Accountable care organizations have done reasonably well at curtailing wasteful spending while promoting the sort of innovation that can help organizations succeed in a value-oriented healthcare environment.

At a Glance

  • Accountable care organizations (ACOs) have been described as a “secret weapon” in the effort to slow the exponential growth of healthcare costs while improving the quality of care.
  • Short-term cost savings are crucial to sustaining the ACO model because without revenue from shared-savings incentives, participating organizations might not be motivated to continue their involvement.
  • ACOs of various types have achieved cost savings in recent years while improving care for their patients, and opportunities lie ahead for ACOs to become even more effective. 

The United States will spend more than $3 trillion on health care in 2014, according to the Centers for Medicare & Medicaid Services (CMS), with much of this spending being unnecessary and wasteful. When Donald M. Berwick, MD, was preparing to leave his post as CMS administrator in late 2011, he noted that 20 to 30 percent of healthcare spending yields no benefit to patients.a

Accountable care organizations (ACOs) are key components of the Obama administration’s strategy to stem the high cost and waste of health care. ACOs address both quality and cost, employing economic carrots and sticks to change the way providers deliver care. The headline of one news article described ACOs as “Obamacare’s Secret Weapon in the War on Exorbitant Healthcare Costs.”b Berwick tied ACOs to the triple aim of sought-after improvements in U.S. health care: “The creation of ACOs is one of the first delivery-reform initiatives that will be implemented under the [Affordable Care Act]. Its purpose is to foster change in patient care so as to accelerate progress toward a three-part aim: better care for individuals, better health for populations, and slower growth in costs through improvements in care.”c

How ACOs Have Fared

In December 2008, the Congressional Budget Office estimated that ACOs could save Medicare $5.3 billion between 2010 and 2019. According to the Medicare ACO business model, the member organizations—usually including physicians and hospitals—share in the savings if they meet certain quality-reporting or performance requirements and a cost-savings target. 

If an ACO falls short of the target, members receive no rewards, which could make them less motivated to continue their participation. Cost savings are critical to sustaining the ACO model.

Physician Group Practice (PGP) demonstration. The PGP demonstration, which took place in 2005-10, was Medicare’s first pay-for-performance initiative for physicians. 

Under terms of the PGP demonstration, 10 large, multispecialty physician groups were eligible to earn performance payments of up to 80 percent of the savings they generated. By the third and fourth years, five of the 10 groups shared in savings by meeting cost-reduction goals and hitting targets on key quality measures, according to a CMS fact sheet released in July 2011. The overall performance improved during the first four years of the demonstration, with incentive payments totaling $7.3 million in year one, $13.8 million in year two, $25.3 million in year three, and $31.7 million in year four. The average payments in year four alone—$6.3 million per physician group—represented a sizable return on the average up-front investment of $1.7 million. (Overall performance dipped slightly in year five, with four of the 10 groups qualifying for
performance payments totaling $29.4 million.) 

Although reaching the cost-savings targets certainly was not a slam dunk for the participating organizations, the targets became more attainable with practice. This trend has remained apparent in subsequent ACO models.

Exhibit 1


Exhibit 2

Medicare Shared Savings Program (MSSP).On Jan. 30, CMS released interim financial results for the MSSP ACOs that began operating in 2012. In their first 12 months, 54 of 114 MSSP ACOs (47 percent) had lower expenses than projected, exceeding their cost-savings benchmarks, according to a U.S. Department of Health and Human Services (HHS) news release announcing the results. Of those 54 ACOs, 29 achieved levels at which they were eligible for shared savings, which totaled more than $126 million. These ACOs generated $128 million in net savings for the Medicare trust funds. HHS also notes that most of the program’s impact is expected to be seen in subsequent years. 

Pioneer ACOs. Announced in December 2011, the Pioneer ACO model, a CMS Innovation Center program, features higher levels of potential reward and risk than does the MSSP model. 

