasing the number of covered lives is a dominant growth strategy under risk contracts, and more covered lives also increases an ACO’s bargaining power during acquisitions of specialist practices, whose referrals are better protected by inclusion in the provider network. As this trend continues, its effect on commercial prices will likely be scrutinized [53,54].

The ACO paradigm may also have significant effects on the physician labor market. Over the past 4 decades, the rate of physician specialization has grown dramatically [55].Fee-for-service incentives were aligned with specialization, but a rapid transition to alternative payment systems may disrupt the more gradually evolving physician labor market. Most medical school graduates today choose to specialize, as do most graduates of general medicine training programs [56,57],yet it is unclear to what degree the demand for specialists will continue to grow in the accountable care era. Specialty services tend to be of higher cost than generalist services. In some situations, high-cost services are more likely to be of lower value [58–60].Yet having specialists allows an organization to integrate services across the continuum of care, for which they are now financially responsible. As a new generation of specialists prepares to enter practice, whether the health care system will be able to support them and fulfill their expectations about their practice environment may be in question.

Looking into the Future

The landscape of payment and organization in health care will likely continue to migrate towards the ACO concept [61,62]. As the federal government, states, and individual payers move in similar directions, physicians and hospitals will face increasing pressures to change and adapt to new incentives surrounding cost and quality. Whether ACOs succeed in slowing spending while improving quality may have important ramifications for future stages of health care reform. For example, the growing debate in Washington, DC, over the future of Medicare financing may be informed, in part, by whether ACOs succeed within the traditional Medicare program. Market-based reforms, such as converting Medicare into a premium support program whereby private insurers compete to insure Medicare beneficiaries for a pre-defined contribution from the federal government, have been gaining momentum in recent years. Although not without concerns, such proposals would expect to gain consideration if the ACO model does not succeed.

Perhaps the most meaningful contribution of the ACO model is that it gives providers a reason to change the culture of medicine. It asks providers across specialties to work together and coordinate care in a way that was not rewarded under fee-for-service. It asks organizations to stitch the separate pieces of the patient’s care trajectory together through teamwork. In the long run, this may be the most intangible but substantive legacy that the ACO model provides. Under a single, collective contract at the organizational level, providers are quite literally in it together. If providers can break down silos, improve care coordination, and manage population health with a collective vision towards keeping patients healthy, the ACO paradigm would be able to claim a profound achievement. Such changes, however, will take time and they are not guaranteed.

Corresponding author: Zirui Song, MD, PhD, Department of Medicine, Massachusetts General Hospital, 55 Fruit St., Boston, MA 02114, zirui_song@post.harvard.edu.

Funding/support: Supported by a grant from the National Institute on Aging F30 AG039175.

Financial disclosures: None.

From the Harvard Medical School and the Department of Medicine, Massachusetts General Hospital, Boston, MA.

In recent years, the growth of health care spending has climbed to the top of the domestic policy agenda. Medicare spending growth is now recognized as the biggest driver of the federal debt [1,2].Medicaid spending growth puts similar pressure on states. In the private sector, employee health care costs increasingly weigh on company balance sheets, affecting business operations and employee wages. All the while, individuals and families face insurance premium growth that far outpaces real income growth.

Out of this recent history emerged a broad recognition that health care spending growth is unsustainable at current rates. If Medicare spending continues to exceed gross domestic product (GDP) by 2.5 percentage points per year—the traditional gap over the past 4 decades—a greater than 160% increase in individual income taxes would be needed to pay for it [3].Even if the gap was 1 percentage point, the increase in income taxes needed would still be over 70%, with consequent contraction in GDP of 3% to 16% by 2015 [4,5].Other consequences, such as significant cuts in Medicare benefits or shifting of costs onto patients, are equally undesirable [6,7].

Policy options for slowing health care spending are varied. Some focus on changing the provider’s incentives, while others focus on changing the patient’s incentives. Some are based on federal solutions [8],while others are based on market solutions [9].In the current policy landscape, payment reform for physicians and hospitals has emerged as a leading candidate for addressing health care spending. Public and private payers are increasingly changing the way that providers are paid, moving away from fee-for-service towards bundled or global payments for populations of patients. Physicians and hospitals are in turn forming integrated provider organizations to take on these new payment systems. The pace of this change has been growing.

Key Features of the ACO Concept

An accountable care organization (ACO) is a group of providers—that can include both physicians and hospitals—that accepts joint responsibility for health care spending and quality for a defined population of patients. The ACO concept can be considered an extension of the staff-model health maintenance organization (HMO) [13,14].It also shares features with the patient-centered medical home (PCMH) model in its focus on a robust primary care nexus that serves to coordinate a patient’s care [15,16].Three key characteristics are embedded in this definition.

The first is joint accountability. In an ACO contract, incentives for providers are agreed upon at the organizational level. Physicians and hospitals bear the financial risks and rewards of the ACO contract together. Shared savings, quality bonuses, and other incentives are determined by how the organization performs as a whole rather than any individual physician, practice, or hospital. In this way, physicians across specialties and care settings are incentivized to approach patient care collectively and coordinate care more effectively.

Third, an ACO is responsible for the care of a population of people. Each year, spending and quality are measured for the population attributed, or assigned, to the ACO. Attribution of patients to organizations can take place in two ways. It can be prospective, meaning that before the start of a contract year, the ACO knows exactly the patients whose spending and quality it is responsible for. This is typically more feasible in commercial ACO contracts, especially in the HMO population, where patients designate a primary care physician at the beginning of the year. Otherwise, attribution is typically retrospective, such as in the Medicare ACO programs, where beneficiaries are assigned to organizations at the end of a contract year based on the organization which accounted for the plurality of a patient’s medical spending or primary care spending.

Evidence to Date

While formal results from most ACOs today are not yet available, several notable ACO experiments have been evaluated. These include early results from the Medicare ACO programs, previous evaluations of the Medicare Physician Group Practice Demonstration (a predecessor of today’s ACO contracting model), and early results from commercial ACO contracts, such as the Blue Cross Blue Shield of Massachusetts global budget contract.

In interpreting lessons from these evaluations, several questions are worth keeping in mind. If a new payment system is correlated with changes in medical spending, is this explained by underlying changes in prices or in quantities? Since medical spending is the product of prices of services and quantities (volume) of services, an intervention that affects spending must affect either the prices or the volume of care. In the Medicare program, where prices are standardized, a global budget contract that works off of the underlying physician fee schedule would only affect spending through volume. In the private insurance sector, however, an ACO contract may affect spending through both volume and prices, since variations in prices across providers creates an opportunity for savings if care is obtained through a less expensive provider.

