As of the end of January 2016, Leavitt Partners, in partnership with the Accountable Care Learning Collaborative, has identified 838 active Accountable Care Organizations (ACOs) (see Figure 1) across the country with service areas in all 50 states and the District of Columbia (see Figure 2). Collectively, the count of ACOs has grown by 94 over the past year, an increase of 12.6 percent. Growth has continued to vary across the country and across public and private health insurance programs, with significant growth in most population centers but increasing activity in some rural areas.

Figure 3 includes counts of ACOs by hospital referral region (HRR); it shows that some markets have significant activity among providers in the region while accountable care has failed to take hold in other regions. In addition to the increase in ACOs, the number of accountable care contracts has continued to grow, with 1,217 identified accountable care contracts.

Figure 1 – ACOs Over Time

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Figure 2 – ACOs By State

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Figure 3 – ACOs by Hospital Referral Region

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ACO Lives

The growth in ACOs has coincided with a growth in the number of lives that are covered by ACO contracts as seen in Figure 4. Leavitt Partners estimates that 28.3 million people are now covered by an accountable care arrangement. In contrast to previous years, we now estimate total lives at the contract level, rather than the organization level, which allows increased precision. Our approach also allows a more granular analysis of the types of contracts, as seen in Figure 5, with a breakdown of lives covered under commercial, Medicaid, and Medicare contracts.

On January 1, 2016 a new cohort of Medicare Shared Savings Program (MSSP) Accountable Care Organizations (ACOs) joined that ACO program. As the program had now been in operation for three performance years, early joiners of the program also had the opportunity to renew their contracts for another performance period. While many chose to do so, some dropped out of the MSSP or Pioneer ACO programs. On net, however, the number and covered lives in Medicare ACO programs has continued to grow steadily.

Even though the MSSP receives the most attention, commercial contracts tend to be larger. They collectively represent a larger portion of ACO lives (Figure 5), and also continue to grow significantly.

Figure 4 – ACO Lives Over Time

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Figure 5 – ACO Lives Per Payer

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Geographically, the total number of lives closely follows the count of ACOs, but ACO penetration—the percentage of lives in a market that are covered by an ACO contract—varies (see Figures 6 and 7). (As noted, our method for estimating lives has shifted from the organization to the contract-level compared to previous years’ estimates.) High penetration may be driven by competition among multiple providers within a market who are all adopting accountable care contracts, or it can be driven by a single ACO run by a dominant provider that is able to take risk for a large portion of the population.

States that have adopted Medicaid ACOs, such as Oregon, also tend to have higher penetration. Nationally, 8.9 percent of the population is covered by ACOs; while ACOs are a growing model, they are far from the dominant model for health insurance coverage.

Figure 6 – ACO Penetration by State

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Figure 7 – ACO Penetration by Hospital Referral Region

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Important Developments

Renewals And Dropouts

One important indication of the success of the early ACO initiatives is how many renew their contracts when they have the option of leaving an accountable care program. Of the 220 Medicare ACOs that were eligible for renewal, 147 renewed in the MSSP, eight transitioned to the Next Generation ACO program, and an additional 10 combined or merged with other ACOs. Collectively, three-fourths of the early Medicare ACOs are continuing onward with a Medicare ACO program. In addition, a number of those that have left the Medicare program continue to have commercial ACO contracts, indicating that ACO policy refinements may further increase participation.

Fully adopting accountable care and successfully transforming a practice to achieve savings is difficult, with mixed results among participants. Many ACOs have not succeeded, and it is likely that more ACOs will ultimately be unsuccessful at making this transition. Other ACOs will likely drop out of government and commercial contracts in the future. But knowledge about how to succeed as an ACO will continue to increase, and organizations that dropped out will have the opportunity to try again in the future in modified ACO programs. Thus, many organizations will iterate as they learn how to make their transition to accountable care.

Policy Drivers

2015 saw the announcement of several important government policies. From the administrative side, Secretary Burwell announced the Department of Health and Human Services’ (HHS) goal to move 50 percent of Medicare payments toward risk by 2018. HHS recently announced that they have achieved their interim goal of 30 percent ahead of schedule. Our figures indicate that the Medicare ACO programs have been the principal contributor to achieving this goal, with approximately 22 percent of Medicare beneficiaries in 477 Medicare ACOs.

HHS also announced the Comprehensive Care for Joint Replacement (CJR) program that will require that hospitals in 67 geographic markets to accept financial risk for hip and knee replacements with its mandatory 90-day bundling program. The administration has continued to develop and expand initiatives that involve provider accountability for spending and population health results via alternative payment models.

On the legislative side, Congress has reinforced this trend with the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). The bipartisan bill (passed 92-8 in the Senate and 392-37 in the House) was noted for repealing the unpopular sustainable growth rate (SGR) formula, but it replaced the fee-for-service (FFS) payment system for physicians with a framework that may lead to a more fundamental shift to alternative payment models based on quality and outcomes performance: FFS payments will be increasingly adjusted based on quality and value performance; the other option for physicians, further encouraged by a significant bonus payment, is to move to population-based alternative payment models (APMs) that involve significant financial risk.

