Exploring Human Potential

Accountable Care Organizations (ACO’s) and Revisiting Managed Care

Mike Magee

Health Policy expert John Iglehart recently wrote, “One of the few major provisions of the Affordable Care Act (ACA) with solid bipartisan support establishes a new delivery model: the accountable care organization (ACO). Congress directed the Department of Health and Human Services (DHHS) to develop an ACO program to improve the quality of care provided to Medicare beneficiaries and reduce its costs while retaining fee-for-service payment. Under this program, medical groups would have to take responsibility for achieving these goals and would share in any savings derived by Medicare.” (1)

Elliott Fisher, who has been credited with creating the label ACO, is uncertain about their future. He says, “Whether ACOs achieve their ambitious promise remains far from certain …The notion of accountable care has broad appeal. But only a robust, comprehensive, and transparent performance measurement system can reassure the public, physicians, hospitals, others who deliver care, and payers that ACOs are worthy of the name.” (2)

Of course, such performance presumes a knowledge of what measures matter. Given that, you need organizational capacity, real time data, and a reliable 24/7  service continuum. And this requires a strong backbone of electronic medical records. It also requires a workforce tilted to primary care according to University of Maryland’s John Kastor. “The ACO concept is predicated on the primacy of primary care, with doctors, nurse practitioners, nurses, and other health care providers working together to supply the most efficient, successful, and economical care for their patients. The concept presumes that the professionals and hospitals (in ACOs that include both) will work together closely — ideally, as single governing units.”(3)

The role of hospitals is problematic to health care economist Gail Wilensky as we struggle to re-center the system around home-centered prevention. She thinks a logical alternative may be direct partnering between doctors and payers. “I think that it is possible that one of the models that could be tried would be physician groups working with payers. As I’ve indicated, I’m very eager to have physicians …take a bigger leadership role. And yes, of course, it could be the health plans as well. They have a lot of organizational structure. They’ve got the data to help differentiate and do a lot of the performance systems and the information systems…When they tried in the 1990s, not very adroitly, but they did actually push down spending very significantly, there was huge pushback by the Congress and by the American population — in part because individuals weren’t choosing the health plans that they wanted to be in.”(4)

For many the name – ACO – has changed, but it still sounds like “managed care”. Managed care may seem a distant memory, but 15 years ago, it commanded everyone’s attention. In 1996, 73 percent of those who were obtaining health coverage through their employer were in managed care plans, and HMOs accounted for 31 percent of the health insurance market.(5)

The approach, popularized by Dr. Paul Ellwood, an adviser to President Richard Nixon in 1973, envisioned rational restrictions on health supply, delivered through tight networks of physicians and hospitals acting as “gatekeepers” of the system.(6) In return for paternalistic control that would hopefully restrict unproven or wasteful tests and therapies, enrollees would benefit from more primary care and preventive treatments, wrapped in a holistic package emphasizing continuity of care and advanced planning.

Insurers liked the idea, in part because it was quite profitable. Prices, pegged at existing levels left lots of room for downward improvement. Promoting competition between hospitals, physicians, and each other was relatively easy to execute in many markets where “caring power” exceeded the primary care base of patients. Primary care physicians, at least initially, embraced the gatekeeper role as a legitimate expression of their team leader skills and saw their salary levels appropriately rise, and family medicine residency slots became increasingly competitive. The new tighter plans with broader benefits delivered early profits, and with the Clinton health care reform plan on the table, they had the potential to dominate the health insurance landscape.(7)

Within this environment, big players evolved, and small players became big players. Traditional insurer Aetna strategically purchased managed care leader U.S. HealthCare to learn the game. UnitedHealthcare, born of a regional HMO, was forced to grow up quickly. Blue Cross/Blue Shield, hanging on to prior success, lost market share. And hospitals began to evolve, creating integrated delivery systems with their own HMOs, in part as a negotiating defense against insurers and in part with an eye toward opportunity.(5)

The subsequent backlash, in retrospect, was predictable. When Ellwood first advanced this new model, a portion of the population voluntarily embraced it with a view toward expanding benefits at a lower cost in return for tighter controls. But as the movement gained steam and employers increasingly steered employees into the new plans to control health care expenditures, patients, physicians, and hospitals became disconnected from each other.(7) This involuntary migration in the middle of the health consumer empowerment movement rattled patients’ nerves. Their inner voices instructed, “If I can’t choose my doctor, I may lose the care when and where I need it and also lose someone willing to fight for me.”