Separate from its relationship to medical spending, which is measured through the claims submitted by providers, what is the connection between a new payment system and total payouts from the insurer to the provider? An ACO contract contains a variety of incentives to providers that may generate additional payments from the insurer (most notably shared savings and quality bonuses). These non-claims payments may partially or entirely offset savings obtained through medical claims, making them an important dimension in the evaluation of the contract. Yet they are also different from medical claim dollars in a meaningful way. Changes in medical spending reflect underlying physician (or patient) behavior—what care is delivered and how much of it is delivered—whereas non-claims payments reflect the incentive structure of the contract.

On the quality dimension, it is worth noting whether a new payment system has similar effects on process and outcome measures. Process measures, which have been widely used by health plans, are operationally similar to additional items on a fee schedule, whereby the delivery of a service effectively generates a payment. Clinical outcome measures, such as blood pressure or cholesterol, and patient experience measures, on the other hand, cannot be fulfilled by simply checking off a box. Therefore, these measures may represent quality in a more meaningful way.

Early Results from Medicare ACOs

Thirty-two provider organizations entered the Pioneer ACO program in 2012, with about 669,000 Medicare beneficiaries attributed to these organizations. According to CMS, medical spending growth for ACO beneficiaries was 0.3% in the first year, compared to 0.8% for similar beneficiaries outside of these organizations [18].This generated a gross savings of $87.6 million in 2012, of which $33 million were returned to the Medicare trust fund. These savings were driven by 13 ACOs, with another 17 ACOs not reporting statistically significant changes in spending and 2 ACOs garnering losses with spending above the target of about $4 million total. Lower rates of admissions and readmissions largely explained the savings. A separate analysis comparing these ACOs to their local markets estimated a higher year 1 savings of $147 million dollars, driven by 8 ACOs whose savings ranged from $396 to $1224 per beneficiary per year [19].

Pioneer ACOs also earned over $76 million for quality. In the first year, quality bonuses were awarded for the reporting of quality measures rather than for performance, and all 32 ACOs successfully reported. According to CMS, Pioneer ACOs on average performed better than fee-for-service Medicare beneficiaries on 15 clinical quality measures for which comparison data were available, including blood pressure control and cholesterol control for diabetic patients. A complete analysis of quality performance is not yet available.

In the Medicare Shared Savings Program, interim results from CMS for the first 2 cohorts of ACOs showed that 29 of the 114 organizations lowered spending sufficiently enough to generate shared savings while 2 organizations had shared losses [20].This suggests that the great majority of ACOs spent close to their target. Final results on spending and quality are pending.

Results from the Medicare Physician Group Practice Demonstration

Ten provider organizations entered one-sided ACO-type contracts with Medicare in 2005 via the Physician Group Practice Demonstration. In this contract, organizations shared in savings provided that their spending was at least 2% below target and they achieved threshold performance on certain quality measures, most of which were process metrics.

In year 1, only one organization decreased spending enough to earn a shared savings, but after 3 years, five organizations had generated shared savings, although half of the savings were awarded to one organization [21].A recent analysis showed that 4 organizations sustained shared savings by the end of the program, with savings concentrated in acute care, readmissions, and beneficiaries who are dually eligible for Medicaid. Across the 10 organizations, financial performance ranged from average savings of $866 to increased spending of $749 per beneficiary per year [22].In total, about $78 million in savings were generated by this demonstration. Although a positive finding, this is a relatively small amount in the context of total Medicare expenditures [23,24].

On quality, all organizations met threshold performance on at least 29 of the 32 measures by the end of 5 years [21]. Most of these were process measures focused on coronary artery disease, diabetes, heart failure, hypertension, and preventive care [25].

Early Results from Commercial ACO Contracts

One of the early commercial ACO contracts to be evaluated was the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract (AQC) [26].Initially implemented in 2009, the AQC is a multi-year contract that pays provider organizations a risk-adjusted global budget over the continuum of care. Seven organizations in Massachusetts entered the contract in the first year, and 4 more entered in 2010. Enrollees in HMO plans were prospectively attributed to their ACO by their designation of a primary care physician. The AQC is a two-sided contract that offered an additional 10% of an organization’s budget as a bonus for performance on 64 quality measures, half outpatient measures and half inpatient. Budget growth rates were tied to inflation and terms of its growth were negotiated with the organizations [27].

Over the first 2 years, the contract was associated with a decrease in medical spending of about $90 per enrollee per year, a –2.8% change (–1.9% in year 1 and –3.3% in year 2) [28].These savings were concentrated in procedures, imaging, and tests in the outpatient facility setting, and were largely explained by lower prices achieved by referring patients to less expensive providers. They were also concentrated in organizations that entered the AQC from fee-for-service, rather than prior risk contracts, and driven by enrollees with the highest expected spending. Over the second year, decreases in volume for certain services, such as percutaneous coronary interventions, began to contribute more to the savings [29].However, medical savings in the first 2 years were exceeded by non-claims payments, including shared savings and quality bonuses [27,28].The AQC was also associated with improvements in outpatient quality, including chronic care management measures (3.7 percentage points increase per year), adult preventive measures (0.4 percentage points per year), and pediatric quality measures (1.3 percentage points per year). Outcome measures such as hemoglobin A1c, LDL cholesterol, and blood pressure also showed an upward trend in the early years [28].Inpatient quality measures have yet to be examined.

Elsewhere in the country, Cigna’s Collaborative Accountable Care model was rolled out in 2009 with provider organizations in New Hampshire, Texas, and Arizona. A one-sided shared savings contract, it features a care coordination fee that is counted towards a practice’s medical spending, helping fund registered nurses who work as care coordinators. Interim results in 2012 suggested cost savings and quality improvements, but they were not statistically significant [30].A two-sided contract between Blue Shield of California and the California Public Employees’ Retirement System slowed medical costs by shortening admission and reducing readmissions [31].Most recently, an accountable care partnership between Anthem Blue Cross and HealthCare Partners physician group in California claimed $4.7 million in savings in the first half of 2013 for 55,000 patients in preferred provider organization (PPO) plans [32].These savings were driven by an 18% reduction in inpatient days, 4% reduction in overall admissions, and a 4% reduction in visits for radiology and lab tests, although specific price and volume contributions are yet unknown. Similar to the AQC, the Anthem contract is a 5-year agreement. Unlike the initial AQC contract, shared savings were tied to meeting a quality threshold and HealthCare Partners did not bear downside risk in year 1 [33].

Lessons Learned

Strengths of the ACO Model

Evidence to date points to both the potential of ACOs to slow spending and improve quality, but also the significant obstacles that they face. One of the encouraging lessons so far is that quality of care need not be threatened by a contract that rewards savings, provided that meaningful incentives for quality are in place. In both public and private two-sided contracts, process quality seemed to consistently improve. However, less is known about performance on outcome measures, which is ultimately a more meaningful metric for patients.