Supporters of MACRA from both parties have highlighted the intent to better align Medicare with private-payer approaches to transforming the broader health care system. Specifically, under MACRA an organization can qualify for APM bonus payments, paid by Medicare, by moving their non-Medicare lives to APMs, not just by changing how they receive payment for their Medicare population. This incentive has the potential to significantly further the adoption of APMs, including ACOs.

Looking Forward In 2016

New Administration

This year will see the election of a new presidential administration and Congress, which will allow many new policies to be implemented, old policies to be changed, and—perhaps—new legislation to be enacted and past legislation to be repealed. Regardless of the next president, we expect accountable care to continue to grow. As indicated by the passage of MACRA, there is strong congressional pressure to hasten the transition toward paying for care based on the value created.

A new administration could make changes to current government ACO programs—for example, increasing the role of beneficiary engagement and shared savings from choosing less costly care—but would not be able to make fundamental changes to the direction of payment reform without legislation. Apart from federal government activity, commercial payers and state payers in both Democratic- and Republican-governed states are continuing to push toward accountable care.

Combining Payment Reform with Delivery Reform

The objective of accountable care payment reform is to support improvements in the delivery of care, which leads to some confusion as the ultimate objective is delivery reform. Accountable Care Organizations consist of health care providers that accept financial risk for the total cost of care delivered to a defined population. They come in various configurations of provider members, including physician groups, hospitals, post-acute care providers, behavioral health providers, and many others. The common thread is the contract arrangement that provides incentives for the provider to improve the quality and lower the cost of care of their population.

As public and private payers gain experience with accountable care contracts, we expect to see further revisions in accountable care payment models. For example, CMS recently announced a set of reforms in benchmark calculations and other aspects of Medicare ACOs, based on its experience to date. Public-private collaborations like the Health Care Learning and Action Network are identifying further steps that could accelerate the adoption of payment reforms.

At the same time, the actual mechanisms that providers are taking to transform the delivery of care vary — not only based on the details of their payment contracts, but also their organizational structure, prior experience, local market conditions, and countless other factors. The real objective of accountable care is to support health care providers in implementing needed reforms in health care delivery. Transforming how medicine is practiced is a concurrent challenge to implementing effective payment reforms.

Despite the proliferation of ACOs and refinements in ACO contracts, the practice of changing health care delivery is still nascent with much work left to be done. The ultimate impact of the accountable care movement will depend on the success or failure of delivery reform. Many organizations, such as the Accountable Care Learning Collaborative as well as many private ACO enablers, are actively working on delivery issues. Nevertheless, progress is difficult, especially in the short term and with limited resources, and not all organizations will be successful at lowering costs or improving quality. Success is not simply moving risk to providers for a population, but improving the delivery of care for that population, and we still have much to learn.

Accountable Care Organization Challenges

As accountable care payment mechanisms become more widespread and mature, we expect attention will shift to the challenges facing providers in adapting to such mechanisms. ACO leaders face many challenges in redesigning care, including achieving organizational buy-in, using technology to manage a population, and aligning intra-organizational incentives — all while making measurable progress on quality and cost.

At the heart of becoming an ACO is changing how an organization operates. Organizational change is hard in any industry, but it is exacerbated in health care due to the fee-for-service infrastructure that has been designed over decades to focus organizations on volume. Shifting from that focus requires a significant amount of structural change, but more importantly it requires individual providers to change how they practice medicine.

Historically clinicians have operated relatively autonomously with a one-to-one, patient-provider relationship, with someone else left to worry about the overall population consequences. With provider organizations increasingly focused on population-level results, that mentality is changing to include a many-to-many approach involving a group of providers that must collectively work together to manage a population of patients. Changing the fundamental practice of medicine takes buy-in, effort, and significant time to accomplish.

For example, to effectively manage a population, a successful ACO must first understand their population, which requires developing and using health information technology (IT) in new ways. Selecting, implementing, and maintaining connected electronic data to support population health platforms remains a challenge, with both providers and the vendors creating new products and refining data-sharing and analytic technologies.

More importantly, ACOs must learn how to identify key data and act on it in a way that measurably improves the care of their population. Aggregating the data is technically challenging, but effectively prioritizing and operationalizing findings is a new skill set that providers are being forced to develop — and better health IT and analytics is only one of the many new capabilities that health care providers must develop to improve population health.

The basic tenet of accountable care is that changing how providers are paid enables them to shift resources to provide care in better ways, ways that were previously not financially sustainable. Figuring out the specific steps to implement those new changes in practice is much more challenging. ACOs, which bear risk at the organizational-level for the financial outcomes of the population, must grapple with how to share that risk with individual providers or practices.

Financial incentives do lead to changes in behavior, but more important is for ACO providers to accept responsibility for the care and health outcomes of the broader population. Individual providers, for example, may be more incented to change their behavior based on how their patients’ outcomes compare to those of their peers’ patients than by any financial incentive. Each organization must discover the appropriate incentives to change behavior.

Future Of Accountable Care

Over the past year the conversation around ACOs has shifted. ACOs have continued to grow, and ACO payment policies are evolving. Along with that, providers, by and large, have begun to think about population-level payments as an eventuality as opposed to just a possibility. Policy pressures will continue to encourage this transition, but there is also a growing recognition that managing a population is a better way to care for patients and most providers aspire to deliver the best care possible.

There remains much to learn and even more to implement, but moving American medicine toward a population-level model is the direction we, as a broader health care system, are heading.