Accountable Care Organizations (ACOs) - Health Cost Containment

New Content Added May 2018

Cost Containment header

Accountable Care Organizations - NCSL PDF File  |   Colorado Supplement: Accountable Care Organizations - PDF File

To read portable document format (.pdf) files, use  Adobe Acrobat Reader.

Cost Containment Strategy and Logic

An accountable care organization (ACO) is a local, provider-led entity comprised of a wide range of collaborating providers. ACOs monitor care across multiple or all care settings (e.g., physician practices, clinics and hospitals) and are accountable to health care payers (e.g., Medicaid, Medicare or private insurers) for the overall cost and quality of care for a defined population. They provide an overarching structure for coupling health care delivery system reforms (e.g., medical homes and electronic medical records) and new forms of provider payment (e.g., global and episode-of-care payments) (Figure 1). The ACO concept envisions direct contracting by payers with provider organizations without reliance on a health plan intermediary such as a managed care plan.In and of themselves, ACOs are not a cost containment strategy. Rather, they are a vehicle for implementing comprehensive payment reform and health care system redesign in order to control the growth in health care costs and obtain better value for each health care dollar.
The Essential Role of States in Financing, Regulating, and Creating Accountable Care Organizations.

Summary of Health Cost Containment and Efficiency Strategies— Brief #5- Accountable Care Organizations (ACOs)

State/Private Sector Examples

 Strategy Description

Target of Cost Containment

Evidence of Effect on Costs

Vermont, Colorado, Brookings/Dartmouth local pilot programs

2014: California, Missouri, Oregon, Wisconsin

A local entity comprised of a wide range of collaborating providers that is accountable to health care payers for the overall cost and quality of care for a defined population.

  • Lack of a locus of accountability for overall health care costs and quality for a population of patients.

  • Fragmentation of care.

  • Because it is a relatively new concept that has not been fully tested, there is insufficient evidence to assess the effect on costs. Existing evidence is mixed.

NCSL Resources


Newer Reports and Resources

  •  Principle-Driven Approach To Gain-Share Contracts
    Despite the growth of commercial gain-share—also known as Accountable Care Organization (ACO)—arrangements, a lack of consistent contract structures and terms has hampered the adoption of value-based care. This post proposes a principle-driven approach to align the incentives of payers and providers to facilitate greater adoption of new value-based payment models and to avoid common pitfalls in ACO contract negotiations.
    >> Read More from Health Affairs, by Alexander B. Blum, Travis Broome (6/1/2018)

