Structuring Incentives within Organizations: The Case of Accountable Care Organizations

48 Pages Posted: 14 Apr 2014

See all articles by Brigham R. Frandsen

Brigham R. Frandsen

Brigham Young University - Department of Economics

James B. Rebitzer

Boston University School of Management; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Bard College - The Levy Economics Institute

Date Written: April 2014

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.

Suggested Citation

Frandsen, Brigham R. and Rebitzer, James B., Structuring Incentives within Organizations: The Case of Accountable Care Organizations (April 2014). NBER Working Paper No. w20034. Available at SSRN: https://ssrn.com/abstract=2424605

Brigham R. Frandsen (Contact Author)

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States

James B. Rebitzer

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4605 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504
United States

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