Because Accountable Care Organizations (ACOs) promise to reduce costs and improve quality it seems like everyone is talking about them as the solution for what ails the US healthcare system.

What is an ACO?
ACOs are a generally described as entities consisting of care delivery providers and clinicians, (e.g. doctors, hospitals, clinics, labs, etc.), organized so that they can more effectively coordinate care and the ACO can accept and mange some type of global, bundled, capitated, or case-base payments for this care in a way that makes the ACO financially accountable for all – or nearly all – the care individuals receive.  In addition, ACOs would be held accountable for their clinical outcomes by requiring them to report various clinical outcomes and performance measures, with the clear expectation that these clinical outcomes are tied to reductions in cost growth.

However, exactly what ACOs are is still very cloudy even though in recent years they have been described in many articles and presentations, and the concept was incorporated into the health reform law as a Medicare “shared savings pilot.”

The reason for all the interest in ACOs is partly due to the Medicare pilot scheduled to start in January 2012, and other initiatives for moving away from fee-for-service payments to more comprehensive payments for value – which is the kernel at the center of the ACO nut.  The hard part – and the source of the uncertainty – is putting substance and specificity around that seed. In other words, some of the “devil of the details” for ACOs are in delineating what the ACO would be responsible for, and how they would be held accountable:

• Would the ACO be responsible for all a person’s care or only that provided within the ACO, or possibly not including some catastrophic illnesses, etc.?
• What type of information about what clinical and economic factors would the ACO have to provide to payers and the public, and would they need to have all the information collection, analysis and distribution capabilities, or would that be shared with other ACOs or the community at large?

In addition, there are a variety of practical implementation issues that need to be specified in creating an ACO, including:

• How individual providers would be paid within an ACO?
• How would individual patients be assigned or connected to an ACO, and what would be the requirements or incentives for individuals to receive their healthcare within an ACO?
• What are the antitrust issues involving providers coming together to form an ACO?

How to Think About an ACO
With all this uncertainty about the specifics of ACOs many people are trying to paint pictures about what ACOs would look like in comparison to existing structures or arrangements in healthcare, i.e. managed care organizations, IPAs, Medical Homes, etc.

Part of the problem people are having in describing or visualizing ACOs is that they will certainly vary across the country – and very possibly even within the same cities. This variety means that what works for building an ACO in one community won’t be exactly replicable in another.

ACOs are the House inside which Medical Homes can be Formed
One way to think about ACOs are that they are like a house.  The house is an overall structure that contains many different rooms with different functions – from bedrooms to bathrooms to a single kitchen, etc., while distributed service functions are inside the walls, (like electricity, phone, cable, plumbing), the roof and outside walls provide structure with windows to let in light and enable the inhabitants to see outside, and the yard and front walk provide buffers and a path to the outside world.  In this analogy, primary care practices (or Medical Homes) would be the multiple bedrooms, other outpatient clinical settings might be the bathrooms, the kitchen might be a clinical lab, the laundry room a hospital, the living room an imaging center, the windows and wires the information technology systems, etc…..

And consistent with this analogy, in different locations, houses are constructed very differently, i.e. multi-story colonials in New England, apartment buildings in cities, single-story stucco in Florida, etc…. and some are free standing while others share walls, utilities and other functions like laundry rooms.

Follow the Money Into and Within ACOs
While the house analogy may describe the organizational structure of ACOs, the flow of money into and within an ACO can be complicated to understand, and may be even more important for the long-term success of the ACO: The flow of money into an ACO will typically be from a payer to the ACO as an umbrella organization for the care of specified individuals connected to that payer, i.e. an employer, or an insurance company.  The flow of money within the ACO is where things get more granular since an ACO needs to distribute funds to providers and clinicians in ways that are both fair and create incentives for them to delivery quality and cost effective care.

These internal financial payment systems and incentives are essential since the success of the ACO depends upon it being able to achieve savings, and sharing them not only with payers, but also internally and potentially with patients as well.  In addition, the ACO will need to have information systems capable of keeping providers updated about their progress toward clinical and economic goals – possibly in conjunction with various payers or the community overall.  It is also important that whatever information is provided to clinicians within the ACOS – and their associated patients – is delivered in a way that is usable and within a time frame that relates to their actual healthcare decisions, ideally within a month.

