Structuring Incentives Within Organizations: The Case of Accountable Care Organizations

4:00 pm on Thursday, December 13, 2012
5:30 pm on Thursday, December 13, 2012
Contact Name:
Jeremy Meltzer
Accountable Care Organizations (ACOs) are a new model for integrated health care delivery created by the Patient Protection and Affordable Care Act. They allow a group of hospitals and providers to jointly contract with the Center for Medicare and Medicaid Services to provide care to a population of Medicare enrollees in an environment that rewards cost-efficiency through global budgeting and group-based pay-for-performance incentives. To improve the precision of performance measures, ACOs are required to have at least 5,000 enrollees. Achieving this scale requires pooling the patient panels of many physicians and this causes a free-riding problem. Working with a stylized model of ACO incentives, we establish that the negative effects of free-riding swamp the positive effects of increased precision. We calibrate the model using proprietary performance measures from a very large insurer. Our estimates suggest that even minimally sized ACOs will require unmanageably high stakes incentives. To achieve their goals under these circumstances, ACOs will have to augment under-powered incentives with motivational strategies that complement pay-for-performance. Jim Rebitzer is a professor of management, economics, and public policy at the Boston University School of Management where he chairs the Markets, Public Policy, and Law Department. He is a research associate at the National Bureau of Economic Research and the Levy Economics Institute, and a research fellow at the Institute for the Study of Labor and the Cornell Compensation Research Institute. Professor Rebitzer has published papers in many academic journals and in 2012 won the Arrow Award for the best paper in health economics given by the International Health Economics Association.