LIKE SO MANY OTHER PRIMARY CARE PHYSICIANS, Jon Wilding feels overwhelmed by the growing number of very sick, elderly patients coming to his office. Today almost half of the 3,000 people he and his partner treat in their small practice in suburban Louisville are covered by Medicare. Not surprisingly, Medicare beneficiaries tend to have nearly intractable medical conditions, with more than half suffering from multiple chronic illnesses—diabetes, arthritis and kidney disease, among others.

Largely left to their own devices in finding help with these problems, these patients have a habit of seeing several physicians, including specialists. No referrals are needed, and Medicare pays a fee to each doctor for every visit. That adds up to a situation in which not only are there no limits on how much is spent, but often there’s no one in charge to make sure patients don’t receive unnecessary or counterproductive treatments.

For Wilding and others who take on the responsibility of managing their patients’ care, it can be time-consuming and complicated. With his staff, he tries to keep tabs on patients with follow-up calls after office visits or hospital stays. They also go over patients’ prescriptions with them and make sure patients are sticking with treatment regimens. But neither Medicare nor the region’s private insurers reimburse the practice for coordinating a patient’s care, Wilding says.

The pressures of caring for an aging population will only increase as those in the mammoth baby boom generation, an estimated 77 million people born between 1946 and 1964, turn 65. This year, the first 3 million will reach that milestone, adding significantly to the 47.5 million patients covered by Medicare in 2010. The latest edition of the Medicare trustees report, an annual statement of the program’s fiscal health, dubbed this unprecedented demographic wave the Baby Boom Tsunami, noting that it will virtually double Medicare enrollment during the next two decades. That explosive growth will jeopardize the federal program’s ability to meet its obligations at the same time that it inundates physician practices and hospitals.

The solution, as laid out in the controversial 2010 Patient Protection and Affordable Care Act, is to create something entirely new: accountable care organizations. The U.S. law allows physician group practices, hospitals and other providers to team up as ACOs. Aided by the electronic health record systems the ACOs must adopt, primary care physicians or non-physician “care coordinators” will track each doctor visit and prescription for every patient, and will know when someone receives physical therapy, shows up at the ER or is admitted to the hospital. Patients will no longer have to repeat their medical history each time they see a new specialist, and with one person taking ultimate responsibility for each patient’s care, the chances of prescribing errors, conflicting treatment plans, and unnecessary or repetitive testing should plummet.

At least that’s how the inventors of ACOs hope they will work. Though the new system won’t eliminate the “do more and you’ll get paid more” incentives of fee-for-service Medicare, it will attempt to encourage a cooperative, comprehensive and economical way to provide treatment—and will put some of everyone’s compensation at risk if that doesn’t happen.

Still, the ACO era is off to a slow start. Most hospital and physician leaders have been disappointed with the government’s first attempt to write rules for how Medicare ACOs must operate, and though a few ACO-like organizations tied to private insurance companies have shown promise, no one knows whether such combinations will prove financially viable. It’s possible that this latest, ambitious attempt to reinvent health care—in pursuit of those eternal twin goals of improving care and curbing costs—could end up being no more successful than past initiatives. The health maintenance organization, dreamed up in the 1970s, had objectives similar to those of ACOs, yet HMOs have largely failed to deliver economical, comprehensive health services.

A final version of Medicare regulations for ACOs, coming after extensive public comments, isn’t expected until later this fall. And until the rule book has been published, many health systems are reluctant to commit to the new structure. Yet that doesn’t mean hospitals and physicians aren’t furiously preparing for it. There has been a wave of consolidation intended to position organizations to form or join ACOs, and it’s almost guaranteed that many groups will at least test the waters. “It’s clear to us that we need to move toward being an ACO,” says Thomas Lee, network president of Partners HealthCare, the system co-founded by Massachusetts General Hospital and Brigham and Women’s Hospital in Boston. “How to change our organization so we can do what’s involved, such as developing a capacity to coordinate care—that work is already under way.”