Hospital consolidation and movement toward integrated systems was mirrored by defensive moves on the part of physicians. Physician-hospital organizations (PHOs) became common on the American health landscape for the purpose of negotiating with insurers, and medical service organizations (MSOs) emerged to create greater efficiency and purchasing power for the physician.(5)

Through this period, insurers maintained the upper hand and cost of care began to decline. In 1994, hospital costs rose 4 percent over the prior year. But by 1996, the annual rise declined to 1.8 percent. Costs for physician services were up 3.1 percent in 1995, but only .7 percent a year later.(5) But at the same time, provider storms were brewing as decreased decision autonomy, increased patient dissatisfaction, and perceived increased liability for medical decisions controlled by insurers created a deep-seated resentment that gradually evolved from passive to active aggression. By the end of the 1990s, most physicians and hospitals saw managed care, rightly or wrongly, as a threat to quality of care and to their financial well-being.(7)

In response to the demise of managed care, or the use of competitive market forces to control health care supply, the insurance industry, with employer support, fully embraced the use of competitive market forces to control demand. Their agent was the patient and the vehicle was consumer-directed health care.(8,9) Employers rejected control-driven managed care and limits on choice, but they were as vocal as ever on the need for cost control. While there was less talk of integrated delivery systems, and PHOs and MSOs were largely a thing of the past, in their place we had thinner benefit packages, higher deductibles and co-insurance, expanded options but tiered payments, and physicians and hospitals competing for patients.(10)

Factors that undermined success included the limited room for insurer competition in an industry already heavily consolidated; the unreliability of quality measures and health data for consumers, weak information system loops connecting home to care team, and an already suspicious and wary public and health professional community.(8)

Lest we forget, ACO’s are a child of the Affortable Care Act meant, in part, to make health coverage more universal in America. And as a result, “push” is rapidly coming to “shove”. As Gail Wilensky said, “…It may be like Massachusetts that if we are really successful in extending coverage to the vast majority of the population, we are absolutely going to have to do something to slow down spending and, oh, by the way, try to get better clinical outcomes. The system we’ve got just is incapable of producing that outcome.”(4)

On that we all agree. As for me, one piece of advice after 30 plus years at this, successful new delivery models require two things – patient support and physician support. It is unclear, at this point, that ACO’s have either.

For Health Commentary, I’m Mike Magee


  1. Iglehart JK. Assessing an ACO Prototype – Medicare’s Physician Group Practice Demonstration. NEJM 2011; 364:198-200, January 20, 2011
  2. Fisher ES and Shortell SM. Competition in health care: its evolution over the past decade. JAMA 2010;304:1715-1716
  3. Kastor JA. Accountable Care Organizations at Academic Medical Centers. NEJM. February 2, 2011.
  4. Lee TH, Casalino LP, Fisher ES, Wilensky GR. Creating Accountable Care Organizations. NEJM 2010;363:e23; October 7, 2010.
  5. Ginsburg PB. Competition in health care: its evolution over the past decade. Health Affairs. 2005;24:1512-1522.
  6. Wood DS. The Rise of the HMO. CNN Interactive. Available at: Accessed January 18, 2006
  7. Lesser CS, Ginsburg PB, Devers KJ. The end of an era: what become of the “Managed Care Revolution” in 2001?. Health Services Research. 2003;1:337-355.
  8. Fuchs VR, Emanuel EJ. Health care reform: Why? What? When?. Health Affairs. 2005;24:1399-1414.
  9. Robinson JC. Reinvention of health insurance in the consumer era. JAMA. 2004;291:1880-1886.
  10. Robinson JC. The end of managed care. JAMA. 2001;285:2622-2628.
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