An Accountable Care Organization (ACO) is a group of doctors, hospitals, and other healthcare providers who agree to share responsibility for the cost and quality of care delivered to a specific population of patients. Instead of each provider billing independently with no connection to outcomes, an ACO ties financial rewards to keeping patients healthy and spending below a target budget. If the group succeeds, it shares in the savings. In some arrangements, if spending goes over budget, the group owes money back.
The Basic Structure
An ACO can include primary care doctors, specialists, nurse practitioners, physician assistants, hospitals, pharmacies, skilled nursing facilities, and home health agencies. Some are built around a single large hospital system that employs hundreds of physicians. Others are networks of small independent practices that band together. Critical access hospitals, federally qualified health centers, and rural health clinics can also participate independently.
The common thread is coordination. These providers agree to function as a team rather than isolated units, sharing patient information through electronic health records and jointly managing care. That shared infrastructure is what distinguishes an ACO from a loose collection of providers who happen to treat the same patient.
How the Money Works
The financial engine behind most ACOs is Medicare’s Shared Savings Program. Here’s the core idea: CMS calculates a spending benchmark for each ACO based on the historical cost of caring for its assigned patients. If the ACO’s actual spending comes in below that benchmark, the difference counts as savings. The ACO gets to keep a percentage of those savings, and the rest stays with Medicare.
How large that percentage is depends on how much financial risk the ACO takes on. In a one-sided (upside only) arrangement, the ACO can earn up to 50% of the savings it generates but owes nothing if costs exceed the benchmark. In two-sided arrangements, which include both potential gains and potential losses, the share can reach 60% or even 75%, but the ACO is also on the hook if spending runs over budget. Savings payments are capped each year at 10% to 20% of the benchmark, depending on the risk track.
Quality performance directly affects how much an ACO earns. Even if an ACO saves money, it only receives its full share if it hits quality benchmarks. These include measures like unplanned hospital readmission rates and hospital admission rates for patients with multiple chronic conditions. An ACO that cuts costs by skimping on care won’t pass the quality test.
How Patients Get Linked to an ACO
If you’re on traditional Medicare, you may already be part of an ACO without having actively chosen one. There are two ways patients get assigned. The first is voluntary alignment: you can log into MyMedicare.gov and designate a provider you consider responsible for coordinating your overall care. That designation links you to whatever ACO that provider belongs to.
The second method is claims-based assignment. CMS looks at where you’ve received the majority of your primary care services and assigns you to the ACO whose providers delivered the largest share. You’re required to be notified of this assignment and told that you can change it. Importantly, being assigned to an ACO does not restrict where you seek care. You keep full freedom to see any Medicare-accepting provider. The ACO is simply accountable for the total cost and quality of your care.
What Coordination Looks Like in Practice
The financial incentives only work if the ACO actually changes how care is delivered. In practice, ACOs use several concrete strategies to reduce waste and catch problems early.
Care managers are often embedded directly in emergency departments. When a patient arrives, the care manager can pull up their health history, contact their primary care provider, and help plan a safe discharge rather than letting the visit become a disconnected event. Electronic alert systems notify clinicians the moment one of their ACO patients shows up in an ER, closing the information gap that leads to redundant tests and missed follow-up.
After a hospital stay, many ACOs conduct home visits within three to five days of discharge. These visits include reviewing medications, checking that the home environment is safe, and making sure the patient understands their discharge instructions. This kind of transitional care management is one of the most effective tools for preventing readmissions.
ACOs also build networks of high-performing skilled nursing facilities, using scorecards that track rehospitalization rates, length of stay, and patient independence. Rather than sending a patient to whichever facility has an open bed, the ACO can steer toward facilities with a proven track record. Some ACOs have gone further by embedding social risk assessments into electronic health records, screening patients for needs like food insecurity or lack of transportation and connecting them to community resources.
One-Sided vs. Two-Sided Risk
The distinction between one-sided and two-sided risk is central to how ACOs evolve over time. New ACOs often start in one-sided arrangements, where they can earn a share of savings but face no penalty for overspending. This lowers the barrier to entry and gives organizations time to build their coordination infrastructure.
As ACOs mature, they’re expected to transition into two-sided risk, where overspending means owing money back to CMS. The tradeoff is a higher potential reward: two-sided ACOs can keep a larger percentage of savings and have higher payment caps. CMS has been pushing ACOs toward two-sided risk over time, with the stated goal of having all Medicare beneficiaries with Parts A and B in an accountable care relationship by 2030.
ACO Variations Beyond Standard Medicare
The Shared Savings Program is the largest ACO model, but it’s not the only one. The ACO REACH Model targets specific populations and emphasizes health equity. It includes three participant types: Standard ACOs with experience serving traditional Medicare patients, New Entrant ACOs composed of organizations that haven’t traditionally treated the Medicare population, and High Needs Population ACOs that focus on patients with complex needs, including those eligible for both Medicare and Medicaid. REACH ACOs are required to have provider-led governance and include beneficiary advocates on their governing boards.
Private insurers have also adopted ACO-style arrangements outside of Medicare, applying similar shared savings models to commercially insured populations. The mechanics vary, but the underlying logic is the same: reward providers for outcomes, not volume.
Do ACOs Actually Save Money?
The most recent performance data from CMS covers 2024. That year, 75% of ACOs in the Shared Savings Program earned performance payments, meaning they delivered care below their spending benchmarks while meeting quality standards. Total earned performance payments reached $4.1 billion. Those numbers reflect a program that has grown substantially since its launch and consistently generates net savings for Medicare, though the magnitude varies from year to year and ACO to ACO.
The ACOs that struggle tend to be those that haven’t invested in the coordination infrastructure, particularly health information technology and care management staff, needed to actually change how care is delivered. Simply forming a legal entity and calling it an ACO accomplishes nothing without the operational work underneath.