Working Paper: NBER ID: w20034
Authors: Brigham Frandsen; James B. Rebitzer
Abstract: Accountable Care Organizations (ACOs) are new organizations created by the Affordable Care Act to encourage more efficient, integrated care delivery. To promote efficiency, ACOs sign contracts under which they keep a fraction of the savings from keeping costs below target provided they also maintain quality levels. To promote integration and facilitate measurement, ACOs are required to have at least 5,000 enrollees and so must coordinate across many providers. We calibrate a model of optimal ACO incentives using proprietary performance measures from a large insurer. Our key finding is that free-riding is a severe problem and causes optimal incentive payments to exceed cost savings unless ACOs simultaneously achieve extremely large efficiency gains. This implies that successful ACOs will likely rely on motivational strategies that amplify the effects of under-powered incentives. These motivational strategies raise important questions about the limits of ACOs as a policy for promoting more efficient, integrated care.
Keywords: Accountable Care Organizations; Incentives; Health Care Delivery; Efficiency
JEL Codes: D23; D86; I12; L14; L24; M5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ACOs size (L25) | incentive effectiveness (M52) |
| free-riding (H40) | optimal incentive payments exceeding cost savings (J33) |
| ACOs size (L25) | incentive dilution (M52) |
| incentive dilution (M52) | effectiveness of incentive payments (J33) |
| ACOs size (L25) | underpowered pay-for-performance systems (J33) |
| pay-for-performance plans (J33) | not self-funding (I22) |
| significant economies of scale or productivity improvements (D24) | self-financed pay-for-performance (J33) |