Broadly speaking, ACO contracts may be able to induce changes in physician behavior that could lead to medical savings. The low hanging fruit in Medicare seems to be admissions and readmissions, while that in commercial contracts may be lower prices obtained by changing referral patterns. While these medical savings reveal changes in clinical decision-making, it is still poorly understood whether clinical choices geared towards higher value can extend to areas of utilization where wasteful care may be concentrated. Little is also known about whether an ACO’s physicians and hospitals are in agreement over these changes in utilization or referral patterns, given their consequences for referral business and admissions. Moreover, there has yet to be evidence suggesting that medical savings can be larger than non-claims payments (rewards and bonuses to the ACOs) in a given year, generating net savings to the health care system. This may well take time to materialize given the initial investment costs and inducements for provider participation embedded in the early year incentives, but it is an important metric of success.

ACOs serve as a vehicle for payment reform and organizational reform among providers. They bring physicians across specialties and hospitals together under the same contractual roof, allowing the organization to determine how it allocates its resources under the spending target. Historically, policies aimed to slow health care spending have focused on either cutting prices (provider fees) or constraining volume (gatekeeping, prior authorization, and utilization review, etc.), but both types of strategies have been complicated by unintended consequences. Medicare fee cuts have traditionally been followed by compensatory increases in utilization or intensity of coding, offsetting the intended savings to a significant degree [34–37].Managed care techniques have met resistance from both physicians and patients [38,39].A spending target or budget takes an alternative approach; rather than controlling prices or quantities directly, it seeks to control total spending. Although the underlying fee schedule is retained for accounting, a spending target or especially a global budget pushes the organization to decide what care is high or low value.

A two-sided contract imposes stronger incentives on the ACO than a one-sided contract, which is both a strength and a weakness. While ACOs facing downside risk may respond earlier to the incentives, as some of the evidence thus far suggests, this risk may also propel ACOs to abandon this contracting model. In the Medicare Pioneer ACO program, for example, 9 of the 32 organizations exited the contract after year 1, which was allowed given the voluntary nature of participation. Seven organizations opted for the one-sided Medicare Shared Savings Program in year 2 and two left the ACO programs altogether. Downside risk was thought to be a principal concern for these organizations [40].Massachusetts providers in the AQC have thus far remained in the contract, but the AQC was a multi-year agreement to begin with.

Spillovers are another potential strength of the ACO model. Given that organizations care for patients across multiple payers, strong payment incentives in one payer population may affect care broadly. In the AQC, for example, recent evidence showed slowing of spending for Medicare beneficiaries associated with the contract in similar settings and categories of care as for the Blue Cross Blue Shield patients [41].

Weaknesses of the ACO Model

Still in its nascent stages, the ACO paradigm faces a number of challenges. Some relate to inherent weaknesses of the model, while others relate to the institutions and economics of the broader health care economy. At a contractual level, a key challenge is setting the target growth rate of the budget. If too low, providers may be overly constrained; if too high, providers may not have enough incentive to change practice. In an extreme case, if the target is set above what spending would have been under the old arrangement, an ACO contract can in fact be cost increasing on claims spending alone. Financial rewards such as shared savings and quality bonuses can help offset the risk, but they also make it more difficult for the ACO contract to generate net savings.

Achieving the right balance of risks and rewards is difficult. As noted above, a one-sided contract may not be strong enough to induce behavior change [42,43],but a two-sided contract may be too risky, driving providers who are unable to align incentives and coordinate care to exit the model [44].Although the percentage of shared risk borne by payer versus provider can be negotiated, putting financial risk on providers in a palatable way will be a key challenge. Financial risk can be more daunting if ACOs do not know in advance which patients they are responsible for, as in contracts with retrospective attribution rules and enrollees in unmanaged plans. A payer can help providers handle risk by sharing data on spending and identifying potential areas of overuse and low value care. Payers can help further by implementing risk corridors, providing reinsurance, or improving risk adjustment of the organization’s global budget. But with all that said, it remains to be seen whether providers around the country will be willing to bear substantive risk.

Within the ACO, a primary challenge is dividing up risks and rewards among constituent providers. How much shared savings are given to the hospital, to primary care physicians, or to specialists? What share should each specialty receive? What about shared losses, should spending exceed the target? In a two-sided ACO contract, these questions are particularly salient as global budgets change the business model for providers. Revenue centers under fee-for-service become cost centers. Organizations are confronted with difficult tradeoffs. The ability of providers across specialties to find common ground will be crucial, and leadership from providers will be key [45].Physicians have established themselves as leaders of the majority of ACOs today [46].It remains to be seen whether these organizations can keep providers together through the tradeoffs.

Patient trust in the ACO model has yet to be established. The managed care backlash of the 1990s suggests that patient buy-in will be crucial for the sustainability of ACOs. ACOs can have similarities to the HMO that traditionally produce negative associations, including downside risk, gatekeeping, or managed care techniques. To earn patients’ trust, ACOs will need to prove their value, such as through delivering better preventive care, less expensive care, more holistic care through stronger teams of providers, or smoother transitions of care across settings. The task of primary care medical homes to provide patient-centered care and coordinate across specialists effectively will be crucial. While today’s ACOs may be better positioned because of risk sharing, quality bonuses, risk adjustment, electronic medical records, or other innovations, the patient’s experience may ultimately be the arbiter.

Broader Challenges

While clinical integration is a central tenet of ACOs, consolidation between providers is simultaneously a chief concern for policymakers. Consolidation generally reduces competition and drives up prices, which is at odds with the goals of cost containment [47,48].Across the nation, physicians are consolidating with hospitals and health systems at an increasing rate, with recent surveys reporting that the proportion of independent physicians has steadily declined to below 50% [49–52].Increasing the number of covered lives is a dominant growth strategy under risk contracts, and more covered lives also increases an ACO’s bargaining power during acquisitions of specialist practices, whose referrals are better protected by inclusion in the provider network. As this trend continues, its effect on commercial prices will likely be scrutinized [53,54].

The ACO paradigm may also have significant effects on the physician labor market. Over the past 4 decades, the rate of physician specialization has grown dramatically [55].Fee-for-service incentives were aligned with specialization, but a rapid transition to alternative payment systems may disrupt the more gradually evolving physician labor market. Most medical school graduates today choose to specialize, as do most graduates of general medicine training programs [56,57],yet it is unclear to what degree the demand for specialists will continue to grow in the accountable care era. Specialty services tend to be of higher cost than generalist services. In some situations, high-cost services are more likely to be of lower value [58–60].Yet having specialists allows an organization to integrate services across the continuum of care, for which they are now financially responsible. As a new generation of specialists prepares to enter practice, whether the health care system will be able to support them and fulfill their expectations about their practice environment may be in question.

