Accountable Care Organizations (ACOs) are generating quite a buzz these days. Health policy experts rejoiced to see ACOs included in the health reform law; hospital systems and medical groups are talking about collaborating to form their own accountable care organizations; and insurance companies are coming up with their own private market models. What are ACOs, and should physicians be excited – or scared stiff?

Accountable Care Organizations in Health Reform

ACOs are the foundation of the Medicare shared savings program. Section 3022 of the Patient Protection and Affordable Care Act called for the Centers for Medicare and Medicaid Services to enter into contracts with organizations that agree to be accountable for the cost, quality and overall care of a panel of Medicare beneficiaires assigned to them. An ACO may be formed by any of the following:

  • Physicians and other professionals in group practices
  • Physicians and other professionals in networks of practices
  • Partnerships or joint venture arrangements between hospitals and physicians/professionals
  • Hospitals employing physicians/professionals
  • Other forms that the Secretary of Health and Human Services (HHS) deems appropriate.


The ACO must have a legal structure allowing it to receive and distribute shared savings, and a leadership and management structure that includes clinical and administrative systems; have sufficient primary care physicians participating to provide care to assigned beneficiaries (at least 5,000); meet patient-centeredness critieria; and have processes to (a) promote evidenced-based medicine, (b) report necessary data to evaluate quality and cost measures, and (c) coordinate care. The Centers for Medicare and Medicaid Programs (CMS) have not yet identified the quality and cost measures that must be reported, but has indicated that these may include requirements of other programs, such as the Physician Quality Reporting Initiative (PQRI), Electronic Prescribing (eRx), and Electronic Health Records (EHR).i

CMS expects to release proposed rules for the shared savings program this fall. While the full program will not be operational until January 1, 2012, CMS may enter into shared savings contracts earlier with the physician groups that participated in the Physician Group Practice demonstration project Meanwhile, on October 5, 2010, a workshop to discuss legal implications of ACOs was held jointly by CMS, the HHS Office of Inspector General, and the Federal Trade Commission (FTC).

Why was the FTC involved? The announcement for the workshop stated that the agencies expect that providers who are seeking to form ACOs will likely use the same protocols and processes both for Medicare beneficiaries, and for privately funded patients. If groups of independent physicians, who otherwise compete for contracts with insurance companies, want to collaborate on a joint program, they must comply with the antitrust laws.

ACOs in the private market: the clinical integration concept

During the October 5 workshop, FTC representatives stated that the agency plans to develop a safe harbor, so that ACOs participating in the Medicare shared savings program may also contract with private payers. One criteria the FTC expects to include is that the operational processes of the ACO must be the same for Medicare and private patients. The agency is studying the question of whether physicians will be limited to participating in one ACO, or whether non-exclusivity will be permitted.

The FTC and the Department of Justice have had decades of experience in analyzing arrangements that physicians have put in place to allow them to jointly contract with insurance companies. Since physicians in private practice normally compete with each other for patients and payer contracts, the antitrust laws prohibit them from combining to contract jointly with payers, unless the group of collaborating physicians demonstrates either sharing of financial risk (typically, through acceptance of capitated contracts) or clinical integration. Capitation (arrangements where the insurer contracts with an independent practice association [IPA] to provide all medically necessary care for a per member per month fee) gained ground in the 1990’s, but lost favor with consumers and physicians alike. Groups which can demonstrate clinical integration are permitted to contract jointly with payers on a modified fee-for-service basis. The FTC’s advisory rulings have found collective negotiation permissible if the joint venture serves the primary purpose of promoting quality and efficiency, and joint contracting is subordinate to that primary purpose. Common elements of approved clinical integration initiatives include:

  • Non-exclusive network (physicians are permitted to contract independently)
  • The network is selective in choosing physicians to participate
  • Physicians have to invest time and money in establishing the program
  • The network has the infrastructure and program capability for achieving efficiencies, such as the use of health information technology to coordinate care, monitor physician adherence to practice protocols, and collect performance data on quality and utilization.

What's Happening Now?

While the Medicare shared savings program will take awhile to develop, some payers are not waiting. Blue Cross and Blue Shield of Illinois has announced a 3-year contract for a shared savings program with the physician-hospital organization (PHO) operated by a large health system. Called AdvocateCare, the arrangement will give the PHO a share in savings earned by meeting performance targets, in exchange for the PHO’s agreement to limit rate increases. Blue Cross and Blue Shield of Massachusetts has established a plan called the “Alternative QUALITY Contract”, which contracts with primary care groups caring for 5,000 to 10,000 members. The Alternative QUALITY Contract is based on a global budget covering all services and costs, including inpatient, outpatient, pharmacy and behavioral health. The initial budget is established based on historical health care costs for that patient population, and then adjusted annually for inflation and the health status of the group’s patients. Participating physician groups retain any margin from savings over the global budget, and have the potential to earn additional performance incentives for achieving quality measures. The quality measures include process goals (such as screening for breast, cervical and colorectal cancer, and chlamydia), outcome goals (such as blood pressure control) and patient experience goals (such as communication quality).

Should physicians welcome or fear the advent of ACOs? The global budget concept found in the Alternative QUALITY Contract brings unwelcome memories of the risk inherent in capitation, that brought financial ruin to so many IPAs. However, the new arrangements should place less emphasis on insurance risk, and more on quality factors that physicians can control, if they collaborate effectively. CMS and private payers, and physicians forming ACOs, will have to reach a delicate balance of quality, efficiency and patient choice if these new initiatives are to succeed.

i CMS has prepared a fact sheet explaining basic elements of ACOs, available at

About the Author

Patricia King is a health care attorney in Illinois, and principal of the web-based business Digital Age Healthcare LLC (

Topics #accountable care organizations #aco #health care attorney #health care law #health care reform