THOUGH IDEAS ABOUT HOW TO SOLVE MEDICARE’S LOOMING CRISS have been bouncing around for years, it wasn’t until a November 2006 meeting of the Medicare Payment Advisory Commission—MedPAC—that one notion took hold. MedPAC wanted to replace the Sustainable Growth Rate Formula, a target that Congress had used to determine physician payment rates since 1997, and one proposal called for breaking down reimbursement for doctors into various pools—geography, practice type and hospital affiliation were among the proposed criteria—with the idea that health spending for patients within those groups would be tracked, and increases in that spending would be capped.

With the benefit of research by the Dartmouth Atlas Project, which for more than 20 years has been mapping wide regional variations in medical resources, cost and quality, Elliott Fisher, a physician researcher at The Dartmouth Institute for Health Policy and Clinical Practice, discovered that while Medicare beneficiaries might see several doctors, they tend to stay within a local network of physicians and their affiliated hospitals. That pattern could be capitalized upon to create a model Fisher called “extended hospital medical staffs”—basically, combinations of providers connected to a particular hospital—that would become what he called “loci of accountability.” Fisher used Medicare claims data for a three-year period to show how 5,000 extended hospital medical staff pools could encompass most Medicare patients across the country and serve as “accountable units” of health care delivery.

Academics and health policy experts quickly embraced the idea, and a month later Fisher published an article, “Creating Accountable Care Organizations,” in Health Affairs to provide details of his proposal and to address challenges raised in the MedPAC meeting. In the article, Fisher and his colleagues outlined an approach to improving quality and reducing waste by “fostering shared accountability” for the cost and quality of care among all providers involved in a patient’s care—those providers, he suggested, could be grouped in “virtual” organizations of local hospitals and physicians.

Fisher’s model eventually morphed into one that wasn’t necessarily hospital-centric. The Mayo Clinic Health System, Geisinger Health System and Kaiser Permanente—highly integrated delivery systems in which employed physicians are part of a network providing comprehensive services—were held up as examples of what an ACO might look like, and the concept started showing up in congressional health reform proposals.

A YEAR LATER, ON MARCH 31, 2011, the federal Centers for Medicare & Medicaid Services, or CMS, took more than 400 pages to describe how the new program would achieve what physician Donald Berwick, the head of CMS, calls its “triple aim”: better care for individuals, better health for populations and lower per capita costs of care without any harm to patients. “ACOs went beyond theory with the proposed CMS rules,” says Michael Nugent, a Chicago consultant with Navigant who has written a book about ACOs. “Until then, many payers and providers were talking about turning into an ACO in the way they’d talk about going green. It was viewed as the right thing to do, but there were all kinds of different interpretations of what an ACO was.”

According to the initial rules, ACOs in the Medicare Shared Savings program would have to involve a sufficient number of primary care physicians to take care of at least 5,000 Medicare patients within a particular geographic area for three years. The law also requires the governing board of each ACO to include health care providers, suppliers and Medicare beneficiaries. Medicare will continue to pay fees for service, but ACOs can choose one of two payment models.

Under both models, ACOs must meet 65 quality standards in five areas: patient and caregiver experience; coordination of care; patient safety; preventive health; and care of at-risk and frail elderly patients. But in the first, “one-sided” model, if the ACO performs well on the quality measures and comes in under a spending target for its patients, the ACO and Medicare will share the savings. The ACO will use its portion to provide bonuses to its hospitals, physicians and other member providers. The model is one-sided in that there’s no financial penalty for the ACO if savings don’t materialize. The size of bonuses is limited, however, and within two years, organizations that take this route must switch to the other, “two-sided” model.

In that approach, an ACO not only risks missing out on bonus payments but could in fact have to compensate Medicare if the ACO doesn’t generate savings. Suppose there is a $100 million spending target for the patients an ACO serves. With the two-sided model, if actual expenditures are, say, $95 million, Medicare will give the ACO a portion of the savings. But if $105 million is spent, the ACO must share financial responsibility for the cost overrun. CMS will withhold 25% of any ACO bonus to offset potential future losses, and the ACO must either carry insurance to cover losses, place funds in escrow, establish a line of credit accessible to Medicare or provide another way for the government to take back money.

