Quality, Cost and ACOs: What Have We Learned from HMOs?

National health reform legislation—the Patient Protection and Affordable Care Act of 2010—gave birth to accountable care organizations, which were touted as a model to promote quality and reduce costs of health care delivery. ACOs do look a lot like health maintenance organizations and have been labeled “HMOs on steroids” by some observers.

Awaiting formal definition by the Centers for Medicare & Medicaid Services, ACOs are envisioned to be networks or groups of providers (e.g., primary care physicians and specialists, nurses, ancillary care providers, hospitals) that have collective responsibility for health care quality and costs for a patient population. Several different organizational forms are likely, from integrated health systems to physician hospital organizations to groups and independent practices.

But are ACOs really HMOs in disguise? What have we learned from HMOs, and what can we expect as ACOs enter the health care scene?

Providers run the show and will be held accountable for the quality and cost of care

With the ACO model, providers, not insurance companies, are in charge. The good news is that health care quality and service delivery step into the spotlight. Insurers are no longer the bad guys who restrict access to network providers and care protocols, a common complaint directed at HMOs as gatekeepers in the 1990s. ACOs will also be able to share is savings that result from reducing health care cost growth and meeting quality targets.

Like HMOs, the ACOs are likely to use several different organizational models depending on market conditions at the local level. Some ACOs will be physician controlled, through large-group practice contracts with hospitals and other providers, resembling the independent-practice association models. Others are likely to resemble physician hospital organizations, based in hospitals using networks of physician employees. In some cases, ACOs may contract with insurers to engage them as administrative services organizations.


To learn more about ACOs, read Altarum’s newest report “Strategic Innovations for Affordable, Sustainable Health Care: Accountable Care Organizations.” This and other topics on “what works” in health care can be found on Altarum’s internal research and development publications page.


Does it matter who controls the ACOs? Yes. A recent New England Journal of Medicine report cautions that whoever controls ACOs will capture the largest share of savings (1). In physician-controlled ACOs, hospital revenues are expected to decline as physicians direct care within their own networks. When hospitals control the plan, they are expected to receive more savings, much of which will derive from enhanced outpatient and community-based care, while physician income is expected to decline. When insurers provide administrative services under contract to ACOs, health care costs can be expected to increase, whoever is in charge.

Primary care and preventive health care have starring roles in an extended continuum of care

ACOs will emphasize primary care by placing primary care practitioners in a central role within patient-centered medical homes, which are care delivery models that place the patient at the center of an interdisciplinary care team, intended to improve patient experience, improve population health outcomes and reduce costs. ACOs and PCMHs will feature an extended continuum of care built around primary care that includes community-based prevention and wellness services. While most HMOs gave lip service to these services, the PPACA makes them real with ACOs.

How will this work? The PPACA enhances the role of primary care in several ways. The PPACA calls for higher payments for primary care under Medicare and Medicaid and includes a 10 percent bonus payment to primary care physicians whose primary care services compose at least 60 percent of their total Medicare services. The bonus will be in effect until December 2015. The American Academy of Family Physicians reports that a primary care physician who meets eligibility requirements and receives 25 percent of practice payments from Medicare could experience an increase of $2,000 a year for the next five years (2). Medicaid payments for primary care services will also increase, bringing them up to the same level as Medicare payments in 2013 and 2014. This will affect primary care physicians differently depending on the state in which they live, and the payment differentials between Medicare and Medicaid.

ACOs will also cover community-based prevention and wellness as well as clinical preventive care for Medicare and Medicaid beneficiaries. The PPACA required health plans to cover 45 preventive care services recommended by the U.S. Preventive Services Task Force; an annual wellness visit and physical examination; a health risk assessment; preventive services recommended by the USPSTF and vaccines for flu, pneumonia and hepatitis B without cost (3). Community-based services will be added for Medicare beneficiaries with a special focus on programs that address physical activity, nutrition, obesity, falls, chronic disease self-management, and mental health. State Medicaid programs are allowed greater flexibility under the new health care reform legislation, and can provide a broad range of home and community-based services, including targeting benefits to populations with specific conditions.

