The ACO Financial Playbook

ACOs that generate shared savings survive. ACOs that do not, exit. The financial mechanics that determine which category an organization falls into are not abstract policy details. They are the operational decisions that drive everything from care coordination staffing to specialist network design to the strategic question of when to pursue plan ownership.

Performance year 2024 results demonstrated that the program generates meaningful savings at scale: $4.1 billion in shared savings earned by participating ACOs, $2.4 billion in net savings to Medicare. Seventy-five percent of ACOs earned shared savings, the highest percentage in program history. But the distribution of that success is uneven. Two-sided risk ACOs in Level E and ENHANCED tracks generated more than two-thirds of all savings. Physician-led ACOs outperformed hospital-led ACOs on per capita savings. ACOs subject to the new benchmark methodology finalized in 2024 generated lower net savings per capita than those operating under prior rules.

Understanding these mechanics is the prerequisite for strategic positioning. This article covers benchmark methodology, risk track strategy, financial results interpretation, and the conversion economics that determine when an ACO should consider plan ownership.

Benchmark Methodology

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The benchmark is the spending target against which an ACO’s actual expenditures are measured. The methodology that determines the benchmark is the single most important policy variable affecting ACO financial performance.

CMS establishes each ACO’s benchmark using historical expenditure data for the ACO’s assigned beneficiary population during a three-year baseline period. This historical spending is then adjusted for regional expenditure patterns, beneficiary risk scores, and technical factors related to coding intensity and FFS spending trends.

The regional adjustment is designed to address the ratchet-down problem. In early MSSP years, ACOs that reduced spending had their historical baselines lowered at renewal, effectively penalizing them for success. Incorporating regional expenditure data anchors a portion of the benchmark to area-wide spending levels rather than the ACO’s own historical costs. The regional component creates a floor that prevents an ACO’s benchmark from declining indefinitely as it improves efficiency.

The current methodology blends historical spending with regional FFS expenditures at ratios that vary by how the ACO’s spending compares to regional averages. ACOs with historically low spending relative to regional peers receive benchmarks that incorporate more regional adjustment, protecting them from having targets set below sustainable levels. ACOs with historically high spending receive benchmarks with less regional adjustment, creating pressure to reduce costs toward regional norms.

Risk score adjustment accounts for the health status of attributed beneficiaries. ACOs whose populations include sicker, more complex patients receive higher benchmarks to reflect the expected higher cost of caring for them. The risk adjustment methodology uses CMS-HCC model scores, which means that the same diagnosis coding and documentation practices that affect MA plan revenue also affect ACO benchmark calculations.

The experience-based reset occurs when an ACO renews its participation agreement. At renewal, CMS recalculates the benchmark using more recent historical data, which now reflects the ACO’s performance during its prior agreement period. An ACO that achieved savings during the prior period faces a lower historical baseline at renewal. The regional blending is designed to mitigate this effect, but the reset remains a structural feature that ACOs must plan around.

The CY 2024 rulemaking cycle finalized several benchmark changes that affected ACOs starting new agreement periods in 2024 and 2025. Health Affairs analysis of PY 2024 results found that ACOs subject to the new methodology generated substantially lower net savings per capita ($143) compared to ACOs not subject to the new rules ($241 per capita). Whether this reflects methodology changes, the characteristics of ACOs entering new agreements, or transitional effects remains to be determined as more performance years under the new rules accumulate.

Risk Track Strategy

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MSSP offers two tracks with different risk profiles. Track selection is a strategic decision that should reflect organizational capability, financial reserves, and growth trajectory.

The BASIC track provides a glide path into two-sided risk. New ACOs enter at levels with upside-only shared savings and transition over the agreement period to levels that include downside exposure. The transition is mandatory; organizations cannot remain in upside-only levels indefinitely. The structure allows new entrants to build capabilities before facing potential losses.

Level A provides 40 percent of savings with no shared losses. Levels B through D gradually increase both the savings rate and introduce limited downside exposure. Level E, which CMS has determined qualifies as an Advanced Alternative Payment Model, provides 50 percent of savings and 30 percent of losses, capped at 4 percent of benchmark.

The ENHANCED track offers higher rewards in exchange for immediate downside risk. Participants can receive up to 75 percent of shared savings but are liable for up to 40 percent of losses in early years, increasing to 75 percent of losses with losses capped at higher percentages of benchmark over time. ENHANCED participants also receive prospective attribution, allowing them to know their assigned population at the start of the performance year rather than receiving final assignment retrospectively.

Prospective assignment has operational value beyond the financial parameters. ACOs that know their attributed population in advance can target care coordination, conduct proactive outreach, and deploy resources to specific beneficiaries rather than managing populations defined only after the performance year concludes.

The performance data strongly favor higher-risk participation. ACOs in Level E and ENHANCED tracks generated more than two-thirds of all MSSP savings in 2024. The savings rate for two-sided risk ACOs substantially exceeded that of upside-only participants. This pattern has been consistent across multiple performance years.

The explanation for the performance differential is not purely financial incentives. The capability development required to accept downside risk, including robust risk stratification, care coordination infrastructure, and utilization management, also drives the care delivery improvements that generate savings. Organizations that invest in these capabilities because they must perform under downside exposure end up better positioned to succeed.

The mandatory participation signals reinforce the case for voluntary advancement to higher risk levels. If CMS moves toward requiring two-sided risk participation, organizations that have already built downside risk experience will have an advantage over those forced to develop these capabilities under mandatory requirements. Moving to ENHANCED voluntarily, while exit remains an option if performance disappoints, allows learning and iteration that will not be available when participation becomes compulsory.

PY2024 Financial Results

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The performance year 2024 results provide the most current benchmark for understanding MSSP financial dynamics.

