ACOs: A Work in Progress


On March 23, 2010, after a year of tumultuous debate, the Patient Protection and Accountable Care Act (“ACA”) was signed into law by President Obama. (1)  ACA is the most significant legislation regarding healthcare since the passage of the Social Security Act of 1965, which established Medicare.   For hospitals and physicians, ACA contains provisions designed to materially change the manner in which healthcare is delivered to Medicare and Medicaid patients and the way healthcare providers are compensated for such services.

ACA authorizes, among other things, that the Centers for Medicare and Medicaid Services (“CMS”) create a program that, commencing January 1, 2012, will allow entities called “accountable care organizations,” or “ACOs,” to share savings obtained by Medicare from the budgeted costs of healthcare services to beneficiaries assigned to those ACOs. (2) ACO has become the latest and hottest “buzz” acronym in the healthcare industry.  Yet many healthcare providers and their counsel do not clearly understand what an ACO is, why it is being discussed in every healthcare forum, why there seems to be a new ACO seminar every day and, perhaps most importantly, how one can be created in areas, like Florida, where fee-for-service medicine and independent physicians predominate. This article examines ACOs, discusses why they are a major focus of health reform, what has been learned from other healthcare integration initiatives, and the obstacles that many providers will face in creating an ACO.

ACOs are organizations that integrate a group of healthcare providers with other facilities and members of the healthcare system, to provide care in a collaborative fashion for a defined population of patients.  While the exact specifications of an ACO are left to the discretion of the secretary of Department of Health and Human Services (“HHS”), ACOs require a significant amount of primary care physicians, and other physicians.  While it is not absolutely necessary, most ACOs will include a hospital.  In fact, hospitals will often be the driving force behind an ACO.  The primary goal of an ACO – what ACA contemplates – is to control or lower healthcare costs while, at the same time, measurably improving the quality of healthcare. As more succinctly described (3):

An ACO is a local health care organization that is accountable for 100 percent of the expenditures and care of a defined population of patients. Depending on the sponsoring organization, an ACO may include primary care physicians, specialists and, typically, hospitals, that work together to provide evidence-based care in a coordinated model. The three major foci of these organizations are:

1) Organization of all activities and accountability at the local level

2) Measurement of longitudinal outcomes and costs

3) Distribution of cost savings to ACO members

Since 1960, healthcare costs in the United States have consistently grown faster than the overall economy and, as a percentage of gross national product (“GDP”), reached 17.3% in 2009. (4) This growth is not sustainable.  From time to time there have been attempts to reform healthcare and to control the upward cost spiral.  In recent years, experts have proposed using financial incentives to prompt physicians and hospitals to change how they are clinically organized and paid for services in order to improve healthcare quality and efficiency.  (5) Recently, the increased ability of healthcare organizations to obtain and utilize meaningful data has made reform potentially more achievable.

Currently, most of the country’s healthcare providers are compensated by insurance companies on a fee-for-service basis, which means that healthcare providers are paid for each service that they furnish to a patient.  This payment structure has been challenged for many years by the federal government and healthcare “think tanks” as being undesirable.  (6)  In the 1990s, capitation, where providers offer services based on a set monthly payment per patient, was trumpeted throughout the country as the best way to control healthcare costs.  Use of capitation has had checkered results.  In most parts of the country its popularity has abated, largely because of the difficulties involved when providers accept risk, and the public perception that capitation means poorer healthcare.  However, it may be that capitation, perhaps in a different, more modern and sophisticated dress, is about to make a big comeback under ACA!

During the Bush Administration there were several Medicare demonstration and pilot projects that experimented with modifications and even elimination of fee-for-service remuneration. (7) In fact, managed care plans have already begun to pay physicians for services on the basis of performance – so-called “pay-for-performance” plans (8) – and hospitals have begun sharing cost reductions with physicians through “gain sharing”, which, subject to limitations, has been approved by the Office of Inspector General in several published opinions. (9)