  • Vermont: All-Payer ACO Set to Begin in Vermont. The $9.5 million, six-year initiative aims to get 90% of Vermont Medicare beneficiaries in an ACO by 2022. Under the program, set to begin January 1, 2017, major payers throughout the state—Medicaid, Medicare, and commercial healthcare payers—will incentivize healthcare value and quality under the same payment structure for the majority of providers throughout the state's care delivery system. “This model is historic in terms of its scope, aiming to include almost all providers and people throughout the state in an all-payer ACO model to drive improved quality, better care coordination, healthier people, and smarter spending,” said Patrick Conway, MD, CMS principal deputy administrator and chief medical officer. Source: HealthLeaders Media, 10/31/2016.      The Vermont All-Payer Accountable Care Organization (ACO) Model is the Centers for Medicare & Medicaid Services’ (CMS) new test of an alternative payment model in which the most significant payers throughout the entire state – Medicare, Medicaid, and commercial health care payers – incentivize health care value and quality, with a focus on health outcomes, under the same payment structure for the majority of providers throughout the state’s care delivery system and transform health care for the entire state and its population.CMS and Vermont aim for broad ACO participation throughout the state, across all the significant payers and the majority of the care delivery system, to make redesigning the entire care delivery system a rational business strategy for Vermont providers and payers. CMS and Vermont additionally aim for this Model to deliver meaningful improvements in the health of a state’s entire population by transforming the relationships between and amongst care delivery and public health systems across Vermont.
  •        The Vermont All-Payer ACO Model continues Vermont’s efforts towards health care reform. In 2011, the state established the Green Mountain Care Board, an independent entity responsible for overseeing the development and implementation, and evaluating the effectiveness, of health care payment and delivery system reforms designed to control the rate of growth in health care costs and maintain health care quality in Vermont. The Board’s regulatory authority includes payment and delivery system reform oversight, provider rate-setting, health information technology plan approval, workforce plan approval, hospital and ACO budget approval, insurer rate approval, certificate of need issuance, and oversight of the state’s all-payer claims database. The Green Mountain Care Board will be a key partner in administering the Vermont All-Payer ACO Model and provides additional information on the Model at its website:
  • Strategies to Reduce Medicaid Spending: Findings From A Literature Review - "This issue brief considers the feasibility of realizing substantial Medicaid cost savings through strategies aimed at improving delivery system and administrative efficiency. We review the literature about the potential for Medicaid cost savings from four strategies related to acute care services: (1) premiums, cost-sharing, and enrollee wellness incentives, (2) complex care management, (3) patient-centered medical homes, and (4) alternative payment models." 
    The use of accountable care organizations (ACO), episode-based payments, and global budgets is still new in Medicaid, and research regarding the effectiveness of these models in containing Medicaid costs is very limited. Early evidence from Medicare ACOs, which may inform expectations for Medicaid, has shown modest savings in total costs of care and improved quality for Medicare ACO participants relative to a control group, but thus far, the savings have not been sufficient to offset Medicare bonus payments to high-performing ACOs. At this time, evidence from rigorous evaluations of episode-based payments and global budgets is also too limited to support expectations that these models can reduce total Medicaid spending."  
         Limited evidence from one state Medicaid program and Medicare suggests that ACOs could reduce total Medicaid costs. At least 10 states are in the early stages of operating Medicaid ACOs, with many opting for one-sided risk.95 Some states have reported reductions in total Medicaid expenditure growth under the ACO when compared to expected expenditure growth from historical trends; reductions in inpatient and ED visits were also achieved. With the exception of Oregon, discussed in greater detail in the “Global Budgeting Model” section, there are no rigorous evaluations comparing spending trends to a matched comparison group. Given the lack of rigorous Medicaid evaluations to date, evidence from Medicare’s ACO initiatives may inform expectations for Medicaid. Early results from evaluations of the Medicare Shared Savings Program (MSSP) and Pioneer ACO program have shown modest savings in total cost of care and improved quality when ACO participants are compared to a control group. Cost reductions are generally driven by reductions in acute and post-acute settings, and some have also seen reductions in outpatient and physician services. Savings also tend to be greater for ACOs with higher baseline spending, and those with more experience operating in risk-based payment models.97,98,99,100 The ability to sustain cost reductions beyond 2 years of implementation remains to be seen. At this early stage, the programs result in a net loss to Medicare because reductions in total spending have not been great enough to offset the shared savings bonus payments paid to high-performing ACOs.101 Because most ACOs are currently operating with one-sided risk only, the relative effectiveness of taking on more risk is unknown. -Full report from Kaiser Family Foundation (33 pp), June 2017.

  • North Carlina: Cornerstone: The Rise and Fall of a Health Care Experiment. A company of doctors tried to link their firm’s compensation to quality over quantity. Then they ran into a buzz saw. Cornerstone Health Care, a large physician group here, made a big bet a few years back: It would get paid based not on how many procedures its doctors performed, but on how effectively they treated their patients. But in 2015, within weeks of Ms. Burwell’s announcement, an exodus of doctors had begun at Cornerstone. In the months that followed, nearly 70 of its 228 doctors left, many attracted by the chance to make more money at area hospitals. There were also dueling lawsuits, including one accusing the practice of gross mismanagement. Over the next year and a half, Cornerstone was thrust into a financial crisis. Last May, unable to go it alone, Cornerstone was bought by Wake Forest Baptist Medical Center, a major hospital system in the area.  New York Times, Dec. 25, 2016 

  • Massachusetts: The Alternative Quality Contract


    The Alternative Quality Contract (AQC), developed by Blue Cross Blue Shield of Massachusetts, was a precursor to the Medicare ACO program. Zirui Song and colleagues compare spending and health care quality among enrollees in regions of Massachusetts with lower and higher socioeconomic status before and after providers joined the AQC. They find a narrowing of disparities in process measures but no similar narrowing of disparities in outcome measures, even though overall improvements in outcome measures were substantial. Health Affairs 1/23/2017

    Alternative ACO - Mass. -2016

  • Accountable Care Organization Medicare Results For 2015: The Journey To Better Quality And Lower Costs Continues. Based on new CMS results, overall, 31 percent of the MSSP and Pioneer ACOs received shared savings bonuses for their 2015 performance, an increase over the 27 percent that earned a bonus in 2014. The Aug. 25, 2016 CMS release of quality and financial results for the ACOs participating in the Medicare Shared Savings Program (MSSP) and the Pioneer ACO Model provided actual results during 2015. Health Affairs, Sept. 9, 2016.
  • ACO map - CMS Medicare NCSL on Accountable Care Organizations - a Medicaid perspective. 2012

  • (ACO) Dropout By Dartmouth Raises Questions On Health Law Cost-Savings Effort
    In its quest to remake the nation’s health care system, the Obama administration has urged doctors and hospitals to band together to improve care and cut costs, using a model devised by researchers at Dartmouth College. But Dartmouth itself, facing mounting financial losses in the federal program, dropped out in September 2016, raising questions about the future of the new entities known as accountable care organizations.  N.Y Times, published 9/10.

