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Tuesday, May 31, 2011

ACOs, markets, and coordinating human activities

I have been reviewing various discussions of the draft ACO rules. I am all for the overall goals of ACOs. To improve patient care it is absolutely essential to improve information sharing and provide appropriate incentives to reward activities which actually provide value to patients. I think it may be very enlightening to look at the proposed ACO approach and compare it to its alternatives.

The ACO mechanism has been proposed in order to more efficiently allocate scarce resources and to coordinate the activities of people and entities involved in delivery of health care. What other validated mechanisms exist to allocate scarce resources and coordinate human activities? The list is not very long, containing only one.. markets. Within markets, information is transmitted via the price mechanism. The price mechanism incorporates risk adjustment and value placed by consumers, and puts it into a dynamic tools which responds rapidly to available resources and value within specific contexts. It requires very simple rules. If you own a particular resource, it is your decision as to whether you want to enter into exchange. If you desire a particular resource, it will require that you be willing to give up something you own to acquire it.

In the attempt to substitute ACO rules for market rules to accomplish resource allocation and coordination of efforts, the first thing that becomes painfully apparent is we are required to substitute mind boggling complexity for the simplicity of markets. We propose to move from a complex system governed by simple rules to a complex system governed by rules that are almost  inconceivably complex. There is simply no precedent in all of human history to suggest that this can work while there are countless precedents which unambiguously demonstrate that such approaches consistently fail. The second half of the 20th century was a remarkable testimony to the consistent failure of non-market based allocation schemes.

The present discussion focuses on the minutia of how ACOs will be structured. It is as if we have abdicated on the discussion regarding whether the fundamental assumption  of their inherent workability. We have been asked to comment on the rules and not on the underlying question of whether such entities can be viewed as substitutes for markets in terms of their basic functions; allocating scarce resources and coordinating human activities. The questions were are debating are irrelevant. ACOs cannot fulfill the missions they were conceived to do and no amount of tinkering can change this. They cannot substitute for markets.

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