Code Red: Two Economists Examine the U.S. Healthcare System

April 25, 2011

The Rashomon of Health Care: Why the Government is Promoting and Hindering ACOs at the Same Time

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:44 am

As I have previously blogged, a centerpiece of the Affordable Care Act (ACA) is the promotion of Accountable Care Organizations (ACOs). The Center for Medicare and Medicaid Services is banking on the financial incentives of ACOs (through “shared savings”), combined with over 60 pay for performance quality metrics, to promote efficient, high quality medical care. Providers are certainly taking notice. Hospitals are acquiring physician practices in numbers not seen since the 1990s and many physicians are thinking of starting their own ACOs. For the federal government to so aggressively promote the reorganization of health care delivery is unprecedented. (I am willing to debate those of you who remember the HMO Act of 1973.)

It must have quite a shock to CMS when the Federal Trade Commission announced its antitrust guidelines for ACOs. (These can be found here, especially pp. 21896-21899). I won’t dwell on the details but suffice it to say that the proposed test is likely to have a high false positive rate (challenging many ACOs that are not anticompetitive). And while the FTC lacks the resources to investigate every new ACO, the new rules certainly pose an obstacle to integration. So why is the FTC standing in the way of CMS? The answer may be found in one the masterworks of the great film director Akira Kurosawa.

In the movie Rashomon, four men witness different moments of what might or might not have been a heinous crime. Testifying at trial just three days later, the men attempt to describe the entire terrible episode from their own limited perspectives. The healthcare event whose details are in dispute occurred not three days ago, or even three years ago. And it wasn’t just one event, it was the entire decade of the 1990s. I believe that support or opposition to ACOs depends critically on how one views that lost decade.

Those who adamantly support ACOs – that includes most of my health services research colleagues, especially those still working in Washington to implement the ACA – view the 1990s as a lost opportunity. During the 1990s, hospitals merged with each other and with their medical staffs to create integrated delivery systems. IDSs were the forerunners of ACOs. They were supposed to coordinate care, accept shared financial risk, and give us greater efficiency and quality. Leading health policy analysts at the time could not wax more enthusiastic about how IDSs would change the system. And health providers were eager to jump on the bandwagon; IDS were hailed as “a new wave becoming a tidal wave.” (There were a few naysayers, including this blogger and my friends on the faculty at the Wharton school.) Unfortunately, the IDS wave crashed. Few IDSs saved money or raised quality; many lost their shirts.

I think that ACO supporters in CMS look back on the 1990s and do not see anything wrong with vertical integration other than that it was an idea before its time. The market wasn’t ready for radical transformation. Physicians weren’t willing to partner with hospitals. Providers lacked the necessary management information technologies. From their perch two decades removed from the IDS debacle, the time for ACOs has come.

I believe that the FTC rejects this view. To the antitrust enforcers, the 1990s was not about a failed effort to coordinate care delivery but was instead about a successful effort to eliminate competition. Hospitals didn’t merge to generate economies of scale, they merged to raise prices. Hospitals didn’t acquire physician practices to promote coordination, they acquired them to increase referrals and prevent physicians from competing in the growing outpatient diagnostics and surgery markets. And while many IDSs did lose money, many hospital systems made small fortunes. Antitrust enforcers worry that providers will use ACOs as an excuse to renew their efforts to grab market power. Hence the new restrictive antitrust guidelines.

In Rashomon, we never find out what really happened on that terrible day. And I think healthcare in the 1990s will be much the same way. The FTC can point to empirical studies showing that some mergers led to higher prices even as scale economies proved elusive. But definitive studies of IDS efficiency do not exist, and no one knows for sure if a new generation of hospital managers can correct the mistakes of the past.

I also bore witness to the 1990s, and from my perch things looked pretty much the same as they did to the FTC. And I worry that ACOs are going to perpetuate the same heinous crimes as their IDSs forebears. So I can support what the FTC is trying to accomplish (though I have some thoughts about how they do so more efficiently that I hope to share with them). But I recall the conviction with which each of Kurosawa’s characters described the events that had just transpired. I may think that ACO supporters are viewing the 1990s through rose colored glasses, but for our nation’s sake, I hope I am wrong.

1 Comment

  1. Prof. Dranove-

    I assume you’re in Evanston, and therefore thinking of the hospital mergers on our North Shore. Insureres were well aware that those mergers resulted in much enhanced pricing power for hospitals. The government tried to reverse at least one merger, but the best it could get was a consent order that two sister hospitals would bid independently for insured care. Another in a long line of laughable anti-trust remedies (in many industries) when divestiture is the only effective solution.

    I worked as a hospital consultant in that era and agree that the acquisition of physician practices and clinics was about locking up patients, referrals and geographies. Improving quality of care through integration was of interest to middle management and the marketing department, but not the people at the top.

    Comment by Dave B — May 7, 2011 @ 7:10 pm

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