Looking into the Future

The landscape of payment and organization in health care will likely continue to migrate towards the ACO concept [61,62]. As the federal government, states, and individual payers move in similar directions, physicians and hospitals will face increasing pressures to change and adapt to new incentives surrounding cost and quality. Whether ACOs succeed in slowing spending while improving quality may have important ramifications for future stages of health care reform. For example, the growing debate in Washington, DC, over the future of Medicare financing may be informed, in part, by whether ACOs succeed within the traditional Medicare program. Market-based reforms, such as converting Medicare into a premium support program whereby private insurers compete to insure Medicare beneficiaries for a pre-defined contribution from the federal government, have been gaining momentum in recent years. Although not without concerns, such proposals would expect to gain consideration if the ACO model does not succeed.

Perhaps the most meaningful contribution of the ACO model is that it gives providers a reason to change the culture of medicine. It asks providers across specialties to work together and coordinate care in a way that was not rewarded under fee-for-service. It asks organizations to stitch the separate pieces of the patient’s care trajectory together through teamwork. In the long run, this may be the most intangible but substantive legacy that the ACO model provides. Under a single, collective contract at the organizational level, providers are quite literally in it together. If providers can break down silos, improve care coordination, and manage population health with a collective vision towards keeping patients healthy, the ACO paradigm would be able to claim a profound achievement. Such changes, however, will take time and they are not guaranteed.

Corresponding author: Zirui Song, MD, PhD, Department of Medicine, Massachusetts General Hospital, 55 Fruit St., Boston, MA 02114, zirui_song@post.harvard.edu.

Funding/support: Supported by a grant from the National Institute on Aging F30 AG039175.

Financial disclosures: None.

From the Harvard Medical School and the Department of Medicine, Massachusetts General Hospital, Boston, MA.

In recent years, the growth of health care spending has climbed to the top of the domestic policy agenda. Medicare spending growth is now recognized as the biggest driver of the federal debt [1,2].Medicaid spending growth puts similar pressure on states. In the private sector, employee health care costs increasingly weigh on company balance sheets, affecting business operations and employee wages. All the while, individuals and families face insurance premium growth that far outpaces real income growth.

Out of this recent history emerged a broad recognition that health care spending growth is unsustainable at current rates. If Medicare spending continues to exceed gross domestic product (GDP) by 2.5 percentage points per year—the traditional gap over the past 4 decades—a greater than 160% increase in individual income taxes would be needed to pay for it [3].Even if the gap was 1 percentage point, the increase in income taxes needed would still be over 70%, with consequent contraction in GDP of 3% to 16% by 2015 [4,5].Other consequences, such as significant cuts in Medicare benefits or shifting of costs onto patients, are equally undesirable [6,7].

Policy options for slowing health care spending are varied. Some focus on changing the provider’s incentives, while others focus on changing the patient’s incentives. Some are based on federal solutions [8],while others are based on market solutions [9].In the current policy landscape, payment reform for physicians and hospitals has emerged as a leading candidate for addressing health care spending. Public and private payers are increasingly changing the way that providers are paid, moving away from fee-for-service towards bundled or global payments for populations of patients. Physicians and hospitals are in turn forming integrated provider organizations to take on these new payment systems. The pace of this change has been growing.

Key Features of the ACO Concept

An accountable care organization (ACO) is a group of providers—that can include both physicians and hospitals—that accepts joint responsibility for health care spending and quality for a defined population of patients. The ACO concept can be considered an extension of the staff-model health maintenance organization (HMO) [13,14].It also shares features with the patient-centered medical home (PCMH) model in its focus on a robust primary care nexus that serves to coordinate a patient’s care [15,16].Three key characteristics are embedded in this definition.

The first is joint accountability. In an ACO contract, incentives for providers are agreed upon at the organizational level. Physicians and hospitals bear the financial risks and rewards of the ACO contract together. Shared savings, quality bonuses, and other incentives are determined by how the organization performs as a whole rather than any individual physician, practice, or hospital. In this way, physicians across specialties and care settings are incentivized to approach patient care collectively and coordinate care more effectively.

Third, an ACO is responsible for the care of a population of people. Each year, spending and quality are measured for the population attributed, or assigned, to the ACO. Attribution of patients to organizations can take place in two ways. It can be prospective, meaning that before the start of a contract year, the ACO knows exactly the patients whose spending and quality it is responsible for. This is typically more feasible in commercial ACO contracts, especially in the HMO population, where patients designate a primary care physician at the beginning of the year. Otherwise, attribution is typically retrospective, such as in the Medicare ACO programs, where beneficiaries are assigned to organizations at the end of a contract year based on the organization which accounted for the plurality of a patient’s medical spending or primary care spending.

Evidence to Date

While formal results from most ACOs today are not yet available, several notable ACO experiments have been evaluated. These include early results from the Medicare ACO programs, previous evaluations of the Medicare Physician Group Practice Demonstration (a predecessor of today’s ACO contracting model), and early results from commercial ACO contracts, such as the Blue Cross Blue Shield of Massachusetts global budget contract.

In interpreting lessons from these evaluations, several questions are worth keeping in mind. If a new payment system is correlated with changes in medical spending, is this explained by underlying changes in prices or in quantities? Since medical spending is the product of prices of services and quantities (volume) of services, an intervention that affects spending must affect either the prices or the volume of care. In the Medicare program, where prices are standardized, a global budget contract that works off of the underlying physician fee schedule would only affect spending through volume. In the private insurance sector, however, an ACO contract may affect spending through both volume and prices, since variations in prices across providers creates an opportunity for savings if care is obtained through a less expensive provider.

Separate from its relationship to medical spending, which is measured through the claims submitted by providers, what is the connection between a new payment system and total payouts from the insurer to the provider? An ACO contract contains a variety of incentives to providers that may generate additional payments from the insurer (most notably shared savings and quality bonuses). These non-claims payments may partially or entirely offset savings obtained through medical claims, making them an important dimension in the evaluation of the contract. Yet they are also different from medical claim dollars in a meaningful way. Changes in medical spending reflect underlying physician (or patient) behavior—what care is delivered and how much of it is delivered—whereas non-claims payments reflect the incentive structure of the contract.

On the quality dimension, it is worth noting whether a new payment system has similar effects on process and outcome measures. Process measures, which have been widely used by health plans, are operationally similar to additional items on a fee schedule, whereby the delivery of a service effectively generates a payment. Clinical outcome measures, such as blood pressure or cholesterol, and patient experience measures, on the other hand, cannot be fulfilled by simply checking off a box. Therefore, these measures may represent quality in a more meaningful way.

