A noted shortcoming in the American health care system is the fragmented care available to most individuals. Fragmented care, where patients see multiple unrelated providers, has been found to be, among other things, both costly, since provider payments are not linked to performance or outcomes and services can be duplicative, and of lower quality, since providers lack financial incentives to coordinate care. Research has suggested that integrated care delivery models can reduce costs and improve quality. Section 3022 of the Patient Protection and Affordable Care Act ( P.L. 111-148 , PPACA), as amended, directs the Secretary of Health and Human Services (the "Secretary") to implement an integrated care delivery model in Medicare, the Medicare Shared Savings Program, using Accountable Care Organizations (ACOs)—a model of integrated care formulated to reduce costs and improve quality. While the concept of an ACO is still evolving, Section 1 of this report describes generally what an ACO is, and Section 2 discusses how an ACO may operate. Section 3 describes essential provisions of the Medicare Shared Savings Program created by PPACA. Section 4 explores some of the arguments in favor and against ACOs, and the report concludes with a discussion of the likely impact of Medicare ACOs. The discussion in Sections 1 and 2 focuses on ACOs generally, and Sections 3, 4, and 5 more narrowly focus on the Medicare Shared Savings Program. On March 31, 2011, the Department of Health and Human Services (HHS) issued its Notice of Proposed Rulemaking for ACOs. Appendix A outlines key parts of the proposed regulations, and Appendix B addresses antitrust issues. Appendix C discusses the Pioneer ACO Demonstration that "is designed for health care organizations and providers that are already experienced in coordinating care for patients across care settings." While there are numerous definitions of an accountable care organization, the following captures the essential elements: ACOs are collaborations that integrate groups of providers, such as physicians (particularly primary care physicians), hospitals, and others around the ability to receive shared-saving bonuses from a payer by achieving measured quality targets and demonstrating real reductions in overall spending growth for a defined population of patients. The key elements of an ACO, highlighted in the definition, are that ACOs bring together and integrate, either actually or virtually, a broad range of providers across care settings; they emphasize primary care; they can achieve savings for a payer by effectively integrating care across providers; providers share with payers in the savings that providers generate; the savings are not at the expense of quality; providers are responsible for improving quality and reducing costs; and improvements are measured across a specified population. The emphasis is on physicians rather than insurers or hospitals since physicians "control (directly or indirectly) 87% of all personal health spending." The rationale for ACOs emerges from the recognition that the current medical system tends to offer fragmented services across providers (an absence of coordinated care), pays for units of service rather than outcomes, and holds no one organization or individual responsible for either the quality or cost of care provided. ACOs are supposed to bring providers together under a single organization and create incentives for them to coordinate care, improve quality, and lower cost. Although ACOs may contract with any payer (Medicare, Medicaid, or private insurer) to provide services and share in any resulting savings, the consequences for the health care delivery system are assumed to be much broader. Proponents anticipate that ACOs will change both the culture and practice patterns of providers and as these changes are institutionalized, all payers and all patients will benefit from the delivery of higher-quality, lower-cost, and better integrated services. Most ACO proposals assume that leaders in the provider community will come together to form an ACO and the ACO will solicit other providers in the community to voluntarily join the ACO to improve the quality of care provided and share in the resulting savings. While this is happening to some extent, the enactment of PPACA has encouraged these efforts as various health care providers seek to position themselves relative to newly formed ACOs. Since ACOs are perceived as having the potential to alter the influence of primary care physicians, specialist physicians, hospitals, and payers vis-à-vis one another, providers may be motivated to participate in ACOs for a variety of reasons. These include a sincere interest in improving quality of care and reducing costs, a desire to protect their place in the market or to ensure that they have a role in any collective decisions, to share in any cost savings, and to preserve their autonomy. ACOs are modeled on entities seen as quality leaders in health care, such as Kaiser Permanente, the Mayo Clinic, the Cleveland Clinic, and Geisinger Health System. All of these exemplars are highly integrated providers, generally with staff models where physicians are employees of the health care organization. While the above entities are non-profit, there are for-profit models, such