  • Accountable Communities for Health - a newer emerging strategy- see the ACH section below

  •   OCO Reimbursement graph -July 2017-HIN

    2017 Healthcare Benchmarks: Accountable Care Organizations

    The accountable care organization, or ACO, has become a cornerstone of healthcare delivery system and payment reform by raising the bar on healthcare quality and reducing unnecessary costs. There are now more than 700 ACOs in existence today, by a 2017 SK&A estimate.

    2017 Healthcare Benchmarks: Accountable Care Organizations, HIN's fifth compendium of metrics on ACOs, captures ACO operation in today's value- and quality-focused healthcare environment. Copies are available for sale for $125. (Provided as general information; NCSL does not endorse third-party publications)

  • Who Administers ACOs? The majority of accountable care organizations are administered by physicians and physician hospital organizations, according to the 2015 Healthcare Benchmarks: Accountable Care Organizations. The survey also identified five additional common ACO administrators. Click here to view a printable version of the chart and discover additional common administrators. 1/25/2016.

  •  ‘Creating The Next Generation: The Payment Model We Need From Medicare.’ Four years of nation-wide testing by CMS has now proven that the current shared savings payment models do not work effectively for low-cost ACOs. After being challenged by members of CMS and others to design a better payment scheme, a new study of the issues leads to proposing a global risk-adjusted payment system.  Health Affairs blog post, 10/5/2015.  

  • Program Design Considerations for Medicaid Accountable Care Organizations - February 2016

    Over the past four years, eight states ─ Colorado, Illinois, Maine, Minnesota, New Jersey, Oregon, Utah, and Vermont ─ have launched Medicaid ACO or ACO-like programs.  These programs serve more than 2.5 million beneficiaries and have saved roughly $167.9 million to date. Of these eight states, four of the more mature programs have reported promising cost and utilization results: 

    • Colorado achieved $77 million in net savings over four years;

    • Minnesota Requires all managed care contacted plans to participate in the ACO program. The state saved $76.3 million over two years;

    • Oregon decreased emergency department (ED) visits by 23 percent and held costs under the programs’ required two percent growth rate since 2011; and

    • Vermont saved $14.6 million in the program’s first year.

      Most ACOs in these four states have met or exceeded quality performance standards. 8 These initial outcomes are encouraging, and 10 more states have begun to develop ACO models. Ten more states have begun to develop ACO models, according to this 2016 analysis. Read the full brief by CHCS, published February 2016.
  • Medicaid Accountable Care Organization Programs: State Profiles October 2015 - Fact Sheet
  • Medicaid Accountable Care Organizations: State Update August 2015
  • Massachusetts Medicaid reform and waivers for 2016-17. "Why is the state restructuring MassHealth?" *NEW*
    The state wants to shift how MassHealth pays doctors and hospitals to what are known as accountable care models.  The administration hopes that restructuring will slow the program’s spending growth, though they won’t say exactly how much they hope to save.The state is on track to spend at least $14.7 billion on MassHealth this fiscal year, and more than $15 billion next fiscal year, which begins July 1 Boston Globe, 4/16/2016
  • CMS launches new ACO dialysis model, designed to improve care for beneficiaries with kidney failure while reducing costs.  More than 600,000 Americans have end-stage renal disease (ESRD), also known as kidney failure, and require life sustaining dialysis treatments several times per week. These individuals typically have many health problems, are at higher risk of hospital readmissions, and suffer from fragmented care. In 2012, ESRD beneficiaries comprised 1.1% of the Medicare population and accounted for an estimated 5.6% of total Medicare spending. As part of the Department of Health and Human Services’ approach to building a health care delivery system that results in better care while using taxpayer dollars more wisely, In October 2015, CMS announced the participants for the Comprehensive ESRD Care (CEC) Model, a new accountable care organization (ACO) model made possible by the Affordable Care Act and conducted by the CMS Innovation Center.  It operates in AZ, CA, FL, IL, NJ, NY, NC, PA, SC, TN and TX.  CMS news release, 10/7/2015. 
  • Missouri Results Reported.  According to the Heartland Health/Mosaic Life Care in St. Joseph, MO, the PACT Collaborative and Premier’s PopulationFocus technology solution, helped the healthcare organization successfully participate in the first Medicare Shared Savings Program (MSSP). Heartland Health/Mosaic Life Care received $2.86 million payment from CMS as its portion of shared savings.  11/16/2015. *NEW*
    ACOs Achieving Quality with Shared Savings - an economic/financial report by Health Capital Consultants, Missouri, October 2014.
  • A fall 2015 study, “Solutions for Filling Gaps in Accountable Care Measure Sets,” was conducted jointly by experts from the National Pharmaceutical Council (NPC), Discern Health, the Brookings Institution and the American Medical Group Association. Researchers examined gaps in accountable care measures as compared with evidence-based guidelines for 20 prevalent and costly conditions, such as breast cancer, diabetes, HIV, and heart disease. Some conditions have a number of quality measures, while others have none. Specifically, to address widespread gaps in accountable care measure sets, the researchers suggested using and promoting the development of the following three types of measures:
    • Outcome measures, which are meaningful to patients and providers, allow for flexibility and innovation in improving care, and can efficiently replace multiple process measures;
    • Cross-cutting measures, which assess care across conditions, settings and time; and
    • The researchers also recognized that accountable care systems use measures at multiple levels of management. By using layered and modular approaches, accountable care systems can customize and optimize measurement efforts by focusing the measures on specific purposes, such as external accountability or internal improvement for the layered approach or a specific subpopulation for the modular approach.

