Accountable care organizations (ACOs) are a payment arrangement made between healthcare payers and providers to assume responsibility for the care of a particular patient group. To date, there are more than 930 ACOs across the country covering 32 million lives. 

Though their numbers are rapidly expanding, data showing ACOs’ effectiveness at reducing costs and improving quality are mixed. Leader’s Edge sat down with David Smith of The Leavitt Partners to discuss the landscape of ACOs and their current place in the market.

Let’s start with the definition of an ACO.
Leavitt Partners defines an ACO as a group of providers who collectively agree to assume responsibility for the cost and quality of care delivered across a defined population. Whatever the payment vehicle is, it’s different from just transactional fee for service. It may be fee for service with an adjustment or a per-patient, per-month payment. It can be really broad.

ACOs began in the Medicare space but have moved to the commercial market. Are they working there?
The Affordable Care Act created an organization in the government to explore different value-based payment vehicles in Medicare that would improve the quality of the program while lowering cost. We began to see hundreds of provider organizations make investments and participate in these arrangements. Many commercial ACOs actually went live before Medicare released its rules and started its programs. Today, there are some large commercial carriers that have a high number of ACOs, like Cigna, Aetna, Humana and certain Blue Cross Blue Shield plans. More than 100 payers across the country have at least one accountable care contract.

There are a few big caveats. First, when you are talking about ACOs, commercial or otherwise, you are talking about a different kind of payment to incentivize or induce structural changes to delivery. ACOs have certainly generated some savings, but they are far from driving wholesale care delivery reform or transformation.

Second, a lot of these commercial arrangements have characteristics similar to the Medicare Shared Savings Program (MSSP) or bundled-payment contracts from the federal government. The MSSP has moved the conversation forward, catalyzed investment and changed the way we think about care. We need to take the best of what we’ve learned thus far and create spaces and programs and arrangements that truly reflect what we are trying to do for our specific populations. The MSSP is still the easiest program to enter, as it has a relatively low barrier to entry and organizations can use the two-sided risk versions of it to qualify as advanced alternative payment models under MACRA [Medicare Access and CHIP Reauthorization Act].

Do we have enough data to see how commercial ACOs are performing so far?
While the government is responsible for sharing ACO data with the public, commercial data from payers and employers are difficult to get. As a result, we don’t have a ton of data on the employer or the commercial payer side. For non-government entities, we typically look at certain benchmarks that indicate sustainability—how long they have been in place and if their purchasers, plans or providers have expanded. There is a lot of activity and innovation occurring in the commercial market—it is just still too early in the game to say if they are creating long-term sustainable value. One important metric is how many ACOs renew their contracts, and a majority of commercial contracts have been renewed.

Right now, ACOs cover a small portion of covered lives. How much would they have to expand to prove they are worthwhile ventures?
The payment models today are still fairly fee-for-service or volume-based with a payment adjustment. If we stick with those, I think we could be at 60% to 70% penetration, we might not have the kind of care transformation needed to drive down cost. We are adjusting payments on the margins, and it is led by quality indicators and economic performance and patient satisfaction, but it’s still not always enough wholesale change.

The qualifiers I would give to the question are how quickly do healthcare organizations assume greater risk, how much of their revenue does that constitute, and how many lives is that spread over? When we have alignment over a material number of lives—when 25% of their bottom line is predicated on performing for a unique contract structure—providers begin to take delivery transformation pretty seriously.

Many ACOs commissioned directly by employers and specific providers are in collaboration with major businesses like Boeing. Is there space for smaller employers as well?
I absolutely believe there is space. There is a spectrum here in what’s possible for small to mid-market employers, or even large group with employees dispersed in different markets. On one end, you could establish a small specialty group in a market—something like a center of excellence but focused on increasing value for local employers. On the other end, you could establish a high-performance network that focuses on primary care and key specialties.

But there are challenges. Small employers often don’t have enough purchasing capital to influence what is happening in the market. However, if I am sitting in Dallas and can stitch together 30,000 lives across four different employers in a five zip code area, I can go to a broker (or some other intermediary) and say, ‘Go build me a network.’ I think 5,000 to 10,000 people is what you need to adjust the risk in a population. Ten thousand is probably the ticket to get the attention of folks on the provider side and drive a unique contract.

Employers represent the last bastion of healthcare not subsidized by the government. This is a venue where providers can still make money and employers can still create value, and those two interests are highly in line with each other.

How can employers best evaluate ACOs that might be in their plans or coverage area?
First, you want to make sure the way you want care delivered is aligned with how a provider is delivering it. Incentive alignment and payment are key components.

Second, it’s got to be primary-care focused. To work well, you have to attribute a population, understand their risk factors and have data (which employers have access to if they are structuring it the right way). Then, there have to be resources to manage that care—like a care coordinator—when employees have to leave the four walls of their primary care office for a procedure or psychological evaluation or long-term recovery.

Finally, all other commercial contracts operate in one-year underwriting cycles, but most employers think of employees’ health in a long-term way. So we have to think about keeping employees healthy. That’s creating environments in cities where we operate and promoting healthy behaviors and wellness programs. But not just so they get a $5 Starbucks gift card. We have to focus on incorporating wellness programs that have a clinical evidence base and execute those programs in conjunction with primary care providers that have the right incentives to change employees’ behaviors.

This represents a lot of work, effort and resources. Employers and intermediaries have not seen enough value to put that together to really drive that change.

So you feel a primary care component is imperative for a quality ACO?
A hospital has a basic economic exigent to maintain an economic structure that underwrites its assets. So when you have a hospital-only led ACO, there becomes tension within the organization about the need to meet a margin and the desire to transform and transition the system. Unless there is some compelling reason, the change may go more slowly.

An integrated delivery network that has a hospital and primary care and other assets has the same situation. But if they are allocating resources correctly and can maintain their margin while operating in a new system, they will do it. But I haven’t seen many types of payment models that allow them to do that.

In a primary care group or multi-specialists or federally qualified health centers, they don’t have the same asset base, so they can create new and different value in terms of how to provide care. They can be far more flexible and nimble working within these new payments.

Is there reason to support ACOs even if they don’t appear to bend the cost curve the way employers would like to see?
You can draw a line showing that improved quality leads to improved functionality, which leads to improved productivity, which over the long run creates economic value. You have to do a lot of things over several years to see how that works and if the juice is worth the squeeze. Improved quality is improved quality, and that should be an aspiration.

This is fundamentally a question of the value we get for our healthcare dollar. We spend $10,000 for every man, woman and child in this country, and we get poor outcomes compared to our international cohorts. So the big question is whether or not we can organize resources in a way that creates better efficiency for the dollar.

This song will not go on forever. We will have one or two outcomes: either we are going to figure out how to allocate resources more efficiently of our own volition or our spending will become so unsustainable that we will be faced with very hard trade-offs regarding how to organize those resources. We are going to solve this in a uniquely American way, or economics will compel us to solve it in a different kind of way. We are optimistic it will be the former and not the latter.