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What is an Accountable Care Organization? A provider’s guide

Accountable Care Organizations (ACOs) are groups of healthcare providers and hospitals that come together to coordinate care for Medicare patients.

Retiree on Medicare asks healthcare provider what is an accountable care organization

At a Glance

  • The primary goals of ACOs are better quality, patient-centric care and reducing long-term healthcare spending costs.
  • Even if you don’t join an ACO, it’s important to know how these networks affect the local healthcare marketplace.
  • Providers can leverage ACO incentives and bonuses to reduce costs without sacrificing patient care.
  • Healthcare providers must meet quality of care and prevention benchmarks to be a part of an ACO.
  • Small practices may find ACOs cost-prohibitive.

The Accountable Care Organization (ACO) organizational model consists of doctors, hospitals, and other healthcare providers that voluntarily work collaboratively with the goal of providing better care for patients at lower costs.

ACOs offer a potential solution to gaps in quality care and high healthcare bills. According to the Centers for Medicare and Medicaid Services (CMS), national health expenses reached $12,914 per person in 2021.

Despite this increase in spending, the 2022 National Healthcare Quality and Disparities Report found that the overall American population’s life expectancy was largely impacted by the pandemic and decreased by 1.5 years in 2021.

There are several potential reasons for the decline, including high healthcare costs, medical labor shortage, and lack of infrastructure, especially in rural areas. Coverage and access limitations also affect patient care. A Med Care study entitled Barriers to Care and Healthcare Utilization among the Publicly Insured discovered that 60.9% of patients reported coverage barriers, and 55.2% reported access barriers.

The ACO payment system aims to remedy these challenges while providing financial incentives to providers. To fully understand the program, let’s take a look at its goals and how it works. 

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What is an ACO, and how does it work?

An ACO is a new healthcare payment model that hinges on strong regional insurance partnerships to support a higher level of quality care. This program aims to decrease patient healthcare spending in the long term by using capitation payment models. 

The combination of higher quality care and reduced costs aims to:

  • Reduce readmissions
  • Eliminate unnecessary service duplication
  • Prevent medical errors
  • Provide preventive healthcare solutions

As a relatively recent healthcare model, few private plans use this payment method. Therefore, most discussions about ACO plans revolve around Medicare ACOs. 

This model is quickly gaining traction among providers. ”

This model is quickly gaining traction among providers. The American Hospital Association reported in 2020 that 56% of hospitals accepted ACOs, as well as other alternative payment models

What is the difference between an ACO and an HMO?

The primary difference is that an ACO is a part of Medicare, while a health maintenance organization (HMO) is an insurance-run managed care system. 

Each has a unique approach to health care. An ACO focuses on sustaining more effective healthcare practices for patients that cut costs, mainly through fewer relapses and preventative measures. The goal of the ACO system is to improve the quality of care while offering providers incentives to improve the patient experience. 

An HMO, meanwhile, is built to fix healthcare prices and may reject or cut services to optimize spending for the organization. This model can negatively impact patient care. 

Furthermore, both patients and providers choose to join the ACO system. In an HMO setup, patients may be automatically enrolled in the program.

What is the difference between a PPO and an ACO?

A preferred provider organization (PPO) is a fee-for-service health insurance model. Unlike an HMO, prices are standardized, and traditionally, these plans have been more expensive than HMO policies. 

With a PPO, patients see high premiums but can see specialists and out-of-network doctors without referrals. However, both systems create their networks of doctors and hospitals.

An ACO plan puts greater emphasis on quality care and long-term savings, making care more affordable for patients. ”

An ACO plan, in contrast, puts greater emphasis on quality care and long-term savings, making care more affordable for patients. The ACO networks are self-defined, and patients may need to switch doctors to be in an ACO. 

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Medicare’s ACO programs

The most recognized ACO programs align with Medicare services. We have summarized the main points of each program. Some of the ACO initiatives have ended, but we included them here as current programs build upon them. 