At the launch of the Pioneer ACO model, CMS noted that the initiative, which at the time had 32 participating Pioneer ACOs, would generate $1.1 billion in savings over five years. Although the projection has been met with criticism, given that Medicare’s annual budget is more than $500 billion, the critics do not recognize the pilot nature of the Pioneer program, which represents an experiment in bending the cost curve that could provide valuable lessons for the healthcare industry. 

In July 2013, CMS shared first-year results of the Pioneer program, disclosing that all 32 Pioneer ACOs successfully reported the required quality measures. Eighteen of the 32 delivered savings, with 13 achieving levels at which they were eligible for shared savings.

Of the 19 Pioneers that failed to qualify for shared savings, seven opted to step down to the less-risky MSSP and two decided to cease operating as Medicare ACOs altogether. The 10 others chose to remain in the Pioneer program, suggesting they planned to take a “wait-and-see” attitude regarding the viability of the model. 

Costs grew by 0.3 percent in 2012 for the approximately 669,000 Medicare beneficiaries in Pioneer ACOs, compared with 0.8 percent for comparable beneficiaries outside the ACOs, according to CMS. As noted by HHS in its Jan. 30 news release, an independent evaluation concluded that the Pioneer ACO program saved $147 million in the first year. That total was $60 million higher than the savings initially reported by CMS.

Pioneer and MSSP ACOs had yielded combined savings of more than $380 million as of January, according to the HHS release. Expenditures were below projections for almost half—72 of 146—of the participating ACOs. 

In a separate release issued the same day, Blair Childs, senior vice president of public affairs for Charlotte, N.C.-based Premier, Inc., notes the “significant early progress” that was evident in the savings figures. “We hope these results will prove the potential of accountable care, and incent other payers and providers to join the growing movement away from today’s broken fee-for-service system, and toward a more value-based, cost-effective future,” Childs says.

Medicaid ACOs. More than 20 states have launched ACOs that cover Medicaid and Children’s Health Insurance Program populations, according to the National Academy for State Health Policy. The largest such ACO, Colorado’s Accountable Care Collaborative (ACC), has been operational since 2011 and manages care for more than 350,000 members, or 47 percent of the state’s Medicaid population. The ACC has focused on connecting members with their primary care physicians, deploying care coordinators, and using analytics extensively. 

The ACC generated gross savings of $44 million in its fiscal year ending in June 2013, according to the Colorado Department of Health Care Policy and Financing, returning $6 million to the state after expenses. It also slowed the growth of emergency department (ED) utilization and reduced hospital readmissions (by 15 to 20 percent), use of high-cost imaging services (by 25 percent), and hospital admissions for patients with chronic obstructive pulmonary disease (by 22 percent). Most important, key health metrics (e.g., rates of chronic conditions, such as hypertension and diabetes) improved for ACC members relative to Medicaid enrollees who were not in the ACC.

Neighboring Utah’s four Medicaid ACOs, which went live on Jan. 1, 2013, and encompass 85 percent of the state’s Medicaid population, have been less publicized, but may turn out to be even more successful: They are on track to save the state’s taxpayers more than $2.5 billion during the next seven years.d

Commercial ACOs. More than 300 ACOs are led by commercial health plans, with the largest plans each orchestrating dozens of these arrangements. Relatively little has been disclosed about their performance, in part because many commercial ACOs only recently have become operational and also because of their status as private entities. 

In 2010, Blue Shield of California launched an innovative shared-savings model involving a purchaser (the California Public Employees Retirement System [CalPERS]), a physician group (Hill Physicians Medical Group), and a hospital system (Dignity Health). The ACO serves approximately 42,000 CalPERS employees and their families who are covered by Blue Shield. It has generated gross savings of $105 million, with net savings of $95 million to CalPERS members.e

In 2011, Advocate Health Care and Blue Cross & Blue Shield of Illinois started an ACO called AdvocateCare. It provides financial incentives for physicians and hospitals to meet quality, patient-satisfaction and cost-reduction goals for a defined population of about 380,000 members. 

