The Accountable Care Organization: Reforming and Refocusing America’s Health Care System

Justin R. Jenkins[1]

At a White House Health Care Forum in 2009, President Barack Obama expressed the urgency of health care reform, stating that “Medicare costs are consuming our federal budget . . . By a wide margin, the biggest threat to our nation’s balance sheet is the skyrocketing cost of health care. It’s not even close.”[2] The Kaiser Family Foundation Program on Medicare Policy projects spending “to increase from $555 billion in 2011 to $903 billion in 2020,” even with the latest round of Medicare cost reduction provisions included in the Patient Protection and Affordable Care Act (PPACA).[3]

One of the most commonly identified culprits causing high Medicare expenditures is the program’s fee-for-service payment system. Under this system, a physician is paid for each individual service the physician performs. The practical effect of such a system is that it provides a financial incentive to physicians for performing or prescribing excessive services, tests, visits, treatments, and drugs.[4] The fee-for-service system provides no motivation for a provider to contain costs by reducing unnecessary and expensive services.[5] Additionally, the quality of health care suffers because fee-for-service alone “creates no incentive for physicians to do things differently; to learn from each other; to try new approaches to care that might provide greater value to patients.”[6]

A.  The Advent of the Accountable Care Organization

It is on this foundation that the PPACA sought to address the eruption in health care spending and increase the overall quality of care by introducing a new “format” for providing and reimbursing health care services: the accountable care organization (ACO). Section 3022 of the PPACA creates the Medicare Shared Savings Program (Program) by adding section1899 to Title XVIII of the Social Security Act.[7] The Program is a “Medicare program to promote accountability for a Medicare patient population . . . and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery.”[8] The goals of the program are to improve the health of the population and the individual, while cutting overall health care expenditures.[9] ACOs serve as the tool through which the aims of the Program are realized.

Broadly speaking, an ACO is a community of physicians who are accountable for the cost containment, quality of care, and clinical outcomes for a defined group of Medicare beneficiaries. If the ACO meets specific cost containment and quality measures, it will be rewarded a portion of the savings generated by the ACO. The ACO represents a new method of health care reimbursement that seeks to reduce incentives for overutilization and reward cost containment and quality care.

An ACO is a legal entity formed under applicable State, Federal or Tribal Law, that is assigned and accountable for the “cost, quality, and overall care” of a defined group of Medicare Part A and B fee-for-service beneficiaries.[10] Group practice arrangements, networks of individual practices, partnerships or joint ventures between providers and hospitals, and hospitals that employ providers are all eligible to participate as an ACO under the Program.[11] The ACO must have a sufficient number of primary care physicians to treat the beneficiaries assigned to the ACO.[12] An ACO must have at least 5,000 assigned beneficiaries.[13] ACOs must agree with CMS to participate in the Program for a minimum of three years.[14]

ACOs are accountable for developing, implementing, and maintaining processes to promote evidence based medicine and patient engagement, coordinate care, internally report on quality and cost metrics, and provide feedback based on quality and cost data.[15] To receive shared savings payments, ACOs must meet certain quality measures defined by CMS, and achieve shared savings.[16] The amount of shared savings is determined based on a benchmark set by CMS.[17] Generally speaking, CMS determines the “cost benchmark” by applying a prospective risk score to the historical cost of the ACO’s assigned beneficiaries during the previous three years.[18]

B.  Physician Accountability, Coordinated Care, and Patient Engagement to Manage Costs and Ensure Quality

One of the ACO’s greatest attributes is that it begins to put the physicians in the driver’s seat to manage costs and ensure quality, rather than insurance companies. Under the ACO system, “there need be no insurer or utilization review process looking over doctors’ shoulders-the doctors themselves must draw the line between necessary and unnecessary care.”[19]

An additional byproduct of physician accountability is that poorly performing providers will be identified and flushed out of the system. When there is no collective accountability, a “code of silence” among physicians impedes the identification and termination of substandard providers.[20] However, due to collective accountability inherent in ACOs, providers are incentivized to remove other specific providers accruing unnecessary costs or falling short of quality measurements.

Health policy experts have increasingly advocated for the development of coordinated (or integrated), care systems to decrease cost and increase quality.[21] ACO regulations require that ACOs “coordinate care across and among primary care physicians, specialists, and acute and post-acute providers and suppliers.”[22] A coordinated care system, like an ACO, places greater risk on all providers within an ACO to achieve quality and cost goals; thus, physicians are incentivized to work as a treatment team, instead of only caring about a single, unconnected interaction with the patient. The “team” focus of integrated care systems imposes “accountability for hand-offs, care transitions, referrals to other providers, and the long-term health status of patients,”[23] all of which results in improving quality and decreasing costs.