  • The Essential Role of States in Financing, Regulating, and Creating Accountable Care Organizations. From the National Academy for State Healthy Policy, this report examines how states are using accountable care organization strategies in Medicaid and health insurance plans for state employees. Published October 2014.

  • The Road to Accountable Care: Building Systems for Population Health Management, Across the United States, federal, state, and private efforts are under way to promote accountable care systems that encourage higher-quality care, control costs, and improve population health. A new Commonwealth Fund report and case studies looks at how three diverse organizations—Health Share of Oregon, Hill Physicians Medical Group (California), and Marshfield Clinic (Wisconsin)—came to develop accountable care systems for their patients covered by Medicare, Medicaid, and commercial health plans. Read the report to synthesize findings from all three cases and lessons to help health care leaders considering similar initiatives. Published 10/6/2014

  • Medicare's Pioneer program down to 19 ACOs after three more exit - Posted: September 25, 2014
    Three more accountable care organizations dropped out of Medicare's Pioneer program, which was designed to test the payment and delivery model with a small group of elite providers deemed best prepared to handle the operational demands and financial risks. The Franciscan Alliance, Genesys PHO and Renaissance Health Network have exited the program, which is now in its third year. In August, Sharp HealthCare, San Diego, announced its decision to pull out. 
    The Pioneer program was Medicare's first test of accountable care under the Patient Protection and Affordable Care Act, designed and administered by the CMS Innovation Center. It launched in 2012 with 32 organizations willing to accept potential losses with the goal of earning bonuses tied to performance on quality measures and their ability to slow health spending. Nine participants dropped out after the first year—seven of them switched to the Medicare's larger and less risky accountable care initiative, the Shared Savings Program.  [Read the full article, Modern Healthcare, 9/25/2014

  • Uwe Reinhardt Questions Bundled Payment Savings Prospects - A July 2013 Alliance for Health Reform video features Princeton’s Uwe Reinhardt questioning whether bundling payments for medical services might actually lead to higher – not lower – costs. "The ACO's, the accountable care organizations, could create local monopolies that could dictate to you what that bundled price would be, and some of us fear that bundled prices might be even more than what the fee-for-service for that bundle would be today. … You really should align all the payers and say, 'Let us jointly negotiate with the ACOs what those bundles should be so that they cannot divide and rule and sort of make us on the buy side weak.'"  FULL TRANSCRIPT Video (2:58)   Read More.
  • "Accountable Communities for Health": 2016 Issue Brief Identifies State Levers 

    Accountable Communities for Health (ACHs) are surfacing as a promising state strategy to integrate and align state health care delivery system transformation with community-based social services to create communities that promote health and well-being. This brief and the accompanying state profiles provide a cross-state analysis of the ACH programs in California, Minnesota, Vermont, and Washington State and highlight key state levers and resources that advance ACHs. This brief also weighs the roles states and communities have played in establishing core ACH components including governance structures, geographic boundaries, financing mechanisms, priority conditions and target populations.Posted by NASHP, May 24, 2016. Read the full brief.
About this NCSL project (2015-16)
NCSL’s Health Cost Containment and Efficiency Series describes two dozen alternative policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi (Program Director), with current and additional research and writing by Ashley Noble (Policy Specialist). 

NCSL gratefully acknowledges the early financial support for the publication series, 2009-2012, from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.  This phase included Martha King (Group Director) with Barbara Yondorf as lead researcher.