ACOs and the Affordable Care Act

Joseph Gaspero

The transition period from any old, familiar system to a new one is difficult. Providers, pharma, patients, payers, and policymakers on all sides of the healthcare industry have encountered hurdles originating from the transition from the old and inefficient healthcare system to the new system born from the Affordable Care Act (ACA). Accountable Care Organizations (ACOs) were designed for healthcare organizations and providers that are already experienced in coordinating care for patients across care settings(1) and to help these providers transition from the past fee-for-service model to the new value-based healthcare model.

The ACA aims to provide healthcare for the U.S. population through expansion of public and private insurance coverage, coverage mandates, subsidies, and creation of insurance exchanges(2). But, in order to do so, the American healthcare system must transition from the fee-for-service model to the value-based model. The fee-for-service-model is an approach to healthcare in which providers are paid for each service (i.e. an office visit, test, or procedure)(3), whereas the value-based model is an approach in which a portion of the provider’s (i.e. hospitals, providers etc.) potential payment is tied to a provider’s performance on cost-efficiency and quality performance measures. While providers may still be paid fee-for-service for a portion of their payments, they may also be paid a bonus or have payments withheld. For value-based contracts, this bonus is not paid unless the provider meets cost efficiency and/or quality targets(4). The new model is now more patient-centric and the previous implicit and explicit costs, which previously fell on the patients, now fall on the providers of healthcare.

The implicit price, or the non-financial costs of transitioning, a challenge facing the ACA, is derived from incentives. Prior to the ACA legislation, the private insurance market allowed patients, providers, and payers to select the best fit for one another. This was a major component of the fee-for service-model. Patients had the incentive to stay healthy, so they did not have to pay money to the providers for treatment (this excludes the cost of medication, etc.). Providers had the incentive to treat as many patients as possible and order more tests to boost their incomes.

However, with the new value-based model, the incentives are shifted. Under the new value-based model, providers have the incentive to keep patients healthier. In fact, providers would prefer to treat only the healthy patients as providers are reimbursed with a set amount. This set amount comes from the ACOs, per patient, based on the old fee-for-service basis(5). Thus, providers want to treat healthy patients to maximize their revenues. Alternatively, the more patients a hospital or member of an ACO treats, the more the entity can counterbalance its revenue loss. Likewise, there is power that comes from belonging to an ACO: The ACO can earn extra revenue through gain sharing, sharing of savings resulting from collaborative efforts to provide care cost-effectively, with Medicare if the overall costs of care for the beneficiaries attributed to it are lower than predicted. This only applies if the ACO also meets stringent conditions of governance (clinicians, not insurers, run them), transparency, and quality performance.(6)

But, much like privatization, this leads to the problem of most providers not wanting to take on the costs of caring for the unhealthy portion of the population. The government purposely created ACOs to address such problems with the ACA. This is why ACOs are a necessary tool to help transition from the old to new model to counterbalance this incentive side-effect.

ACOs are groups of medical providers (i.e. physicians, hospitals, insurance companies) that accept payments based on quality under the Medicare Shared Savings Program (MSSP).(7) They were created in part by the ACA to aid hospitals and providers in providing value-based healthcare treatment. If providers do not spend all the money of the allotted subsidiary, then they are permitted to keep that extra revenue. However, if not, then the ACOs can owe money to Medicare.

Another reason why ACOs are crucial to a smooth transition from the new to old models results from the payment models, which cannot be separated from changes in care delivery. They require increasingly tight hospital-physician alignment, which can be achieved through physician employment, entering into service line co-management arrangements, clinical integration, or other methods. Thus, to operate effectively, there must be better communication and fewer occurrences of asymmetrical information under the value-based model in order to provide the best quality of healthcare possible throughout the transition.

Although hospitals are required to keep track of the number of patients treated for certain physical ailments under the ACA, all hospitals participating in ACOs are required to supply additional metrics to improve clarity. For example, the ACA will require Medicare ACOs to report 33 different quality metrics.(8) This, along with other incentives to keep better track of patient records and become more organized, helps improve clarity and transparency of the healthcare system.(9) Hospitals will have to become very efficient and become very familiar with their cost structure in order to reduce costs as the losses have now shifted from the patient to the ACO infrastructure. With this clarity, it will be easier for consumers, producers, and the government to track changes, learn from mistakes, correct tweaks, and smooth the transition from the past model to the value-based model.

In the end, there appears to be both pros and cons to ACOs as a method of helping the providers, pharma, patients, payers, and policymakers transition from one model to another. With proper implementation, time, and further research, the Affordable Care Act will be improved so it can improve the quality of healthcare for all Americans.

However, a new problem with ACOs has not been addressed yet: How will this affect the patient-centric value-based model? The Center for Healthcare Innovation’s Healthcare Executive Roundtable on October 15, 2015 will address new questions in this uncertain transition period. This consumer-focused Roundtable Discussion brings the best and brightest healthcare leaders from around the globe together to share their ideas and expertise on the intersection of healthcare value and patient-centricity.  Please visit for more information.


Joseph Gaspero

About Joseph Gaspero

Joseph Gaspero is a non-profit founder, healthcare thought-leader, serial entrepreneur, and diversity leader. He is passionate and committed to making healthcare and our world a better place. He is the President and Co-Founder of the Center for Healthcare Innovation (CHI), a non-profit research and educational institute that helps patients and providers increase their knowledge and understanding of the opportunities and challenges of maximizing healthcare value to improve health and quality of life. His leadership stems from a wide array of experiences, including founding and operating several non-profit and for-profit organizations, serving in the U.S. Air Force in support of 2 foreign wars, and deriving expertise from his time spent in the healthcare, financial services, and media industries. His skills include strategy, management, entrepreneurship, healthcare, clinical trials, diversity & inclusion, life sciences, research, marketing, and finance. He has lived in 6 countries, traveled to over 30 more, and speaks 3 languages, all which help him view business strategy through the prism of a global, interconnected 21st century. When he is not immersed at the Center for Healthcare Innovation, he spends his time snowboarding backcountry, skydiving, mountain biking, and rock climbing. He is a passionate volunteer for the causes that he cares most deeply about.

Leave a Reply