Deconstructing ACOs

Accountable care organizations (ACOs) are the latest fad.  They were even included in the newly passed health reform bill, whose backers expect ACOs to raise the quality and lower the cost of patient care at the same time. Detractors, on the other hand, describe them as “HMOs on steroids.” A point-counter-point on the topic is at the Health Affairs Blog.

As is so often true in health policy, the clearest way to think about this topic is to imagine applying the concept to some other good or service. Say automobiles. What would it be like to buy an automobile from an accountable CAR organization?




She’ll have fun, fun, fun,
‘Til her daddy takes the T-Bird away

For starters, you wouldn’t buy the auto yourself.  You would turn some of your money over to an entity (employer, insurance company, government, etc.) that would buy the car on your behalf.  It would do so by agreeing to pay an auto ACO, say, $X per car and insisting in advance on certain minimum quality standards.  For example, the ACO might be required to produce automobiles that:

  • Meet a minimum fuel economy standard.
  • Accept only fuel with a minimum percent of ethanol.
  • Come equipped with a toddler protection system that disengages the ignition if your kid is not safely buckled and strapped (in the backseat, of course) and that emits a loud siren if you try to leave him in the car unattended.
  • Have an I-brake-for-animals sensor that spots the furry little thing before you even know it’s there and brings your vehicle to a screeching halt.
  • Have an airbag that catches you before your head goes smashing into the dashboard in response to the sudden stop.
  • Have an OnStar system that alerts the EMTs if you don’t regain consciousness within a certain number of minutes after being knocked out by the airbag.

Oops.  Sorry.  I was getting carried away there — just thinking about all the possibilities.

Additionally, the buying entity would offer financial rewards for exceeding the quality of standards and financial penalties for falling short.  For example, the auto ACO might get $X + 5% if it exceeds the minimum fuel efficiency or exceeds expectations, say, for animal avoidance or child safety.

(Did I forget to mention?  The standards, the rewards, the penalties, etc., are not going to be chosen by you.)

So what’s not to like about all this?

One problem is that in the very act of listing minimum standards, there will always be a lot of features not on the list (Will the roof hold up if you flip over?  What happens if you get hit by an 18 wheeler?), items that may be more important to you than, say, avoiding squirrels.  And since $X is a fixed price, the auto ACO will have a strong incentive to skimp on anything that’s not measured and not on the list.  All the more so, because the ACO gets to keep any money it doesn’t spend producing your car.

More importantly, you are not the real customer of the auto ACO.  The third-party payer is.  The ACO is not trying to meet your needs.  It’s trying to meet the third-party payer’s needs.  So if Blue Cross were your car buying intermediary, for example, the auto ACO would not view you as the buyer.  It would see Blue Cross as the buyer.  The car produced for you would not be a car that you want.  It would be a car that Blue Cross wants.

(Oh, and did I forget to mention?  Any repairs or maintenance can only be done by your auto ACO.  You can’t go to some other repair shop.)

Now in moving from autos to health care there is another issue.  Although there are some differences in what people want in a car, those differences are narrow compared to the differences in what people need in medical care.

When you are healthy, how your ACO functions may not matter very much.  But when you’re sick, the fact that the ACO is the agent of Blue Cross instead of your agent may matter a great deal.

More on this in a future Alert.

Comments (31)

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  1. Tom H. says:

    Nice piece. Well done.

  2. Vicki says:

    Nice Beach Boys song.

  3. Madeline says:

    Reading this very excellent explanation, it is as clear as Christmas that you would never want to buy a car this way. So why would anyone want to buy health care this way?

  4. Virginia says:

    I’m always a little shocked by how complicated these payment systems have become. Why do we need to judge the merits of a gallbladder removal on all of these categories? It seems pretty simple to me: was the person cured? Did they get any infections or other complications that inhibited recovery?

  5. Devon Herrick says:

    I suspect that Accountable Care Organizations are just an HMO by another name.

  6. artk says:

    The current system is like have your money manager paid by the number of trades he makes, even if you lose money. An ACO is, getting back to the investment analogy, a step to a system where your money manager gets paid based on how your portfolio performs.

  7. James says:


    I have looked at some of the successful ACO experiments and large multi-specialty practices that sre organized like an ACO model and would happily entrust my medical care to them. Look at Kelsey-Seybold in Houston for an ACO-like model that delivers great results. Or, check out the impressive results at the Marshfield Clinic demonstration project.

    So, how about applying a little analysis to how the potential of an ACO could be realized and the promise shown in the demonstration stage expanded.

    Oh, and it was doctors — not HMOs — that spurred the push for ACO. Specifically, it was AMGA (American Medical Group Association) that led the charge.

