Should Your Primary Care Practice Join an ACO?

By: Holly Regan on April 28, 2017

Lauded by the Obama administration as a way to save money and provide better care to patients, and so far untouched by Republican attempts to repeal and replace the Affordable Care Act (ACA), Accountable Care Organizations (ACOs) are becoming increasingly popular: the number of ACOs has risen from just 32 in 2011 to over 500 today.

ACOs are groups of doctors, practices, hospitals and (sometimes) insurance companies that join together to provide higher-quality patient care, improve care coordination and make more cost-efficient health care decisions. The ACO must meet certain benchmarks for keeping patients healthy and out of the hospital. And when the ACO saves money by reducing unnecessary procedures, visits and hospital stays, providers get to share in the savings.


President Obama meets with physicians at the White House

There are several models of ACOs, both private and public, but the majority of them are part of the Medicare Shared Savings Program: a measure of the Affordable Care Act (ACA). Contrary to popular belief, it is not necessary to sell your primary care practice to a hospital in order to join an ACO (though some may offer to buy). Primary care practices can band together to form an ACO, or they can join forces with larger hospitals, integrated delivery networks and (in some areas) even insurance companies.

While ACOs can be an effective mechanism for providing better care to patients and saving money, there are some financial risks involved for smaller practices, as well. If you are a primary care provider who’s thinking of joining an ACO, here are some key considerations to weigh before making your decision.

Why Are ACOs Becoming More Common?

ACOs are becoming more common, says Steve Shortell, distinguished professor of health policy and management at the University of California at Berkeley’s School of Public Health, because a shift is taking place in the medical landscape as a result of the ACA: away from traditional fee-for-service payments, and towards value-based payments.

Value-based payments reward doctors for keeping patients healthy, and for eliminating unnecessary tests and hospital visits. In other words, where fee-for-service is about quantity, value-based payments are about quality. Emphasizing quality care and changing the way physicians are paid is a major component of the ACA, the provisions of which are continually being rolled out.

What Financial Incentives Do ACOs Bring for Doctors, Practices and Hospitals?

For physicians, the biggest financial incentive of participating in an ACO is the opportunity to share in the savings when they stay under their expenditure target. With Medicare, Professor Shortell says, this is a 50-50 split; with private contracts, the way the savings are divided varies.

Some ACO contracts offer bonuses for physicians who hit quality targets, in addition to the shared savings. If a doctor kept a certain percentage of his diabetes patients at a healthy blood sugar level, for example, he might get an additional payment on top of the cost-savings payout, says Shortell.

The incentives are similar for hospitals: if they can perform all necessary procedures (knee surgeries, hip replacements and cardiac care, to name a few) within their spending target, they get a piece of the savings. Under fee-for-service, says Shortell, hospitals were incentivized to maximize hospital stays, as their payments were based on inpatient care margins. The ACO model, however, incentivizes “bundled” payments—meaning a patient’s total care margin, including out-of-hospital care and rehab costs. This encourages hospitals and primary care physicians to work together to keep the patient from being readmitted to the hospital, and ensures that the patient gets comprehensive, prevention-oriented care.

“I think of ACOs as an exercise in ‘risk transfer,’” says Jaan Sidorov, MD, principal of Sidorov Health Solutions and an expert on ACOs. “In ACOs, insurers (government and commercial) are transferring some risk to the providers of health care.” By taking on this additional risk, providers can get a piece of the money currently being held by insurance companies, Sidorov explains—though, of course, they are also at risk of losing money if their ACO doesn’t meet quality and cost-savings requirements.

What Costs Are Involved?

The startup costs involved with joining an ACO can be prohibitively expensive for some small practices: between $2 million and $12 million, says Shortell. This variation depends on such factors as the size of the practice, what part of the country the practice is in and what sort of infrastructure is already in place.

If your practice hasn’t gone digital yet, you’ll need to invest in the hardware and software to support EHRs—and you’ll have to learn how to use them effectively to manage patient care. Practices also need to have a health information exchange (HIE) system in place, in order to share information with other providers. Typically, all providers in an ACO use a single EHR system—the question is who pays for it, Sidorov says. In large ACOs, central management may handle these costs; in smaller collaboratives, this responsibility may fall to individual practices.

And these aren’t just one-time investments: most of the expenditures a practice makes will involve ongoing costs, as well. Sidorov points out that in order to manage and mitigate the risk previously borne by the insurance companies, “ACOs will have to invest in the very same systems that have been in place for years in the commercial insurers.”

This means maintaining electronic health records (EHRs) in order to track potentially dangerous and actionable trends in the covered population, says Sidorov. Practices must also invest in care and disease management programs, which are particularly important for patients with chronic, complex illnesses (the small percentage of patients who are responsible for the majority of the practice’s health care costs). In some cases, Shortell adds, new kinds of health professionals must be brought on staff, such as diabetic nurse educators or pharmacists.

