The Patient Protection and Affordable Care Act (PPACA) strongly encourages the growth of accountable care organizations (ACOs). In particular, the provisions in sections 3022 and 10307 of PPACA (Public Law 111-148) have generated considerable attention. Although the ACO concept has been a hot topic in health policy for several years, there is still no standard definition that would allow comparisons of performance. The Centers for Medicare and Medicaid Services (CMS) has a major opportunity to determine the future for this model of organizing medical care delivery. Stakeholders will want to be positioned to work with CMS as the proposal takes shape.

The basic premise for ACOs is that they can facilitate medical care coordination among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary spending. Even though the legislated program is limited to Medicare, private health plans would also be able to work with Medicare qualified ACOs, seeking the same goals of improved quality at reduced cost.

It is important to note that the ACO provisions are part of PPACA’s Medicare “Shared Savings” program, sending the clear signal that ACOs will be expected to reduce Medicare spending. In fact, ACOs will not be able to benefit financially unless they meet Medicare savings benchmarks determined by CMS.

While many of the other Medicare savings provisions, such as bundling of medical payments, are either pilot programs or demonstration projects, ACOs will be a permanent fixture in Medicare. Participation is voluntary, but providers may find themselves under increasing pressure to organize around this framework. There is a separate four-year pediatric ACO demonstration project with a focus on Medicaid and CHIP savings.

The Obama Administration has placed great emphasis on the ACO program, hosting a meeting between CMS and stakeholders at the White House in August 2010, which was preceded by a June 2010 “listening session” conference call. Other listening sessions are planned and CMS intends to publish a proposed rule by the end of this year.

Although CMS will “assign” beneficiaries to ACOs, that process will be invisible to beneficiaries and they will still be able to use any provider.

The timeframe in the legislation is ambitious. The provisions become effective January 1, 2012, and the law gives CMS considerable discretion in many key operational areas. Stakeholders with interest in or experience with ACOs should make sure that they are engaged with the agency as it sorts through all of the questions that need answers. While CMS will look to private sector models in this process, it is very likely that any organization which decides to participate in the program will need to make operational and structural changes to conform to new federal standards. Even though the program will not be effective until 2012, it is not too soon for healthcare organizations to begin evaluating their potential to participate.

Key Issues

The lack of specificity in the statute and the limited real world experience with ACOs means that there are many important, and as yet unanswered, questions that stakeholders will need to consider over the next two years before the program is implemented in Medicare. A short list follows. Any one of these points could deter participation, unless the potential ACO members are properly advised and prepared to deal with all of the uncertainties.

Will the financial rewards be enough to justify the costs of becoming a certified ACO?

How can ACOs control costs and maintain quality outcomes if they don’t get to manage 100 percent of the patient’s medical services?

What mechanism will CMS develop to assign beneficiaries to ACOs?

What are the criteria CMS will use to determine which groups qualify to be ACOs?

How is CMS going to assess quality across diverse organizations with different patient populations?

On what basis will CMS attribute savings? Should ACOs be judged in comparison to their own, earlier performance or against the performance of a broader set of similar organizations?

How will medical and surgical specialists participate in ACOs?

Are there antitrust, anti-kickback and Stark concerns in organizing ACOs? If so, how will CMS address them?

Are there state and federal tax implications if for-profit medical practices and not-for-profit hospitals and other institutions try to form joint venture ACOs?

Legislative Framework

In the absence of further agency guidance, what we know is limited to the language of the law. Key provisions are summarized below.

Definition of an “Accountable Care Organization”

An accountable care organization is defined as an organization of healthcare providers that agrees to be accountable for the quality, cost and overall care of Medicare beneficiaries enrolled in the traditional fee-for-service program who are assigned to it. For ACO purposes, “assigned” means those beneficiaries for whom the professionals in the ACO provide the bulk of primary care services. Assignment will be invisible to the beneficiary, and will not affect their guaranteed benefits or choice of doctor. A beneficiary may continue to seek services from the physicians and other providers of their choice, whether or not the physician or provider is a part of an ACO.

Organizations That May Become a Medicare Recognized ACO

The health reform law lists the following kinds of organizations that might participate:

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 may determine appropriate

CMS will have to develop specific requirements in rulemaking to better define eligibility and clarify the permissible levels of integration. The agency will have authority to waive certain federal laws that interfere with the ability of organizations to form ACOs, but it is unknown how willing CMS will be to waive that power.

Statutory Requirements That an Organization Will Have to Meet to Participate

PPACA specifies the following requirements although CMS could add to them in the upcoming rulemaking:

have a formal legal structure to receive and distribute shared savings

have a sufficient number of primary care professionals for the number of assigned beneficiaries, which will be 5,000 at a minimum

agree to participate in the program for at least a three-year period

have sufficient information regarding participating ACO healthcare professionals as the Secretary determines necessary to support beneficiary assignment and for the determination of payments for shared savings

have a leadership and management structure that includes clinical and administrative systems

have defined processes to (a) promote evidenced-based medicine; (b) report the necessary data to evaluate quality and cost measures (this could incorporate requirements of other programs, such as the Physician Quality Reporting Initiative (PQRI), Electronic Prescribing (eRx) and Electronic Health Records (EHR)); and (c) coordinate care

demonstrate it meets patient-centeredness criteria, as determined by the Secretary, such as the use of individualized care plans

Qualifying for Shared Savings

CMS will set annual Medicare savings benchmarks for ACOs to meet. They will be based on the most recent available three years of per-beneficiary expenditures for Parts A and B services for Medicare fee-for-service beneficiaries assigned to the ACO. The benchmark for each ACO will be adjusted for beneficiary characteristics and other factors determined appropriate by the Secretary, and updated by the projected absolute amount of growth in national per capita expenditures for Part A and B.

ACOs that meet the specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount. There are no penalties for ACOs that do not meet the savings targets.


Congress and the Administration see ACOs as a major breakthrough in the way healthcare services are organized and provided. However, substantial hurdles stand between passage of the law and the signing of the first agreement between Medicare and an ACO. CMS will need to make hundreds of decisions to implement the law, and each one could have consequences for healthcare providers. Stakeholders that seize the opportunities to impact those judgments will be better positioned when the change occurs.