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Accountable Care Organizations
A Primer for Orthopaedic Surgeons
1st Edition
AAOS Health Care Systems Committee
February, 2011

Accountable Care Organizations:
A Primer for Orthopaedic Surgeons
2010-2011 AAOS Health Care Systems Committee:
Kevin J. Bozic, MD, MBA, Chair
Thomas C. Barber, MD
William R. Beach, MD
Timothy Bhattacharyya, MD
Craig A. Butler, MD
David L. Cannon, MD
John M. Cherf, MD, MPH, MBA
Maureen A. Finnegan, MD
Mark I. Golod, MD
Alexandra E. Page, MD
Ranjan Sachdev, MD, MBA

February, 2011
© 2011 American Academy of Orthopaedic Surgeons
Disclaimer
This Accountable Care Organization Primer is intended to provide general, authoritative information, available at the
time of publication, in regard to the subject matter covered. It is offered with the understanding that the publisher and
the contributors are not rendering formal legal, accounting, or information systems consulting advice. Nothing contained
herein is intended to serve as a substitute for obtaining such advice.
The American Association of Orthopaedic Surgeons does not endorse, support or accept the applicability of this data to any
reader’s particular practice setting. Each practice has its own particular needs, patient populations, revenues, volume and
mix of services, and professional goals and objectives.
Disclosures
Richard Afable, MD (Newport Beach, CA): (n). Submitted on Mark Ira Golod, MD (San Jose, CA): 9 (AAOS Health Care
10/13/2010 and last confirmed as accurate on 10/15/2010. Systems Committee; Santa Clara County [CA] Individual
Practice Association). Submitted on 01/18/2011.
Thomas C. Barber, MD (Oakland, CA): 9 (American Total
Joint Registry Board; FDA: Co-leader on international David Jevsevar, MD (Saint George, UT): 2 (Medacta USA;
registry project; FDA Orthopaedic Device Panel; RAND/ Omni Life Sciences); 3B (Medacta USA; Omni Life Sci-
AMA PCPI Committee on Meaningful Use). Submitted on ences); 4 (Omni Life Sciences); 5 (Medacta USA). Submit-
10/27/2010. ted on 09/07/2010.
William R. Beach, MD (Richmond, VA): 5 (Arthrex, Inc; Alexandra Elizabeth Page, MD (La Jolla, CA): 9 (AAOS).
Smith & Nephew; Bon Secours Health Systems; Synthes); Submitted on 10/07/2010.
9 (American Board of Orthopaedic Surgery, Inc.; Arthros- Ranjan Sachdev, MD, MBA (Great Bend, KS): 4 (Stockholder
copy Association of North America; American Orthopaedic in retirement fund; Bristol-Myers Squibb; Eli Lilly; General
Society for Sports Medicine). Submitted on 03/31/2010 and Electric; Johnson & Johnson; Pfizer; Procter & Gamble;
last confirmed as accurate on 09/25/2010. Sanofi-Aventis; Stryker; Zimmer; Founder and share-
Timothy Bhattacharyya, MD (Bethesda, MD): 3B (Best Doc- holder of Exscribe Inc, an EMR company). Submitted on
tors, AllMed). Submitted on 10/22/2010 and last confirmed 01/10/2011.
as accurate on 10/22/2010. Anthony Hunter Schiff, JD, MPH (Los Angeles, CA): (n). Sub-
Kevin John Bozic, MD, MBA (San Francisco, CA): 9 (AAOS; mitted on 11/10/2010.
Agency for Healthcare Research and Quality [AHRQ]; Toya M. Sledd, MPH, MBA (Rosemont, IL): (n). Submitted on
American Association of Hip and Knee Surgeons; American 10/26/2010 and last confirmed as accurate on 01/13/2011.