Gross savings reached $6.6 billion, the highest in program history. Net savings to Medicare after shared savings payments to ACOs totaled $2.4 billion. Shared savings payments to ACOs totaled $4.1 billion. The relationship between gross savings, shared savings payments, and net Medicare savings reflects the program’s design: ACOs that reduce spending receive a portion of the savings while Medicare retains the remainder.

Seventy-five percent of participating ACOs (359 of 476) earned shared savings payments. This is the highest share of ACOs earning payments in program history. The remaining 25 percent did not generate savings relative to their benchmarks. Sixteen ACOs owed shared losses totaling $20.3 million, a small absolute amount that reflects the loss caps embedded in the risk track parameters.

Per capita metrics show improvement over prior years. Net savings per capita reached $241, and gross savings per capita reached $643. The savings rate, expressed as the percentage of benchmark spending saved, reached 4.7 percent program-wide.

The distribution of savings across organizational types carries strategic implications. Low-revenue ACOs, typically physician-led, generated $319 in net per capita savings. High-revenue ACOs, typically hospital-led, generated $180 in net per capita savings. The $139 per capita differential reflects the structural differences between organizations whose revenue models are aligned with reducing hospitalizations versus those whose revenue depends on hospital admissions.

ACOs composed predominantly of primary care clinicians outperformed those with fewer primary care providers. The primary care advantage likely reflects attribution methodology (beneficiaries are assigned based on primary care visits), care coordination efficiency (primary care serves as the hub for managing referrals and transitions), and alignment between primary care practice economics and utilization reduction.

Since 2012, MSSP ACOs have generated cumulative gross savings of $35 billion and net Medicare savings of $13.6 billion. The upward trajectory of savings over the program’s history reflects both expanding participation and improving performance among established ACOs.

ACO REACH Financial Model

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ACO REACH offers financial structures that differ from MSSP in ways that affect strategic positioning.

The Global track provides full capitation with retrospective reconciliation. ACOs receive prospective total care capitation payments and are eligible for up to 100 percent of savings while being liable for up to 100 percent of losses relative to their performance benchmark. This structure approximates plan-level risk within the FFS framework.

The Professional track provides primary care capitation with shared savings on total cost. The savings and loss exposure is capped at 50 percent. This track serves organizations that want capitated primary care payment without accepting full total-cost-of-care risk.

The benchmark methodology in ACO REACH differs from MSSP’s regional blending approach. REACH uses a prospective benchmark based on historical expenditures with adjustments for risk, regional factors, and trend. CMS updated the financial methodology in 2025 to reduce net spending, reflecting ongoing adjustments to ensure the model generates certifiable savings.

For current REACH participants evaluating their 2027 options, the comparison between REACH performance and projected LEAD performance under the new model’s benchmark methodology is essential. LEAD’s ten-year benchmark stability offers advantages that REACH’s annual methodology updates do not provide, but the transition requires careful modeling of how the organization’s patient population and care delivery capabilities translate to the new structure.

The Payvider Conversion Economics

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At some threshold of ACO performance, scale, and market position, the economics favor adding a plan license rather than continuing to operate solely as an ACO.

The financial comparison involves multiple factors. Shared savings under MSSP are inherently limited by the benchmark methodology and the sharing rates embedded in each track. An ACO that consistently generates 5 percent savings on a $500 million benchmark and keeps 50 percent of those savings earns $12.5 million annually. The same population managed through a plan could generate substantially different economics depending on the MA benchmark for the service area, the bid strategy, and the MLR achieved.

The capital requirements differ substantially. ACO participation requires modest capital for care coordination infrastructure and reserves for potential shared losses. Plan ownership requires meeting state insurance capital requirements, which vary by state but typically involve demonstrating reserves sufficient to cover claims obligations under stressed scenarios. The capital threshold for plan startup often exceeds $10 million and can reach $50 million or more depending on projected enrollment and state requirements.

The actuarial capacity for plan operations exceeds what ACO participation requires. Rate filing, bid development, and reserving require actuarial expertise that most ACOs do not have in-house. Building this capacity internally is expensive; contracting for it is an ongoing operational cost.

The regulatory timeline affects strategic planning. The CMS Part C and Part D application process takes 12 to 18 months under normal processing timelines. State insurance licensing adds additional time depending on the jurisdiction. Organizations considering conversion should plan for a multi-year pathway from decision to operational plan.

The rate environment affects conversion timing. In a 0.09 percent MA rate growth environment, the plan-level margins available are thinner than when rates increased 5 percent annually. The counter-argument is that a payvider’s cost structure differs fundamentally from a national insurer’s. The medical loss is an internal transfer, not an external cost. The plan can accept lower margins if the delivery system captures volume and the combined entity remains viable.

The trigger question for conversion is what level of ACO performance signals readiness for plan-level risk. An ACO that has generated shared savings across multiple consecutive performance years in ENHANCED track, serving 10,000 or more attributed beneficiaries, with infrastructure for risk stratification, care coordination, and quality reporting, has demonstrated capabilities that transfer to plan operations. An ACO that has struggled to generate savings or has high beneficiary turnover should focus on improving ACO performance before considering the additional complexity of plan ownership.

The LEAD model’s ten-year performance period creates an alternative pathway for organizations not ready for immediate conversion. An organization that enters LEAD in 2027 and develops capabilities over the model’s first several years could position itself for conversion in the early 2030s, by which point the policy environment and rate conditions may have evolved.

Related Reading

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MCR-01_07 LEAD and ASM: New Pathways for ACOs and Specialists MCR-12_03 The ACO Accountability Ratchet: MSSP Performance, ACO REACH, and the Savings Distribution