In 2009, a Massachusetts Special Commission Report (10) set forth in great detail the case against fee-for-service payments, decrying them as, among other things, rewarding overutilization of services; failing to recognize differences in provider quality or performance; encouraging the use of high-margin services rather than low-cost alternatives; failing to compensate for care coordination; basing payment on market leverage rather than healthcare value; and failing to align provider incentives.  In addition, under the current fee-for-service model, healthcare providers are not encouraged to, or financially rewarded for, coordinating the overall care of patients.  This often leads to services being duplicated, treatment plans conflicting, and the prescribing of medication being contraindicated.  Because of the flaws of the fee-for-service model, reformers of the healthcare system have focused on creating integrated healthcare systems that can work together to manage the overall care of a patient.  ACA contains many provisions designed to reinforce this movement away from fee-for-service and to compensate ACOs based on quality and efficiency through financial incentives.  Critical to the new focus is the ability now, through electronic health records, to create meaningful data to better determine the quality of care being provided.

Over the past decade, the majority of hospital and physician relationships (per-click leases, capitation, joint-ventures, employment arrangements, and under arrangements) were designed primarily to transfer income; physicians needed new sources of income to keep up with the rising costs of their medical practices.  Although many of these independent partnerships exist today (and are still being formed), most are not structured with a principal goal to provide quality healthcare at a low cost.  Not many healthcare organizations have been able to successfully coordinate the care of patients and improve the quality and efficiency of the healthcare services provided to such patients.

Among the most commonly known collaborative healthcare organizations are Kaiser Permanente, the Mayo Clinic, the Cleveland Clinic and Geisinger Health Systems (collectively we will call these entities the “Integrated Systems”). A major stated goal of each of the Integrated Systems is to allow their healthcare providers to work together to improve the quality of care that they provide to their patients through employing physicians, understanding that a team approach is the cornerstone to providing efficient quality care, creating teams of specialists that collaborate in treating patients, implementing evidence based medicine treatments, and using a comprehensive health information system that integrates an electronic health record with the tools to support physicians in delivering evidence-based medicine.  (11) Collaboration and integration between healthcare providers has allowed the Integrated Systems to share patient information and care, including the adoption of evidence based medicine, standards of care performed through the use of clinical protocols. (12)  While there have been many efforts to promote integrated healthcare systems, the outcomes achieved by the Integrated Systems has proved difficult to imitate when hospitals and physicians operate independently and try to achieve such integration through capitation, joint ventures, or similar arrangements.

From the success of the Integrated Systems and the failures of those who have tried to imitate them without fully integrating, the ACO emerged as a goal of healthcare reform.  The ACO concept began with the observance of the Integrated Systems and networks similar to them where physicians and hospitals would function as a quasi-network and the patients treated within the particular network would stay within it for most of their care.  With the acknowledgement that physicians affiliated with, but not necessary employed by, hospitals could work collaboratively in an organized system, President Obama began questioning “why places like the Mayo Clinic in Minnesota, the Cleveland Clinic in Ohio, and other institutions can offer the highest quality care at costs well below the national norm.”  (13) He further suggested that “we need to learn from their successes and replicate those best practices across our country.”  (14)

In June 2009, the Medicare Payment Advisory Commission (“MedPAC”), Congress’ Medicare-policy advisory arm, identified ACOs as a potential tool for restructuring traditional Medicare coverage to promote care coordination, increase quality and lower cost growth. (15) Under MedPAC’s recommendations, ACOs would be comprised of a group of physicians (possibly including a hospital or academic medical center) that would assume the risk of the costs of healthcare provided to Medicare patients and would be compensated through an arrangement that combines traditional fee-for-service payments with financial incentives to reduce costs, improve quality, and achieve greater information transparency.  (16) MedPAC indicated that the success of this model would depend on the adoption of clear quality standards combined with a payment methodology that rewards quality while reducing current financial incentives for uncontrolled practice and volume expansion.

However, changing the way providers practice is a daunting task when the underlying structures do not support such change and the cultural differences between physicians and between physicians and hospitals are vast.   Collaboration under an ACO model not only requires that hospitals and physicians integrate contractually with a shared sense of purpose, but it also must include a seismic change in culture, which presents a massive challenge and, in any event, seldom occurs quickly.  Because the ACO concept is new, its shape and substance will evolve over time as third party payors, hospitals, and physicians learn which model works best. However, it is clear that the success of any ACO will require cultural compatibility between the physicians and the hospitals and shared responsibility for clinical outcomes, financial incentives, and commitment to patient care. The integration between the physicians and hospitals will also need to focus on maximizing outcomes and financial performance associated with shared reimbursement.

