Not many people outside the health care industry can even answer the question: What is an ACO? The term Accountable Care Organization (ACO) was created in 2006 by Elliott Fisher, M.D., Director of the Center for Health Policy Research at the Dartmouth Medical School.

The ACO concept is still developing, but it can be broadly defined as a group of health care providers—including hospitals, doctors, health plans, and other health care players—who voluntarily collaborate to deliver coordinated high-quality care to patients. The purpose of coordinated care is to guarantee that patients and populations (especially the chronically ill) get the right care, without unnecessary waits or further damage, all while evading duplicative or unnecessary care.

The concept is abstract, but it helps to think of it like buying a TV, according to Harold Miller, president and CEO of the Network for Regional Health care Improvement and executive director of the Center for Health care Quality & Payment Reform in Pittsburgh. A TV manufacturer contracts with multiple suppliers to construct sets. Like the manufacturer does for TVs, Miller says, ACOs bring together the different component parts of care for the patient—primary care, specialists, hospitals, etc.—so that the "parts work well together."

The current problem faced today, Miller says, is that patients obtain each part of their health care separately. “People want to buy individual circuit boards, not a whole TV,” he says, "If we can show them that the TV works better, maybe they'll buy it," rather than assembling a collage of services themselves.

ACOs gained worldwide attention in 2009 when the concept was included as part of the Affordable Care Act (ACA). The idea was appealing to Congress for its potential to reduce the national deficit. The concern was that, as baby boomers enter retirement age, the costs of programs like Medicare for elderly and disabled Americans would increase. But since ACOs make providers jointly responsible for their patients’ health, they have solid incentives to be efficient and save by avoiding unnecessary treatment. The Department of Health and Human Services agreed and estimated that ACOs could save Medicare up to $960 million in the first three years—far less than one percent of Medicare spending during that time period.

These savings are attributed to ACOs’ distinctive monetary incentives. In Medicare's traditional fee-for-service payment system, providers are generally paid more when they give more tests and procedures (which end up driving up costs). And while ACOs do not eliminate fee-for-service, they create savings incentives through bonuses for providers who keep costs down, meet specific quality standards, and focus on prevention and managing patients with chronic illnesses. Moreover, providers get paid more for keeping patients healthy and out of the hospital.

If an ACO were unable to save money, it would have to assume the costs of the investments made to improve care—such as hiring new nurse care managers—though it would still be able to maintain the standard Medicare fees. The Affordable Care Act also gives regulators the ability to formulate other payment systems such as flat fees paid for each patient the ACO cares for.

Currently, about 6 million Medicare beneficiaries are in an ACO, and along with the private sector, at least 744 organizations have become ACOs since 2011. Moreover, an estimated 23.5 million patients are now being served by an ACO. 

ACOs are becoming prevalent, and they might be a step towards a more efficient American health care system. Still, for now one of the key challenges for physicians and hospitals are the incentives in ACOs which aim to decrease hospital stays, emergency room visits, and expensive specialist consultations and tests—all the traditional ways that hospitals and physicians make money in the fee-for-service system.

In fact, recently about a third of the pioneer ACOs announced they were dropping out of the program because it did not save them enough money. Seven of the ‘dropouts’ however, are moving into a secondary Medicare Accountable Care Organization model, which should lessen the risk to monetary losses.

Still, there’s reason for hope:

  • all 32 pioneers succeeded in improving quality and outperformed fee-for-service Medicare in 15 quality measures
  • in just the first year of the program, they generated a gross savings of $87.6 million

Though many people may not know the answer to the question: What is an ACO? But that doesn’t mean that they are not benefiting from the changes that have been made and the stronger foundations that are being built in the health care industry to make treatment and procedures more efficient and effective.