ACOs v. MCOs
Some have questioned how ACOs are really different than managed care organizations.  This is a fair point since at a very macro level, like a staff model HMO, an ACO is accepting a fixed amount of money, (a.k.a. capitation), for providing comprehensive care to individuals.  However, there are many differences below that broad description.  For example, ACOs will most likely be formed as business relationships among a variety of different care providers rather than as a fully integrated single business entity.  Therefore, in a very general way, ACOs could be seen as virtual managed care organizations, with their structures varying based upon the existing relationships within a community.  But ACOs may not be fully responsible for the cost of care for a defined population, and at least initially they will likely enter into shared savings and shared risk relationships with payers – who will also continue to play a role in managing the enrollment/assignment of individuals to the ACOs and the flow of dollars from the individual (and their employer as a contributing payer) to the ACO.

Medicare’s Shared Savings (a.k.a. ACO) Pilot
Last week, the Centers for Medicare and Medicaid Services (CMS) held an Open Door Forum conference call about the Medicare shared savings pilot created in the Accountable Care Act, and scheduled to begin January 1, 2012. This conference call was designed to provide individuals and groups the opportunity to comment upon the legislation and make recommendations about how various issues should be addressed by CMS in their regulations for the pilot – a draft of which are scheduled to be released this fall.  As expected, on the conference call CMS repeatedly stated that no decisions have been made, and most of the organizations made comments that seemed to be from prepared statements outlining their major concerns about how the pilot is implemented.

Not raised in the conference call was what may be one of the most important sentences in this section of the new law, “The Secretary may give preference to ACOs who are participating in similar arrangements with other payers.”

This is a key concept for two reasons.  First, for a group of care providers to organize themselves and establish new ways of providing healthcare and managing payments based upon quality and efficiency will require them to have a significant percentage (e.g., >60%), of their patients coming to them with some type of shared savings/risk payments. Otherwise they may find they are losing money for their efforts because delivering care in more efficient ways while still receiving mostly fee-for-service payments will reduce their income rather than potentially raise it.  Therefore, while Medicare is a major payer in many areas, for most potential ACOs it will not represent anything close to 50% of their patients or revenues.  Thus for the pilot to be successful, CMS should seek to leverage their efforts with other payers who are also looking to change their payment mechanisms to promote the creation of ACOs – which is the reason that sentence was added to the legislation. Second, the word “similar” is key in the sentences since while Medicare may “assign” patients (and hence payments) to ACOs based upon where individual beneficiaries have historically received care, but as a government program they will likely find it difficult to require beneficiaries to choose a specific ACO or create significant financial incentives for beneficiaries to receive their care within the ACO.  Conversely, large private payers – insurers and large self-insured employers – can more easily create incentives or situations for individuals to enroll into or preferentially use a single ACO.

Good News about ACOs
The good news about ACOs, their formation, and the ability of Medicare to work in conjunction or parallel with private payers, is that in many communities across the country multi-stakeholder conversations are taking place about how to form ACOs.  And from what I have heard several things are clear:  First, these conversations recognize that ACOs need to reflect existing relationships among local providers.  Second, managed care organizations and provider groups, (e.g., multi-specialty physician groups and IPAs), seem to be ahead of the curve in these discussions since they see a clear path for establishing the care delivery and information processing capabilities required to be an ACO.  And third, multiple stakeholders are part of these conversations, i.e. employers, insurers, hospitals, patient groups, etc.

The importance of these discussions should not be trivialized because they will lead to negotiations and legal documents for the formation of ACOs, and thus need to be conducted in good faith and with diligent examinations of the financial, clinical and information processes required to be “accountable.”

The bottom line is that while the regulations from CMS about the Medicare shared saving pilot will be important guidance for those looking to create ACOs, they will only be part of the equation since  private payers’ goals and payments will also be significant for planning the creation of ACOs. The success of nascent ACOs will not be apparent on January 1, 2012 when the Medicare pilot starts, but rather over the following years as their clinical and IT operations are improved, and the financial mechanisms and incentives (both internally and externally) get refined.

As I’ve said before about the health reform legislation, keep your seat belts fastened since this will be a rough and twisting ride.  However, what is different now is that all stakeholders need to be at the table for these discussions and negotiations, and it will be an ongoing process of analysis and improvement for making ACOs a successful part of the US healthcare system over the next decade and beyond.