If you’re looking to start an ACO by banding together with other small primary care practices, be aware that the costs for starting a new ACO are onerous: between $11.6 million and over $26 million. One of the biggest categories in this startup spending is healthcare IT. For small ACOs, the initial IT investment averages $1 million; for larger ACOs, it’s $4 million. This IT spending covers everything from EHRs to e-prescribing and data center security. This is why many ACOs are formed by small practices joining with large hospitals that have deeper pockets.

What Are Some of the Biggest Financial Risks?

Many smaller primary care practices simply don’t have the infrastructure or resources available to larger clinics or hospitals, says Shortell, such as EHRs, team-based care and quality improvement systems. But when a smaller practice joins an ACO, it must meet the same standards as the group’s larger providers. “This can make it harder for these practices to realize a positive return on investment, at least in the short run,” he says.

The amount of risk your practice takes on will depend largely on the other providers in the ACO. Sometimes, large hospitals will help smaller members by providing additional staff members or funding their EHR investment; sometimes, the ACO as a whole will absorb these costs. In some cases, practices have already invested in an EHR system, only to find that it is incompatible with the EHR being used by the ACO—and have to invest all over again. Without the financial assistance of the ACO and/or its larger members, the costs of entry may be too steep for smaller practices.

“There is a generality when it comes to insurance risk called the ‘Law of Large Numbers,’” Sidorov says. “If a small practice with a small number of patients has one patient with a disastrous spate of pricey health care, that can make it look like that practice is not managing risk, even if all the other patients are being kept out of the hospital.”

This is why, Sidorov explains, many smaller private practices often join together (or join with larger providers) in an ACO: so that their combined patient base will be large enough to dilute the effects of the occasional expensive outlier. The risk for any one practice is that it must rely on the other practices in the ACO to be equally skilled at keeping patients healthy, and must rely on the ACO’s central management to know how to effectively implement information technology and care management.

What Are the Key Benefits?

Joining an ACO can help improve the functioning and profitability of your practice while also increasing patient wellbeing and satisfaction, Shortell notes. ACOs with well-financed partners, such as large hospitals, can help smaller practices by funding or supplying EHRs, quality improvement resources and care coordinators. When the ACO meets its benchmark quality standards and provides care within the specified budget, providers get a chance to make more money—and patients get care that’s focused on keeping them off the operating table and out of the doctor’s office.

Of course, Sidorov warns, primary care practices should enter into any discussion about joining an ACO with a healthy degree of skepticism. The ACO isn’t just aimed at saving money for individual practices—it’s also trying to save money for insurance companies and large hospital systems. It’s important, he says, to understand “the myriad contracting details that specify just how the risk transfer is allocated” to ensure that the arrangement will be beneficial to your practice.

How Can Smaller Practices Achieve a Positive ROI?

Sidorov advises smaller practices to proceed with caution. In the end, primary care practices are subject to the ROI of the ACO as a whole, not just the ROI of their own practice. The other physicians, clinics, hospitals and insurance companies that are participating also get a piece of the pie—and that piece can be very small (or nonexistent) by the time it’s divided up.

That being said, there are things smaller practices that join an ACO can do to maximize their ROI. Shortell recommends that primary care practices take the following steps:

  • Have physician leadership. You need at least one physician at your practice who sees that the payment system is changing, and understands what these changes mean. “This person is really going to lead the way, engage and try to make the changes needed,” says Shortell.

  • Focus on high-cost, chronic illnesses. The real savings for practices that join ACOs lie in chronic-illness cases: the 5 percent of the patient population that generates 50 percent of the practice’s health care costs. Doctors must focus on reducing repeat visits and costly procedures for these patients in order to generate real savings.

  • Learn to work in teams. Physicians at many small practices are used to doing it all themselves. While it may be hard for doctors to let go, it’s important that they learn to delegate. Nurse practitioners and physician assistants must be enabled to help take care of patients so that doctors’ time is freed up for those complex chronic-illness cases.

  • Get access to EHRs. Especially when it comes to treating patients with chronic illnesses, physicians need access to EHRs; they must have all available information on patients in order to treat them properly.

  • Manage the pace of change. Small practices sometimes try to do too many things at once. In order to avoid making mistakes, they must prioritize what is most important to do this year versus next year, ensuring that change happens on a manageable scale and at a reasonable pace.

  • Learn from your peers. While ACOs are still relatively new, there are now some around the country that have been established for two or three years. Join a learning collaborative to learn from the experience of other practices and see what’s worked best for them.

Overall, Shortell says, if you are a primary care practice that is considering joining an ACO, you must remain vigilant about the changes in payment models that are taking place, and make the relationships and partnerships in your local community that you need to be successful.

ACOs can provide opportunities for physicians and practices to operate more efficiently and share in health care cost savings, while saving patients time, money and effort on unnecessary visits and medical procedures. But there is a significant financial risk involved for small primary care practices. If you decide to join an ACO, make sure you carefully weigh the potential risks and rewards first.