    There is nothing wrong with a touch of skepticism, as it provides an important tempering to hype. But, it can veer into cynicism where reforms with actual potential for improvement are tossed aside with little review.

    Why, it can be just like the way some wonks treat health savings accounts! They don’t care to look at any evidence that it works, because they “know” it won’t. And, even if it worked, they still don’t like it anyway.

  8. Paul Nachtwey says:

    Excellent post, as usual. May I only request that your future blogs not contain the critical labeling error of the recently enacted legislation, which mostly serves as insurance regulation and excessive taxation, as health care “reform?” Reform means to improve, and that of course is an absurd expected outcome. We prefer terms and phrases like “that vile piece of legislation” or “health care conform.”

  9. John Goodman says:

    Interesting point, Paul. The word “vile” would be seen as a bit opinionated, however.

  10. Robert Kramer says:


    Incredible that health care providers need an accountable care organization to practice medicine the way they were taught in school. Parameters to assure best practices, gold standard and quality doesn’t seem to exist any more. Given the constraints of financial remuneration, time to spend with patients has created a system where over 50% of patients leave the doctor’s office with the wrong diagnosis.

    My profession has fallen prey to the insurance and pharmaceutical companies as well as big government trying to practice medicine, for which they are totally unqualified to do. The only way we can come up with a workable and equitable program is to return the delivery of health care to physicians and their patients. We have been led down a destructive path by not asserting ourselves, and until we do, any plan is doomed to failure. The current system can’t be fixed, which is what our health care pundits are trying to do. We need to assume control of a program that works, that polices, monitors and disciplines itself to take away the fear and greed that unfortunately has become rampant. There can be equitable solutions but it will take a large dose of cultural change to make it happen. And to assess more stringent penalties to those physicians whose prime interest in in the bucks, not excellent health care delivery.

    Sorry this is so long, but once I get started, it is impossible to address the situation.

  11. Jay gregory says:

    John. In the ACarO the consumer pays for the organization. In the ACareO the organization will be paid for out of the physicians’ fees. Score another victory for the AHA and another hickey on the AMA.

  12. Bob says:

    I believe that when implemented correctly, HMOs/managed care have been the only system of medical coverage in the US that has proven to improve care, improve access and lower/manage costs – and in fact have led to many of the quality initiatives/programs we have in place today. ACOs to me, are a re-invention of managed care, so that in and of itself may prove to be a good thing — we’ll see. The analogy with a car doesn’t work for me. A better analogy would be what if buying health insurance was like buying a car. Of course, to do that people would have to agree that employers and the government would no longer subsidize a great deal of the cost for their premiums — and therein lies the rub, when someone else is paying, you are at the mercy of what they want.

  13. Brant S Mittler MD JD says:

    Excellent post,John, but it doesn’t go far enough in predicting the pernicous impact of ACOs. ACOs are worse than HMOs. Both shift risk to providers. But ACOs, run by hospitals, will have the full legal power of the peer review process to discipline physicians who don’t follow their “evidence based” guidelines or who try to do more for their patients. The power of hospitals in this regard is virtually absolute and impossible to fight in court. Dissenters and competitors who are on a hospital’s staff will be dealt with harshly by already overpaid hospital administrators who have always lusted for the power to tell doctors how to practice medicine. And before they are kicked off the staff physicians will have to run the gauntlet of disruptive doctor committees with staff psychiatrists who fit the old Soviet Union model. Folks, I represent doctors in these proceedings now, and can assure you it will only get worse. The ACOs will result in patients not being able to trust their doctors – if they even get to see a doctor. They’ll probably be seeing pharmacists, nurses, or PAs. If anyone thinks this “re-invention of managed care” is a good thing, think again.

  14. Chris Ewin, MD says:

    Robert – hit the nail on the head
    Bob – I respectfully disagree. it’s hard for non-Docs to comment about care/access and cost. They don’t see the results and the hassles we/they have to through.
    James – valid point for this model but AGMA only represents 70k docs in multi-specialty groups. It doesn’t apply to most Docs just like the AMA doesn’t represent most Docs (only ~ ?12% of Docs are members)

    How do you do the metrics to evaluate whether these models work?
    As practicing Docs, our hands are tied with these regulations.
    The Computer Sciences Corporation did a recent study
    and found that two-thirds of the quality reporting requirements aren’t captured in current hospital electronic health record systems.

    To qualify for the first wave of HITECH meaningful use incentives starting in 2011, hospitals have to meet 14 core requirements and eligible professionals — such as doctors and nurse practioners — must meet 15 core requirements.

