PNHP

ACO incentives exceed efficiency gains

Structuring Incentives Within Organizations: The Case of Accountable Care Organizations

By Brigham Frandsen, James B. Rebitzer
NBER, April 2014

Accountable Care Organizations (ACOs) are new organizations created by the Affordable Care Act to encourage more efficient, integrated care delivery. To promote efficiency, ACOs sign contracts under which they keep a fraction of the savings from keeping costs below target provided they also maintain quality levels. To promote integration and facilitate measurement, ACOs are required to have at least 5,000 enrollees and so must coordinate across many providers. We calibrate a model of optimal ACO incentives using proprietary performance measures from a large insurer. Our key finding is that free-riding is a severe problem and causes optimal incentive payments to exceed cost savings unless ACOs simultaneously achieve extremely large efficiency gains. This implies that successful ACOs will likely rely on motivational strategies that amplify the effects of under-powered incentives. These motivational strategies raise important questions about the limits of ACOs as a policy for promoting more efficient, integrated care.

http://www.nber.org/papers/w20034

Comment:

By Don McCanne, MD

The growth in the number of accountable care organizations (ACOs) has been phenomenal considering that they are primarily only a wish on the part of the policy community and bureaucrats that such organizations would increase efficiencies to reduce health care spending, especially when earlier results have been very disappointing. This study has added to the doubts about ACOs by showing that incentive payments that they receive will exceed cost savings unless the ACOs “achieve extremely large efficiency gains” – an extremely unlikely outcome.

The policy literature is saturated with these “wish they would work” reports and recommendations to further expand the use of ACOs. The experiment has already failed, and we are meandering back into the disdained managed care organization model disguised as ACOs. The tragedy is that this has distracted our politicians and bureaucrats from moving forward with a model that actually would increase efficiencies, not to mention meeting other goals such as universality and removing financial barriers to care – a single payer national health program.

ACO incentives exceed efficiency gains

Structuring Incentives Within Organizations: The Case of Accountable Care Organizations

By Brigham Frandsen, James B. Rebitzer
NBER, April 2014

Accountable Care Organizations (ACOs) are new organizations created by the Affordable Care Act to encourage more efficient, integrated care delivery. To promote efficiency, ACOs sign contracts under which they keep a fraction of the savings from keeping costs below target provided they also maintain quality levels. To promote integration and facilitate measurement, ACOs are required to have at least 5,000 enrollees and so must coordinate across many providers. We calibrate a model of optimal ACO incentives using proprietary performance measures from a large insurer. Our key finding is that free-riding is a severe problem and causes optimal incentive payments to exceed cost savings unless ACOs simultaneously achieve extremely large efficiency gains. This implies that successful ACOs will likely rely on motivational strategies that amplify the effects of under-powered incentives. These motivational strategies raise important questions about the limits of ACOs as a policy for promoting more efficient, integrated care.

http://www.nber.org/papers/w20034

The growth in the number of accountable care organizations (ACOs) has been phenomenal considering that they are primarily only a wish on the part of the policy community and bureaucrats that such organizations would increase efficiencies to reduce health care spending, especially when earlier results have been very disappointing. This study has added to the doubts about ACOs by showing that incentive payments that they receive will exceed cost savings unless the ACOs “achieve extremely large efficiency gains” – an extremely unlikely outcome.

The policy literature is saturated with these “wish they would work” reports and recommendations to further expand the use of ACOs. The experiment has already failed, and we are meandering back into the disdained managed care organization model disguised as ACOs. The tragedy is that this has distracted our politicians and bureaucrats from moving forward with a model that actually would increase efficiencies, not to mention meeting other goals such as universality and removing financial barriers to care – a single payer national health program.