Let’s Hope ACOs Aren’t Our Last, Best Chance for Delivery System Reform

After reading the July edition of Health Affairs, I’m concerned about the impact of Accountable Care Organizations (ACOs) on cost trends in the US health care system.

In The Accountable Care Organization: Whatever Its Growing Pains, The Concept Is Too Vitally Important To Fail, Francis Crosson of the Kaiser Permanente Institute for Health Policy plays down the various criticisms of ACOs (that they may stifle innovation, unleash a torrent of regulation, and rely too heavily on fee for service payment methodologies) and argues that we need to help them succeed because there are no good alternatives. If not,

both public and private payers will probably be forced into across-the-board reductions in payment rates to providers, because the state of the economy will require cost reductions, and there will be no other obvious course to pursue. Reductions in quality and access may follow…

But the emergence of ACOs is driving hospitals to consolidate, buying other hospitals and physicians practices.

This may help them coordinate care as required by an ACO but also increases consolidation in local markets. James Robinson (Hospitals Respond To Medicare Payment Shortfalls By Both Shifting Costs And Cutting Them, Based On Market Concentration) demonstrates that more market power leads to hospitals raising costs and boosting prices to commercial payers:

It generally is more desirable, from a hospital management perspective, to increase revenues than to reduce costs, because the former merely alienates insurers, but the latter alienates employees, physicians, and potential patients. The cost-shift perspective highlights the revenue-enhancement hospital response to Medicare payment shortfalls.

The hospital’s ability to pursue revenue enhancement over cost reduction will depend, however, on the degree of competition in the local market. Hospitals in competitive markets will be less able than those in concentrated markets to raise prices and hence must either reduce costs or suffer erosion in their profitability.

In other words, as Medicare reduces reimbursement levels, hospitals in competitive markets respond by cutting costs, while hospitals in concentrated markets –for example where ACO development is strong– raise prices. This doesn’t bode well.

I really hope Crosson is wrong about the lack of alternative to ACOs. To me ACOs are very much a top down, scale-based approach that gives too much credence to the cost-saving potential of organizational integration and ignores the anti-competitive tendencies of large organizations and the potential for smaller, nimbler competitors to make markets more efficient and drive down costs. I’d like to see the emergence of virtual ACOs, tied together more by information flow than ownership and top-down management, but I’m not hugely optimistic.

David E. Williams is co-founder of MedPharma Partners LLC, strategy consultant in technology enabled health care services, pharma,  biotech, and medical devices. Formerly with BCG and LEK. He writes regularly at Health Business Blog, where this post first appeared.