On a wooded campus in Falls Church, Va., Inova Health System has executives in its integrated provider network and its insurance joint venture with Aetna working alongside each other on one floor of a building. It's part of the system's $27 million investment in establishing an insurance arm and an accountable care program.

The physical proximity between leaders of Inova's Signature Partners Provider Network and its insurance joint venture Innovation Health underscores the increasing overlap in operations between hospitals, doctors and insurers as accountable care takes hold across the healthcare market.

“Traditionally, hospitals, payers and physicians have been adversaries,” said Dr. Matthew Poffenroth, chief medical officer of Signature Partners. “This is the exact opposite of that. Now, we're all equally at risk for the quality of care and for the dollar. We have complete alignment of incentives.”

Perhaps not complete alignment, but definitely closer than before. The Inova ACO is one of hundreds of private-sector ACOs taking shape across the country as insurers and health systems test new financial incentive models to reduce costs and improve care. ACOs in the private sector have grown more rapidly and show more diversity than in Medicare, though not all provider systems have made investments and embraced financial risk contracting to the same degree as Inova. For some, these deals will prepare providers and payers for fully capitated arrangements in which providers are paid a global fee per member for managing an enrolled population's healthcare.

Roughly 14 million Americans are covered under commercial accountable care contracts, compared with 7.8 million in Medicare ACOs and 1.7 million in Medicaid ACOs, according to Leavitt Partners, a healthcare consulting firm that tracks ACO developments. More than 100 private insurers and employers have entered ACO contracts. Growth of private-sector ACOs has varied significantly by region and market. That commercial ACO growth comes as Medicare nears the end of its first round of accountable care contracts and the CMS grapples with regulatory constraints and seeks to keep hospitals and physician groups participating. Private-sector ACO participants have greater leeway to negotiate key details such as incentive structures, benefit designs, quality targets and which patients are attributed to the ACO. Private-market efforts can customize ACO agreements to each provider, with the ability to work through operational issues.

“It's not the monopsony Medicare that's (dictating) the rules,” said David Muhlestein, Leavitt's senior director of research and development. “It's more a negotiation between organizations with equal bargaining power.” He said the structure and details of private-sector ACOs vary so much that it's hard to even generalize about what a private-sector ACO is.

The laboratory of the marketplace may help guide Medicare's future ACO efforts, said Dr. Mark McClellan, director of the Health Care Innovation and Value Initiative at the Brookings Institution and a former CMS chief. “Everybody wants Medicare to lead, but Medicare has a hard time leading if it's doing something that people haven't tried and succeeded at somewhere before,” he said. New Medicare policies on quality measurement and payment incentives often “come out of models that have been tried … in the private sector.”

In Virginia, Innovation Health and Signature Partners are close to reaching a contract that for the first time introduces financial incentives for cost and quality performance for the network's 1,800 employed and independent doctors. The contract will at first offer bonuses with no potential risk of loss.

In future years, the contract will introduce the risk of loss if performance targets are not met, along with the potential for bonus payments, said David Notari, CEO of Innovation Health. “It's a great opportunity to learn and see, (and) make sure it works,” he said.

Eventually, ACO deals will shift doctors and hospitals to capitated payments. “We know that the market is going to change,” Notari said. “It has to change.”

But providers haven't fully accepted that yet. Signature Partners' Poffenroth, who was interviewed jointly with Notari, said independent doctors remain reluctant to accept downside financial risk in contracts. Currently, doctors who enter Innovation Health's ACO do so “knowing they are not at full risk and if this isn't working, they can bail,” he said. “There is no downside risk here.”

“Short term,” Notari interjected.

Dr. Ken Zweig, a member of an internal medicine group that contracts with Signature Partners, said the shared-savings contract being negotiated between Innovation Health and Signature Partners could mean “some financial benefit for what we've been doing all along.” The medical group already has invested in care coordination, and a shared-savings deal could help defray the costs.

His practice, the General Internal Medicine Group, which has about two dozen providers, joined Signature Partners because of Inova's market clout. But he said he hopes his group will receive valuable data identifying the area's most cost-effective quality providers.

Many private-sector ACOs are expanding gradually, Muhlestein said. Commercial ACO deals in many markets started with pilots, often featuring self-insured hospitals enrolling their own employees. These pilots are now starting to expand.

Peoria, Ill.-based OSF HealthCare is moving forward gradually with its commercial ACO contract, even though it has experience with financial risk under contracts with Medicare and Medicaid, including a Medicare Pioneer ACO.

Moving deliberately—and not immediately including downside risk in contracts—allows providers and payers time to fully understand how their contract works, said Robert Sehring, CEO of OSF's central region. Still, he predicts ACO contracts eventually will shift to capitation in both private and public ACO arrangements.

Several large employers have bypassed insurers and negotiated accountable care or other types of value-based contracts directly with healthcare providers. Intel signed an ACO deal with Presbyterian Healthcare Services in 2013 in Rio Rancho, N.M. Separately, Intel entered into an ACO with Providence Health & Services in the Portland area. Boeing also signed an ACO deal with Providence and Swedish Health Services in the Seattle area.

For Providence, the experience of direct contracting with employers has been eye-opening. Boeing executives set high expectations for healthcare providers, just as they do for airplane-parts suppliers, said Dr. Joseph Gifford, chief executive of accountable care for the Providence-Swedish Health Alliance. “When the corporations get involved in healthcare benefits, they really bring something to the table,” he said. “It hasn't always been fun. They bring serious business pressure into the equation.”

Boeing's demands go beyond high medical quality and efficiency to top-notch customer service. “That's kind of a religion they've all gotten,” Gifford said. “They're forcing that on us. What they want is the customer to be delighted.”

He acknowledged that this has been challenging. Boeing's contracts have specific customer satisfaction performance criteria for various services in its contract, and the company deploys secret shoppers to check up. “It's not just about, 'Is the nurse nice to you?' ” Gifford said. “Does the doctor ask you what you really want?”

Still, Providence leaders like that these direct ACO contracts with employers give their system the financial flexibility and customer access that make it easier to experiment. “This is the license to innovate,” he said. “Being right across the table from the purchaser is amazingly different than having an intermediary.”

On their side, employers are seeking direct deals with healthcare providers because they face significant pressure to reduce healthcare spending and improve employee productivity. Lowe's Corp., which has launched direct contracting efforts with providers, spends about $1 billion a year to cover 210,000 workers and dependents across 1,800 locations. “It is the only expense, as I am reminded almost weekly by the CFO, that is … growing faster than our business is growing,” said Robert Ihrie Jr., Lowe's senior vice president of compensation and benefits. “So it's a serious concern for us.”

Lowe's went directly to providers to gain more control of financial incentives for cost and quality. “After three or four years of trying to deal with health plans who had no interest in being very innovative, we just gave up and decided we're going to do it for ourselves,” Ihrie said.

But Lowe's chose not to go the ACO route because the company lacks a sufficient concentration of employees in any single market. Instead, the retailer chose a centers-of-excellence approach, offering to fly employees to select providers across the country for certain surgical procedures. The company pays those providers on a bundled-payment basis.

Direct contracting pressure from employers to curb costs and improve patient outcomes should prove a strong incentive for healthcare providers to change and improve, said Michael Chernew, a professor of healthcare policy at Harvard University. Employers “are simply not going to pay the rate of spending growth that we've seen in the past,” he said.