Playing well with others pays off

Interdisciplinary team-based care coordination is the foundation of care delivery in ACOs. Unlike HMO models where health care administrators manage access to providers and treatments, in ACOs care is managed by teams comprised of primary care physicians, nurses and specialists as well as community-based providers. Accountability for quality and costs of care rests with these interdisciplinary, interprofessional teams. Financial incentives to encourage attainment of team goals will be common in many ACOs.

Providers need to understand the roles played by other health care professionals to facilitate the communication, collaboration and coordination across team members that is essential to successful team-based care. A breakdown in these areas easily leads to poor patient care: More than two-thirds of all medical errors are found to be associated with poor interpersonal interaction issues. Poor communication, lack of collaboration and increased error rates have all been associated with decreased patient outcomes (4). Communication enables the collaboration across providers needed to coordinate care in the medical home. Increasingly, health plans and providers are relying on interdisciplinary care coordination to address the needs of their patients with complex and costly multiple chronic illnesses. Coordination of care linked to primary care practice has been shown to substantially reduce overall costs while increasing quality of care for patients with severe chronic illness (5).

Managing risk is a numbers game

The challenge of managing risk in an ACO is finding the balance of quality and cost efficiency. How much care is enough? What is the quality-cost tradeoff? What is the optimal mix of services to improve population health, lower medical costs, and maintain viability of the ACO organization and its provider network?

ACOs will require large numbers of members enrolled for extended periods to successfully manage risk. A Shared Savings Program, to launch in January 2012, calls for ACOs to have sufficient provider panels to manage the care of at least 5,000 individuals. Herein lies the rub. A critical lesson from HMOs and their primary health organization relatives is that plans must include sufficient numbers of enrollees to pool risk and guard against the potential impact of adverse selection and catastrophic care costs. Indeed, many health plans and PHOs encountered difficulties staying afloat when enrollment was too small to spread risk. Large ACOs are likely to be able to bear financial risk, receive risk-adjusted payments for the care of chronically ill patients and share responsibility for the spectrum of patient care services and costs. But in small and rural communities, achieving the minimum 5,000 beneficiaries may be difficult.

Bundled payment, including capitation, harkens back to HMOs and is touted as one approach to help guard against the impacts of adverse selection and catastrophic care costs. However, we’ve learned a hard lesson from the early plans: Bundling must provide incentives or controls to ensure that providers will not skimp on services needed in order to save costs. Capitation payments, if brought to bear, will be adjusted for age, gender and health status—another key lesson fine-tuning the HMO experience for ACOs.

Integrating care can fuel market costs and stifle competition

Accountable care organizations are vertically integrated organizations of care, which can drive up costs in health care markets. Many HMOs and large PHOs of the 1990s moved to vertically integrate in health care markets, consolidating information systems and administrative infrastructure and directing patients within their circumscribed networks to achieve administrative efficiencies and save costs. While this approach may provide efficiencies of shared technology such as EHRs and other resources, vertically integrated systems also have market power through their provider networks by precluding referral to non-network hospitals and physicians, which increases premiums and prices.

Market effects on health care costs can be significant. A 2006 study found that mergers involving inpatient hospitals between 1990 and 2003 resulted in increased consolidation in 90 percent of hospital markets nationwide and raised prices from 5 to 40 percent (6). It suggests that declines in quality may have resulted as well. A more recent study of the California health care market also found that increased consolidation in markets creased providers’ leverage in negotiating with private health plans (7). The study’s author, Medicare expert Robert Berenson, warns that vertical integration through ACOs could produce similar increases by exerting their market power.

So…what now?

ACOs hold potential as new care delivery models that can help transform our fragmented delivery system into a coordinated system of care delivery. The challenge is to develop an effective ACO model that challenges and changes the way care is delivered in the U.S. Our early experiences with HMOs and PHOs can help guide program and payment system design toward flexible, patient centric models of care delivery that incentivize and reward quality care and cost control.

