NCPA - National Center for Policy Analysis

Accountable Care Organizations: Panacea or Train Wreck?

August 14, 2012

One of the hottest new ideas in health care is the Accountable Care Organization (ACO).  Similar to health maintenance organizations, ACOs are designed to bring hospitals, physicians and insurers together to reduce health care costs by improving quality and reducing expenditures for unnecessary tests and procedures. ACOs aim to do so by restructuring the financial incentives for providers, say Roberta Herzberg, a senior fellow with the National Center for Policy Analysis and an associate professor of political science at Utah State University, and Chris Fawson, a professor of economics and finance at Utah State University.

However, there are problems with ACOs, including:

  • ACOs assume financial risk, but have no formal control over patients' choice of treatment or providers.
  • Patients are assigned to an ACO based on past service use, not explicit agreement. That is, providers do not know in advance which patients count as members of their ACO, and patients are retrospectively assigned to an organization based on receiving much of their primary care from the ACO.
  • Higher regulatory burdens: To qualify as an ACO, a provider network must meet a variety of benchmarks for quality measurement, governing structure and information transmission. Meeting these requirements and demonstrating compliance is expected to add millions of dollars in administrative costs, at least in the short run. Whether the expected savings will offset the additional costs is unclear.
  • Reduced competition: The creation of large ACO provider networks will reduce competition for the business of consumers and insurers.
  • Data collection requirements raise costs and privacy concerns.
  • Providers will be tied to ACOs. There are concerns that providers are being enticed into ACO networks with promises of rewards for efficient behavior, but over time their reimbursements could be squeezed. Providers may be hesitant to leave as the economics change. Moreover, since other providers and regulators have information regarding a provider's practice, it may be impossible for that provider to operate independently again.

The Obama administration has little trust for real markets and believes that consumers are incapable of directing their own health care in a competitive market. It believes that government experts must manage consumers to protect them from unscrupulous providers. The result is a top-heavy regulatory system in which administrators in government and the ACOs could soak up health care dollars without improving patient outcomes or reducing overall health care costs.

Source: Roberta Herzberg and Chris Fawson, "Accountable Care Organizations:  Panacea or Train Wreck?" National Center for Policy Analysis, August 14, 2012.


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