Joint Replacement Registry; American Orthopaedic Associa-
Wade Russell Smith, MD (Danville, PA): 2 (Synthes); 3B (Os-
tion; California Joint Replacement Registry Project; Cali-
teotech; Synthes); 5 (Synthes); 7 (McGraw Hill); 8 (Journal
fornia Orthopaedic Association; Orthopaedic Research and
of Trauma). Submitted on 09/29/2010 and last confirmed as
Education Foundation). Submitted on 01/04/2011 and last
accurate on 11/17/2010.
confirmed as accurate on 01/04/2011.
Matthew J. Twetten (Rosemont, IL): (n). Submitted on
Craig Alan Butler, MD (Tallahassee, FL): 9 (Florida Ortho-
01/18/2011.
paedic Society Risk Purchasing Group). Submitted on
07/15/2010 and last confirmed as accurate on 01/03/2011. Richard E. White, Jr, MD (Albuquerque, NM): 1 (Zimmer);
3B (Ardent Health Services Lovelace Medical Center); 9
James T. Caillouette, MD (Newport Beach, CA): 1 (DePuy, A
(American Association of Hip and Knee Surgeons; Hip
Johnson & Johnson Company); 3B (DePuy, A Johnson &
Society). Submitted on 12/17/2010.
Johnson Company); 9 (California Orthopaedic Association).
Submitted on 10/06/2010. Mark Wieting, MA (Rosemont, IL): (n). Submitted on
10/19/2010 and last confirmed as accurate on 11/15/2010.
David L. Cannon, MD (Germantown, TN): (n). Submitted on
Disclosure Items: (n) = Respondent answered ‘No’ to all
07/26/2010 and last confirmed as accurate on 10/25/2010.
items indicating no conflicts. 1 = Royalties from a company
Susan Charkin, MPH (Salina, CA): (n). Submitted on
or supplier; 2 = Speakers bureau/paid presentations for a
11/15/2010.
company or supplier; 3A = Paid employee for a company or
John Cherf, MD, MPH, MBA (Chicago, IL): 1 (Innomed); 2 supplier; 3B = Paid consultant for a company or supplier; 3C
(Breg); 3B (Breg); 4 (DePuy, A Johnson & Johnson Com- = Unpaid consultant for a company or supplier; 4 = Stock or
pany); 9 (AAOS). Submitted on 10/15/2010. stock options in a company or supplier; 5 = Research support
Maureen A. Finnegan, MD (Dallas, TX): 8 (Clinical Orthopae- from a company or supplier as a PI; 6 = Other financial or
dics and Related Research); 9 (AAOS; Texas Orthopaedic material support from a company or supplier; 7 = Royalties,
Association). Submitted on 01/04/2011. financial, or material support from publishers; 8 = Medi-
cal/orthopaedic publications editorial/governing board; 9 =
Marilyn L. Fox, PhD (Rosemont, IL): (n). Submitted on
Board member/committee appointments for a society.
11/12/2010.
AAOS Board of Directors American Academy of
Orthopaedic Surgeons Staff
John J. Callaghan, MD
President Mark Wieting
Daniel J. Berry, MD Chief Education Officer
First Vice President Marilyn L. Fox, PhD
John R. Tongue, MD Director, Publications
Second Vice President Matt Twetten
Frederick M. Azar, MD Senior Policy Analyst
Treasurer Toya M. Sledd
Jeffrey O. Anglen, MD Clinical Quality Improvement Coordinator
Richard J. Barry, MD Suzanne O’Reilly
Graphic Designer, Publications
Kevin P. Black, MD
M. Bradford Henley, MD, MBA
Gregory A. Mencio, MD
Michael L. Parks, MD
Fred C. Redfern, MD
David D. Teuscher, MD
Paul Tornetta III, MD
Daniel W. White, MD
George Z. Wilhoit, MS, MBA
Joseph D. Zuckerman, MD
Karen L. Hackett, FACHE, CAE
(Ex Officio)
February, 2011
© 2011 American Academy of Orthopaedic Surgeons
February, 2011
Dear Colleague:
The AAOS Health Care Systems Committee (HCSC) has developed this Primer to help educate AAOS members on issues
related to Accountable Care Organizations (ACOs). The HCSC reports to the Council on Advocacy, and has been tasked with
addressing issues related to hospital-physician alignment.
