• 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.


    • Until recently, the trend in health care, promoted by health care policy, had been the development of outpatient facilities to compete with hospitals, more efficient facilities, more convenient facilities, more innovative facilities, Indeed, studies have shown that much of the recent cost “savings” in the delivery of health care were attributable to these facilities. Consolidation and integration are intended to reverse the trend. It’s understandable, if unfortunate. Hospitals receive much higher reimbursement for services as compared to outpatient facilities, so returning services to the hospital has been the principal business strategy of the hospitals, achieved by acquiring competing facilities and by integrating the physicians into the hospital and providing incentives for the physicians to choose hospital services. And this strategy is being supported by current health care policy, which includes significant cuts in reimbursement for the already relatively low outpatient facilities and continued increases in reimbursement for the already relatively higher hospitals. Some observers, paranoid observers I call them, believe that encouraging consolidation and integration is simply a means to a sinister end, to make it much easier for the government to control health care prices. I’m no paranoid, not yet anyway, and my observation is that current policy is simply misguided. But all may work out for the best in the end. Why? Those higher deductibles and co-pays. Patients are becoming much more sensitive to pricing. Patients will demand that services be provided in more efficient outpatient facilities, where the total cost for a colonoscopy, a catheterization, or other procedure is less than the co-pay for the same procedure in the hospital.

    • I’d like to see a healthy mix of all-payer rate setting efficiency-enhancing processes – which I think would address both of your concerns, Austin.

      • Sorry- that last post should have read

        I’d like to see a healthy mix of all-payer rate setting in conjunction with efficiency-enhancing processes – which I think would address both of your concerns (market power consolidation and inefficiency).

    • There’s a complication here. Some innovations can only be undertaken at scale. A lot of improvements in quality monitoring or follow-up care, for example, are overhead in a health care organization’s budgets. They can only get done if you care write the cost off over a large volume of services or covered patients. So in some ways, large organizations like ACOs are required for some kinds of innovation. And that’s one of the reasons why Group Health, IHC, Kaiser, and Geisinger are innovation leaders.

    • It is certainly possible that ACOs are a move in the wrong
      direction due to the consolidation concerns noted. Unfortunately,
      in most markets, insurance companies have so much market power that
      the only alternatives are to force competition (i.e., antitrust
      policies) or provide a countervailing force. But, the other part of
      ACOs is that they will also be taking in some insurance risk: in
      addition to being responsible for the outcomes of their population,
      they will be responsible for Total Cost of Care (TCOC). Most such
      arrangements feature either Shared Savings, which gives the ACO –
      or at least a significant number of ACO participants, depending on
      how they’re structured – an incentive to reduce cost. The other
      prevalent arrangement is Risk Adjusted Capitation, which also
      provides incentive to reduce cost. In order to reduce the risk that
      financial factors will lead to withholding beneficial services,
      ACOs and Clinical Integrated Networks must first clear quality
      hurdles before they can take part in the savings. Logically, an
      ACO/CI is the only type of organization that can take on both types
      of risk. An insurance company can’t take on health risk because
      they don’t provide care. A non-integrated provider network can’t
      take on financial risk because they can’t control enough of the
      utilization. That does not mean ACOs are a sure thing. We should
      certainly be concerned that so many ACOs are dominated by large
      hospital systems or Insurance companies; these players, along with
      specialists and Pharma, have the most to lose if the status quo
      changes. Most of them also have a well established track record of
      profit maximizing behavior. There are notable exceptions but it
      will take more than a few exceptions to make the concept