Rewarding Accountable Care

March 2010

The health reform bills passed by the U.S. Senate and House of Representatives include provisions aimed at improving the value of health care delivery through the development of accountable care organizations (ACOs). Accountable care organizations are defined as groups of providers that take responsibility for the cost and quality of care provided to a panel of Medicare patients. Both bills would allow ACOs to share in the cost-savings that accrue from providing more efficient health care or provide partial capitation. The Senate bill, The Patient Protection and Affordable Care Act (H.R. 3590), requires ACOs to include a sufficient number of providers and related infrastructure to distribute savings and report quality information. The House bill, The Affordable Health Care for America Act (H.R. 3962), would establish ACO pilots and expand them if they meet benchmarks set by the U.S. Department of Health and Human Services.1 Both bills would also establish a center within the Centers for Medicare & Medicaid Services (CMS) to test and diffuse new and effective payment models. The Congressional Budget Office estimates that the ACOs as defined in the Senate and House bills would save $4.9 and $2.6 billion, respectively, over the next decade.2 Inherent in these reforms is the drive to increase accountability for patient care and to coordinate that care across provider settings.

The State of Health Care Delivery

ACOs may offer the potential to realign incentives and correct some of the inefficiencies intrinsic in the current delivery system. Health care costs and the number of individuals without health insurance continue to rise. The recent recession and resultant growth in public spending on health led to an expected 1.1 percent increase in health care spending as a percent of GDP in 2009.3 The fee-for-service payment system contributes to these costs; providers receive payment based on the volume of services rather than on the quality of care they provide. Moreover, fee-for-service payment does not reimburse providers for coordinating care between providers and across provider settings.

A HCFO study led by Ann S. O’Malley, M.D., Center for Studying Health System Change, identified and documented “best practices” in physician offices that have developed care coordination processes. The researchers found that a lack of reimbursement for care coordination resulted in a “culture of non-communication and non-ownership of coordination.”4 The failure to coordinate care can result in costly hospital readmissions, duplicative tests, and the provision of unnecessary care, thus increasing health care costs and jeopardizing patient outcomes. The reforms proposed by current legislation aim to reward providers for coordinating care, instill accountability for patient care, and encourage collaboration among providers to achieve high-value care.

Existing Organizational Models Can Guide the Development of ACOs

While the proposed payment reforms would likely encourage providers to form ACOs, several organizational prototypes could serve as ACOs and guide their development. These models include multispecialty group practices, integrated delivery systems, and physician-hospital organizations, among others.5,6 Many multispecialty groups can coordinate care between providers while integrated delivery systems can coordinate care across settings.7 Research has shown that multispecialty medical groups achieve higher-quality care than individual practice associations and that larger medical groups are more likely than smaller groups or solo physicians to use health information technology (HIT), coordinate care, and use evidence-based processes.8, 9

One multispecialty model, the group employed model (GEM), has proven successful in achieving high-quality, low-cost care. A GEM is a multispecialty, physician-led medical group that is often aligned with a hospital. The attributes of a GEM that facilitate the provision of high-quality care include physician leadership, integration, governance and strategy, transparency and HIT, and physician accountability.10 Salary is likely a contributing factor to GEMs’ success as it is often based on values that are important to the GEM, such as quality, patient satisfaction, and productivity. Moreover, the salary-based model mitigates volume-driven incentives and promotes value-focused practice.

Forming New ACOs

Creating more organized systems of care will likely require the development of organizational capacity, including physician leadership, culture, implementation of HIT, and the redesign of care processes.11 HCFO grantee John Kralewski, Ph.D., University of Minnesota, is assessing the organizational attributes of a nationally representative sample of medical groups that are involved in the provision of high-quality and low-cost care. Similarly, HCFO grantee David Grembowski, Ph.D., University of Washington, and colleagues examined the effectiveness of Group Health Cooperative’s Access Initiative on utilization, costs, and patient satisfaction.12 Findings from these studies may guide efforts to form ACOs.
Developing more integrated organizational models may not be possible in all regions of the country and for all physicians seeking to join an ACO. In a HCFO-commissioned paper, David Dranove, Ph.D., Northwestern University, examines integration through the economics of strategy, a management concept based on the premise that “firms can only succeed in the long run by creating value for consumers.”13 Dranove posits that integration is more effective than market transactions if contracts are not adequate to achieve desired outcomes and if coordination is required to achieve the desired product. The diffusion of HIT and contracts may facilitate the development of virtually integrated organizations. An HCFO study led by Dave Knutson, Ph.D., University of Minnesota, is using a technique known as “network methodology” to identify health care providers who share a common patient population and could serve as an accountable care team.