The goal of this Primer is to help orthopaedic surgeons understand and prepare for the changes that lie ahead as our healthcare
system undergoes fundamental reform related to the financing and delivery of care. We’ve gathered national experts on the
subject to provide the best available information on the following topics:
• Vertical integration and ACOs
• Lessons learned from integrated health systems
• Hospital perspective on ACOs
• Alternative models for vertical integration
• Early experienwces in bundled payments
• Legal considerations in establishing an ACO
• Opportunities for specialist participation in ACOs
AAOS members can download a PDF copy of this Primer from the online Practice Management Center (www.aaos.org/prac-
man) or the online Government Relations page (http://www.aaos.org/Govern/Govern.asp).
A cautionary note: A primer is “a book or booklet that covers the basic elements of a subject.” This Primer is not designed to
make you an expert on ACOs, but it will give you important tools to improve your knowledge of vertically integrated care
delivery models and ACOs.
Members of the 2010-2011 HCSC, whose names are listed on the inside front cover, helped develop this Primer. Specifically,
input was provided by HCSC members Kevin Bozic, MD, MBA; Timothy Bhattacharyya, MD; Craig Butler, MD; John
Cherf, MD, MBA, MPH; Alexandra Page, MD; and Ranjan Sachdev, MD, MBA. The HCSC wishes to acknowledge the
contributions of legal expert Anthony Schiff, Esq; Richard Afable, MD, MBA; James Caillouette, MD; Susan Charkin, MPH;
David Jevsevar, MD, MBA; Wade Smith, MD; and Richard White, Jr., MD.
AAOS HCSC staff liaisons Toya Sledd and Matthew Twetten made additional contributions. This Primer could not have been
written without them.
Kevin J. Bozic, MD, MBA
Chair, AAOS Health Care Systems Committee
Table of Contents
Introduction ...................................................................... 8
Vertical Integration and ACOs: Impact on Healthcare Delivery Through Medicare ..............12
Lessons Learned From Integrated Health Systems ........................................ 13
Hospital Perspective ............................................................... 17
Alternative Models for Vertical Integration.............................................. 18
Episode of Care (‘Bundled’) Payments ................................................. 18
Legal Considerations in Establishing an ACO ...........................................20
Ongoing Challenges to the ACO Model................................................23
Opportunities for Specialist Participation in ACOs ....................................... 24
Summary ....................................................................... 26
© 2011 American Academy of Orthopaedic Surgeons 7
Introduction
hospitals, and ancillary care providers who are jointly held
In the national effort to curb healthcare costs and broaden accountable for achieving measured quality improvements
benefits, stakeholders such as the Centers for Medicare and reductions in the rate of spending growth.
and Medicaid Services (CMS), government policy If you are thinking that ACOs sound familiar, they
makers, hospitals, payers, and physician groups agree that are. One pilot participant described an ACO as “a health
the current system is unsustainable. These stakeholders maintenance organization (HMO) on steroids.” The
are looking for ways to shift payment models from fee- following are key differences between HMOs and ACOs:
for-service toward episode-based payment models that (1) The ACO model is the first to attempt to link quality
provide shared accountability and shared savings for all and patient experience to financial rewards when providers
of the providers involved in managing a patient’s care. meet quality and cost containment benchmarks. The ACO
Accountable Care Organizations (ACOs) are entities being is accountable for meeting quality and cost containment
created and piloted as the primary approach to reduce targets. As such, providers have a strong incentive to keep
health care costs and improve outcomes and the overall their patients happy and healthy.
quality of care. (2) ACOs are owned and operated by physicians and
Although joining or forming an ACO is not immediately hospitals, not health plans. ACOs are provider-centric,
urgent, orthopaedic surgeons cannot afford to ignore recognizing and rewarding efficiency in the delivery of
the opportunity to be on the leading edge of this new quality care. Innovative providers can be rewarded for
care delivery model. The ACO delivery model, although reducing the cost of delivering care in episode treatment
centered around the primary care provider (PCP), creates groups (ETGs) and/or uncomplicated treatment through
important opportunities right now that orthopaedic referral patterns, data flow, and coordinated care team
specialists should understand so they can develop strategies structures.
and tactics that work for them. An ACO, in short, is a The ACO model is flexible enough to include many
fully integrated, continuum healthcare delivery model existing delivery systems. Entities such as physician-hospital
that provides for complete and coordinated patient care, organizations (PHOs), independent physician associations
including hospitalization and specialty services, with the (IPAs), and virtual organizations of providers could all
goal of improving quality and health outcomes at a lower qualify to organize as new ACO structures. All ACOs
cost. incorporate legal, administrative, and clinical structures and
systems that will enable both the development of evidence-
ACO Overview based, coordinated clinical practice and the development
ACOs are mandated by the Patient Protection and and implementation of quality and cost measures.
Affordable Care Act (ACA) of 2010 under Title XVIII of Additionally, ACOs require technology platforms and
the Social Security Act (42 USC §1395 et seq.) This law systems that will enable data gathering, data integration,
states that not later than January 1, 2012, the Secretary of and public reporting of quality and cost outcomes. Many
the Department of Health and Human Services (HHS) providers do not have this level of sophistication built into
shall establish a shared savings program that promotes their current systems. Strategic relationships could help
accountability for a defined patient population, coordinates fill these technology gaps. Eventually, with input from
items and services under Medicare Parts A and B, and Medicare, individual state departments of insurance and
encourages investments in infrastructure and redesigned managed care will likely require licensure for ACOs as they
care processes for high quality and efficient service delivery. grow to take on more of the risk burden.
The primary purpose of an ACO is to decrease Medicare Fee-for-service payments have been targeted as a major
costs so that Medicare will be in place for the next factor contributing to rising healthcare costs. A system that
generation and beyond. Even a small decrease in healthcare pays providers piecemeal for services provided creates an
cost, as little as 1-2%, could make the difference. inherent incentive to provide more services. Healthcare
Also, it is very likely that ACOs will foster lower cost providers and hospitals have no financial incentive to
commercial insurance products, which, combined with minimize the number of duplicate tests or consultations.
significant pressure from employer groups and individuals PCPs and care managers receive no reimbursement for time
who purchase health insurance, will put downward spent coordinating care. For both PCPs and specialists, it
pressure on traditional insurance payment methodologies. is easier and more lucrative to transfer care to the specialist
This, in turn, puts pressure on clinical providers, such rather than have the specialist communicate with the PCP
as physicians and hospitals, to reduce their costs and and attempt to manage the patient’s problem within the
improve the efficiency and quality of care. To meet the primary care practice.
goal of providing a continuum of care for a pre-designated Furthermore, the profound geographic differences in
population of patients, ACOs will include PCPs, specialists, practice patterns and healthcare spending have highlighted
8 © 2011 American Academy of Orthopaedic Surgeons
the possibility that care is often given without regard to preventive screenings, and a requirement that no more than
efficiency or evidence-based practices. Marked regional 15% of healthcare premiums be diverted to administration
deviations between specialty referral and surgery rates and overhead cost. Insurance carriers, in anticipation of
have been noted, and improved care integration has been increased costs to their plans, have already raised premiums
proposed as a way to address these discrepancies.1 to group plan consumers. In turn, the groups have raised
Recently, attempts have been made to minimize costs their employees’ contributions. This behavior has drawn
associated with what are perceived as preventable poor sharp criticism from the HHS Secretary, but insurance
outcomes. Because the federal government bears the costs carriers and employer groups continue to adjust their
of treating complications in Medicare patients, this expense business models to deal with the higher cost of coverage in
is essentially invisible to hospitals, physicians, and patients. advance of the mandates’ effective dates.
Attempts to address this problem by linking reimbursement In addition, insurance carriers are reacting to market
to demonstrable quality outcomes or to reductions in forces that limit how much they can raise premiums by
complications, such as pay-for-performance programs and enacting regional fee schedules, wherein they implement a
value-based purchasing, have been proposed. However, standard fee schedule for all providers for all services. This
these programs still do not shift liability for the cost of business practice virtually eliminates a medical practice’s
complications to hospitals and physicians. Thus, there has ability to negotiate for increased reimbursements, even as
been a concerted effort to increase the financial incentive physicians face premium increases for themselves and their
for avoiding complications. As quality of care improves employees. On one hand, payers are refusing to enter into
and fewer complications arise, Medicare and healthcare negotiations with doctors, claiming pressure from employer
providers could benefit financially. groups to keep costs down. On the other hand, insurance
The ACO’s primary goal is to align all healthcare companies are raising premium prices to those same
providers to provide coordinated care in the most effective physician groups when they renew their policies.
and cost-efficient manner. From a financial standpoint, The ACO model is a risk-sharing-and-reward model
the model incentivizes hospitals, physicians, and other that may provide relief on both sides of that equation.
care providers to work together to improve quality and If the pilot programs prove promising and this new
contain costs. As integrated payment models mature, a program structure advances, the ACO model could help
focus on improving quality and patient outcomes will be control costs and improve patient care. However, logistic
increasingly important both internally (to control costs) complexities, even in small geographic areas, and shifting
and externally (to modify reimbursements). market conditions make a “one-size-fits-all” version of an
ACO impossible to develop. For actual cost savings to be
What Does All This Mean? achieved, The Vermont Accountable Care Organization
It is highly unlikely that Medicare and Medicaid fee-for- Pilot: A Community Health System to Control Total
service physician reimbursement rates will significantly Medical Costs and Improve Population Health report
increase in the coming years. Insurance premiums, on the indicates that 70 percent of the managed care population
other hand, will likely continue to rise. More than one (including participation of all Medicare and Medicaid
of the stakeholders interviewed for this Primer stressed recipients) would have to “opt-in” to an ACO healthcare
that neither ACOs nor the ACA will likely bring down delivery system, which makes voluntary participation
the cost of insurance premiums. The hope, according to questionable. At these levels, mandatory patient
payers, ACO program designers, and demonstration project participation will be more likely.
participants, is that ACOs will slow the rate of increase
of overall healthcare costs. Although this legislation was Precursors to the ACO Model
widely touted as providing cost-containment benefits to The ACA includes provisions for the formation of
consumers, the ACA does not put a cap on commercial “shared savings programs” by January 1, 2012, for
insurance premiums. Although under the ACA, medical items and services under Medicare Parts A and B.
loss ratios (the percentage of healthcare premium dollars However, CMS has been exploring options for improved
spent on delivering care) are required to increase to 85%, healthcare coordination for many years. In compliance
payers can mitigate this financial risk by passing on this cost with the Medicare, Medicaid, and State Child Health
in the form of higher premiums. In theory, the healthcare Insurance Program (SCHIP) Benefits Improvement and
legislation mandate will bring more healthy people into Protection Act of 2000, the physician group practice
the insurance market who will pay premiums without (PGP) demonstration was established to improve care
utilizing benefits. In practice, however, the ACA’s following coordination and cost efficiency. In 2003, the Medicare
provisions have triggered cost increases: no lifetime caps Prescription Drug, Improvement, and Modernization Act
on benefits, coverage for children up to the age 26, no-cost (MMA) required the HHS Secretary to “establish a pay-
© 2011 American Academy of Orthopaedic Surgeons 9
for-performance demonstration program with physicians be a part of the ACO. Contracting with outside providers
to meet the needs of eligible beneficiaries through the is permitted. However, lack of coordination between PCPs
adoption and use of health information technology and and specialists can result in duplication of effort (laboratory
evidence-based outcome measures.”2 Out of this mandate tests, imaging studies) and poor support for preventing
came various demonstration models including the Medicare complications. These increased costs would detract from
Care Management Performance (MCMP), Medical Home, the shared savings of the ACO. Thus, a successful ACO
and various care coordination demonstrations. Outcomes could promote PCP-specialist coordination regardless of
from the demonstrations have been encouraging, but with whether the specialist is part of an ACO or an outside,
reservations. For example, the PGP demonstration showed contracted provider of services.
