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The ACO Failure Hypothesis: Likely But Not Inevitable

We recently participated in a program at Columbia Business School’s Healthcare Program on whether ACOs (Accountable Care Organizations) will fail. For those of you that don’t know, ACOs are one of the structures promulgated by PPACA (aka Obamacare) designed to encourage better cost control and quality improvement in the healthcare system.

The current zeitgeist among the commentariat is that ACOs will fail (examples: here and here). We think the reason for the one-sided nature of the question is that those of us who lived through the healthcare upheaval in the early and mid “90s” saw first hand the failure of PHOs, PPMs and IDNs (and all of the other acronyms now relegated to the dustbin of history). When ACOs are touted as a saving grace for the system, you can almost hear the collective groan of the industry veterans.

Ever the contrarian, however, we took the side of the debate that said ACOs will NOT fail. The premise of our argument was that since we already have a good idea of why the structure will fail, we can, a priori, fix the shortcomings, and though likely, ACO failure is not inevitable.

There is an extensive list of why list of why ACOs will fail. We put them into four general buckets.

Infrastructure: The system has mis-allocated resources so we have too many of some things and not enough of others leading to inefficiencies.

Technological/telecommunication: For a number reasons the healthcare system has not adopted technology as fast as other industries.

Cultural: Providers are habituated to fee-for-service payment mechanisms and patients aren’t likely to change their own healthcare behaviors.

Inertia: The well known system problems (e.g. asymmetry of information, the Pareto nature of patient demand, unexplained variation of care, counterproductive incentives) have been around forever and are difficult to overcome.

Because we spend most of our time identifying private healthcare companies with investment potential, we often get a view into what is happening in the entrepreneurial space under the punditry radar.

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