Medicare Shared Savings Program 

The Medicare Shared Savings Program (MSSP) aims toward fee-for-service beneficiaries and better supports providers and organizations. Under this program, physicians, hospitals, clinics, and other patient care professionals collaborate to voluntarily create an Accountable Care Organization. As a result, the ACO maintains accountability for the patient’s quality of care, care expenses, and patient experience.

For ACOs to adopt MSSP, they must:

  • Commit to 3 or more years
  • Accept a minimum of 5000 beneficiaries
  • Establish a formal legal structure
  • Have enough primary care doctors
  • Be able to distribute savings
  • Be able to evaluate the health needs of the population
  • Be patient-centered

There are 2 arrangement options, called tracks, enabling healthcare providers to structure their ACO in a way that makes sense for their current needs. These tracks are built to balance risk and reward, with the BASIC track having incremental increases in incentives and risk, and the ENHANCED track offering the highest risk and reward.


The BASIC track is one-sided and enables ACOs to receive up to 50% of savings after meeting its minimum savings rate (MSR), representing potential rewards, with a limit of 10% of their benchmarks. The BASIC A and B tracks allow for up to 40% of savings, with a limit of 10% of their benchmarks. This approach minimizes potential downside risk, known as the minimal loss rate (MLR).

Meanwhile, the BASIC C-E tracks and the ENHANCED track are two-sided, meaning they account for the MSR and the MLR.

As an example of the differences in savings and loss, the Physicians Advocacy Institute summarized the savings and loss rates for the following two-sided tracks:

Shared Savings Limit10%10%10%20%
Shared Loss Limit2% of ACO participant’s revenue capped at 1% of the benchmark4% of ACO participant’s revenue capped at 2% of the benchmark8% of ACO participant’s revenue in 2019-2024 capped at 4% of the benchmark15% of ACO participant’s revenue

An ACO provider or supplier is a professional accepting Medicare and billing fee-for-service beneficiaries using a Medicare billing number assigned to their TIN.

Eligible ACO providers and suppliers include:

  • Critical Access Hospitals billing under Method II
  • Federally Qualified Health Centers (FQHCs)
  • Group practices
  • Hospitals employing ACO professionals
  • Network of individual practices
  • Partnerships or joint venture arrangements between hospitals and providers
  • Rural Health Clinics (RHCs)
  • Teaching hospitals receiving payment for direct medical and surgical services

ACO Investment Model

The ACO Investment Model builds on the Medicare Shared Savings Program to offer prepaid shared savings. The purpose of this initiative is to serve rural and underserved areas. Paying ACOs upfront enables providers and suppliers in these areas to invest in the required infrastructure and resources to successfully improve the quality of care.

There are 3 types of prepayments:

  • One-time fixed payments
  • One-time variable payments, based on the number of estimated beneficiaries
  • Monthly variable payments, based on the number of estimated beneficiaries

To be eligible for the ACO Investment Model, ACO professionals must:

  • Be accepted into and participate in the Medicare Shared Savings Program
  • Have completely and accurately reported quality measures in the most recent year
  • Be a critical access hospital or inpatient prospective payment system (IPPS) hospital with 100 or fewer beds if it is a hospital participant. 
  • Not be owned or operated by a health plan
  • Not have participated in the Advance Payment Model

Advance Payment ACO Model

The Advance Payment ACO Model is another add-on to the Shared Savings Model. Its purpose is to support rural providers who accept Medicare payments. Similar to the ACO Investment Model, the Advanced Payment Model provides upfront payments for infrastructure and staff investments. 

This model supports small providers, while the ACO Investment model has a wider range of supported organizations. 

There are 3 types of prepayments:

  • One-time fixed payments
  • One-time variable payments, based on the number of estimated beneficiaries
  • Monthly variable payments, based on the number of estimated beneficiaries

Comprehensive ESRD Care 

The Comprehensive ESRD Care (CEC) initiative was specific to End-Stage Renal Disease (ESRD). This approach aimed to improve care for patients with ESRD through testing a new payment and delivery model based on results from the Pioneer ACO, Next Generation, and Shared Savings Program models. 

