Dranove on ACOs and the “antitrust crisis”

David Dranove has just published a post worth reading on The Health Care Blog. It makes some of the same points I’ve been making about ACOs. Not that it isn’t meaningful when I write it, but when it comes from Dranove–who did much of the original work that informs health economists’ views on ACOs and who knows more about hospital market power and antitrust in health care than I do–it means a lot.

Even if we ignore the overwhelming evidence on the evils of hospital market power, it is important to ask what any of this has to do with ACOs. The AHA wants us to believe that all hospital mergers are just part of the effort to create ACOs. But ACOs are more about vertical integration between doctors and hospitals than they are about horizontal hospital mergers, and there is no obvious reason why hospitals have to merge for ACOs to work. […]

Hospitals may not have much of a case for relaxing antitrust enforcement, but physicians might. Like hospitals, many physicians have spent the last two decades merging with one another and have often faced antitrust challenges from the FTC. Physicians will argue that by organizing into groups, they can better afford the information technologies envisioned for ACO success and may also be better positioned to establish internal monitoring and control systems. While the argument is theoretical at this point, all of the benefits of ACOs are theoretical, and the doctors’ theories do have the benefit of being grounded in basic economics of organizations.

Parties to a merger are always quick to tout the synergies they will create and deny that their combination will lead to higher prices. Hospitals played this game with the utmost success in the 1990s and much of the 2000s, and the courts approved hospital mergers on the weakest of theoretical and empirical evidence. Now that the theory and evidence is weighing against mergers, hospitals are playing the ACO card. If they succeed, I fear that any hope of reining in hospital spending will be forever lost.

Dranove is responsible for jump starting my own thinking about ACOs and market power. I saw him speak about related matters on a panel at the Academy Health Annual Research Meeting in 2009 and documented it on this blog.

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