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It’s been a rough week for what is more or less the structural cornerstone of President Barack Obama’s vision for a new healthcare system, the Accountable Care Organization (ACO). The first bit of news was the startup costs associated with creating an ACO, which the Department of Health and Human Services originally estimated to be around $1.8 million, are closer to $11-$26 million. The second was the American Medical Group Association, which represents groups providing care to one-in-three Americans, announced that 90% of its members would not participate in such an organization. This is good news for American patients.

Though ACOs, and the broader healthcare law, was sold in the language of “choice” and “competition,” they will provide little of either. In fact, economic reality precludes such an outcome, and I think the administration knows it.

If your goal is to realize the cost-saving and innovation-creating benefits of vigorous competition, you would ideally prefer a superfluity of buyers and sellers. On the other hand, if your goal is to micromanage healthcare providers and restrain costs via price-controls and regulations, you would like to see fewer such entities. Some would call these monopolies; the Affordable Care Act calls them ACOs.

With authority over the healthcare of a predetermined geographic region, these organizations will be so large that the Federal Trade Commission and Department of Justice will have to establish a new anti-trust policy that exempts ACOs. In other words, because the Obama administration believes in a technocratic approach to healthcare and its ability to leverage savings over larger institutions via Medicare reimbursement cuts, these groups will be able to play by a different set of rules than the rest of the economy.

While Medicare is able to dictate the prices it will pay on a take it or leave it basis, private insurers must negotiate their reimbursement levels. And, of course, the larger an organization is, the more leverage it has in exacting above-market reimbursements. Furthermore, as health reform put Medicare on a path to reduce reimbursement levels below Medicaid rates within nine years, the incentives for ACOs to shift cost from public to private payers will increase. As such, the desired savings will fail to materialize.

This is precisely what happened with the HMO experiment in California over the last decade after hospitals and physician practices merged to counter HMOs’ bargaining power. The outcome was predictable: The number of hospital beds shrank, prices more than doubled, and overall healthcare costs in the state grew at the fastest rate in the nation. Today, after its own experiment with reform, that distinction belongs to Massachusetts.

There is a very good reason that, over the past 15 years, virtually every successful innovation driven by private capital has focused on getting people out of the expensive, inpatient hospital setting. Free standing outpatient surgical and diagnostic centers are able to operate with much lower overhead, and can pass those savings on to patients. Of course, it takes the famous Washington wisdom to reverse this trend and force patients back into the exponentially more expensive hospital setting. Large, entrenched hospital systems do not innovate, despite what administration officials might claim.

As health reform marches on, the administration is doubling down to make sure it gets what it wants. Unfortunately, patients will be left with the bill.

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