THCB

ACOs and Antitrust: A Few Words of Caution

I am coauthoring (with Cory Capps) a chapter on healthcare antitrust for the forthcoming International Handbook of Antitrust Economics. As we finish our first draft, we were searching for a good way to tie everything together. We both thought of concluding by discussing antitrust and ACOs. Cory and I believe that the underappreciated (and often excruciatingly boring) topic of antitrust is fully interwoven with the story of ACOs. And even if the Supreme Court strikes down the ACA (note to readers of my prior blog – I was just kidding), ACOs may endure. So this is as good a time as any to explain the connections between antitrust and ACOs.

I first recognized this connection twenty years ago, when my colleague Steve Shortell was touting the growth of integrated delivery systems. Steve even offered a universal health insurance proposal (which several states explored) built around competing IDSs. In Steve’s world, an IDS would consist of several hospitals and hundreds of physicians. I argued with Steve that economic theory provided little support for massive vertical integration (and theory is still not all that kind to the idea.) I granted Steve that if integration made theoretical sense, integration would be all well and good for Chicago, where there might be four or five competing IDS. But what about Milwaukee, Cleveland, or any number of other midsize metropolitan areas? They would do well to have two or three IDS. Indeed, even with a legislative mandate to form IDS, consolidation has left these and other midsize markets with just two or three health systems. Smaller metro areas might have only had one IDS.

The empirical evidence on IDS confirmed economic theory. IDS failed to generate consistent efficiencies or quality improvements and no one knows if things will be any better this time. But there is one aspect of integration about which theory and evidence agree. Market power is almost surely bad. Monopolists and oligopolists have less incentive to innovate, reduce costs, and constrain prices. They also tend to take rash steps to maintain their monopolies, signing exclusive contracts with insurers that foreclose rivals, and buying out physician practices to deny referrals to competitors. In the rush to form IDSs, Shortell would have left us with a free market system without competitive dynamics, where rent seeking replaced rent creation. I didn’t see the point.

Fast forward to today and the same issues prevail. Economic theory still suggests that independent providers can be more efficient, especially if they have integrated EMR (which may be one of the few arguments in favor of integration.) But there is no way to shake concerns about market power. Outside of a handful of large metropolitan areas, the concept of competing ACOs may be oxymoronic. The FTC and DOJ have said that they will closely examine any ACO in whose physician members have more than a 30 percent market share in a given specialty. (The horse may have left the barn on this one; many specialty groups have shares exceeding 30 percent.) That could have a chilling effect on ACO formation in smaller markets. But before we blame the FTC and DOJ, let’s remember that there is little research evidence to suggest that physicians have to control 30 percent of the market to realize efficiencies. More problematically, providers are engaging in a range of questionable activities in the name of ACO formation. Hospitals are acquiring physician practices in unprecedented numbers and demanding various exclusive arrangements from insurers. Providers claim they are taking these steps to realize integration efficiencies but there is little evidence to back them up. How simple it is for firms to invoke the mantra of efficiency when the ulterior motive is to exclude rivals.

Do not get me wrong; there is reason to hope that ACOs can correct the mistakes made by IDS. Economic theory is not completely one sided on this matter and integration could lead to efficiencies. But if we allow providers to circumvent antitrust laws in the name of ACOs, then we will give up the benefits of competitive dynamics and even encourage destructive rent seeking behavior, all in the name of a shaky theory with no empirical foundation. That is not an experiment worth taking.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

Livongo’s Post Ad Banner 728*90

7
Leave a Reply

5 Comment threads
2 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
5 Comment authors
Barry CarolBobbyGMaggie MaharDoug Arnoldsouthern doc Recent comment authors
newest oldest most voted
Barry Carol
Guest
Barry Carol

David — If the healthcare provider side continues to consolidate into large systems that include hospitals as well as employed physicians, labs, imaging centers, physical therapy centers, etc. and if the payment model moves away from fee for service in favor of global payments, the dynamic could change materially. Either the provider groups would start to perform the insurance function themselves or partner with an insurer with more expertise in estimating the cost to provide care for a large population. Instead of using their market power to extract high payments from insurers, they would have to submit bids to cover… Read more »

Maggie Mahar
Guest

Bobby G–

True. Perhaps more than 10 years.

And Romney could win.

Everything depends on the Dems getting
Obama’s voters (the folks who registered and voted for him last time)–out to the polls.

I don’t mean advertising on tV . I mean old-fashioned door-to-door campaigning and making sure people get to the polls making sure that the olines are not too long, (if they are, brining them food and coffee) and making sure that they are not prevented from voting.

This will take manpower. I hope the dems can pull it together.

Maggie Mahar
Guest

David– You make many good points that have set me thinking about the future of ACOs. I would just say that this time around, things may be different because there will be far more regulation. ACO’s will not be operating in a laissez-faire free market. They will be operating in a market much more like health care markets in Western Europe, where prices are regulated. I anticipate that insurers will be hooking up with ACOs, creating entties where the payor and the provider are partners. (Ideally, this means they share the same goal: keeping patients healthier). Under the Affordable Care… Read more »

BobbyG
Guest

“because health care providers will no longer be operating in a largely unregulated free market ”
___

Romney wins, and that ideal will be set back 10 years.

southern doc
Guest
southern doc

“entties where the payor and the provider are partners. (Ideally, this means
they share the same goal: keeping patients healthier)”

You honestly believe that that is what for-profit insurers are about? You would be comfortable with your doc being an employee of a corporation whose reason for being is to maximize profits?

Doug Arnold
Guest
Doug Arnold

Funny how nobody seems to be bothered by all the insurer oligopsonies (purchaser monopolies) where a small number of huge insurers control most of the fees paid to physicians via contracts of adhesion (here’s the deal..take it or leave it) in most markets, doing their best to disaggregate physicians and other providers to keep prices low. Oh, I forgot, insurers are exempt from federal antitrust laws. Insurer CEOs make tens of miilions in compensation, with Hemsly from United reprtedly getting over $100 million a year or two ago. How wonderful. So when ACOs now permit docs and hospitals to work… Read more »

southern doc
Guest
southern doc

I’d love to know what these efficiencies are that physicians achieve when they integrate. The only one I know of is more efficiency in negociating inflated fee schedules.