Early Results from Medicare ACOs

Thirty-two provider organizations entered the Pioneer ACO program in 2012, with about 669,000 Medicare beneficiaries attributed to these organizations. According to CMS, medical spending growth for ACO beneficiaries was 0.3% in the first year, compared to 0.8% for similar beneficiaries outside of these organizations [18].This generated a gross savings of $87.6 million in 2012, of which $33 million were returned to the Medicare trust fund. These savings were driven by 13 ACOs, with another 17 ACOs not reporting statistically significant changes in spending and 2 ACOs garnering losses with spending above the target of about $4 million total. Lower rates of admissions and readmissions largely explained the savings. A separate analysis comparing these ACOs to their local markets estimated a higher year 1 savings of $147 million dollars, driven by 8 ACOs whose savings ranged from $396 to $1224 per beneficiary per year [19].

Pioneer ACOs also earned over $76 million for quality. In the first year, quality bonuses were awarded for the reporting of quality measures rather than for performance, and all 32 ACOs successfully reported. According to CMS, Pioneer ACOs on average performed better than fee-for-service Medicare beneficiaries on 15 clinical quality measures for which comparison data were available, including blood pressure control and cholesterol control for diabetic patients. A complete analysis of quality performance is not yet available.

In the Medicare Shared Savings Program, interim results from CMS for the first 2 cohorts of ACOs showed that 29 of the 114 organizations lowered spending sufficiently enough to generate shared savings while 2 organizations had shared losses [20].This suggests that the great majority of ACOs spent close to their target. Final results on spending and quality are pending.

Results from the Medicare Physician Group Practice Demonstration

Ten provider organizations entered one-sided ACO-type contracts with Medicare in 2005 via the Physician Group Practice Demonstration. In this contract, organizations shared in savings provided that their spending was at least 2% below target and they achieved threshold performance on certain quality measures, most of which were process metrics.

In year 1, only one organization decreased spending enough to earn a shared savings, but after 3 years, five organizations had generated shared savings, although half of the savings were awarded to one organization [21].A recent analysis showed that 4 organizations sustained shared savings by the end of the program, with savings concentrated in acute care, readmissions, and beneficiaries who are dually eligible for Medicaid. Across the 10 organizations, financial performance ranged from average savings of $866 to increased spending of $749 per beneficiary per year [22].In total, about $78 million in savings were generated by this demonstration. Although a positive finding, this is a relatively small amount in the context of total Medicare expenditures [23,24].

On quality, all organizations met threshold performance on at least 29 of the 32 measures by the end of 5 years [21]. Most of these were process measures focused on coronary artery disease, diabetes, heart failure, hypertension, and preventive care [25].

Early Results from Commercial ACO Contracts

One of the early commercial ACO contracts to be evaluated was the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract (AQC) [26].Initially implemented in 2009, the AQC is a multi-year contract that pays provider organizations a risk-adjusted global budget over the continuum of care. Seven organizations in Massachusetts entered the contract in the first year, and 4 more entered in 2010. Enrollees in HMO plans were prospectively attributed to their ACO by their designation of a primary care physician. The AQC is a two-sided contract that offered an additional 10% of an organization’s budget as a bonus for performance on 64 quality measures, half outpatient measures and half inpatient. Budget growth rates were tied to inflation and terms of its growth were negotiated with the organizations [27].

Over the first 2 years, the contract was associated with a decrease in medical spending of about $90 per enrollee per year, a –2.8% change (–1.9% in year 1 and –3.3% in year 2) [28].These savings were concentrated in procedures, imaging, and tests in the outpatient facility setting, and were largely explained by lower prices achieved by referring patients to less expensive providers. They were also concentrated in organizations that entered the AQC from fee-for-service, rather than prior risk contracts, and driven by enrollees with the highest expected spending. Over the second year, decreases in volume for certain services, such as percutaneous coronary interventions, began to contribute more to the savings [29].However, medical savings in the first 2 years were exceeded by non-claims payments, including shared savings and quality bonuses [27,28].The AQC was also associated with improvements in outpatient quality, including chronic care management measures (3.7 percentage points increase per year), adult preventive measures (0.4 percentage points per year), and pediatric quality measures (1.3 percentage points per year). Outcome measures such as hemoglobin A1c, LDL cholesterol, and blood pressure also showed an upward trend in the early years [28].Inpatient quality measures have yet to be examined.

Elsewhere in the country, Cigna’s Collaborative Accountable Care model was rolled out in 2009 with provider organizations in New Hampshire, Texas, and Arizona. A one-sided shared savings contract, it features a care coordination fee that is counted towards a practice’s medical spending, helping fund registered nurses who work as care coordinators. Interim results in 2012 suggested cost savings and quality improvements, but they were not statistically significant [30].A two-sided contract between Blue Shield of California and the California Public Employees’ Retirement System slowed medical costs by shortening admission and reducing readmissions [31].Most recently, an accountable care partnership between Anthem Blue Cross and HealthCare Partners physician group in California claimed $4.7 million in savings in the first half of 2013 for 55,000 patients in preferred provider organization (PPO) plans [32].These savings were driven by an 18% reduction in inpatient days, 4% reduction in overall admissions, and a 4% reduction in visits for radiology and lab tests, although specific price and volume contributions are yet unknown. Similar to the AQC, the Anthem contract is a 5-year agreement. Unlike the initial AQC contract, shared savings were tied to meeting a quality threshold and HealthCare Partners did not bear downside risk in year 1 [33].

Lessons Learned

Strengths of the ACO Model

Evidence to date points to both the potential of ACOs to slow spending and improve quality, but also the significant obstacles that they face. One of the encouraging lessons so far is that quality of care need not be threatened by a contract that rewards savings, provided that meaningful incentives for quality are in place. In both public and private two-sided contracts, process quality seemed to consistently improve. However, less is known about performance on outcome measures, which is ultimately a more meaningful metric for patients.

Broadly speaking, ACO contracts may be able to induce changes in physician behavior that could lead to medical savings. The low hanging fruit in Medicare seems to be admissions and readmissions, while that in commercial contracts may be lower prices obtained by changing referral patterns. While these medical savings reveal changes in clinical decision-making, it is still poorly understood whether clinical choices geared towards higher value can extend to areas of utilization where wasteful care may be concentrated. Little is also known about whether an ACO’s physicians and hospitals are in agreement over these changes in utilization or referral patterns, given their consequences for referral business and admissions. Moreover, there has yet to be evidence suggesting that medical savings can be larger than non-claims payments (rewards and bonuses to the ACOs) in a given year, generating net savings to the health care system. This may well take time to materialize given the initial investment costs and inducements for provider participation embedded in the early year incentives, but it is an important metric of success.