Between 2011 and 2012, Advocate and its network of 4,000 physicians improved key care metrics for the approximately 200,000 members in the ACO’s preferred provider organization (PPO):

  • The hospital admission rate decreased 1.4 percent, compared with an increase of 2.2 percent at other hospitals in the Blue Cross broad PPO network.
  • Average length of stay increased 1.7 percent, compared with 2.7 percent for the rest of the network.
  • Inpatient days increased 0.3 percent, compared with 4.7 percent for the rest of the network.

Factoring in positive outpatient metrics, AdvocateCare’s costs were trending 2.5 percent below the other hospitals in the Blue Cross PPO network.f

Areas of Opportunity

CMS’s final rules for the MSSP and Pioneer ACO models explain in great detail how per capita expenditures are set. But they are silent as to how ACOs should go about achieving the cost-reduction targets. 

Provider organizations in Medicare ACOs are free to use various technologies and explore innovative approaches that will reduce the utilization of services. A review shows that high-performing ACOs employ a data-driven approach and use analytics extensively, including to carry out risk stratification, identify gaps in care, improve care coordination, and enhance patient engagement.

The pursuit of cost savings by ACOs has spurred interest in management of high-cost and chronic diseases, and of areas where the care delivery chain somehow breaks down. Promising approaches include renal-specific ACOs, advocated by DaVita Inc., the nation’s second-largest dialysis provider; oncology ACOs, piloted by Aetna and Florida Blue; and medication adherence initiatives, which have been shown to lower hospitalization rates and ED use, resulting in a significant net reduction in healthcare costs. 

Taking the ‘Long View’

ACOs are an aggressive, innovative means of shifting the business of health care from the well-entrenched fee-for-service model to a fee-for-value approach. They are an example of practicing the art of the possible, effecting fundamental change in a large, capitalist society where the healthcare system is a complex web of public- and private-sector involvement.

Some view the mixed results of ACOs regarding cost reduction as proof that the basic concept is flawed. But surely unaccountable care is not the answer. 

We should refine the existing ACO programs and launch new ones, sharpen our strategies and tactics, and improve population health management. “We have to take the long view, and be focused on iterating, evolving, and improving the concept, rather than seeking summary judgment,” says Farzad Mostashari, a visiting fellow at the Brookings Institution and former national coordinator for health information technology.g If we take that approach, we will see greater successes in our effort to solve the problems of unacceptably high healthcare costs and poor quality. 

Ken Perez is vice president of healthcare policy, Omnicell, Inc., Mountain View, Calif., and a member of HFMA’s Northern California Chapter. 


a. Pear, R., “Health Official Takes Parting Shot at ‘Waste’,” The New York Times, Dec. 3, 2011.

b. Lopez, G., “Meet Obamacare’s Secret Weapon in the War on Exorbitant Healthcare Costs,” Vox, May 17, 2014.

c. Berwick, D. M., “Launching Accountable Care Organizations—The Proposed Rule for the Medicare Shared Savings Program,” New England Journal of Medicine, March 31, 2011.

d. Liljenquist, D., “Utah’s Medicaid Reform Has Been a Quiet Success,” Deseret News, April 10, 2014.

e. Melnick, G., and Green, L., “Four Years Into a Commercial ACO for CalPERS: Substantial Savings and Lessons Learned,” Health Affairs blog, April 17, 2014.

f. Wang, A.L., “Advocate-Blue Cross ACO Sees Improvement in Utilization, Costs,” Crain’s Chicago Business, Jan. 21, 2014.

g. Stuckey, M., “Poised for Growth, Commercial ACOs Also Face Considerable Challenges,” California Healthline, May 21, 2014.


Future ACO Opportunities 

Many areas of opportunity exist for ACO expansion or development, including:

  • Medication adherence initiatives
  • Renal-specific ACOs
  • Oncology ACOs
  • Post-acute careintegration 
  • Retail pharmacy utilization
  • Wellness programs
  • Mobile health 

Publication Date: Monday, September 01, 2014