That downside risk is the main reason hospitals and physician groups have been unhappy with the proposed regulations. “The rules shift significant financial risk to the provider organizations, which are already worried about how to pay for improvements to their infrastructure and other challenges they’ll have to meet in implementing an ACO,” says Rob Parke, an actuary with Milliman, a global consulting firm. And while CMS estimates that an ACO could get up and running for about $1.7 million a year, a study by the American Hospital Association pegs first-year costs at as much as $26.1 million.

Then there are those 65 quality targets. Current data from Medicare claims can be used to meet just 11 of them, leaving 54 that might require pulling information from medical records or patient surveys at potentially great expense. Another challenge is that under the proposed rules, an ACO will know after the first year which Medicare beneficiaries have been officially assigned to it, to minimize the possibility that physicians try to game the system by delivering better care to them. In the meantime, the ACO won’t have any way of knowing how well it’s doing. “That aspect makes it harder for organizations to do financial modeling and assess their readiness to become an ACO,” Parke says. Moreover, though the ACO is financially accountable for the Medicare beneficiaries assigned to it, those patients are free to get care outside of the ACO, and they can opt out of sharing personal health data. “Those are risks an ACO can’t manage,” Parke says.

CMS was deluged with letters about the proposed ACO rules during the public comment period, which ended in mid-June. The American Medical Group Association, which represents nearly 400 physician groups and health systems, said that fewer than 1 in 10 of its members would sign up to be an ACO under the current rules, which the organization derided as “overly prescriptive” and “operationally burdensome,” with incentives that “are too difficult to achieve.”


IN MAY THE CENTER FOR MEDICARE & MEDICAID INNOVATION UNVEILED an alternative “pioneer” ACO model that offers higher financial rewards to 30 organizations able to launch a program by later this year. Though participants will still have to meet the quality measures in the originally proposed rules, there are variations in the model that require the ACOs to serve a minimum of 15,000 Medicare beneficiaries—compared with just 5,000 originally—and that make them eligible for larger bonuses. The pioneer model also allows organizations to get timely, detailed data from Medicare and to propose their own models for sharing savings.

These rule changes have made the model more attractive, and despite some remaining problematic aspects, a number of providers are considering participation, Parke says. The University of Michigan Faculty Group Practice was among those seriously thinking about signing up, says David Spahlinger, senior associate dean for clinical affairs at the University of Michigan Medical School. But in August, the government announced that it was extending Medicare’s Physician Group Practice Demonstration, which had served as a sort of dry run for the Medicare ACO model. From 2005 through 2010, the Michigan group was one of the 10 in that demonstration project, and when it was offered the chance to continue its participation through the end of 2012, it opted for that rather than joining the pioneer experiment.

In contrast to the proposed regulations for Medicare ACOs, the group practice demonstration project has included “training wheels,” Spahlinger says, noting that his practice had five years to accustom itself to the project’s rules and that it wouldn’t have participated if there had been a risk to its bottom line. “Providers need to get experience with new forms of care delivery and get comfortable before they take on financial risk,” he says.

During the first four years of the demonstration, the Michigan practice was one of just two that saved the government money every year—in its case, a total of more than $15 million on care for 19,000 Medicare patients. Spahlinger says his health system benefited from having integrated electronic health records, but it still had to invest $5 million over five years to improve that system and for additional hires, including eight nurse care managers. While the practice met more than 98% of 32 quality measures (the physician demo preceded the current 65-measure models), there was a steep learning curve, says Spahlinger. “Over time, you figure out how to use your resources,” he says. “But no one will know how to do it from the start.”

EVEN AS CONCERNS ABOUT THE MEDICARE ACOS CONTINUTE TO BE DEBATED, there is growing momentum for establishing private-sector versions, says Fisher, who has been working with five ACO pilots sponsored by Dartmouth and the Brookings Institution’s Engelberg Center for Health Care Reform. One of those involves Norton Healthcare, Louisville’s largest health provider, which owns five hospitals and several outpatient centers and employs nearly 400 physicians, including Wilding. Norton and the insurer Humana announced late last year that they were launching a five-year ACO pilot to cover the two organizations’ employees and their dependents who received care during the past two years from Norton physicians. The Brookings-Dartmouth team is offering technical and strategic advice, with the goal of demonstrating improved care while meeting a spending target for the 9,000 patients.

