Commercial Accountable Care Organizations

Models of health care delivery are evolving on many fronts, driven by the overriding goals of lowering the cost of health care and increasing its quality. Traditional private insurance models provide incentives for providers to over-prescribe care, and they pit providers and insurers against one another during rate negotiation. The Accountable Care Organization (ACO) model, by contrast, promises to bring providers and carriers together to negotiate a shared savings strategy with benefits to both parties for increased quality of care and decreased costs. A lack of centralized ACO regulation has allowed innovators to create a number of different ACO models. What the future of ACO contracting may hold is an open question.

What is an ACO?

In the context of Medicare, the Centers for Medicare and Medicaid Services (CMS) define ACOs as groups of doctors, hospitals and other health care providers who come together voluntarily to give coordinated high quality care to the patients they serve. CMS, like many providers and commercial insurers, believes that coordinated care will help patients get the right care at the right time, with the goal of avoiding unnecessary duplication of services and preventing medical errors.

The CMS definition is also general enough to apply to the commercial setting, although commercial ACOs vary widely in terms of organizational, legal, and other considerations. In simplified terms, commercial ACOs are created via contract whereby the carrier and the providers agree to an anticipated annual budget and agree to share in the upside and downside risk to the extent that the actual medical cost for the member population differs from the agreed-upon budget.

Why is there no standard commercial ACO?

While the Affordable Care Act (ACA) and regulations promulgated pursuant thereto govern Medicare ACOs, commercial ACOs are not federally regulated and are not regulated comprehensively at the state level. Generally applicable state laws also differ widely on key aspects of ACOs, including, for example, the essential ability of health care providers to bear risk. Some state laws are silent or permit providers to take on the type of downside financial risk contemplated in commercial ACOs, while others prohibit providers from taking such risk, at least without first obtaining some form of insurance or risk-bearing license. Provider organizations are also different from state to state. States that tend to have more naturally integrated organizations, such as physician hospital organizations (PHOs) (or even physician organizations (POs) to some extent) will be more hospitable to ACOs than those with more independent, non-integrated, organizations such as independent practice associations (IPAs). As a final example, even ACO models used by the same carrier can differ. Some carriers use different contracting vehicles for health maintenance organization (HMO) agreements and preferred provider organization (PPO) agreements.

What will the commercial ACO of the future look like?

ACOs are being created by diverse carriers in jurisdictions with different regulatory schemes and different provider landscapes. Therefore, ACO models will likely continue to diverge but probably only to a point, as industry standards and best practices emerge. We believe that integrated care will continue to be the centerpiece of ACOs and indeed health care in general. In the traditional ACO model where there is a particular member population under the care of the ACA, the path to clinical integration of care is more obvious. The greater challenges to integrated care are posed by the venues where individuals may choose to obtain one-off care for reasons of convenience cost, or lack of other options—for example, urgent care centers, emergency rooms and even concierge medical clinics that offer same-day treatment for a fee. Pulling these types of providers into ACO models and finding new ways of granting ACOs access to data for such treatment will be crucial to truly integrated care of the future.

How are ACOs treated under California's health care service plan law?

An ACO in California is considered a risk bearing organization (RBO), defined as a group of physicians  that contracts with a health care service plan (an HMO) to provide health care services to the plans enrollees, is paid on a capitated or fixed payment basis and is responsible for processing and paying claims made by physicians for covered services. An HMO may delegate its responsibilities to the RBO, subject to certain requirements, including a requirement that the RBO provide regular financial information to the HMO, the HMO be authorized to assume responsibly for claims if the RBO fails to do so, and the HMO provide the RBO with information necessary to inform the RBO regarding the financial risk assumed. The RBO must provide financial information to the Department of Managed Health Care (DMHC) and maintain positive tangible net equity (and can take into account any guarantees by a sponsoring organization that meet specified requirements). DMHC conducts audits and reviews corrective action plans agreed to by the RBO and the HMO as appropriate.

What is the HMO's liability when the RBO is financially unable to pay?

The financial arrangements between an HMO and an RBO were addressed in the recent case ofCentinella Freeman Emergency Medical Associates v. Health Net. The case is currently under review by the California Supreme Court, and the decision should resolve a conflict among the courts of appeal.

Centinella Freeman was an IPA registered as an RBO. It suffered financial problems that were allegedly reflected in financials provided to DMHC and the HMOs it contracted with. As financial problems progressed, Centinella Freeman failed to reimburse physicians, including non-contracting emergency physicians who provided emergency services to enrollees, and they sued. The court held that the HMO must bear the loss and reimburse the physicians despite delegation of the claims function to the RBO where:

  • the physician is required by law to provide emergency care to patients,
  • the physician is not a contracting provider with the HMO,
  • the physician provides emergency services to the patient, and
  • the HMO delegated its statutory duty to reimburse the physician for the emergency services to an RBO that the HMO knew or should have known was unable to fulfill the obligation.

The court stressed three additional factors:

  • the plan's knowledge of the RBO's financial problems,
  • the physicians' status as noncontracting providers, and
  • the provision of statutorily required emergency services.

The case is interesting because the court confirmed the HMO's right to delegate to an RBO and the principle that absent these three critical factors, the HMO would not be required to step in and pay claims that should have been paid by the RBO.

In later issues of the IREG Update, we will explore the complexities of maintaining the confidentiality of data while allowing enough data-sharing to foster truly integrated care through an ACO.


Noteworthy links from the past two weeks


  • Senate Banking Chair Richard Shelby unveiled a discussion draft of a financial regulation bill that would revamp Dodd-Frank [Insurance Journal]
  • Prudential argued to a Senate subcommittee that there should be a clear path for escaping SIFI-hood [Law360]
  • Florida Commissioner McCarty warned the Senate Banking Committee about the dangers of federal encroachment in insurance regulation [Insurance Journal]
  • The federal government moved to dismiss MetLife's lawsuit against its SIFI designation [Bloomberg]
  • New York Superintendent Lawsky said NYDFS will issue new cyber security regulations by year-end [Reuters]

Property & Casualty

  • Assurant and PNC were hit with a force-placed insurance class action [Law360]
  • Georgia's Governor signed a law regulating the ride-sharing business including insurance coverage requirements [Athens Banner-Herald]

Life & Health

  • S&P issued a report on captive reinsurance criticizing the lack of transparency but supporting life insurer contention that statutory reserves are too high [The Wall Street Journal]
  • States passed new rules on long term care insurance [USA Today]
  • A study found significant gains in health insurance coverage after Obamacare [Los Angeles Times]
  • California Commissioner Jones continued his push for greater oversight power over health insurance rates [State of Reform]
  • Senator Warren's inquiry on annuity sales incentives sparked a debate [Investment News]


  • German insurers worried that Solvency II capital requirements will cause some insurers to fail [The Wall Street Journal]