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The Vermont Accountable Care Organization Pilot: A Community Health System to Control Total Medical Costs and Improve Population Health


The accountable care organization (ACO) has emerged as a promising component of health care reform. An ACO is a health care provider organization that is accountable for meeting the health needs of a defined population, including the total cost of care and the quality and effectiveness of services. For the last two years, the Vermont Health Care Reform Commission (HCRC) has been charged with investigating how ACOs might be incorporated into the state’s comprehensive health reform program. Three Vermont provider organizations are now in various stages of creating an ACO, with the objective of implementing the first site in 2011 as part of a national ACO Learning Network.

In 2008, the Vermont state legislature instructed HCRC to assess the feasibility of a pilot project based on the ACO model. Based on HCRC’s findings, legislation was passed supporting the implementation of at least one pilot ACO as the next phase of health care payment reform. The ultimate goal is to achieve delivery system reform based on the development of a true community health system that both improves the health of the population it serves and manages medical costs at a population level.

Key stakeholders in the ACO pilot program have included the state’s three major commercial insurers, three community hospitals and one tertiary hospital, the state hospital association, the state medical society, the business community, state health reform staff, the Vermont Department of Health, the Department of Banking, Insurance, Securities, and Health Care Administration, and the legislature.

This report provides an in-depth look at Vermont’s ACO pilot program, beginning with its origins in the state’s broader health reform efforts. While some of the findings are relevant primarily to small to medium-sized community provider networks in rural settings like Vermont, we believe that many of them apply to ACO development in general.


The ACO cannot exist in a vacuum. It is essential to simultaneously create or enhance capabilities at the primary care practice level, as exemplified by the patient-centered medical home; at the community health system level; at the state level, with infrastructure to support health information technology, payer payment reforms, and technical support services; and at the national level, chiefly through Medicare participation. Our experience to date has shown that we know how to build these capabilities at the primary care practice level and at the state level. However, the real action in “bending the medical cost curve” is at the community level.

The working design for an ACO pilot is built on three major principles: 1) local accountability for a defined population of patients; 2) payment reform based on shared savings; and 3) performance measurement, including patient experience data, clinical process and outcome measures. All ACOs should be structured as provider-based organizations with a network of primary care providers that elect to participate in the ACO. The model should also have a patient population of sufficient size to support performance measurement and the stability of expenditure projections. In rural areas like Vermont, commercial payers may have to participate in a consolidated shared savings pool in order to achieve the minimum population. The ACO must be a legal entity capable of internally distributing shared-savings payments and accepting incentive payments from payers and also have an organizational and governance structure capable of coordinating providers into a single ACO entity.

ACO pilots need to have threshold capabilities in five areas to get started. First, the ACO must be able to manage the full continuum of care settings and services for its assigned patients, beginning with a patient-centered medical home approach to primary care. Second, it must be financially integrated with both commercial and public payers, and all payers need to participate, so that at least 60 percent to 70 percent of patients in a provider’s practice can be eligible for inclusion in a shared-savings model. Third, a health information technology platform that connects providers in the ACO and allows for proactive patient management is essential, along with a strong financial database and reporting platform for managing the global medical budget. Fourth, physician leadership, as well as the commitment of the local hospital CEO and leadership team, is vital to driving changes in process, cost structure, and mission. Finally, it must have the process improvement capabilities required to change both clinical and administrative processes to improve the ACO’s performance so that it can achieve its financial and quality goals.

Community health systems are the focal point of health care delivery reform, as they are responsible for care integration and coordination of the service network that provides the bulk of care to a patient population. The ACO is a promising financial incentive model that could support the development of a community health system, but it still needs to be tested in pilots. This will require participation of public payers, particularly Medicare, in a common multipayer framework to realize their potential.

Some large integrated care systems have the scale and resources to work concurrently at practice, community, and regional/state levels to support ACOs. However, most small and medium-sized communities and care systems will need state and/or national support for defining a common financial framework for all payers, supporting the development and expansion of primary care medical homes, information technology (IT) support, technical support, and training and start-up funding. A rural setting makes potential ACOs even more dependent on state and national support. Rural models will require either a consolidated performance pool involving multiple payers or an expansion of the ACO to include multiple hospitals, making it possible to achieve the necessary critical mass of patients needed to support statistically meaningful measures of performance.

Some important lessons have emerged from the Vermont ACO pilot experience thus far:

    1. National and state sponsors should proceed with pilots and learning collaboratives in diverse settings, including smaller communities, to learn more about success factors in developing ACOs. A critical pilot component is funding for a local provider infrastructure and community resources.
    2. An ACO’s success depends on committed leadership from physicians and other key stakeholders, multipayer participation, a patient-centered primary care model, and robust IT support and reporting.
    3. Clusters of ACOs within selected states would encourage the development of the statewide infrastructure needed by ACOs. States can also support ACOs by mandating Medicaid participation in ACO pilots through a state waiver, implementing IT tools and a health information exchange, and sponsoring patient self-management programs, among other options.
    4. ACO growth in Vermont and elsewhere must be coordinated with the broader payment and delivery system reforms included in the recently enacted health reform bill. Federal policy support will be critical to enabling a fair test of the ACO model, including Medicare participation in ACO pilots by 2011, federal approval of state waiver requests for Medicaid participation in ACO pilots, and implementation of Medicaid/Medicare advanced primary care model multipayer demonstrations.

Publication Details



J. Hester, J. Lewis, and A. McKethan, The Vermont Accountable Care Organization Pilot: A Community Health System to Control Total Medical Costs and Improve Population Health, The Commonwealth Fund, May 2010.