An accountable care organization (ACO) is a healthcare organization that ties payments to quality metrics and the cost of care. Accountable care organizations in the United States are formed from a group of coordinated health-care practitioners and doctors who come together to adopt an alternative payment method. The ACO adopts alternative payment models (e.g., capitation) and accountable to patients and third-party payers for the quality, appropriateness and efficiency of its services. An accountable care organization could be likened to a corporative for example. According to the Centers for Medicare and Medicaid Services (CMS), an accountable care organization is an organization of health care practitioners that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it. And they decide to do this collectively as a group. Some of the payment models that the health practitioners and doctors practicing accountable care organizations solutions are:


Fee-for-service plus bonus: Also called pay-for-performance contracts, these are traditional fee-for-service contracts that include incentive payments for hitting pre-defined targets.

Bundled payments: Bundled payment initiatives attempt to reduce care fragmentation and improve overall quality of care by aligning the financial incentives between all providers (for example, hospitals, physicians, and post-acute care providers) that touch a single episode. While these payments increase coordination across the episode, they don’t provide any incentive to reduce episode volume.

Shared savings: Shared savings initiatives give providers the opportunity to benefit or ‘share’ the cost reductions that they drive through their improvement initiatives. Providers and payers negotiate a benchmark rate, typically representing what the expected payment would have been in the absence of an ACO. In an upside only arrangement (also called a one-sided model), the provider’s risk is limited. They benefit from any savings, but don’t incur losses if spending goes above the target. In a model with downside (also called a two-sided model), providers typically have a greater financial stake but also go at risk for losses should total payments surpass the benchmark.

Capitation: Under capitated payment models, providers receive a set per-member-per-month payment and are at full financial risk for the members in their population.


These new payment methods have a background that can be traced back to the fact that today’s fee-for-service contracts reward health care organizations that increase the volume of services that they provide. Broadly, value-based contracts attempt to use payment to incentivize other aims, such as cost reduction and quality improvement. Many of these payment models attempt to improve on the current fee-for-service system, while adjusting the model in a range of ways—small and large—in an attempt to more adequately compensate ‘value’ in health care. Other models, like capitation, represent a break altogether from the current fee-for-service system. Providers, payers, and employers across the country are experimenting with a wide variety of these payment models in an effort to find contract types that best improve care delivery.


Switching between payment type such as Preparing for a Shift from Fee-for-Service to Fee-for-Value is not an easy task. Being able to remain financially viable and excel under fee-for-value contracts requires a fundamentally different set of competencies. To succeed under fee-for-service contracts, health care leaders need to be skilled at driving the growth of a high margin. To succeed under value-based payments, health care leaders must do the exact opposite. To reduce costs, preventative services are emphasized far more than high-cost, acute care services, which are used as sparingly as possible. To improve quality, leaders need to identify and minimize unnecessary variation from evidence-based practice. It’s not an easy task.


Today’s healthcare leaders face the great challenge of developing the competency for this new world in a market that, paradoxically, rewards a different set of values. Despite the challenge, building these new competencies is absolutely critical. Straddling two fundamentally competing payment models is sustainable only while value-based payment contracts represent a small subset of overall agreements. As providers and payers identify effective value-based contracts, it’s likely that the market will hit a tipping point where there’s a rapid acceleration toward value-based payments. Organizations that are unprepared for this shift to  Accountable Care Organization Solutions put themselves at serious risk.