Economies of Scale and Individual Incentives in Accountable Care Organizations

Abstract

This paper is an empirical analysis of the effect of size on the quality and cost of care in accountable care organizations (ACOs) established under Obamacare. ACOs are groups of doctors who come together and agree to receive bonuses from Medicare for reducing expenditures or improving the quality of care in their practices. The literature on this topic is divided: some authors suggest that these groups benefit from economies of scale whereas other authors argue that ACOs suffer from the agency problem of output-sharing teams. My results estimate a non-monotone relationship between size and expenditure: for a small ACO, increasing the number of doctors in the organization leads to lower expenditures whereas for a large ACO, adding doctors is associated with higher expenditures. The findings presented in this paper suggest that there is an ideal size for ACOs to reduce expenditures that balance the benefits of the economies of scale and the costs of the agency problem. For quality of care, I find that increasing the size of an ACO organization is associated with improved quality suggesting that ACOs generate strong economies of scale in this aspect of healthcare.