"Trust, but verify"—Ronald Reagan 


The Affordable Care Act (ACA) aims to change the healthcare provider economic model from the current, largely fee-for-volume approach to a future world of fee-for-value. Accountable care organizations (ACOs) are the lead car in the fee-for-value train, arguably the most aggressive of the healthcare delivery reforms mandated by the ACA. 

In very simple terms, ACOs can be defined as collaborative care pursuing the Triple Aim of improving the patient care experience, improving population health, and reducing healthcare costs, driven and fueled by a financial model. But are ACOs good for hospital finances? Like most things in life, it depends.

Checkered Results from the Pioneer ACO Program

Under the Medicare ACO programs, if a total ACO enterprise—which usually includes physicians (organized in various ways) and hospitals—fails to meet the quality reporting or performance requirements and/or misses the expenditure target (savings goal), there will be no shared savings pool from which hospitals can draw. 

That was the case for the majority of Pioneer ACOs during the first year of the program. On July 16, 2013, the Centers for Medicare & Medicaid Services (CMS) disclosed that all 32 Pioneer ACOs successfully reported the required quality measures, but 19 (60 percent) failed to produce shared savings, with nine of these dropping out of the program and two incurring losses of a magnitude that required penalty payments to CMS.a

The checkered results of the Pioneer program’s first year are reminiscent of the Physician Group Practice (PGP) Demonstration, a precursor to the current Medicare ACO programs, which took place from April 1, 2005, through March 31, 2010. 

During the first year of the PGP Demonstration, only two of 10 participating physician groups produced shared savings. Encouragingly, in year two of the project, four of the 10 groups achieved shared savings, and in years three and four, five groups did.

In the end, whether ACOs are good for hospital finances depends on whether the overall ACO enterprise is successful in meeting the quality requirements and achieving expenditure benchmarks, which are modified (i.e., made more challenging) each year. Given the significant start-up costs of an ACO—estimated by the American Hospital Association and McManis Consulting at $5.3 million for a single-hospital system—an ACO’s risk of failing to meet these requirements should give hospitals pause.c

Calculating the Net Impact on Hospital Finances 

With the ascent of ACOs, the “hotel” (fill the beds) and “efficient factory” (keep equipment running) models of how to run a hospital are becoming increasingly passé. The following four primary factors determine the net financial impact of accountable care arrangements on hospitals. 

Reduced revenue due to decreased utilization. This is the biggest factor in the ACO financial equation for hospitals. Medicare ACOs save money (i.e., reduce costs to the government) primarily by decreasing the per-beneficiary utilization of services, driven largely by reduced admissions, decreased emergency department (ED) visits, shorter lengths of stay, fewer readmissions, and/or lower utilization of imaging and other services. Although these cut costs for Medicare, they also decrease hospital revenue.

For example, in November 2012, Colorado’s Accountable Care Collaborative (ACC) Program, a Medicaid ACO, reported slower growth in ED utilization rates, fewer hospital readmissions, and lower utilization of high-cost imaging for the ACC program compared with nonparticipating Medicaid enrollees. For FY11-12, the total reduction in medical spending was estimated at $20 million to $30 million.

Variable cost savings due to decreased utilization. Inpatient revenue decreases are offset to some extent by variable cost reduction, which could amount to 40 percent of the revenue decline, given hospitals’ relatively high fixed costs. 

Increased revenue due to higher in-network admissions. Two hallmarks of ACOs—improved care coordination and enhanced provider integration—could increase the share of ACO member admissions going to the hospital in an ACO. Depending on the levels of care coordination, provider integration, and market competition, the market share gain could be 5 to 10 percent. Higher in-network admissions constitute a critical offset to the reduced utilization under an accountable care arrangement.

Hospital share of ACO shared savings. For hospitals, this is the elephant in the room of the ACO financial model. What will be the hospital’s share of ACO shared savings, and how much will it offset decreased utilization? 

Medicare ACOs offer this proposition for providers: If the ACO meets quality benchmarks and reduces per-beneficiary spending by an amount below what would otherwise have been expected, it will receive a share of the savings.

However, the final rule for the Medicare Shared Savings Program, released on Oct. 20, 2011, does not establish any requirements for how shared savings payments should be distributed. The final rule simply requires ACOs to include in their application a description of the criteria they plan to use for distributing shared savings among ACO participants and ACO providers and suppliers.

As ACOs increasingly turn the traditional fee-for-service model on its head, ultimately rewarding healthcare providers for nonutilization of services (and achievement of quality objectives) as opposed to volume, much attention has been given to how to motivate participating ACO physicians financially—both primary care physicians and specialists. For example, AdvocateCare, the largest ACO—commercial or Medicare—in the United States, employs elaborate, multistep incentive fund models for distribution of savings to individual primary care physicians and specialists.

Much less focus has been placed on the determination of the hospital share of ACO shared savings. Regardless of the allocation methodology, as John Harris, et al., concluded in a recent hfm article, “The portion of ACO shared savings accruing to the hospital is not enough to make up for the lost revenue due to [the expected] decrease in utilization.”g



The Way Forward

Although the move toward accountable care seems inexorable, hospitals should take an active, not passive, stance in evaluating and participating in ACOs. To safeguard its financial condition, a hospital contemplating an ACO strategy should assess the ACO’s probability of success, develop and maintain a robust financial model, and realistically estimate how much in-network admissions could increase as a result of ACO participation. The hospital also should negotiate up front for an appropriate portion of shared savings. 

In addition, any hospital that is planning to participate in an ACO should pursue other cost-saving initiatives to help offset the negative financial impacts of the accountable care arrangement and the long-term trend of reduced payment mandated by the ACA. 

Ken Perez is a healthcare IT marketing and policy consultant in Menlo Park, Calif., and a member of HFMA’s Northern California Chapter.


a. “Pioneer Accountable Care Organizations Succeed in Improving Care, Lowering Costs,” Centers for Medicare & Medicaid Services, press release, July 16, 2013.

b. Iglehart, J.K., “Assessing an ACO Prototype—Medicare’s Physician Group Practice Demonstration,” New England Journal of Medicine, Jan. 20, 2011.

c. American Hospital Association and McManis Consulting, The Work Ahead: Activities and Costs to Develop an Accountable Care Organization, April 2011.

d. Rodin, D., and Silow-Carroll, S., “Medicaid Payment and Delivery Reform in Colorado: ACOs at the Regional Level,” The Commonwealth Fund, March 2013. 

e. Kimmel, K., Kotzbauer, G., Perez, K., et al., “Accountable Care Organizations: Summary and Analysis of the Final Rule,” MedeAnalytics whitepaper, October 2011.

f. Sacks, L., and Shields, M., “Applying Lessons from Two Years of a Commercial ACO to a Medicare Shared Savings Program,” AMGA 2013 Annual Conference, March 16, 2013

g. Harris, J., Elizondo, I., and Johnson, M., “3 Steps to Analyze Your Organization’s ACO Opportunity,” hfm web extra, January 2012.

Publication Date: Monday, December 02, 2013

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead