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Accountable Care Organization

Accountable Care Organization (ACO)

Definition

Accountable Care Organization (ACO) —

A type of organization created by the Patient Protection and Affordable Care Act (PPACA). ACOs offer financial incentives for healthcare providers to band together to better coordinate services for groups of patients and thereby improve the quality of care, all while lowering costs. Another focus of ACOs is to promote a reduction in hospital readmission rates for certain conditions, such as heart attack/heart failure and pneumonia.

ACOs can include primary care physicians, specialist physicians, hospitals, or other types of healthcare providers. Under the provisions of the ACA that created ACOs, if an ACO achieves certain quality targets, the resulting savings are divided between the various providers who are part of the ACO.

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Related Terms

Patient Protection and Affordable Care Act (PPACA)

A 2010 law that enacted the most significant regulatory overhaul of the American healthcare system since passage of Medicare and Medicaid in 1965. It is also referred to as the Affordable Care Act (ACA) or as "Obamacare."

Following are the highlights of the PPACA.

  • Health insurance market reforms: Among the reforms include: (1) health insurance policies are barred from having annual or lifetime coverage limits; (2) insurers must cover all applicants, with new minimum policy standards, and offer the same rates regardless of preexisting conditions or gender; (3) those with preexisting conditions cannot be denied coverage; (4) health insurers may not drop insureds who develop a medical condition; (5) parents with children up to the age of 26 can cover them under their own policies.
  • Individual mandate: Everyone in the United States must purchase health insurance or pay a penalty to the Internal Revenue Service (IRS) on their income tax return. Exemptions will be granted for financial hardship, religious objections, American Indians, prison inmates, those without coverage for less than 3 months, undocumented immigrants, people with incomes below certain tax filing thresholds (currently $9,500 for individuals and $19,000 for married couples), and those for whom the lowest cost plan option exceeds 8 percent of household income.
  • Medicaid expansion: As of 2013, every state has different Medicaid eligibility requirements based on income, age, gender, dependents, and other specific requirements. Starting in 2014, states have the option, but not the obligation, to expand Medicaid eligibility levels to 138 percent of the federal poverty level (FPL). The expansion covers the gap for those who earn too much to qualify for Medicaid but not enough to qualify for subsidies available under the individual mandate.
  • Insurance exchanges: Directs states to establish insurance exchanges where individuals and small businesses can compare various insurers' healthcare plans, band together to form larger purchasing groups, and obtain coverage at more affordable rates. In states that choose not to establish such exchanges, the federal government will do so.
  • Premium subsidies: Provides sliding-scale subsidies that reduce the cost of coverage. To be eligible for a premium subsidy, household income must be between 100 percent and 400 percent of the FPL. (Below 100 percent of FPL, the household qualifies for Medicaid. Above 400 percent of FPL, subsidies are no longer available.)
  • Large employer mandate: Requires employers with more than 50 full-time employees to offer "affordable" coverage to their workforce or pay an annual penalty to the IRS. "Full-time" employees are defined as working 30 hours or more per week (which means the law does not apply to part-time workers). The amount of the penalty depends on whether the employer does or does not offer coverage and whether any of the employees receive a premium credit for purchasing individual or family coverage on a state-based exchange.
  • Small employer subsidies: Offers a modest tax credit to small employers to help defray some of the cost of purchasing health insurance for their employees. To be eligible, a small business must meet the following criteria: (1) 25 full-time employees or fewer (meaning tax credit subsidies are unavailable for companies with between 26 and 50 employees); (2) average annual wage less than $50,000; and (3) employer contributes at least 50 percent to the premium cost.

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