ACOs serve as a vehicle for payment reform and organizational reform among providers. They bring physicians across specialties and hospitals together under the same contractual roof, allowing the organization to determine how it allocates its resources under the spending target. Historically, policies aimed to slow health care spending have focused on either cutting prices (provider fees) or constraining volume (gatekeeping, prior authorization, and utilization review, etc.), but both types of strategies have been complicated by unintended consequences. Medicare fee cuts have traditionally been followed by compensatory increases in utilization or intensity of coding, offsetting the intended savings to a significant degree [34–37].Managed care techniques have met resistance from both physicians and patients [38,39].A spending target or budget takes an alternative approach; rather than controlling prices or quantities directly, it seeks to control total spending. Although the underlying fee schedule is retained for accounting, a spending target or especially a global budget pushes the organization to decide what care is high or low value.

A two-sided contract imposes stronger incentives on the ACO than a one-sided contract, which is both a strength and a weakness. While ACOs facing downside risk may respond earlier to the incentives, as some of the evidence thus far suggests, this risk may also propel ACOs to abandon this contracting model. In the Medicare Pioneer ACO program, for example, 9 of the 32 organizations exited the contract after year 1, which was allowed given the voluntary nature of participation. Seven organizations opted for the one-sided Medicare Shared Savings Program in year 2 and two left the ACO programs altogether. Downside risk was thought to be a principal concern for these organizations [40].Massachusetts providers in the AQC have thus far remained in the contract, but the AQC was a multi-year agreement to begin with.

Spillovers are another potential strength of the ACO model. Given that organizations care for patients across multiple payers, strong payment incentives in one payer population may affect care broadly. In the AQC, for example, recent evidence showed slowing of spending for Medicare beneficiaries associated with the contract in similar settings and categories of care as for the Blue Cross Blue Shield patients [41].

Weaknesses of the ACO Model

Still in its nascent stages, the ACO paradigm faces a number of challenges. Some relate to inherent weaknesses of the model, while others relate to the institutions and economics of the broader health care economy. At a contractual level, a key challenge is setting the target growth rate of the budget. If too low, providers may be overly constrained; if too high, providers may not have enough incentive to change practice. In an extreme case, if the target is set above what spending would have been under the old arrangement, an ACO contract can in fact be cost increasing on claims spending alone. Financial rewards such as shared savings and quality bonuses can help offset the risk, but they also make it more difficult for the ACO contract to generate net savings.

Achieving the right balance of risks and rewards is difficult. As noted above, a one-sided contract may not be strong enough to induce behavior change [42,43],but a two-sided contract may be too risky, driving providers who are unable to align incentives and coordinate care to exit the model [44].Although the percentage of shared risk borne by payer versus provider can be negotiated, putting financial risk on providers in a palatable way will be a key challenge. Financial risk can be more daunting if ACOs do not know in advance which patients they are responsible for, as in contracts with retrospective attribution rules and enrollees in unmanaged plans. A payer can help providers handle risk by sharing data on spending and identifying potential areas of overuse and low value care. Payers can help further by implementing risk corridors, providing reinsurance, or improving risk adjustment of the organization’s global budget. But with all that said, it remains to be seen whether providers around the country will be willing to bear substantive risk.

Within the ACO, a primary challenge is dividing up risks and rewards among constituent providers. How much shared savings are given to the hospital, to primary care physicians, or to specialists? What share should each specialty receive? What about shared losses, should spending exceed the target? In a two-sided ACO contract, these questions are particularly salient as global budgets change the business model for providers. Revenue centers under fee-for-service become cost centers. Organizations are confronted with difficult tradeoffs. The ability of providers across specialties to find common ground will be crucial, and leadership from providers will be key [45].Physicians have established themselves as leaders of the majority of ACOs today [46].It remains to be seen whether these organizations can keep providers together through the tradeoffs.

Patient trust in the ACO model has yet to be established. The managed care backlash of the 1990s suggests that patient buy-in will be crucial for the sustainability of ACOs. ACOs can have similarities to the HMO that traditionally produce negative associations, including downside risk, gatekeeping, or managed care techniques. To earn patients’ trust, ACOs will need to prove their value, such as through delivering better preventive care, less expensive care, more holistic care through stronger teams of providers, or smoother transitions of care across settings. The task of primary care medical homes to provide patient-centered care and coordinate across specialists effectively will be crucial. While today’s ACOs may be better positioned because of risk sharing, quality bonuses, risk adjustment, electronic medical records, or other innovations, the patient’s experience may ultimately be the arbiter.

Broader Challenges

While clinical integration is a central tenet of ACOs, consolidation between providers is simultaneously a chief concern for policymakers. Consolidation generally reduces competition and drives up prices, which is at odds with the goals of cost containment [47,48].Across the nation, physicians are consolidating with hospitals and health systems at an increasing rate, with recent surveys reporting that the proportion of independent physicians has steadily declined to below 50% [49–52].Increasing the number of covered lives is a dominant growth strategy under risk contracts, and more covered lives also increases an ACO’s bargaining power during acquisitions of specialist practices, whose referrals are better protected by inclusion in the provider network. As this trend continues, its effect on commercial prices will likely be scrutinized [53,54].

The ACO paradigm may also have significant effects on the physician labor market. Over the past 4 decades, the rate of physician specialization has grown dramatically [55].Fee-for-service incentives were aligned with specialization, but a rapid transition to alternative payment systems may disrupt the more gradually evolving physician labor market. Most medical school graduates today choose to specialize, as do most graduates of general medicine training programs [56,57],yet it is unclear to what degree the demand for specialists will continue to grow in the accountable care era. Specialty services tend to be of higher cost than generalist services. In some situations, high-cost services are more likely to be of lower value [58–60].Yet having specialists allows an organization to integrate services across the continuum of care, for which they are now financially responsible. As a new generation of specialists prepares to enter practice, whether the health care system will be able to support them and fulfill their expectations about their practice environment may be in question.

Looking into the Future

The landscape of payment and organization in health care will likely continue to migrate towards the ACO concept [61,62]. As the federal government, states, and individual payers move in similar directions, physicians and hospitals will face increasing pressures to change and adapt to new incentives surrounding cost and quality. Whether ACOs succeed in slowing spending while improving quality may have important ramifications for future stages of health care reform. For example, the growing debate in Washington, DC, over the future of Medicare financing may be informed, in part, by whether ACOs succeed within the traditional Medicare program. Market-based reforms, such as converting Medicare into a premium support program whereby private insurers compete to insure Medicare beneficiaries for a pre-defined contribution from the federal government, have been gaining momentum in recent years. Although not without concerns, such proposals would expect to gain consideration if the ACO model does not succeed.

