Roosevelt Institute | Cornell University

Healthcare's shift from Fee-For-Service payments to Accountable Care Organizations

By Matthew HersmanPublished March 11, 2015

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Fee-for-service has long been known to be an ineffective and wasteful way to determine physicians' payments. As healthcare providers increasingly shift their payment models away from fee-for-service methods to Accountable Care Organizations, money will be saved as quality of care improves.
By Matthew Hersman, 3/11/2015

Fee-for-service has long been the norm in America when determining physicians' payments for their services. The fee-for-service payment method compensates physicians for each service they deliver. While in theory this may seem to make sense, many experts agree that the fee-for-service model provides physicians an incentive to provide extra and unnecessary services. Because physicians are paid on the quantity of the services provided rather than the quality, doctors are encouraged to provide more services regardless of the outcomes. Many have attributed the fee-for-service method to be a primary driver of healthcare costs with no consideration for the effectiveness of the services provided. 

An estimated 30% of all healthcare payments are ineffective or redundant. When America spends $2.8 trillion per year on healthcare costs, 30% becomes a very sizable number. To counteract the cost of inefficiencies in healthcare, healthcare providers have increasingly begun to form networks of Accountable Care Organizations (ACOs). As opposed to the classic fee-for-service model, ACOs provide these networks of doctors and hospitals with quality and cost benchmarks for their services. If they meet their quality and cost benchmarks, they are provided an extra bonus for their services and are able to pocket some of the savings. Networks that exceed benchmark costs or fail to reach quality standards may be subjected to a fine. As a result, the ACO payment model encourages doctors to focus on the quality of their services and the prevention of disease rather than the quantity of their services.


As the benefits of ACOs are becoming increasingly apparent, so are the size and number of these networks. To counteract the increased coverage and quality of healthcare due to the Affordable Care Act, doctors and hospitals have increasingly been encouraged to form ACOs in the Medicare program. As a result, currently four million Medicare beneficiaries are in an ACO and more than 428 provider groups have signed up. In addition, many private insurance companies are also realizing the benefits and jumping on board. UnitedHealth hopes to increase its accountable care contracts from a current $30 billion to over $65 billion by 2018. Aetna has also stated more than 20% of its medical costs will be coming from value-based contracts this year. Recent estimates by Oliver Wyman state that 17% of the American population is currently being served by an accountable care organization. 

It's simple really. Providers make more when they keep patients healthy and help minimize costs. Due to the incredible complexity in the healthcare system, there is no "one size fits all" approach to ACO payment models. However, as insurance companies and healthcare providers work out the kinks in the payment methods, America's healthcare system will be seeing an increased focus on quality, rather than quantity of services.