Further, with the emergence of the ACO and the focus on how to achieve the best quality outcomes as efficiently as possible, the variations in the structure of an ACO have broadened to include large multi-specialty groups, independent physician associations, and physician hospital organizations (“PHOs”).  Regardless of the size or structure of an ACO, ACA provides that an ACO must, among other things:

(a) have a formal legal structure, which includes the ability to receive and distribute payments among its members to promote shared savings;

(b) be able to care for a minimum of 5000 Medicare beneficiaries;

(c) enter into a three year contract with Medicare;

(d) have meaningful primary care participation; and

(e) practice evidence based medicine (i.e. clinical protocols); and have and utilize clinical and administrative systems that allow for reporting on quality and cost measures. (17)

CMS will issue regulations (the “Regulations”) that will provide more detailed information regarding the requirements to obtain Medicare certified ACO status.  It is currently expected that proposed Regulations will be published on or about mid-January 2011.

Starting in 2013, CMS will begin to withhold 1% of each Medicare MS-DRG payment to fund an incentive pool.  CMS will set quality standards, measuring such things as amount of patient readmissions.  Top hospital performers relative to their peers may receive more than the hold back, while lower performers may receive less.  The withhold will increase to 2% in 2018.  Similarly, private payors are following suit with their own “pay-for-performance” models. For hospitals to be able to achieve financial success in this atmosphere, they need to find a way to work collaboratively with their medical staff, especially those who treat patients in the hospital, and will have to tighten controls on the post-acute care facilities where patients are often housed after surgery.  It is thought that such actions will result in the best performing hospitals who will be the “winners” in the battle for the withheld funds.

As an ACO, hospitals and their physicians will not just have to perform better, they will have to be transformed and develop a degree of coordination that is currently lacking in healthcare in many parts of the country, including Florida.  Physicians generally operate with a high degree of professional autonomy, shying away from being controlled by hospitals or managed care companies, and many will resist partnering with hospitals and accepting responsibility for the care of all patients within a local delivery system.  For most hospitals and health systems, payment incentives will have to be synchronized with the changes in the clinical side of the ACO.  Much of the desired savings will be achieved by finding ways to keep patients out of the hospital and emergency rooms, and by being proactive to try to keep patients healthy.  Primary care physicians, of which there is currently a severe shortage, will need to be the anchor of any ACO and reduce demand for specialists and in-patient services.  Patient centered medical homes, where the focus is on proactive treatment of those with chronic diseases like diabetes by primary care physicians and affiliated professionals such as nurses and professional assistants, are being touted by CMS and others as a method of producing better care while controlling or reducing costs.  (18)

In some specialties, physicians benefit directly from the volume of services that they perform and the financial incentives offered under ACA may not fully offset the return that these physicians earn from such services.  The incentive to constrain utilization and reduce the volume of services will also hinge on whether physicians face similar incentives from private payors.  Further, in order for providers to receive the financial incentives, patient outcomes will have to improve, which will require patients to take an active interest in their own care.  This can be a challenge when ACA does not require that a patient receive all of his or her care through a particular ACO.  Even if all of this can be achieved in a relatively short amount of time, the creation of the technological infrastructure, administrative time, and managerial manpower needed to create and operate an ACO will require significant capital.  Therefore, creating a successful ACO from scratch will certainly take time, and probably cannot be achieved by the end of 2011.

In addition to these substantial hurdles, ACOs will have to comply with the federal anti-kickback laws and federal anti-trust laws.  Payments within the ACOs could easily be considered a kickback if tied to the volume or value of referrals and powerful ACOs could raise competition issues.  ACOs will have to avoid situations where The Centers for Medicare and Medicaid Services (“CMS”) might reward an ACO’s performance but the Federal Trade Commission (“FTC”) hits the same ACO with an antitrust complaint.  At an FTC workshop held in Baltimore on October 5, 2010 (the “Workshop”), FTC Chairman Jon Leibowitz announced that the FTC will develop antitrust safe harbors for ACOs, and an expedited review process for ACOs that do not qualify for those safe harbors.  (19)