Perhaps the most meaningful contribution of the ACO model is that it gives providers a reason to change the culture of medicine. It asks providers across specialties to work together and coordinate care in a way that was not rewarded under fee-for-service. It asks organizations to stitch the separate pieces of the patient’s care trajectory together through teamwork. In the long run, this may be the most intangible but substantive legacy that the ACO model provides. Under a single, collective contract at the organizational level, providers are quite literally in it together. If providers can break down silos, improve care coordination, and manage population health with a collective vision towards keeping patients healthy, the ACO paradigm would be able to claim a profound achievement. Such changes, however, will take time and they are not guaranteed.

Corresponding author: Zirui Song, MD, PhD, Department of Medicine, Massachusetts General Hospital, 55 Fruit St., Boston, MA 02114, zirui_song@post.harvard.edu.

Funding/support: Supported by a grant from the National Institute on Aging F30 AG039175.

Financial disclosures: None.

From the National Initiative for Children’s Healthcare Quality, Boston, MA.

This month JCOM launches a series calling attention to 5 teams working to improve care for individuals with sickle cell disease and sickle cell trait in the Hemoglobinopathy Learning Collaborative (—Ed.)

Sickle cell disease affects close to 100,000 people in United States [1]. This condition is characterized by chronic anemia and unpredictable pain episodes beginning in early childhood and leading to changes in functioning, diminished health-related quality of life, end-organ damage, increased health care use, and in some cases early mortality [2–5]. Sickle cell disease is identified through universal newborn screening [6] and is found in one in 2474 newborn Americans [7], with Americans of African ancestry most frequently affected. It is estimated that over 2 million Americans are genetic carriers of the sickle cell gene.

Although there have been major advancements in sickle cell care within the past several decades, there still exist significant variations in care and mortality [8–14]. Ongoing strategies to improve patient access to efficacious treatments are essential to improve outcomes for individuals with sickle cell disease.

Recognizing the compelling need for a focused national effort to improve care for this population and the relative lack of private resources committed to it [15], Congress established 2 federal programs to enhance newborn screening and improve follow-up and care and outcomes for this population: the Sickle Cell Disease Newborn Screening Program in 2002 [16] and the Sickle Cell Disease Treatment Demonstration Program in 2004 [17]. The programs are funded by the Health Resources and Services Administration and administered by the National Initiative for Children’s Healthcare Quality (NICHQ)’s Working to Improve Sickle Cell Healthcare (WISCH) program [2]. NICHQ became the coordinating center for the programs in 2011 and 2010, respectively. Diverse grantees are now working together in a Hemoglobinopathy Learning Collaborative, coordinated and facilitated by NICHQ and its partners Boston Medical Center and the Sickle Cell Disease Association of America. The current rounds of funding continue through 2014 for the Sickle Cell Disease Treatment Demonstration Program and 2015 for the Sickle Cell Disease Newborn Screening Program.

The Hemoglobinopathy Learning Collaborative grantees are developing strategies that will result in more coordinated and appropriate care in order that individuals with sickle cell disease experience fewer complications, acute care visits, and hospitalizations; enhanced quality of life; and more compassionate and respectful treatment from the health care system. Processes are also being developed to ensure that individuals screened for sickle cell disease and sickle cell trait receive genetic counseling, education and appropriate follow-up care for their condition. The aims of the collaborative are aligned with the national quality strategy of the Triple Aim—better care, better health, and lower overall health care costs [18]. The strategies and approaches developed and tested by the teams will be disseminated to the broader sickle cell community for use in the treatment and management of individuals with sickle cell disease.

The Hemoglobinopathy Learning Collaborative’s approach is based on the structure of the Breakthrough Series Learning Collaborative [19–21], a model championed by the Institute for Healthcare Improvement that brings together health care organizations that share a commitment to making major, rapid changes in order to produce breakthrough improvements in quality. Using a process known as the Model for Improvement [22], the teams develop ideas for changes, test small-scale changes using Plan-Do-Study-Act (PDSA) cycles, and measure to determine if the changes are leading to improvement. This method can quickly identify promising ideas and adapt and develop them to into robust, reliable standard processes [2].

There are 15 improvement teams working on quality improvement projects focused on improving acute care management, provision of recommended care, transition, self-management, provider education, and screening, counseling, and education for individuals with SCD and SCT. The 5 articles in this special series span these major content areas, from improving outcomes in the emergency department using standardized order sets to assessing the readiness of adolescents to transition to adult care, to using health information technology to improve care coordination, to developing a home pain management plan, and to using patient navigators to help coordinate care and resources. The series begins with the article by Treadwell et al in this issue and will continue for the next several months. The WISCH teams will serve as leaders for sustainable and positive change for treatment of individuals with sickle cell disease and sickle cell trait in the United States. Their work is an important step towards transforming care for people with sickle cell disease, so that each person with sickle cell disease will receive the highest quality of care throughout their lifespan.

Corresponding author: Suzette Oyeku, MD, MPH, Children’s Hospital at Montefiore/Albert Einstein College of Medicine, 3444 Kossuth Ave, 1st Fl, Bronx, NY 10467, soyeku@nichq.org.

From the National Initiative for Children’s Healthcare Quality, Boston, MA.

This month JCOM launches a series calling attention to 5 teams working to improve care for individuals with sickle cell disease and sickle cell trait in the Hemoglobinopathy Learning Collaborative (—Ed.)

Sickle cell disease affects close to 100,000 people in United States [1]. This condition is characterized by chronic anemia and unpredictable pain episodes beginning in early childhood and leading to changes in functioning, diminished health-related quality of life, end-organ damage, increased health care use, and in some cases early mortality [2–5]. Sickle cell disease is identified through universal newborn screening [6] and is found in one in 2474 newborn Americans [7], with Americans of African ancestry most frequently affected. It is estimated that over 2 million Americans are genetic carriers of the sickle cell gene.

Although there have been major advancements in sickle cell care within the past several decades, there still exist significant variations in care and mortality [8–14]. Ongoing strategies to improve patient access to efficacious treatments are essential to improve outcomes for individuals with sickle cell disease.

Recognizing the compelling need for a focused national effort to improve care for this population and the relative lack of private resources committed to it [15], Congress established 2 federal programs to enhance newborn screening and improve follow-up and care and outcomes for this population: the Sickle Cell Disease Newborn Screening Program in 2002 [16] and the Sickle Cell Disease Treatment Demonstration Program in 2004 [17]. The programs are funded by the Health Resources and Services Administration and administered by the National Initiative for Children’s Healthcare Quality (NICHQ)’s Working to Improve Sickle Cell Healthcare (WISCH) program [2]. NICHQ became the coordinating center for the programs in 2011 and 2010, respectively. Diverse grantees are now working together in a Hemoglobinopathy Learning Collaborative, coordinated and facilitated by NICHQ and its partners Boston Medical Center and the Sickle Cell Disease Association of America. The current rounds of funding continue through 2014 for the Sickle Cell Disease Treatment Demonstration Program and 2015 for the Sickle Cell Disease Newborn Screening Program.

