Hospitals: Are You Ready for an ACO?

Contributed by Michael Sandwith, Director of Business Development at ICA

The Accountable Care Organization (ACO) aims to change the way hospitals deliver care by changing the financial incentives.  There are different payment structures than can be used to encourage hospitals to lower costs, improve quality, or both.  Since the goal of an ACO should be to lower costs and improve quality, using an accountability payment structure – one in which costs and quality are linked–will be the most effective. [1]

For most hospitals and health systems, appropriately synchronizing changes in payment incentives, aligning of physicians, and the clinical model will prove a tall task.  The pacing and sequencing of investment and change must be very carefully managed to ensure the financial sustainability of innovation.  Accepting more payment change without sufficient clinical innovation leads to underperformance against new clinical and financial measures of success.  The opposite is equally true: changing a care model without a revenue model to capture the value created promises to improve someone’s bottom line, but not the hospital’s. [2]

Hospital ReviewsWhat is a hospital or health system to do?  Begin evaluating internally, focusing on ways to optimize care efficiency and cost control within the acute care walls of the hospital, and then extending the care continuum within the post acute care market place.  The advantage to this approach is as follows.  First, improvements within traditional acute care operations address the performance risk all hospitals face.  Second, improvements that directly benefit hospital finances can expand capabilities to manage utilization risk in the post-acute care realm down the line.

A recent survey by Buck Consultants, 2011 Health Care Organizations Health Care Reform Readiness[3], outlines how hospitals and hospital systems were addressing the various initiatives of healthcare reform.  For example, when asked, how are you adjusting your business to adapt to this new era of healthcare reform? Fifty percent responded that they were structuring quality measurements with their physicians, whereas only 17 percent were creating an ACO.[4] The survey points out that hospitals and hospital systems are focusing on performance risks and financial incentives with their approach to controlling hospital infections (76%) and reducing patient readmissions (67%).

Quality improvement is the basis for ACOs. The intent of ACOs is to promote accountability for the care that patients receive, and quality measurement is a key element of accountability.  Without such measurement, it will be very difficult to assess the quality of care that patients receive and determine whether that care improves over time.

It would seem that we have a lot of work to do in the area of quality measurement considering that only between six and eight percent of the respondents felt that the quality of healthcare will improve substantially over the next five years by implementing healthcare reform initiatives.  Whereas 33 to 37 percent felt it will improve somewhat, 20 to 36 percent felt that it will stay the same, 13 to 28 percent felt that it will deteriorate somewhat, and six to 13 percent felt it would deteriorate substantially.

If You Can Measure It Then You Can Manage It

ACOs are one of the key features in the Patient Protection and Affordable Care Act (PPACA) but they require a tremendous amount of administrative and operational oversight, in addition to managing risk, coordinating care, and improving overall health status.  Just being able to comply with the Medicare version of accountable care requires seven additional participation and experience measures.  This will include measuring care coordination, special patient safety, and outcomes along with ACOs wanting to control utilization, streamline care, reduce practice variation, control readmissions, and eliminate unnecessary procedures.  To guide patients and position your ACO initially within the market place, you will have to develop a measurement infrastructure to support the collection and dissemination of both quality data and patient perception survey results.  CMS has already identified 33 quality indicators for ACO accreditation and is expected to release an ACO member experience of care survey in late September 2012.

Issues for the Hospital or System

Given current market conditions, the question about whether to develop an ACO is still a strategic decision.  A hospital or system that succeeds and participates as an ACO will definitely see reductions in acute inpatient utilization and other services.  It is doubtful that any shared savings participation will be sufficient enough to make up for the potential losses, so it will be imperative for the ACO to build market share.  If a hospital or system does not create an ACO and their competing organizations do, the non-ACO organization will more than likely lose market share, maybe not in the short-term but definitely in the long-term.  Commercial insurers, Medicare and Medicaid will continue to reduce fee-for-service reimbursement and reward healthcare providers for managing the total risk of a population, therefore forming an ACO should be a strategic first step.  The determining factors will depend on individual community market place competition, physician collaboration, and strategic relationships with all payers (commercial, Medicare, and Medicaid) and let’s not forget about the developing health insurance exchanges.

A hospital or health system that succeeds with an ACO will probably not make a lot of money from the ACO directly, but it may succeed in transforming its organization into a patient-focused, integrated provider of high-quality care with a strongly-aligned medical staff that can provide high-value, low-cost care not only to the governmental but also to the commercial payers.


The ACO must be more than a new way to pay healthcare providers. Instead, it must encourage healthcare providers to change the way they deliver care by improving quality and care coordination through a patient-centered approach.

If ACOs are to fulfill their potential goal in lowering costs and improving quality, it is crucial to structure their payment models and quality measurement requirements appropriately.  The focus must not be solely on lowering costs. Payment models will need to be structured in a way that will encourage meaningful change by the healthcare providers.  Linking any payment or financial incentive to quality measurements and performance requirements will ensure that providers are lowering healthcare costs through delivering improved care, not by limiting access to medically necessary care.  Publicly reporting the quality measurements and cost information will provide a new level of accountability to patients, the public, and payers.

Whether the ACO model succeeds in changing the way healthcare providers deliver care will depend on two key elements: financial incentives and performance requirements.  If the financial incentives are not strong enough, providers will not be encouraged to change the way they deliver care.  If the performance requirements are not set high enough, then quality will not improve and could even decline.

[1] Engelberg Center for Health Care Reform, The Brooking Institution, and ACO Learning Network Tool Kit (Washington: Engelberg Center for Health Care Reform, January 2011).

[2] “Making Good on ACOs’ Promise-The Final Rule for the Medicare Shared Savings Program”, Donald M. Berwick, MD, N Eng J Med 2011, 365: 1753-1756 | November 10, 2011

[3] “Health Care Organizations Health Care Reform Readiness Survey”,  Buck Consultants, A Xerox Company, 2011

[4] “Health Care Organizations Health Care Reform Readiness Survey”,  Buck Consultants, A Xerox Company, 2011

Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>