In their joint Statements of Antitrust Enforcement Policy in Health Care (August 1996) (“Joint Statements”), the FTC and the Department of Justice set forth the concept that a physician network, even if it is not a single Tax ID/Medicare number group, can share financial healthcare information and jointly bargain with third party payors if the network is “clinically integrated.”  At Section 8 of the Joint Statements it is stated that clinical integration requires the implementation of:

… an active and ongoing program to evaluate and modify practice patterns by the

network’s physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality. This program may include: (1) establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; (2) selectively choosing network physicians who are likely to further these efficiency objectives; and (3) the significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies.  (20)

It is likely that the best indication as to what will be contained in the Regulations and the new antitrust safe harbors is contained in three Advisory Opinions issued by the FTC during the past eight years, each effectively concluding that, under the facts presented to it, the network met the definition of “clinical integration.”  In fact, clinical integration is the key ingredient to a successful ACO, so much can be learned by reading these Advisory Opinions.

The most recent and cogent of the Advisory Opinions, TriState Health Partners, Inc. (“TriState”), issued in April 2009, involved a physician-hospital organization based in Hagerstown, Maryland. (21)  TriState was in effect a PHO, a joint venture between a physician network (with a large group of primary care physicians) and a hospital.  In a 38 page opinion, the FTC concluded that TriState, “while still in the early stages of development in some respects, appeared to have the potential to create substantial integration among its participants, with the potential to produce significant efficiencies, including both improved quality and more cost-effective care (italics added).”

While the discussion of the antitrust regulations in this Advisory Opinion is insightful, in this article our focus is on the manner in which TriState is structured and how it operates, as we believe it may be, in some respects, a guideline as to what will appear in the Regulations.  TriState stated that its three major objectives were to: (a) facilitate and assure collaboration among its physician members, in order to improve the health of its patients and the delivery of services “resulting in the right care being rendered in the right setting at the right time;” (b) induce all with a stake in TriState, including physicians, hospitals, case managers, administrators, payors and patients, to engage in a “cohesive and comprehensive program of care management” that would result in better quality of care for patients while lowering costs for payors; and (c) allow TriState to offer a set of integrated services not available otherwise in the marketplace. (22)

The TriState program included the following components, which were viewed favorably by the FTC and are highly likely to be material in creating a Medicare-certified ACO:

  • Implementing a sophisticated health information technology system that all of the ACO physicians are required to use;
  • Developing clinical practice guidelines and protocols and monitoring physicians to make certain they abide by them;
  • Monitoring overutilization and underutilization of  services by physicians;
  • Developing, implementing, and overseeing policies and procedures related to utilization management, case management and disease management;
  • Monitoring the achievement of physician performance targets, using peer, regional and national benchmarks, and making recommendations for both individual and group performance improvements, including report cards, peer counseling, and expulsion; and
  • Requiring a financial commitment from each physician.

Each TriState physician was also required to enter into a provider agreement, which requires each physician to:

  • Participate in all TriState contracts (no opting out);
  • Provide TriState with patient and treatment information deemed necessary to implement the TriState programs;
  • Refer patients to other TriState physicians when medically appropriate (note that the allows patients the ability to choose their physicians, whether or not they are part of the ACO);
  • Comply with all of TriState’s policies, procedures, rules and regulations;
  • Be trained in, and use, TriState’s health information network;
  • Assist TriState in completing quality, safety, and cost assessments; and
  • Serve on TriState’s clinical integration oversight committees.

It is likely that virtually all of the above will be required under the Regulations for a Medicare-certified ACO.

It would be an understatement to say that there is serious ambiguity and confusion concerning the creation of an ACO, as many of the specific details are currently left to the discretion of HHS.  Hopefully, the Regulations, when final, will provide clarity.  Meanwhile, providers are gearing up to form ACO collaboratives and raising capital to purchase the technology necessary to achieve reliable, high quality patient care, achieve greater coordination and collaboration in the administrative processes, and create clinical protocols.

At the Workshop, CMS Administrator Donald Berwick stated that the “triple aim” of integrated care is improving individual patient care, improving the health of communities, and lowering the cost of healthcare services without any diminution in quality. (23)  The authors believe that, no matter what happens politically to ACA – even if it were to ultimately be repealed – the aims enunciated by Mr. Berwick are here to stay.  Having a significant role and impact in an ACO in the future starts with laying the foundation today.