The Hemoglobinopathy Learning Collaborative grantees are developing strategies that will result in more coordinated and appropriate care in order that individuals with sickle cell disease experience fewer complications, acute care visits, and hospitalizations; enhanced quality of life; and more compassionate and respectful treatment from the health care system. Processes are also being developed to ensure that individuals screened for sickle cell disease and sickle cell trait receive genetic counseling, education and appropriate follow-up care for their condition. The aims of the collaborative are aligned with the national quality strategy of the Triple Aim—better care, better health, and lower overall health care costs [18]. The strategies and approaches developed and tested by the teams will be disseminated to the broader sickle cell community for use in the treatment and management of individuals with sickle cell disease.

The Hemoglobinopathy Learning Collaborative’s approach is based on the structure of the Breakthrough Series Learning Collaborative [19–21], a model championed by the Institute for Healthcare Improvement that brings together health care organizations that share a commitment to making major, rapid changes in order to produce breakthrough improvements in quality. Using a process known as the Model for Improvement [22], the teams develop ideas for changes, test small-scale changes using Plan-Do-Study-Act (PDSA) cycles, and measure to determine if the changes are leading to improvement. This method can quickly identify promising ideas and adapt and develop them to into robust, reliable standard processes [2].

There are 15 improvement teams working on quality improvement projects focused on improving acute care management, provision of recommended care, transition, self-management, provider education, and screening, counseling, and education for individuals with SCD and SCT. The 5 articles in this special series span these major content areas, from improving outcomes in the emergency department using standardized order sets to assessing the readiness of adolescents to transition to adult care, to using health information technology to improve care coordination, to developing a home pain management plan, and to using patient navigators to help coordinate care and resources. The series begins with the article by Treadwell et al in this issue and will continue for the next several months. The WISCH teams will serve as leaders for sustainable and positive change for treatment of individuals with sickle cell disease and sickle cell trait in the United States. Their work is an important step towards transforming care for people with sickle cell disease, so that each person with sickle cell disease will receive the highest quality of care throughout their lifespan.

Corresponding author: Suzette Oyeku, MD, MPH, Children’s Hospital at Montefiore/Albert Einstein College of Medicine, 3444 Kossuth Ave, 1st Fl, Bronx, NY 10467, soyeku@nichq.org.

From the National Initiative for Children’s Healthcare Quality, Boston, MA.

This month JCOM launches a series calling attention to 5 teams working to improve care for individuals with sickle cell disease and sickle cell trait in the Hemoglobinopathy Learning Collaborative (—Ed.)

Sickle cell disease affects close to 100,000 people in United States [1]. This condition is characterized by chronic anemia and unpredictable pain episodes beginning in early childhood and leading to changes in functioning, diminished health-related quality of life, end-organ damage, increased health care use, and in some cases early mortality [2–5]. Sickle cell disease is identified through universal newborn screening [6] and is found in one in 2474 newborn Americans [7], with Americans of African ancestry most frequently affected. It is estimated that over 2 million Americans are genetic carriers of the sickle cell gene.

Although there have been major advancements in sickle cell care within the past several decades, there still exist significant variations in care and mortality [8–14]. Ongoing strategies to improve patient access to efficacious treatments are essential to improve outcomes for individuals with sickle cell disease.

Recognizing the compelling need for a focused national effort to improve care for this population and the relative lack of private resources committed to it [15], Congress established 2 federal programs to enhance newborn screening and improve follow-up and care and outcomes for this population: the Sickle Cell Disease Newborn Screening Program in 2002 [16] and the Sickle Cell Disease Treatment Demonstration Program in 2004 [17]. The programs are funded by the Health Resources and Services Administration and administered by the National Initiative for Children’s Healthcare Quality (NICHQ)’s Working to Improve Sickle Cell Healthcare (WISCH) program [2]. NICHQ became the coordinating center for the programs in 2011 and 2010, respectively. Diverse grantees are now working together in a Hemoglobinopathy Learning Collaborative, coordinated and facilitated by NICHQ and its partners Boston Medical Center and the Sickle Cell Disease Association of America. The current rounds of funding continue through 2014 for the Sickle Cell Disease Treatment Demonstration Program and 2015 for the Sickle Cell Disease Newborn Screening Program.

The Hemoglobinopathy Learning Collaborative grantees are developing strategies that will result in more coordinated and appropriate care in order that individuals with sickle cell disease experience fewer complications, acute care visits, and hospitalizations; enhanced quality of life; and more compassionate and respectful treatment from the health care system. Processes are also being developed to ensure that individuals screened for sickle cell disease and sickle cell trait receive genetic counseling, education and appropriate follow-up care for their condition. The aims of the collaborative are aligned with the national quality strategy of the Triple Aim—better care, better health, and lower overall health care costs [18]. The strategies and approaches developed and tested by the teams will be disseminated to the broader sickle cell community for use in the treatment and management of individuals with sickle cell disease.

The Hemoglobinopathy Learning Collaborative’s approach is based on the structure of the Breakthrough Series Learning Collaborative [19–21], a model championed by the Institute for Healthcare Improvement that brings together health care organizations that share a commitment to making major, rapid changes in order to produce breakthrough improvements in quality. Using a process known as the Model for Improvement [22], the teams develop ideas for changes, test small-scale changes using Plan-Do-Study-Act (PDSA) cycles, and measure to determine if the changes are leading to improvement. This method can quickly identify promising ideas and adapt and develop them to into robust, reliable standard processes [2].

There are 15 improvement teams working on quality improvement projects focused on improving acute care management, provision of recommended care, transition, self-management, provider education, and screening, counseling, and education for individuals with SCD and SCT. The 5 articles in this special series span these major content areas, from improving outcomes in the emergency department using standardized order sets to assessing the readiness of adolescents to transition to adult care, to using health information technology to improve care coordination, to developing a home pain management plan, and to using patient navigators to help coordinate care and resources. The series begins with the article by Treadwell et al in this issue and will continue for the next several months. The WISCH teams will serve as leaders for sustainable and positive change for treatment of individuals with sickle cell disease and sickle cell trait in the United States. Their work is an important step towards transforming care for people with sickle cell disease, so that each person with sickle cell disease will receive the highest quality of care throughout their lifespan.

Corresponding author: Suzette Oyeku, MD, MPH, Children’s Hospital at Montefiore/Albert Einstein College of Medicine, 3444 Kossuth Ave, 1st Fl, Bronx, NY 10467, soyeku@nichq.org.