Accountable care organizations (ACOs) make up only a miniscule fraction of the Obama administration’s new health care law, but have quickly become one of the most talked about provisions. The health care industry is buzzing about these organizations that will offer financial incentives for health care organizations that provide excellent care to Medicare recipients. In spite of all the talk – details are still vague.

What Are Accountable Care Organizations and How do They Work?

Accountable care organizations are basically networks of health care providers that share the responsibility of caring for patients across the entire spectrum of health care services. Under provisions of the new health care law, an ACO would oversee all health care services for a minimum of five thousand Medicare recipients for at least three years. The provision for accountable care organizations was put into the new health care act with the hopes that services would be more organized, seamless, and affordable.

ACOs were formed as a way to provide quality care, cut down on costs, and encourage cooperation between health care providers within the same ACO. Medicare costs have spiraled out of control and the program has come under intense scrutiny. Under the current Medicare model, providers make more money by providing more services – not exactly an incentive to keep costs down. Under the new law, ACOs would benefit more financially by cooperating with other organizations and foregoing frivolous tests and procedures.

To further incentivize cost reduction and quality care, ACOs would be able to keep more of the savings by meeting quality care benchmarks and cooperating with partners within their network. On the other end of the spectrum, providers that do not meet quality care standards while keeping costs down would risk losing money.

How Will ACOs be Paid?

The traditional fee-for-service system is criticized by many because health care providers are paid when they deliver services. Experts say that this drives up costs. The fee-for-service system would not be eliminated, but the problem of performing unnecessary services would be eliminated because the payment focus would shift to keeping patients out of the hospital, preventative care, and living a healthy lifestyle.

ACOs that meet quality care and cost savings benchmarks would receive bonuses, while organizations that were not able to save money would be forced to pay for capital and personnel required to help the ACO achieve its benchmarks or face the risk of losing its contract.

The health care legislation did not specify which service providers would be left to lead ACOs. Hospitals, insurers and physicians are all vying for control. Only time will tell which parties will be best suited to manage the network. Physician groups and large health care insurers are currently forming their own ACO networks in anticipation of the bill going into affect.

ACOs may sound like HMOs, but with one major difference. Patients do not have to stay within the network of providers. They may choose to see whichever provider they choose at their discretion. The whole goal of the ACO is to replicate the cost savings of HMOs without the labor intensive and systematic control caused by the referral process.