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.

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  1. 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 a population within its network at rates that might vary with age within certain limits but little else.

    There would have to be risk adjustment payments to compensate provider networks that wound up with above average risk populations. Risk adjustment payments would be financed by assessments on insurers, including provider groups performing their own insurance function that wound up with below average risk populations. Care provided out of network under emergency conditions or outside the member’s home region, while traveling, for example, could be reimbursed at Medicare rates or some small percentage above it by law.

    At the end of the day, the winners would be those that could provide care at low cost and high quality. High cost providers would have to learn how to become more efficient, shrink their physical plant and employment footprint or go out of business altogether. Large size wouldn’t matter as much as long as there was adequate competition in each market. Adequate competition could consist of as few as two viable ACO’s.

    Provider systems could operate a fee for service system internally that could be used to track resource utilization among individual physicians if desired.

    In the retail sector, two competitors provide plenty of competition in most categories. Think Wal-Mart and Target, Home Depot and Lowe’s, Walgreen and CVS, Costco and Sam’s Club. You get the picture. Sometimes there is a weak #3 competitor as well and, in the case of supermarkets, as many as five or six competitors in some markets.

    Of course, it’s important to have complete price and quality transparency and it would be helpful if both providers and insurers see the individual member / patient as the customer as opposed to the employer. Employer needs and priorities are different from those of employees and their families and often in conflict.

    Separately, with respect to insurers’ anti-trust exemption, it only allows them to pool claims data. They can’t collude to set premiums or provider reimbursement rates. The exemption was intended to allow smaller insurers to access s larger claims database to enable them to more accurately price their products. Thus, it enhances competition rather than restricts it.

  2. 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.

  3. David–

    You make many good points that have set me thinking about the future of

    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 ACt, these insurers will be regulated by the 85/15 (80/20) rule, and they will have to justify premium increases to state.

    Meanwhile, Medicare will be regulating what ACOs charge by using the carrots and sticks in the AFfordable Care Act to pay them more for quality, while penalizing them for inefficency, preventable mistakes, etc. The Secretary of HHS also will have the power to reduce payments for “ovarvalued services” while increasing payments for “undervalued services.”

    Finallly moving away from paying “fee for services” to bundling and other forms of payment that reward better co-ordianted care is another way that Medicare will be regulating prices.

    I appreciate your concerns, but because health care providers will no
    longer be operating in a largely unregulated free market where they are the “price-makers” I’m not convinced that we will need antitrust laws to restrain large providers.

    We”ll see. Over the next 10 years the Affordable Care Act will require
    continuing improvement–like health care itself. CMS and HHS may
    need to come up with some new rules to govern large ACOs


    • “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.

    • “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?

  4. 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 together and share savings by finally having an economic reason to coordinate care, that’s now a bad thing? Let’s see how ACOs play out in multiple markets before calling the FTC and DOJ. Some insurers just want ACO care coordination while still retaining the right to set reimbursement and other contract terms for providers. They realize that they need docs for care coordination, but they can’t let them economically integrate too much. Stay tuned.

  5. 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.

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