855.210.6003

MMA Blog

ACOs, Tiered Networks and Medical Homes - Why They Matter


Many articles on improving health care quality or lowering its costs reference at least one if not all three of these approaches. ?Should employers care? ?More importantly, can they really make a difference? ?The answer to both of these questions is yes.

First, though, given the sometimes contradictory use of these items, let's define what we are talking about.

First, A Little History

The last 15-20 years of managed care has been built on the assumption that provider networks needed to include virtually every hospital and physician in a geography. ?Carriers and TPAs focused on very broad access and then tried to control costs by aggressively negotiating reimbursement rates and hiring their own doctors and nurses to try and manage unnecessary utilization out of the system.

Given that medical trend has averaged 9% a year over this time period, and that an employer who did not make plan changes would pay 5 times today in health care for an employee than they did in 1993, it is pretty clear that this model has failed.

To slow down the rate of growth in health care costs, employers have basically three options:

  • Reduce benefits
  • Increase premium contributions for employees
  • Improve the health of their population

The first two will ultimately lead to benefit plans that do not provide meaningful coverage (which as an aside the Affordable Care Act tries to prevent with its 60% actuarial value minimum plan design requirement and affordable test).

Only the third option, improving the health of the population, is viable long term. ?If successful, it can also have the biggest impact. ?There are several levers to accomplish this, and while not the focus of this paper, employer health improvement and wellness programs, when done correctly, can make a real impact.

ACOs, Tiered Networks and Medical Homes change the paradigm for the carrier or TPA from using a very broad network and trying to manage utilization to having a smaller network and letting this network manage itself to lower healthcare costs. ?These smaller networks will still have plenty of providers for members to access care; however shrinking the network allows for lower cost or high quality, and in the best cases both.

Let's look at each of these separately.

Tiered Networks

Tiered networks allow members to access the broad network with one level of cost sharing and the narrower (think tiered or preferred) network with a lower level of cost sharing. ?An example would be $2,500 deductible for the broad network and a $1,000 deductible for the preferred network. ?The providers in the preferred network can be determined through cost and quality or cost only. ?When these preferred networks are based on cost alone, TPAs still use well known and reputable providers. ?The problem with a cost only based tiered network is that while it will provide a one-time reduction in costs it will not slow the ongoing rate of trend or improve the overall quality of care being delivered.

Are ACOs Unicorns?

ACOs and medical homes are different and are the current best ideas for slowing, and possibly reversing, the cost of healthcare.

Each starts with a network that only includes the higher quality providers, and then pays a reasonable rate for their services. ?If the providers continue to meet and improve their quality metrics, they have the ability to earn incentive payments. ?In addition, if these providers deliver care below a certain cost level, they are eligible for additional incentive payments. ?A critical aspect of both ACOs and Medical Homes is that regardless of how low they manage the cost per member, they cannot receive any incentive payment unless they first meet the quality metrics. ?In other words, quality comes first.

Using a simple definition, an ACO is an Accountable Care Organization, which consists of doctors and hospitals in a group that share their resources to both manage and provide the spectrum of care to a population with the goal of lowering costs and increasing quality.Again, if the group can meet certain quality metrics and deliver the care below a targeted cost, it earns incentive payments. ?Note that the doctors and hospitals can either be part of one large system or independent of each other but work together as part of the ACO.


Many say ACOs are like a unicorns; everyone knows what one is but nobody has actually ever seen one. ?That's not quite fair; there are a few out there, but only a few and many entities that say they are an ACO are really a Medical Home.

Medical Homes

A medical home, sometimes referred to as a Patient Centered Medical Home (PCMH), is an approach that puts the primary care physician (PCP) in charge of a patient's overall medical care. The PCP is the members "medical home" and manages all their medical and pharmacy care and helps them navigate the healthcare delivery system. Unlike an ACO, the medical home does not provide all the services needed, just the primary care, and utilizes other high quality providers of their choosing for the rest.

Similar to an ACO, if the PCP group meets certain quality metrics and manages the overall care below a targeted cost, it earns incentive payments. ?Not any PCP group can or should be a medical home ?only those that have shown a track record of higher quality, cost effective care and are certified in the medical home model are typically candidates.

Back to the Future

Some may see this as going back to the HMO world. ?While several of the concepts are similar there is one very big difference - instead of the HMO dictating where the care goes or what care is allowed these models have the higher quality physicians themselves, using fact based data, determine what care is needed and where to get it.

Defining Quality

What does quality mean and who determines this ?The quality metrics used in these models are based on the appropriate standards of care defined by each physician specialty association as well as things such as infection rates following surgery, percentage of the population receiving annual screenings, and whether the population utilizes their prescribed drugs correctly. ?Surprisingly, or maybe not, higher quality care costs less due to the fact that things do not have to be done twice, errors do not need to be fixed, and if people get their screenings and take their prescriptions properly they stay healthier.

One Major Concern

One potential concern around both ACOs and Medical Homes is that carriers and TPAs have started suggesting that if these providers can earn incentive payments (reward) they need to take risk. ?This would be a mistake and may very well threaten the entire movement to these programs and the best idea to improve quality and lower cost.

Several years ago, prior to joining PBS, I inherited managing all the risk deals across the country (over 500) for one of the big 3 national insurance carriers. ?Time and time again I met with physician groups or large health systems which were over their medical cost budget and struggling on how to divert capital that was needed to upgrade their equipment or facilities to pay the insurance carrier. ?It didn't take long to realize this was an inappropriate use of their resources and we worked hard over the next three years to transition the arrangements to upside incentive payments only and improve our reporting to help them track and ultimately earn the incentives.

Even the largest health systems are not risk bearing entities and they are simply not set up to manage downside risk (meaning they could owe the insurance carrier money if the population they manage had larger than expected claims even if they met the quality metrics). ?They understandably do not manage their business that way, and they do not allocate their capital in this manner (adequacy reserves are requirements set by state departments of insurance for risk taking insurance companies). ?Providers should use and focus their resources and expertise to improve the quality of care and then be rewarded when they do so instead of acting like an insurance carrier and putting their capital at risk.


Rick Kelly is Division Manager and Senior Vice President of Progressive Benefit Solutions, a Marsh and McLennan Agency. ?He is also the Hospital Practice Leader for Mid-Atlantic Region. ?His background includes in-depth experience working with hospitals and physicians on business strategy and benefit plans, managing different markets and segments for carriers, and performing a variety of actuarial consulting. ?Rick is a member of the Society of Actuaries and a member of the American Academy of Actuaries, and he is quoted often in healthcare articles and participates regularly in panel discussions and advisory councils.

Learn more about Rick?


Posted November 06, 2012

Back to All Blog Posts

Recent News

President Trump Issues Executive Order on the Affordable...
President Trump moved swiftly after taking office on Friday, issuing an Executive Order...
Jan 23, 2017 | PDF
EEOC Releases Final Rules for Wellness Programs Under ADA...
On Monday, May 16, the Equal Employment Opportunity Commission (EEOC) released final...
May 24, 2016 | Read Article
HHS Finalizes 2017 Out-of-Pocket Maximums and Marketplace...
On March 8, 2016, HHS published the final version of its 2017 Notice of Benefit and...
May 17, 2016 | PDF
View All News

Get Started Today

Please fill out the fields below.

* Required Information