Research Spotlight: ACOs & TCE
What might accountable care organizations (ACOs) look like moving forward? As ACOs continue to grow and evolve in our health care delivery system, how will pursuit of ACO models align with consolidation pressures in the health care industry? This month's Research Spotlight post shines on a recent article by Dr. Steve Mick (Virginia Commonwealth University) and our own Dr. Patrick Shay, who together considered the question of whether the continued proliferation of ACO models may encourage health care organizations to adopt vertically integrated organizational forms.
Their work, included as part of a special December issue of Medical Care Research and Review dedicated to using organization theory to understand ACOs, applies a perspective known as Transaction Cost Economics (TCE) to explore what degree of vertical integration activity ACO forms may take. Developed from the work of Nobel laureates Oliver Williamson and Ronald Coase, TCE focuses on the classic "make or buy" decision, helping to explain why organizations may integrate production activities through hierarchical structures versus relying upon external exchanges in the development of a good or service. At its core, TCE suggests that organizations compare the costs of producing internally (i.e., "make") or externally (i.e., "buy"), factoring in non-production - or transaction - costs that stem from environmental uncertainty, asset specificity, the frequency of exchanges, and bounded rationality.
Ultimately, Mick and Shay (2016) predict that ACOs are likely to yield a spectrum of vertical integration activities, noting that "vertical integration may remedy transaction costs stemming from diverse sources of uncertainty, providing ACOs with a means to limit opportunistic behavior, defend competitive advantages, adeptly pursue adaptive strategies in the face of unforeseen contingencies, and enforce common interpretations and expectations of the organization and external environment" (p. 655). However, they also acknowledge that ACOs are likely to contribute to increased internal transaction costs due to the "administrative complications and challenges of continually internalizing exchanges wrought by vertical integration" (Mick & Shay, 2016, p. 655), and they furthermore point to the possibility that embedded network relationships characterized by high levels of trust and frequent exchange may allow for the benefits of vertical integration without the necessities of physical integration and common ownership. Thus, on the one hand, ACO models may promote increased consolidation activities among health care organizations, but on the other hand, in situations where the benefits of vertical integration can be attained without consolidation, or when the costs of vertical integration and consolidation outweigh the benefits, providers may engage in ACO activity while pursuing vertical integration strategies virtually. Such varied integration activities are consistent with the diversity of ACO forms that have been previously identified by scholars (e.g., Auerbach et al., 2013; Kreindler et al., 2012; Shortell et al., 2014). As Mick and Shay (2016) suggest, this application of TCE makes the classic "make or buy" decision seem anything but simple, but for a health care industry known for its complexity, perhaps this goes without saying.
References:
Mick, S.S.F., & Shay, P.D. (2016). Accountable care organizations and transaction cost economics. Medical Care Research and Review, 73 (6), 649-659.
Auerbach, D.I., Liu, H., Hussey, P.S., Lau, C., & Mehrotra, A. (2013). Accountable care organization formation is associated with integrated systems but not high medical spending. Health Affairs, 32, 1781-1788.
Kreindler, S.A., Larson, B.K., Wu, F.M., Carluzzo, K.L., Gbemudu, J.N., Struthers, A., & Fisher, E.S. (2012). Interpretations of integration in early accountable care organizations. Milbank Quarterly, 90, 457-483.
Shortell, S.M., Wu, F.M., Lewis, V.A., Colla, C.H., Fisher, E.S. (2014). A taxonomy of accountable care organizations for policy and practice. Health Services Research, 49, 1883-1899.
Their work, included as part of a special December issue of Medical Care Research and Review dedicated to using organization theory to understand ACOs, applies a perspective known as Transaction Cost Economics (TCE) to explore what degree of vertical integration activity ACO forms may take. Developed from the work of Nobel laureates Oliver Williamson and Ronald Coase, TCE focuses on the classic "make or buy" decision, helping to explain why organizations may integrate production activities through hierarchical structures versus relying upon external exchanges in the development of a good or service. At its core, TCE suggests that organizations compare the costs of producing internally (i.e., "make") or externally (i.e., "buy"), factoring in non-production - or transaction - costs that stem from environmental uncertainty, asset specificity, the frequency of exchanges, and bounded rationality.
Ultimately, Mick and Shay (2016) predict that ACOs are likely to yield a spectrum of vertical integration activities, noting that "vertical integration may remedy transaction costs stemming from diverse sources of uncertainty, providing ACOs with a means to limit opportunistic behavior, defend competitive advantages, adeptly pursue adaptive strategies in the face of unforeseen contingencies, and enforce common interpretations and expectations of the organization and external environment" (p. 655). However, they also acknowledge that ACOs are likely to contribute to increased internal transaction costs due to the "administrative complications and challenges of continually internalizing exchanges wrought by vertical integration" (Mick & Shay, 2016, p. 655), and they furthermore point to the possibility that embedded network relationships characterized by high levels of trust and frequent exchange may allow for the benefits of vertical integration without the necessities of physical integration and common ownership. Thus, on the one hand, ACO models may promote increased consolidation activities among health care organizations, but on the other hand, in situations where the benefits of vertical integration can be attained without consolidation, or when the costs of vertical integration and consolidation outweigh the benefits, providers may engage in ACO activity while pursuing vertical integration strategies virtually. Such varied integration activities are consistent with the diversity of ACO forms that have been previously identified by scholars (e.g., Auerbach et al., 2013; Kreindler et al., 2012; Shortell et al., 2014). As Mick and Shay (2016) suggest, this application of TCE makes the classic "make or buy" decision seem anything but simple, but for a health care industry known for its complexity, perhaps this goes without saying.
References:
Mick, S.S.F., & Shay, P.D. (2016). Accountable care organizations and transaction cost economics. Medical Care Research and Review, 73 (6), 649-659.
Auerbach, D.I., Liu, H., Hussey, P.S., Lau, C., & Mehrotra, A. (2013). Accountable care organization formation is associated with integrated systems but not high medical spending. Health Affairs, 32, 1781-1788.
Kreindler, S.A., Larson, B.K., Wu, F.M., Carluzzo, K.L., Gbemudu, J.N., Struthers, A., & Fisher, E.S. (2012). Interpretations of integration in early accountable care organizations. Milbank Quarterly, 90, 457-483.
Shortell, S.M., Wu, F.M., Lewis, V.A., Colla, C.H., Fisher, E.S. (2014). A taxonomy of accountable care organizations for policy and practice. Health Services Research, 49, 1883-1899.
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