While this initiative ended in 2021, it became the foundation of the Kidney Care Choices (KCC) Model. ”

In particular, the CEC Model partnered with dialysis clinics, nephrologists, and similar providers to advocate for more holistic care.

While this initiative ended in 2021, it became the foundation of the Kidney Care Choices (KCC) Model. 

Next Generation ACO Model

The Next Generation ACO Model has its roots in the Pioneer ACO Model and the Shared Savings Program. The main difference between this program and earlier initiatives is that it offered a higher level of financial risk and report, and it included additional patient protections. It also included benefit enhancements in the form of rule waivers for services like:

  • Cost-sharing for Part B Medicare services
  • Telehealth expansion 
  • Three-day skilled nursing facilities
  • Post-discharge and care management home visits

It also allowed providers to offer chronic disease management rewards in the form of gift cards worth up to $75. 

This model ran from 2016-2021. 

Pioneer ACO Model 

The Pioneer ACO Model assisted healthcare organizations and providers already coordinating patient care with other ACOs. It used a population-based payment model similar to the Medicare Shared Savings Program. However, unlike the Shared Savings Program, the Pioneer ACO initiative was designed to work with private payers. 

This model ran from 2012 to 2016. 

Vermont All-Payer ACO Model

The Vermont All-Payer ACO Model is a state-specific initiative meant to improve care and reduce long-term costs for patients who use Medicare, Medicaid, or other commercial insurance. 

This is a two-sided risk payment model aligned with the CMS’ Quality Payment Program. As a result, ACO providers in Vermont who join this program may be eligible for Advanced Alternative Payment Model bonuses. 

This program is scheduled to end on December 31, 2023. 

Patient Perspectives Report

4 common patient questions about ACOs

The term "ACO" may confuse patients, especially retirees, and they may wonder how it affects their insurance plan. Here are the answers to the top 4 questions they may ask you:

1. How does an ACO handle patient data?

Medicare shares limited information with an ACO, which stems from its claims data. A patient’s billing information links to this information and and it is sensitive data. An ACO collected information related to a patient’s care but not the results. For example, it will receive test names, dates, locations, and provider details.

Patients may call Medicare at 800-633-4227 to request that Medicare not share their data with their ACO. ”

Patients may call Medicare at 800-633-4227 to request that Medicare not share their data with their ACO. Medicare will still use patient data to assess provider performance in ACOs and quality of care. 

2. Will your practice be covered, or are my benefits changing?

There will be no changes to a patient’s coverage or benefits. If your practice is currently covered by Medicare, it will continue to be covered as an ACO. 

3. Will an ACO affect my supplemental health insurance?

A provider joining an ACO will not affect a patient’s supplemental insurance. Just as with regular Medicare benefits, the coverage, costs, and network related to a patient’s Medicare plan will not be affected.

4. What are unnecessary tests?

Unnecessary tests refer to the duplicated tests or procedures a patient has already received. Patients will still receive tests when they are required to diagnose or treat a condition. Eliminating unnecessary tests and procedures is meant to help lower overall healthcare costs. 

Building a better patient experience

Whether you decide to join an ACO or not, fostering a better patient experience can build trust, improve outcomes, and boost retention and referrals. Check out Tebra’s webinar on creating a superior patient experience to learn how to improve the patient journey while avoiding burnout. 

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Kelsey Ray Banerjee

Kelsey Ray Banerjee is a professional content writer in the healthcare, marketing, and finance space. She has worked in the back office of a psychiatric practice, and with family members working in mental health for 2 generations, she understands the challenges healthcare professionals face when it comes to marketing and admin. She believes access to efficient healthcare is essential for society’s well-being, and loves being able to write content that can positively impact a practice and its patients.

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