Several health systems issues remain to be addressed. Primary care is an important building block of ACOs, and the foundation of the medical home. Primary care providers are in short supply. Do we have enough to go around? According to American Academy of Family Physicians president Lori Heim, 65 million Americans live in a primary care shortage area. AAFP is predicting a shortage of 40,000 family physicians in 2020. And under provisions of the PPACA, 32 million new people will be added to the health insurance rolls. Many of our most vulnerable populations reside in these areas.

In the ACO model, payers and employers are expecting providers to assume greater levels of financial risk for managing the care they provide to their covered populations. Providers working as part of interprofessional clinical care teams collectively will decide, provide, and be accountable for patient care. Overall, providers must master a whole new set of competencies to remain competitive and successful. Are our physicians, nurses and other health care professionals up to the challenges? With their new responsibilities come requirements for competencies in health information technologies and their application, a dose of health care financing and, perhaps most important of all, interpersonal and management skills to facilitate team work. Do providers know the rules of ACO care management, and can they play well with others?

Managing risk means growing ACO networks and numbers of enrollees to levels that ensure quality patient care while maintaining financial viability. Safety net providers and patients, along with providers and populations in rural and underserved areas, can expect to struggle in communities that are most in need. Managing risk also means improving care for patients with a focus on the 10 percent of patients who account for 64 percent of U.S. health care costs, often associated with chronic and disabling conditions and with “waste” resulting from poor quality and overutilization of care (8).


In the end, are ACOs all that different from HMOs? Yes, but they are close relatives of HMOs, in a new arena of health care transition and reform. But perhaps we must we welcome them for the promise of transformation—as a “fix” to what ails our health care experience—in the spirit of Janus: with one face to what has been and the other to what lies ahead.



1. Kocher, R., & Sahni, N. R. (2010, November 10). Physicians versus hospitals as leaders of accountable care organizations. New England Journal of Medicine, 363(27), 2579–2582. Retrieved from http://healthpolicyandreform.nejm.org/?p=13020.

2. Arvantes, J. (2010, July 28). Provisions in health care reform law lay out role of primary care, family physicians: Measures place greater emphasis on prevention, care coordination. AAFP News Now. Retrieved from http://www.aafp.org/online/en/home/publications/news/news-now/government-medicine/20100728hcreformoverview.html.

3. A list of covered services is available at http://healthcare.gov/center/regulations/prevention.html.

4. Yeager, S. (2005, June). Interdisciplinary collaborations: The heart and soul of health care. Critical Care Nursing Clinics of North America, 17(2), 143–148.

5. Grumbach, K., & Grundy, P. (2010, November 16). Outcomes of implementing patient-centered medical home interventions: A review of the evidence from prospective evaluation studies in the United States. Retrieved from http://www.pcpcc.net/content/pcmh-outcome-evidence-quality.

6. Vogt, W. B., Town, R., & Williams, C. H. (2006, February). How has hospital consolidation affected the price and quality of hospital care? Robert Wood Johnson Foundation Research Synthesis Report No. 9. Retrieved from http://www.rwjf.org/files/research/no9researchreport.pdf.

7. Berenson R. A., Ginsburg, P. B., & Kemper, N. (2010, April). Unchecked provider clout in California foreshadows challenges to health reform. Health Affairs, 29(4), 699–705. Retrieved from http://content.healthaffairs.org/content/29/4/699.abstract

8. Orszag, P. R., & Emanuel, E. J. (2010, August 12). Health care reform and cost control. New England Journal of Medicine, 363, 601–603. Retrieved from http://www.nejm.org/doi/full/10.1056/NEJMp1006571.


As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions. Read more.

Leave a Comment

(In order to leave a comment, you must supply information for all of the required fields below)


Note: Comments are subject to approval and moderation. Please keep your thoughts brief and avoid ALL CAPS. Thanks for joining the conversation.