Improving Healthcare Finances with Accountable Care Organizations



The ACO reduces cost utilization and ensures quality services for patients.

Owing to the pandemic, the world has observed a major shift in the functioning of healthcare institutes. Not only the institutes are overburdened with the services that they provide but are also bleeding dry due to the high cost of the modern techniques that enable effective recovery of their patients. Financial stability in hospitals and healthcare organizations has always been observed as a major concern amongst physicians. For improving the healthcare affordability, an alternative solution concerning Fee from Service (FFS) becomes imperative for cost-saving and utilization of services amongst the government and health insurance providers.

As the global healthcare sector is already marching in testing waters, one of the solutions to counter high-cost demands of health services would be with Accountable Care Organizations.


What is an Accountable Care Organization?

The Accountable Care Organization was formed in the year 2012 in the US by the Centres of Medicare and Medicaid to reduce the national healthcare deficit. Formed under Medicare Shared Service Programs, it ensures cost savings in healthcare setup while delivering effective and quality medical services.

In Accountable Care Organizations, a network of doctors, hospitals and other health care providers voluntarily contribute in a coordinated manner to share financial and medical responsibilities to reduce the unnecessary spending. The Fee for Service model ensures that the doctors and hospitals are paid by the health insurance companies and the government every time they provide service to the patient. Sometimes this is not necessary and the patient is rendered to get low-quality treatment, which overburdens the government and health insurance companies with high healthcare costs.

The ACO allows the government and insurance companies to set a quality benchmark for the doctors and hospitals so that they get the incentive, based on reduced cost utilization and the quality of service that they provide to the patient. One of the traits of ACO is providing quality healthcare services while lowering the total care cost. Thus in ACO providers are paid for the quality of the services they are providing for the patients.

For an ACO to be eligible to get the incentives from the government, it must adhere to providing quality services while keeping the total cost care below the mark. If the total cost care exceeds the benchmark then ACOs are required to pay penalty to the government or insurance company for a portion of total care cost that went above the benchmark.

An ACO can be governed by either hospital or a physician. The ACO is part of the Obamacare program in the US. A Mckinsey Report states that the ACOs have delivered high-quality care with an average composite score of 93.4% for quality metrics. The net savings by the Medicare programme was estimated to be US$144 million for 2015.


The Math Of ACOs

To reap the maximum benefits ACOs must focus on four tenants that would bring profitability to the organizations. These are Bonus Payments, Demand Destruction, Market Share Gains, Operating Costs.

Bonus Payments

As the focus of ACO is in reducing the cost utilization, bonus or incentive payment method would be a great option for the profitability in an organization. It has four key elements:

  • Baseline and Benchmark- Most of the organizations observe the historical baseline for establishing an annual trend rate so that quality and cost-effective performance can be delivered by them. This historical baseline can be of the immediate year or the previous multiple years. The annual trend rate helps in the setting of a benchmark which can later be used as the point of reference for comparing the actual care cost to the bonuses that are needed to be paid.
  • Shared Savings Rate- The shared savings rate is the percentage of the estimated savings paid to the ACOs, to meet the requirements for quality performance.
  • Risk Corridors- is based on caps on losses or gains in the total cost care by ACO.
  • Rebasing: Sometimes the benchmark by the ACO is set by observing their performance in the earlier year or immediate year. This is called rebasing. However, experts criticise this model as sometimes the benchmark set by ACO for a particular year is hard to beat in the following year, which leads to ACOs incurring losses and penalty.

Demand Destruction 

As ACO heavily relies on applying methods for reducing the cost utilization to get incentives. However, this shared saving model does not take into account the past revenue or margins by the healthcare institute, to the attached patient volume seeking treatment. This is called Demand Destruction.

The Demand Destruction helps in analyzing the loss of revenue due to reduced utilization from the ACO population and Spillover effects from the non-ACO population.

Market Share Gains

It can improve the profitability in an ACO, by reducing the system leakage through aligning the physicians in both ACO and non-ACO patients, and by improved networking across ACO.

Operating Costs


The operating costs also determine the profitability of any ACO. The operating cost of a hospital led ACO is higher than the Physician-led ACO. The operating costs include:

  • Care Management cost
  • Data and Operating Analytics Costs
  • Additional Administrative Costs

The success of any ACO is determined by the coordination and cooperation amongst the team. Reducing the cost utilization would enable the country to invest that money in areas which have the necessity for urgent investment. Also, though this model is only applied in the US, a similar model can be designed in countries where the government feels the burden of healthcare deficit.