“You must form an ACO or you will miss the health reform boat,” said the health care consultant. “An ACO? Okay, I do not know what that is, but how do we get started?” replied the primary care physician.

In the 1970s, we heard the acronym HMOs (health maintenance organizations), in the 1980s it was PPOs (preferred provider organizations), and IPAs and PHOs in the 1990s (independent practice associations and physician-hospital organizations). The gist of these organizations was to try to deliver health care services more cost-effectively through various provider structures and payment mechanisms.

One payment mechanism, known as capitation, was fairly popular in the 1990s. Capitation was a payment to a provider of a set amount of money per month to manage the care of an assigned population of patients. If providers carefully watched over the amount of services being provided, they would retain the leftover money not spent on services. The theory was that providers would be incentivized to provide care or refer to specialists only when necessary. Capitation, while it still exists, eventually fell out of favor as a payment method because it ended up being more about providing only medically necessary care rather than managing care to head off more serious medical conditions.

What does all that have to do with ACOs? And, furthermore, what are ACOs? Well, with the 2010 health reform ink starting to dry, the new buzzword is ACO, and that is short for accountable care organization.

In the first of the two companion health reform laws, the Patient Protection and Affordable Care Act (Public Law 111-148), two ACO programs are established. There is a Pediatric Accountable Care Organization Demonstration Project set up in Medicaid and the Children’s Health Insurance Program (see Section 2706), and a Shared Savings Program in Medicare (see Section 3022 as amended by Section 10307). Both ACO programs are set to start January 1, 2012, and the Medicaid/CHIP project basically defers to the Medicare program for ACO standards.

The Centers for Medicare and Medicaid Services describe an ACO as “an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it.” If the ACO meets specified quality performance standards, it will be eligible to receive a share (a percentage) of “any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount.” Sounds rather complicated, and to be fair, it is rather complicated when described with such vague terminology. Hopefully, the regulations that are due to be drafted by the early fall will spell out the detail of the programs in a clear and straightforward manner.

Notably, last minute language added to the Medicare program by Section 10307 specifically refers to capitation as a possible payment mechanism. It is unclear if this provision is Congress simply catching up with the 1990s and we are doomed to see capitation fall out of favor again, or if we will see more detailed regulations that view the statutory language simply as a suggestion and seek more creative ways to incentivize physicians to care for beneficiaries and recipients and be fairly compensated for doing so. Regardless, the key to these programs obviously will be doing a better job actually heading off serious medical conditions, demonstrating clearly the actual savings to the federal programs, and being rewarded financially for those efficiencies.

What should provider organizations do? Common sense dictates that if this proposal fits with your organization’s mission and structure, you should take a closer look. If you have not already done so, form a committee to research the law, learn about what the law’s criteria will mean in practice, and discuss with commercial payors whether they are interested in applying what is learned from these government projects to a broader range of commercial insurance products. Furthermore, if the proposed regulations for the trial projects are off track, and we should know more about that by the fall of this year, let Health and Human Services (HHS) know that and suggest ways to make the programs work better. Congress provided little detail to HHS so there is room for folks working on the front lines to say, “hey, that won’t work, or this way might be better.”

Above all, do not get hung up on acronyms. ACO may or may not be the buzzword in five or ten years, but if your organization can provide care that improves the overall health of a patient population, do so efficiently with less health care dollars, and still make a profit, those seem like worthy business goals to pursue.