as HealthCare Partners Medical Group, with both a staff model and affiliated independent physician association (IPA), and the for-profit Permanente Medical Group that serves Kaiser Permanente. These integrated providers are paid in a variety of ways, including fee-for-service, capitation, and pay-for-performance, and the method of payment does not define the ACO. It is important to recognize that proponents of ACOs have limited experience replicating the formation and experiences of these integrated providers in more varied organizational environments (see Table 1 ). The existing models for ACOs, Mayo, Geisinger, and Intermountain, for example, may have had the benefit of physicians self-selecting into a staff model of medical care where physicians are directly employed. New efforts may involve physicians being associated with, but not employed by, the ACO or involve physicians who may not warmly welcome the presence of ACOs but perceive pressure to participate. Such factors may influence the impact of ACOs because providers may be more likely to deviate from directives when they are either not directly employed or feel compelled to participate. Similarly, concern has been expressed that existing examples of ACOs may have unique and potentially nonreplicable characteristics such as an attractive patient population—generally less poor, healthier, and more likely insured. ACOs also have somewhat limited experience in (1) dense urban areas, where insureds have the ability to obtain services more easily from a non-ACO provider, and (2) large rural areas where the ACO may be a virtual entity and there may be a limited sense of shared commitment across providers spread over a large geographic area. Finally, failed similar efforts often recede into the larger health care market and are rarely cited or studied. While there is general consensus that ACOs seek to integrate a range of providers, there has been an evolution regarding which providers need to be brought into an ACO and whether hospital participation is fundamental to ACOs. While the idealized list of participants from four often-cited ACO proposals is presented below, current thinking is that the composition of ACOs may vary geographically, reflecting local market conditions. However, regardless of which organizations or individuals are involved, analysts have concluded that the effort needs to be provider-led. In an early hospital-centric model, from 2007, developed by Elliott Fisher and his colleagues, ACOs were envisioned as a hospital medical staff model in which a hospital and its extended medical staff (those individuals who work within the hospital, those organizations which primarily refer to the hospital, and those providers for whom a majority of their patients are admitted to the hospital), form the basis of an organization responsible for system performance, improving health care quality, and reforming payment. In 2008, the Congressional Budget Office (CBO) described a bonus-eligible organization (BEO) model of ACO which was not hospital-centric. The BEO was envisioned to be providers or physicians practicing in groups, networks of discrete physician practices, partnerships or joint ventures between hospitals and physicians, hospitals employing physicians, integrated delivery systems, or community-based coalitions of providers. MedPAC described an option for a hospital-centric model of an ACO in 2009 as one that "would consist of primary care physicians, specialists, and at least one hospital. It could be formed from an integrated delivery system, a physician-hospital organization, or an academic medical center." By 2010, the earlier Fisher proposal had been transformed from a hospital medical staff model to a non-hospital-centric model that "involves broad participation and encourages hospitals to participate" but one in which "hospital participation is not an absolute requirement." In this proposal an ACO can include a variety of provider configurations, ranging from integrated delivery systems and primary care medical groups to hospital-based systems and virtual networks of physicians such as independent practice associations. Table 1 illustrates the various delivery systems that could form the basis for an ACO, however, there is not an archetype organization that one could name associated with each of the model types. In addition to the models listed in Table 1 , insurers are now entering the market and evaluating the role they may play within the ACO framework. For instance, both Blue Cross Blue Shield of Massachusetts and Anthem Blue Cross have contracted as ACOs with provider groups in their service regions. In other markets, insurers such as Cigna are working with physician groups to form ACOs. These five models, and even entities within a model type, are likely to vary by the degree of integration, the role of hospitals, the mix of staff and non-staff physicians, and the sense of a shared commitment to the goals and aspirations of the ACO. In addition, other models may emerge as specialist physicians, who often provide primary care as well as specialty medical services, seek to maintain or improve their market position vis-à-vis other providers and payers. There are several reasons to believe that hospitals are likely to be integral to ACOs.