Market Power, Transactions Costs, and the Entry of Accountable Care Organizations in Health Care

Abstract

ACOs were promoted in the 2010 Patient Protection and Affordable Care Act (ACA) to incentivize integrated care and cost control. Because they involve vertical and horizontal collaboration, ACOs also have the potential to harm competition. In this paper, we analyze ACO entry and formation patterns with the use of a unique, proprietary database that includes public (Medicare) and private ACOs. We estimate an empirical model that explains county-level ACO entry as a function of: physician, hospital, and insurance market structure; demographics; and other economic and regulatory factors. We find that physician concentration by organization has little effect. In contrast, physician concentration by geographic site-which is a new measure of locational concentration of physicians-discourages ACO entry. Hospital concentration generally has a negative effect. HMO penetration is a strong predictor of ACO entry, while physician-hospital organizations have little effect. Small markets discourage entry, which suggests economies of scale for ACOs. Predictors of public and private ACO entry are different. State regulations of nursing and the corporate practice of medicine have little effect.

Physician Competition in the Era of Accountable Care Organizations

“…The majority of ACOs we observe have their greatest density of specific physician specialists in unconcentrated markets. This contrasts with prior work showing ACO presence to be negatively correlated with the number of physician groups in a market (Lewis et al 2013)-although Frech et al (2015) find the opposite. However, both of these…”

“…)—although Frech et al. () find the opposite. However, both of these studies focus on a much earlier period of ACO formation (2011–2012), with less than half the number of ACOs we observe.…”

“…), and the formation of ACOs, at least early on, appears linked to the market structure of physicians, hospitals, and insurers (Frech et al. )—including the prevalence of provider integration (Auerbach et al. ).…”

“…and Lyons 2015) can lead to higher health care prices and spending. As ACOs deliberately encourage closer business relationships between otherwise separate entities, some have voiced concerns over the potential risks of ACOs' driving anticompetitive behavior in health care markets (Brill 2015;DeCamp 2013;Frech et al 2015;Greaney 2011;Lieberman 2011). Yet we have little empirical guidance on the pervasiveness or magnitude of such an issue.…”

“…Yet we have little empirical guidance on the pervasiveness or magnitude of such an issue. We know that ACOs are often found among more populated, urban locales (Muhlestein 2015;Lewis et al 2013), and the formation of ACOs, at least early on, appears linked to the market structure of physicians, hospitals, and insurers (Frech et al 2015) -including the prevalence of provider integration . However, none of these existing works informs the research or policy communities as to if and how ACOs are currently changing the competitive health care landscape across the United States.…”