    The biggest challenge: the need for additional physician documentation in the EHR and for electronic medication administration. In addition, the report shows that 30% of data elements from physician documentation and 10% of those from medication administration may come from the emergency department (ED) or surgical suite, areas where many hospitals have limited clinical IT.
    Meaningful Use Core Requirements For Healthcare Providers

    So what are the more than two-dozen core “meaningful use” requirements that healthcare providers need to meet in order to qualify for financial incentives?

    The govt regs are only 864 pages and the list is on page 221….for those interested in late night reading.

    So what are the more than two-dozen core “meaningful use” requirements that healthcare providers need to meet in order to qualify for financial incentives?

    for the short list, see:

    Our hands are tied. I saw a cardiologist friend the other night typing (collecting data) at 10 pm trying to care for patients…His quote…
    “I feel like an intern again”.

  15. Paul Nachtwey says:

    John, Does insidious sound more objective?

  16. Linda Gorman says:

    AMGA is basically a trade organization that represents large group practices. They are an interest group. Naturally they want everyone to use their model of care and would be perfectly happy to have government force everyone to join or pay to use the software systems that they have developed. Never mind that large numbers of people prefer to organize their medical care in other ways.

  17. Linda Gorman says:

    Oh, and the competitive practices of the Marshfield Clinic give people in their service area little choice.

  18. steve says:

    “So why would anyone want to buy health care this way?”

    Maybe because there is very little relationship between buying a car and health care. You can walk away from buying a car, not always the case for medical care. You tend to have much different time horizons and geographical restrictions for health care. Information asymmetry is larger. There is so little in the way of valid comparison here, it is not worth considering. Again , illustrating the problem of argument by analogy. Wonder why he didnt use the analogy of buying a nuclear weapon? Think about it.


  19. Philip Weintraub says:


    Accountable Care Organizations and Medicaid Medical Homes coupled with payment reforms hold promise to link quality of care with the cost incurred.

    I think it must be comfortable to sit on the sidelines and shoot arrows at people who are actually trying to improve healthcare delivery for all Americans-but it is such a waste of energy and intellect.

    I recognize you were not part of the healthcare solution embarked on this year, but that is no reason to continue to be on the wrong side of history. The quality of the healthcare available to all of us in the future will depend on the effective implementation of the 2010 legislation. Why don’t you become part of the future solution instead of inventing obstacles?

    Phil Weintraub

  20. Chris Ewin, MD says:

    Thx for the clarification on AMGA.

    I find it difficult to understand the reasoning from the top down about the concept of a Medicaid medical home. To have a patient-centered medical home, Medicaid patients need access to care. This isn’t happening. Payments to physicians are less than the cost of delivering care and their overhead. Many of those Docs that do accept Medicaid are not accepting new patients. And the fact is, it’s predicted that 46% of PCP’s are retiring early or changing jobs.
    How do you propose that a medical home can be provided to link quality to care when the physicians are bolting????
    It just ain’t gonna happen.

  21. John Goodman says:

    Phil, there are numerous examples all over the country of low cost, high quality care — and I can’t think of a single example of one that was created as the result of guidance from anyone inside the Beltway. As is well known, these providers are penalized under the current Medicare payment system. As far as I can tell, they will continue to be penalized under the new law.

    So no, the health care reform law is not designed to reward efficient, high quality care. It is designed to force a preconceived notion of how care should be delivered on the entire medical community.

  22. artk says:

    John sez: “I can’t think of a single example of one that was created as the result of guidance from anyone inside the Beltway.”

    John, unless I’m mistaken, you’re “inside the Beltway”, are you saying we should dismiss all your ideas out of hand just you’re recommending we dismiss all those other “inside the Beltway” ideas?

  23. John Goodman says:

    Actually, artk, I’m in Dallas. We do have a Washington office. I visit there as infrequently as possible.

  24. Celia says:

    John, why do you assume the ACOs will be run by hospitals? As commenter James pointed out, the organizations that most resemble ACOs are the big clinics like Kelsey Sebold. Hospitals are deep in discussions about ACOs, because they HOPE they can take the lead and get the doctors to come along. And some of them probably will succeed. But the purpose of an ACO is to manage care for a group of people, most of whom will never see the hospital but nearly all of whom will see a doctor.

