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Structuring Incentives within Accountable Care Organizations

Author

Listed:
  • 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 5000 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 (JEL D23, D86, I12, L14, L24, M52).

Suggested Citation

  • Brigham Frandsen & James B. Rebitzer, 2015. "Structuring Incentives within Accountable Care Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 77-103.
    • Handle: RePEc:oup:jleorg:v:31:y:2015:i:suppl_1:p:i77-i103.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewu010
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    Citations

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    Cited by:

    1. Simona Grassi & Ching-to Albert Ma, 2016. "Information acquisition, referral, and organization," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 935-960, November.
    2. Larry G. Epstein & Hiroaki Kaido & Kyoungwon Seo, 2016. "Robust Confidence Regions for Incomplete Models," Econometrica, Econometric Society, vol. 84, pages 1799-1838, September.
    3. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2024. "Competition, quality and integrated health care," Journal of Health Economics, Elsevier, vol. 95(C).
    4. Hui Zhang & Christian Wernz & Danny R. Hughes, 2018. "Modeling and designing health care payment innovations for medical imaging," Health Care Management Science, Springer, vol. 21(1), pages 37-51, March.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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