1)      H.R. 3590, 111th Cong. 2009, “Patient Protection and Affordable Care Act,” Washington, DC: US Senate, 2009.

2)      Id.

3)      Deloitte. Accountable Care Organizations: A new model for sustainable innovations. Jan. 31, 2010.

4)      A.M. Sisko, C.J. Truffey, S.P. Keehan, J. A. Posal, M.K. Clemens and A.J. Madison, “National Health Spending Projections: The Estimated Impact of Reform Through 2019,” Health Affairs, October 1, 2010.

5)      Shortell, Stephen M.; Casalino, Lawrence P., “Health Care Reform Requires Accountable Care Systems”, The Journal of American Medical Association, July 2, 2008.

6)      Applewhite, Scott  J., “Obama, Overtreatment Drives Health Care Costs”,; E. Werner, “Health care issues: Overutilization of care”, The Seattle Times, Sept. 25, 2009; Landers J., Health Care System Can Ill Afford to Continue With Fee-For-Service,” Dallas Morning News. July 21, 2010.

7)      Centers for Medicare & Medicaid Services, U.S. Department of Health and Human Services, Medicare Demonstrations;

8)      Henley E., “Pay-For-Performance:  What can you expect?,”  The Journal of Family Practice.  2005;54(7): 609-612.; Press Release, Blue Cross BlueShield Association, “Highmark’s Pay-For-Performance Program Is Saving Lives And Health Care Dollars,” December 8, 2009.

9)      See, e.g., OIG Advisory Opinion No. 07-21 (2007);; and OIG Advisory Opinion No. 07-22 (2007);

10)  Massachusetts Special Commission Special Report: “Recommendations of the Special Commission on Health Care Payment System,” July 16, 2007.

11)  See V. Fuhrman, Vanessa, “Replicating Cleveland Clinic’s Success Poses Major Challenges,” The Wall Street Journal, July 23, 2009; D. McCarthy, K. Mueller, and J. Wrenn, “Kaiser Permanente: Bridging the Quality Divide with Integrated Practice, Group Accountability, and Health Information Technology,”  The Commonwealth Fund, June 2009 pub. 1278 Vol. 17; “Mayo Clinic: A Model for Service Success,” American Management Association, Sept. 2008.

12)   Id.

13)  The White House Office of the Press Secretary, Text of a Letter from President Obama to Senator Edward M. Kennedy and Senator Max Baucus, June 2, 2009.

14)  Id.

15)   “MedPac 2009 Report to Congress: Improving Incentives in the Medicare Program,” June 2009.

16)  Pub. L. 111-148 § 3022 (amending § 1899 of Title XVIII of the Social Security Act).

17)  H.R. 3590, 111th Cong. 2009, “Patient Protection and Affordable Care Act,” Washington, DC: US Senate, 2009.

18)  See Mark W. Friedberg, Deborah J. LAi, Peter S. Hussey and Eric C. Schneider, “A Guide to the Medical Home as a Practice-Level Intervention,” The American Journal of Managed Care, December 2009.

19)   Thomas Bartrum, Tracy Weir and Bryan Rockwell, “Workshop Regarding Accountable Care Organizations, and Implications Regarding Antitrust, Physician Self-Referral, Anti-Kickback, and CMP Laws,” American Health Lawyers Association Practice Group Email Alert, October 8, 2010.


21)  U.S. Federal Trade Commission.  Greater Rochester Independent Practice Association, Inc Advisory Opinion (Sept. 17, 2007).; U.S. Federal Trade Commission.  MedSouth, Inc Advisory Opinion (Feb. 19, 2002).; U.S. Federal Trade Commission.  TriState Health Partners, Inc. Advisory Opinion (April 13, 2009);

22)  Id.

23)  Id.

24)  Thomas Bartrum, Tracy Weir and Bryan Rockwell, “Workshop Regarding Accountable Care Organizations, and Implications Regarding Antitrust, Physician Self-Referral, Anti-Kickback, and CMP Laws,” American Health Lawyers Association Practice Group Email Alert, October 8, 2010.

Mike Segal and Heather Siegel Miller are health care attorneys with Broad and Cassel in Miami.

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