steady improvements in quality indices, but even in the 2. Budget and resource planning An ACO is expected to
third year of the demonstration, only 50 percent of the have a leadership and management structure to manage
participating groups were able to achieve payment under finances. Such a structure would appropriately accept and
the performance payment methodology. The MCMP distribute the shared savings component of income. The
demonstration is in progress. Early reports indicate that shared savings represent funds returned to the ACO from
involved practices have found that tracking data on CMS if the cost of care provided is below the established
patient care has enabled them to improve awareness of benchmark, which is based on historic healthcare spending
care gaps, but the high level of effort and costs associated for the population being managed. The savings between
with reporting has threatened the long-term viability of projected cost and actual cost would be shared between
the program.3 Although the Medical Home demonstration CMS and the ACO. The potential for additional income
rewards PCPs for their vital role in care coordination, this from the shared savings provides the financial motivation
plan lacks motivation for cost containment. for providing coordinated, cost-effective care for the
More recently, ACO models have been further refined patients in the ACO.
through the Brookings/Dartmouth Accountable Care Many of the savings forecasted by CMS and lawmakers
Collaborative, which includes five systems across the rely on improving efficiency through better use of
country representing diverse structures and markets. technology. Because the costs of implementing technologies
These are devised as part of a “learning network,” such as electronic medical record (EMR) systems and
enabling the sharing of best practice information.4 Thus, telemedicine are high, an ACO must have sufficient
the current model of the ACO has evolved from various financial resources available to cover such costs.
demonstrations exploring ways to optimize healthcare Additionally, the structure of an ACO supports effective
delivery. The regulations for enactment have not yet been use of existing capital resources. For example, rather than
written, so specifics remain subject to change. adding hospital beds to increase volume, incentives could be
provided to hospitals and physicians to reduce admissions
Definition of an ACO through preventive care and to shorten length of stay.
The ACA states that “... an ACO shall ... be willing to 3. Sufficient size and quality monitoring ACOs must
become accountable for the quality, cost, and overall care be sufficiently large to be able to monitor and report
of the Medicare fee-for-service beneficiaries assigned to on quality measures. The Medicare Payment Advisory
it.” Accordingly, an ACO model must have the following Commission (MedPAC) estimates “sufficient size” as 5,000
fundamental components: patients. The definition and measurement of quality are
1. The ability to provide care across a continuum of more elusive. For an ACO, quality monitoring must be
settings, including at minimum ambulatory and considered in two discrete components. First is the quality
inpatient settings for a minimum of 5,000 Medicare of care provided to the patient. Increasingly, quality of
beneficiaries patient outcomes will be defined by subjective, patient-
2. The capability for planning budgets and resources and centered criteria (eg, overall hospital experience and ability
participation in shared savings to return to work or sports). This is markedly different
3. Sufficient size to monitor and report on quality than most of the current orthopaedic metrics utilized by
measurements hospitals or payers, which are more objective, physician-
1. Provide continuum of care An ACO must be able to defined definitions (fracture alignment, joint range of
meet all patient needs in one formal legal structure for motion, blood loss). The second aspect of quality for which
a minimum of three years. A PCP would be the care an ACO will be responsible involves the system itself.
coordinator, but an ACO must provide access to all Reporting on metrics involving the system’s efficiency and
specialties. Participation of a hospital is necessary to meet effectiveness, including care transitions and readmissions,
the requirement for inpatient services. Although the model can be expected. Reimbursement will likely be tied to both
requires access to all specialties, all specialists do not need to of these quality components.
10 © 2011 American Academy of Orthopaedic Surgeons