The ACO regulations are perhaps most progressive in their focus on patient engagement and preventative care. Under the regulations, ACOs are required to “promote patient engagement” by “evaluating the health needs of the ACO’s population,” partnering with community leaders to improve the health of the community, communicating “clinical knowledge/evidence-based medicine to beneficiaries in a way that is understandable to them,” and requiring shared decision-making with the beneficiary “that takes into account the beneficiaries’ unique needs, preferences, values, and priorities.”[24] The regulations’ explicit and extensive call for patient engagement and community involvement signifies a movement toward encouraging provider involvement in promoting general public health and preventative care measures.

C. Potential Threats to ACO Success

As ACOs begin operations, it will become clear whether the financial incentives offered by the ACO program are enough to truly reduce costs and improve quality of care. Two major influences have the potential of undermining the success of the ACO program: provider liability and the continued use of fee-for-service payments.

The threat of medical malpractice is a significant factor that encourages overutilization in the health care industry.[25] Providers regularly practice “defensive medicine” to avoid potential malpractice liability.[26] The practice of defensive medicine is extremely costly, as providers often proscribe excessive treatment solely based on the fear of being sued.[27] Thus, malpractice liability acts to deter cost cutting measures. In the context of an ACO, successful cost reduction requires providers, when diagnosing and determining treatment, to potentially weigh the risk of liability with the benefit obtained through cost reduction.[28] The diluted shared savings payments obtained through aggregate cost savings measures, in many cases, will not come close to outweighing the provider’s individual interest in avoiding a lawsuit.

In addition, under the fee-for-service model, when determining a specific course of treatment, a physician may weigh the individual benefit of performing a procedure with the potential for any shared savings payment. In general, the “individual physician or provider’s incentive to choose a costly, revenue producing surgical procedure tends to override the ACO-group incentive to choose a less costly, lower revenue producing procedure.”[29]

To overcome the problems associated with liability and fee-for-service incentives, ACOs must hold physicians accountable by effectively reporting and monitoring individual physician cost cutting measures. More importantly, CMS must appropriately monitor ACO activities and determine if the ACO incentive structure is actually changing provider behavior. If overutilization and defensive medicine continue to prevail, CMS may need to reduce reliance on the fee-for-service system, ease the risk of liability, or increase incentives.

Despite the obstacles and legal hurdles, the advent of the ACO represents a positive and much needed paradigm shift regarding health care in the United States. As the ACO moves forward, much patience and flexibility will be required by all parties to deal with unforeseen obstacles and unintended consequences. This patience and flexibility, in the end, will be rewarded with a system that is – simply put – in much better health.


[1] J.D. Candidate, 2013, University of Denver Sturm College of Law.

[2] Obama’s Remarks at the White House Health Care Forum, N.Y. Times, Mar. 5, 2009,

[3] Kaiser Family Foundation, Medicare Spending and Financing Fact Sheet: September 2011 (Sept. 2011),

[4] Stephen M. Shortell, Key to Health Care Reform: Changing how Care is Delivered, 25 Notre Dame J.L. Ethics & Pub. Pol’y 399, 401 (2011).

[5] Id.

[6] Id.

[7] Medicare Shared Savings Program, 42 C.F.R. § 425.10 (2011).

[8] Medicare Program; Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg. 212 (Nov. 2, 2011).

[9] Id.

[10] 42 C.F.R. § 425.20.

[11] 42 C.F.R. § 425.102.

[12] 42 C.F.R. § 425.110.

[13] Id.

[14] 42 C.F.R. § 425.200.

[15] See generally 42 C.F.R. § 425.

[16] Id.

[17] 42 C.F.R. § 425.602.

[18] Id.

[19] Jackson Williams, The “Shared Accountability” Approach to Physician Payment: Four Options for Developing Accountable Care Organizations, 7 Ind. Health L. Rev. 185, 200 (2010).

[20] Id. at 199.

[21] Id. at 200.

[22] 42 C.F.R. § 425.112.

[23] Williams, supra note 19, at 188.

[24] 42 C.F.R. § 425.112.

[25] Christopher Smith, Between the Scylla and Charybdis: Physicians and the Clash of Liability Standards and Cost Cutting Goals within Accountable Care Organizations, 20 Annals Health L. 165, 200 (2011).

[26] Id.

[27] Id.

[28] Id.

[29] Id. at 199.