Market power, ACOs, qualitative analysis, and policy implications

Historically, I’ve been  a very quantitative and multivariate thinker. That explains my undergraduate and graduate interest in physics and engineering, my fascination with the game of Go, and my professional focus on econometric techniques for causal inference in health care. But lately I’ve been paying a lot more attention to qualitative and descriptive evidence in the health services research literature.

It’s not that I suddenly think qualitative and descriptive analyses answer questions any more definitively than do the complex multivariate approaches I normally consider. It’s that qualitative and descriptive analyses are incredibly helpful in revealing potential relationships, suggesting hypotheses, and relatively quickly and easily revealing the possible broad nature of and context for an issue.

Moreover, less econometrically or statistically complex analyses are more easily communicated to thinkers outside the field, like policymakers, journalists, and beekeepers. That’s important, and I have no problem using results of simpler analytical techniques for policy advocacy so long as the qualitative conclusions they suggest are consistent with more rigorous, but complex and less broadly accessible, approaches.

But be on guard! How can non-practitioners tell when qualitative or descriptive analyses are “telling the truth” and when they’re just wrong? Oh boy, is that a thorny issue. For now I”ll just say, roughly speaking, they can’t. They need the guidance of experts. (Perhaps I’ll come back to this issue another time.)

With that as backdrop, here are two very good passages from just one of many qualitative/descriptive papers published by researchers with the Center for Studying Health System Change. The paper, by Devers et al., appeared in a 2003 issue of Health Services Research. First, on market power:

Market power is defined as the degree of control or influence an organization has over another organization (Scott 1987; Emerson 1962). Control or influence is shaped by the willingness and ability of one organization to sanction (i.e., punish or reward) another organization that it interacts with to attain key goals, such as survival, growth, or increased margins. The origin of market power is the dependency one organization has on the resources controlled by another….

This sociological definition highlights why and how an organization exercises market power, as well as the outcome (i.e., increased control or influence over another organization in a key area). As such, this definition of market power is broader than those used in economics, which focus primarily on the ability of an organization to influence price. For example, Carlton and Perloff (1994) define market power as the ability of a firm to charge a price above that which would prevail under perfect competition, usually taken to be marginal cost.

Next up, some commentary that relates market power (or “negotiating leverage,” which the authors take to be a synonymous moniker) to arrangements that may be encouraged by an accountable care organization (ACO) payment model.

Another key change [between 1996 and 2001] was the level of hospitals’ vertical integration with physicians (e.g., physician practice acquisition, formation of intermediary organizations such as physician–hospital organizations). Greater hospital-physician alignment strengthened hospitals’ negotiating leverage and weakened plans’ options. Many hospitals had implemented a range of physician-integration strategies, becoming a critical gateway for plans to physicians in the market. In many of the contract disputes noted above, plans were negotiating with hospital-physician organizations for physician professional services as well.

That pretty much sums up my concerns about ACOs, and those of others in my field. I think the qualitative ideas suggested–that vertical integration encouraged by ACOs may increase provider market power and consumer prices–are consistent with rigorous quantitative studies of hospital and provider market power. (I’ve cited about a bazillion of such studies in prior posts; or, you can just trust me.) So, I have no problem making some policy suggestions based on these concerns. Here goes:

First, let me be clear, I’m not saying ACOs are bad. I’m saying I have concerns about the implications for private-sector costs of such organizations, which will be encouraged under new Medicare and Medicaid, ACO-like payment schemes. What this means is that policymakers and regulators need to tread carefully in this area, think things through, and come up with public-side cost control approaches that don’t exacerbate private-side problems. (I suggested one idea, though without substantial detail. If someone were to pay me to study it–you know, rigorously, quantitatively–I’d have more to say. Meanwhile, back to thinking about ideas I’m actually paid for …)

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