Market power and efficiency in health care

David Cutler and Fiona Scott Morton point to another limitation of provider consolidation and integration, such as that promoted by Accountable Care Organizations (ACOs):

Another potential adverse effect of consolidation is lack of innovation in products and processes. With respect to product innovation, most studies find that investment in new technologies is positively correlated with profits. Process innovations, however, seem to decline with market power consolidated in a few institutions. Organizations with market power often lack the incentive to develop simple items such as checklists and uniform protocols that deliver services in newer, more efficient ways. Such changes are difficult, and managers of large, profitable organizations might conclude that they do not need to undertake them. [Bold added.]

If I could make one and only one change to the health system, it’d be to infuse it with efficiency-enhancing processes. Increasing productivity — health produced per dollar input — is precisely what’s needed. Consequently, policies that serve to increase provider market power would seem to be pushing the system in the wrong direction.

However, Cutler and Morton did not write that organizations with market power never innovate toward efficiency. They only wrote that such organizations “often lack the incentive” to do so. Thus, it is, in principle, possible that ACOs could face incentives for productivity even as they face incentives for consolidation and integration. Could the former outweigh the latter?

I do not think anyone can be both evidence-based and confident the constellation of incentives in place today are sufficient to guarantee the performance we should want. Even if early evidence appears promising, it is simply too soon to tell if ACOs will work.


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