Barriers to Forming ACOs

Several issues pose barriers to the formation of more organized and accountable systems of care. Currently, approximately one-third of physicians practice in one- to two-physician practices.14 Encouraging solo-practice physicians to join formal organizational structures may be difficult.15 Moreover, primary care is essential for ACOs, and there is currently a shortage of primary care physicians.16

Integration between and among physician groups and other health care entities may also raise concerns regarding physician self-referral and antitrust laws.17 For organizations to allay these concerns, they must integrate financially and operationally or demonstrate clinical integration. Moreover, Medicare payment is determined through the sustainable growth rate (SGR) formula while private health insurance plans negotiate rates with providers through contracts. Integration may therefore reduce cost savings for Medicare but increase overall health care costs. Evidence from California suggests that integration between hospitals and physicians may increase prices to private insurers as a result of increased bargaining power.18


Although the passage of health reform remains uncertain, CMS has indicated that it will work to increase its capacity to test and evaluate new payment and organizational reforms; private pilots are currently underway.19,20 Ensuring that the delivery system provides efficient, high-value care will be critical to ensuring the sustainability of efforts to expand access to care.

HCFO-supported work can help inform efforts to organize care for improved accountability and value. See the HCFO grants below or visit

Title: The Characteristics of Best Medical Practices
PI: John Kralewski, Ph.D.
Institution: University of Minnesota
Period: December 2008 - September 2010

The researchers will identify the organizational characteristics of medical group practices that achieve high quality, low cost care. Current research suggests that the cost and quality of care vary across geographic areas and health plans within geographic areas. The causes of this variation at the practice level, however, are not well understood. Using a sample of physician practices from Medical Group Management Association (MGMA) membership, the researchers will examine how financial incentives within the practice, structural, and cultural attributes at the practice-level influence costs and quality of care, and the linkages between cost and quality. They will examine the effects of practice size, physician workload, and collegiality on cost and quality independently and then examine the effects on cost and quality jointly. Finally, they will calculate the configuration that results in the optimal performance of best medical practices. The objective of this project is to provide benchmarks that policymakers and health insurance plan and medical practice administrators can use to promote a cost-effective health care system.

Title: Accountable Care Teams for Disabled Medicaid Beneficiaries
PI: David J. Knutson
Institution: University of Minnesota
Period: November 2008 - July 2009

The researchers will identify health care providers who share a common patient population (accountable care teams), using a technique known as “network methodology.” These teams could serve as a medical home for their patients. If successful, the process of identifying accountable groups of providers could also support value-based purchasing. The researchers will employ the network methodology to identify provider “clusters” – those who are densely interconnected through serving a common patient population, in this case disabled Medicaid patients in Minnesota. They will then (1) assess the “fit” of the clustering with observations about care organization in Minnesota, and (2) develop measures of cluster cohesiveness. The objective of the project is to introduce a new technology for identifying accountable groups of providers that can be the basis of medical homes/care teams and inform efforts to implement value-based purchasing of health care.

Title: Identifying Best Practices in the Coordination of Care
PI: Ann S. O’Malley, M.D.
Institution: Center for Studying Health System Change
Period: October 2007 - May 2009

The researchers examined how care is coordinated in ambulatory care settings. Specifically, they identified and documented “best practices” in physician offices that have developed care coordination processes and determined the financial implications of increased coordination. For example, the researchers assessed whether a periodic care coordination fee or itemized billing for coordination activities is more efficient. They also examined a group of “average practices” to assess how they set priorities for coordination activities and what barriers they encounter. The objective of the proposed project was to better inform the replication of organized care coordination processes in medical practices.

Title: Improving Access to Improve Quality: Evaluation of an Organizational Innovation
PI: David Grembowski, Ph.D.
Institution: University of Washington
Period: November 2004 - November 2006

Can quality be improved by creating patient-centered delivery systems? The researchers evaluated an initiative comprising six patient-centered changes in Group Health Cooperative's (GHC's) delivery system. The six changes, designed to improve quality by increasing enrollee access to physicians and information, were: 1) same-day appointments with primary and specialist physicians; 2) direct patient access to specialist physicians (removal of gatekeeping); 3) patient-physician email messaging (with physician compensation for responding to patient emails); 4) physician compensation with productivity and quality incentives; 5) patient internet access to GHC electronic medical record; and 6) health promotion information on the GHC Web site. The researchers estimated enrollee utilization of same-day appointments, direct access to specialists, email with physicians and nurse practitioners, and electronic medical records. They also examined the percentage of physicians' salaries from incentives. Physician awareness of changes, as well as physician and enrollee satisfaction, was assessed and utilization statistics and continuity of care, before and after the changes, were compared. The objective of the project was to better understand the impact of new IT and payment incentives on patient and provider health care decisions and utilization.