  25. Dan MD says:

    My interpretation of ACOs after finding the term in the Health Care Reform bill is that they are re-incarnation of capitated gatekeeper HMOs such as were widespread in the 1980s. My medical group participated in many of them. Like ACOs, they were supposed to emphasize preventive care, depend on the primary care physician to make timely and appropriate referrals while doing as much as he was competent. What happened as frequent gaming of the system by patients, rebellion against staying in the network or having a family physician perform a simple procedure like removing a basal cell cancer that a dermatologist would have charged double for. There was a built in conflict of interest in that capitated funds left over went to the group’s bottom line, meaning less care.The ACOs are going to add quality initiatives, which will serve to penalize physicians who deviate from guidelines. Try explaining guidelines to the parent of a screaming toddler in the middle of the night.If I had Donald Berwick’s cell phone number, I might want to hand the phone over so he could explain the wisdom of committe-determined best practices.

  26. Linda Gorman says:

    I figure that the Accountable Car Organization is called General Motors in the real world. Here in Colorado, the nascent ACO organization went dormant in the budget crisis thanks to lack of funding. Like the Terminator, they’ll be back.

  27. Linda Gorman says:

    More detail:
    Budget for FY 2009-10 for the Colorado Accountable Care Collaborative was $677,636, state share was $200,659. (As I rule of thumb I figure that anything with collaborative in its name is a leftie plot until proven otherwise.)

    According to the appropriations documents, the Department “revised the time line for implementing the Accountable Care Collaborative.” It has a request in for funding restoration in the FY 2010-11 budget. The money was to be used for two things:

    1. an actuary contract to develop a pay-for-performance calculation;

    2. a MMIS (Medicaid Management Information System) contract for programming in “advance of the pilot program’s start-up.

    One wonders if they are planning to hire former GOSPLAN employees as experienced managers for this kind of thing.

  28. Jay Gregory says:


    In the ACarO the consumer pays for the organization. In the ACareO the organization will be paid for out of the physicians’ fees. Score another victory for the AHA and another hickey on the AMA. Quality will not improve nor will costs go down. Dollars will merely be shifted to those doctors who can game the system by doing all the paperwork and taken away from those who refuse to do the paper work. In P4P it is the paper work that counts.

    Jay Gregory

  29. Chris Ewin, MD says:

    Pharmacists have become data collectors as providers since the 70’s. They have lost the ability to care for their patients and counsel them.
    I noted this as a member of NCPDP, the standard development organization for pharmacy, when I was medical director of PDX, a pharmacy software company, in 2000. At the meetings, their was continual battling for what would be included in the pharmacy info sent to the payers. The data is collected and sold for zillions of $ as you know.

    Likewise, third parties want Docs to become data collectors…P4P is ridiculous and the Docs hate it…It interferes with patient care and workflow and makes Docs feel like leaving the practices they love…

    That’s why I have a fee for care model..I haven’t used ICD 9 and CPT codes for 7 1/2 years and never will do it again…

  30. James says:

    Again, I need to point out that there seems to be some confusion between the ACO model (physician based) and things like bundled payments (hospital based). ACO’s to put it in grossly simplistic terms, make money by trying to keep patients out of the hospital and long-term care. That is the bulk of the savings. Done properly, it is good for the patient. I would be happy to share in the savings with a medical group that got more money by keeping me out of the hospital. Win-win, as I see it. Give me aligned incentives!

    There is what certainly appears to be a bit of an inherent conflict between hospitals and the ACO model, which may be one reason why hospitals are snatching up physicians as fast as possible. Hospitals are more interested in bundled payments, which gives them more control. There can be some very positive aspects of bundled payments, but it is NOT an ACO model.

    I never claimed that AMGA association represented a majority of physicians. They are also, of course, an interest group. My point was that the push for ACOs was not led by HMOs, but was coming from doctors. Yes, it is doctors in large multi-specialty practices. But, it didn’t come from HMOs and it wasn’t pushed by hospitals. And, many decry that health care reform didn’t listen enough to doctors as an interest group. This is one example where one sector of the physician market got something they appear to have wanted that has some potential.

    Can this get hopelessly screwed up? Of course it can! But, it has potential, it aligns incentives, it puts doctors back in the saddle more than other options, and is worth a closer look.

    The Medicaid Pediatric ACO Demonstrations may be an option to explore for Texas.

    If anyone is interested, one of the more intriguing things I have seen lately was an ACO model that partnered doctors and home health agencies, with heavy use of home-based electronic monitoring. There was a gain-share incentive for keeping patients out of the ER, hospital, and long-term care — which is EXACTLY what the patients wanted.

    I would love to have something like this available for my elderly mother-in-law, just home from colon cancer surgery with more treatments to follow.

  31. Mike Bond says:

    Could we agree that ACO’s might have a better chance of working if the buyer was actually the patient instead of his/her HR department? Currently almost 90% of employers that offer health insurance have ONE plan choice. Remember, if you buy at the company store you get what the company wants.