Doctor Smiling PoseOne of the many ways the Affordable Care Act seeks to reduce health care costs is by encouraging doctors, hospitals and other health care providers to form networks that coordinate patient care and become eligible for bonuses when they deliver that care more efficiently.

The law takes a carrot-and-stick approach by encouraging the formation of accountable care organizations (ACOs) in the Medicare program. Providers make more if they keep their patients healthy. About 6 million Medicare beneficiaries are now in an ACO. An estimated 23.5 million Americans are now being served by an ACO. People may even be in one and not know it.

While ACOs are touted as a way to help fix an inefficient payment system that rewards more, not better, care, some economists warn they could lead to greater consolidation in the health care industry, which could allow some providers to charge more if they’re the only game in town.  

Here are answers to some common questions about how they work:

What is an accountable care organization?

An ACO is a network of doctors and hospitals that shares financial and medical responsibility for providing coordinated care to patients in hopes of limiting unnecessary spending. At the heart of each patient’s care is a primary care physician.

Think of ACOs as buying a television. A TV manufacturer like Sony may contract with many suppliers to build television sets. Like Sony does for TVs, an ACO brings together the different component parts of care for the patient – primary care, specialists, hospitals, home health care, etc. – and ensures that all of the “parts work well together.”

In most health systems today, many patients are getting each part of their health care separately. ACOs, like the television, work better as one component rather than assembling a patchwork of services.

Why did Congress include ACOs in the law?

As lawmakers searched for ways to reduce the national deficit, Medicare became a prime target. With baby boomers entering retirement age, the costs of caring for elderly and disabled Americans are expected to soar.

The health law created the Medicare Shared Savings Program. In it, ACOs make providers jointly accountable for the health of their patients, giving them financial incentives to cooperate and save money by avoiding unnecessary tests and procedures. For ACOs to work, they have to seamlessly share information. Those that save money, while also meeting quality targets, keep a portion of the savings.

In Medicare’s traditional fee-for-service payment system, doctors and hospitals generally are paid for each test and procedure. That drives up costs, experts say, by rewarding providers for doing more, even when it’s not needed. ACOs don’t do away with fee-for-service, but they create an incentive to be more efficient by offering bonuses when providers keep costs down. Doctors and hospitals have to meet specific quality benchmarks, focusing on prevention and carefully managing patients with chronic diseases. In other words, providers get paid more for keeping their patients healthy and out of the hospital.

How do ACOs work for patients?

Doctors and hospitals will likely refer patients to hospitals and specialists within the ACO network. But patients are usually still free to see doctors of their choice outside the network without paying more. Providers who are part of an ACO are required to alert their patients, who can choose to go to another doctor if they are uncomfortable participating. The patient can decline to have his data shared within the ACO.

Who’s in charge — hospitals, doctors or insurers?

ACOs can include hospitals, specialists, post-acute providers and even private companies like Walgreens. The only must-have element is primary care physicians, who serve as the linchpin of the program.

In private ACOs, insurers can also play a role, though they aren’t in charge of medical care. Some regions of the country, including parts of California, already had large multi-specialty physician groups that became ACOs on their own by networking with neighboring hospitals.

In other regions, large hospital systems are scrambling to buy up physician practices with the goal of becoming ACOs that directly employ the majority of their providers. Because hospitals usually have access to capital, they may have an easier time than doctors in financing the initial investment, for instance to create the electronic record system necessary to track patients.

If I don’t like HMOs, why should I consider an ACO?

ACOs may sound a lot like health maintenance organizations. Some people say ACOs are HMOs in disguise. But there are some critical differences – notably, an ACO patient is not required to stay in the network.

ACOs aim to replicate “the performance of an HMO” in holding down the cost of care while avoiding “the structural features” that give the HMO control over [patient] referral patterns.

In addition, unlike HMOs, the ACOs must meet a long list of quality measures to ensure they are not saving money by restrictions on necessary care.

Are ACOs the future of health care?

ACOs are already becoming pervasive, but they may be just an interim step on the way to a more efficient American health care system. ACOs aren’t the end game.

One of the key challenges for hospitals and physicians is that the incentives in ACOs are to reduce hospital stays, emergency room visits and expensive specialist and testing services — all the ways that hospitals and physicians make money in the fee-for-service system.

The ultimate goal would be for providers to take on full financial responsibility of caring for a population of patients with a fixed payment, but that will require a transition beyond ACOs.