Title: Physician-Organization Arrangements: Impact on Integration and Managed Care
PI: Gloria J. Bazzoli, Ph.D.
Institution: Hospital Research and Educational Trust
Period: February 1996 – February 1998

What are the effects of hospital, health market, regulatory, and community characteristics on the decision to develop a physician-organization arrangement and on the type of arrangement that is selected? The Hospital Research and Educational Trust (HRET), in collaboration with the Wharton School of the University of Pennsylvania, studied joint hospital and physician group efforts to create integrated service arrangements and facilitated managed care contracting. The study provides baseline data on the prevalence of these relationships, associates different organizational arrangements with measurable characteristics to develop classification schemes, and develops an analytic framework for assessing why hospitals and physicians implement various arrangements.

1 Davis, K. et al. “Starting on the Path to a High Performance Health System: Analysis of Health System Reform Provisions of Health Reform Bills in the House of Representatives and Senate,” The Commonwealth Fund, December 2009, updated January 7, 2010.
2 Ibid.
3 Truffer, C.J. et al. “Health Spending Projections through 2019: The Recession’s Impact Continues,” Health Affairs, Web Exclusive, February 4, 2010. 
4 O’Malley, A.S. et al. “Coordination of Care by Primary Care Practices: Strategies, Lessons, and Implications,” Center for Studying Health System Change, Research Brief, No. 12, April 2009. Also see
5 Shortell, S.M. and L.P. Casalino. “Health Care Reform Requires Accountable Care Systems,” Journal of the American Medical Association, Vol. 300, No. 1, July 2, 2008, pp. 95-97. 
6 “Medical Homes and Accountable Care Organizations: If We Build It, Will They Come?” AcademyHealth, Research Insights, November 2009. Also see
7 Davis, K. et al. “Starting on the Path to a High Performance Health System: Analysis of Health System Reform Provisions of Health Reform Bills in the House of Representatives and Senate,” The Commonwealth Fund, December 2009, updated January 7, 2010.
8 Mehrotra, A. et al. “Do Integrated Medical Groups Provide Higher-Quality Medical Care than Individual Practice Associations?” Annals of Internal Medicine, Vol. 154, No. 11, December 5, 2006, pp. 826-33. 
9 Crosson, F.J. “The Delivery System Matters,” Health Affairs, Vol. 24, No. 6, November/December 2005, pp. 1543-48. 
10 Helms, W.D. “Group Employed Model,” Presentation at AcademyHealth’s National Health Policy Conference, Washington, D.C., February 9, 2010. Also see
11 Devers, K. and R. Berenson. “Can Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?” Robert Wood Johnson Foundation and the Urban Institute, Timely Analysis for Immediate Health Policy Issues, October 2009. Also see
12 For findings, see “Improving Access to Improve Quality: Evaluation of an Organizational Innovation,” AcademyHealth, HCFO Findings Brief, Vol. XI, No. 5, August 2008. Also see:
13 Dranove, D. “Viewing Health Care Consolidation through the Lens of the Economics of Strategy,” AcademyHealth, HCFO Report, March 2010. Also see
14 Liebhaber, A. and J.M. Grossman. “Physicians Moving to Mid-Sized, Single-Specialty Practices,” Center for Studying Health System Change, Tracking Report, No. 18, August 2007.
15 Crosson, F.J. “Policy ‘Levers’ to Support 21st Century Delivery System,” Presentation at  AcademyHealth National Health Policy Conference, Washington, D.C., February 9, 2010. Also see
16 Rittenhouse, D.R. et al. “Primary Care and Accountable Care—Two Essential Elements of Delivery-System Reform,” New England Journal of Medicine, Perspective, December 10, 2009, pp. 2301-03.
17 Hastings, D. “Is Your Organization Ready to Become an Accountable Care Organization? Here are 10 Questions to Ask,” Health Care Policy Report, Bureau of National Affairs, January 4, 2010.
18 Berenson, R.A. et al. “Unchecked Provider Clout in California Foreshadows Challenges to Health Reform,” Health Affairs, Web Exclusive, February 25, 2010.
19 Reichard, J. “Blum: CMS Committed to Boosting Research on Delivery System Change,” Commonwealth Fund, Washington Health Policy Week in Review, February 1, 2010.
20 Cys, J. “Accountable Care Organizations: A New Idea for Managing Medicare,”, August 31, 2009.