As one of 150 primary care physicians in the pilot, Wilding plans to increase his use of generic drugs, preventive screenings and flu vaccinations, and improve treatment for chronic conditions such as heart disease and lower back pain. Meeting quality standards for treating ACO patients could earn Wilding a bonus, though the Norton and Humana employees in the pilot account for less than 10% of his total patient population.

Like other insurers, including Aetna, Cigna and UnitedHealthcare, Humana is experimenting with ACOs as a way to improve care and to stem costs through new payment, risk and quality arrangements with physician groups and hospitals. “Working with Norton is a learning opportunity for us and will help us see how viable the ACO model will be,” says Tom James, Humana’s medical director. “We’re doing things insurance companies haven’t done before—collecting real-time data and reporting back to providers so they can better coordinate care.”

Kenneth Wilson, vice president of clinical effectiveness and quality for Norton, says Norton may also form a Medicare ACO once the final rules come out. “We are a traditional fee-for-service-built organization, so the ACO model turns our business model upside down and requires a big change in our culture,” he says. “In the current environment, if a patient goes to the emergency room, it’s a good thing because it brings in revenue. But in the new world, that may represent a failure in ambulatory care. We see participating in the Medicare ACO as an opportunity to learn some things on the ground.”

AS A RELATIVE HANDFUL OF ORGANIZATIONS TRY OUT THE ACO CONCEPT with private insurers or with Medicare, most others seem to think they’ll get involved sooner or later. In an April survey of health care executives, nearly two-thirds of respondents said they had either already formed or were preparing to participate in an ACO. And that sentiment is contributing to a frenzy of mergers and alliances.

Some experts worry that excessive consolidation could stifle competition and give health systems the leverage to negotiate higher prices with insurers, leading to rising costs for consumers. “The concern is that the formation of ACOs might result in monopolies in some geographic areas,” saysBill Kramer, executive director for national health policy at the Pacific Business Group on Health in San Francisco. “That could hurt consumers and purchasers alike, and it would be really hard to undo.”

Concern may be warranted. According to a 2006 study, mergers involving inpatient hospitals between 1990 and 2003 resulted in increased consolidation in 90% of hospital markets nationwide, raised prices by as much as 40% and may have led to a decline in quality of care. A more recent study of the California market found that mergers there, though not related to the formation of ACOs, have given physicians and hospitals more clout in negotiating with private health plans. Robert Berenson, the study’s author and a physician at the Urban Institute, a Washington, D.C., think tank, has warned that ACOs could produce similar increases by exerting their market power.

That, of course, is not what ACOs are meant to do, and there are also concerns about unintended consequences for Medicare beneficiaries. A recent report from the Geiger Gibson/RCHN Community Health Foundation Research Collaborative asserts that the new structure won’t work for federally qualified health centers, which serve 1.4 million Medicare beneficiaries in mostly poor, rural communities. And Debra Ness, head of the Campaign for Better Care, a coalition of more than 150 state and national consumer groups, says there’s work to be done to make sure Medicare ACOs live up to their potential for health care consumers. “Making sure groups don’t cherry-pick healthy patients while avoiding the sickest is really crucial,” Ness says. Meanwhile, an article in The New England Journal of Medicine last year proposed that patients share in any savings that an ACO achieves through lower premiums or co-payments. “No one knows the exact right way to do things yet,” Ness says.

Yet despite such issues, and despite the widespread dissatisfaction with the government’s first attempt at defining how ACOs should work, it seems clear that the concept will get a full audition in the marketplace in the months to come. Medicare, in particular, has to find a way to avoid being wiped out by the Baby Boom Tsunami, and Fisher, who wasn’t directly involved in writing the Medicare ACO regulations, thinks the rules are likely to be revised in a way that provider groups will accept. “I see strong openness on the part of CMS to improve the proposals, to reduce uncertainties for participating organizations,” Fisher says. “Will there be a strong Medicare program that supports accountable care? I’m confident that there will be.”