Discussion

Chapter 8: Managed Care

This chapter presents a brief history of growth and development of managed care as an alternative to traditional fee-for-service medical care delivery. The different varieties of managed care are discussed, including health maintenance organizations, preferred provider organizations, and point-of-service plans. The cost-saving features of managed care and the mixed empirical evidence that this form of delivery actually saves money is summarized in the chapter. Check these out on the PowerPoint file:

a. History of managed care

b. Types of managed care plans and managed care organizations

c. The theory of managed care savings

Selective contracting, Risk-sharing arrangements, Utilization review

d. Managed care strategies

e. Market Alternatives

f. Consumer-directed health plans

g. Innovative delivery concepts

h. Evidence of managed care savings

i. Evidence of quality differences between managed care and fee-for-service care

j. Managed care and its public image

k. The future of managed care

Issues in Medical Care Delivery

· Public Employees Shifting into Consumer Driven Plans · The Managed Care “Blues”

Objectives:

Understand the historical development of managed care.

Explain the main differences between traditional fee-for-service insurance with deductibles and copayments and managed care with capitated payments.

Understand the distinctions between retrospective and prospective payment.

List the distinctive features of the different varieties of managed care arrangements.

Describe the importance of risk shifting in the managed care environment.

Summarize the reasons for the popularity of managed care and the seeds of its possible demise.

Understand the major drawbacks of a fixed-budget system, such as managed care.

Key Points:

1. Fee-for-service and capitation are opposites in the payment mechanism; fee-for-service encourages over-treatment and capitation under-treatment. Capitation creates pressures to provide fewer services and is a fixed payment determined in advance to pay for all medically-necessary care. Assignment forces physicians to accept lower fees for treating Medicare patients. This results in cost-shifting to private health insurance patients.

2. Providers share some of the financial risk in managed care, especially in those situations where capitated payment is used. Risk sharing changes the incentive structure. No longer is it profitable to provide more services. Physicians get more by providing less. The physician views the patient as a cost center, not a profit center.The most important aspect of the change from fee-for-service to capitation is thatthe most valuable patient is no longer the sickest, but the most healthy.

3. The HMO is a provider and a payer. The health maintenance organization where the physicians are salaried employees of the HMO is called a staff-model HMO. As an insurer, the HMO shares the financial risk of providing care. The HMO does have some control over the amount of care provided. The Network model HMOs use capitation to shift financial risk back onto providers.

4. Cost-saving features include provider networks, payment by capitation, utilization management, and the use of gatekeepers.

5. Cost-conscious providers are continually searching for less expensive ways to provide care. Discounted fee-for-service, closed panels, required second opinions, and formularies will have an effect on the rest of the health care sector. A shift to inpatient care, moving recovering patients out of the hospital and into acute-care nursing homes, the provision of home health care, and hospice care will all increase.

6. The incentive is to provide less care, fewer hospital admissions, and shorter hospital stays. The empirical evidence all seems to point to these results. Overall health status does not seem to suffer.

7. Risk sharing will make providers responsible for all spending greater than the capitated payment creating an incentive to limit equivocal care.

8. Kaiser-Permanente, to provide access to medical care to Kaiser’s workers in remote locations where medical services were in short supply.

9. Managed care combines the responsibilities of payer and provider of medical services, and attempts to shift a portion of the financial risk onto providers.

10. The HMO that contracts with individual physicians or group practices to provide care for a specified group of enrollees is called an IPA. The type of managed care organization that has the strictest cost control features is Closed-panel HMO.

11. The RAND Health Insurance experiment compared costs of HMOs with the costs of indemnity insurers. The study confirmed the cost-saving potential of HMOs and that the HMO had per capita costs that were 28% lower than the indemnity. Most empirical studies show that the cost-savings provided by managed care are accomplished byreducing the rate of hospitalization.

12. To control moral hazard and the increased spending that accompanies it, managed care providers include clinical rules, capitation, risk sharing, in contracts with providers.

Chapter 9: The Physicians’ Services Market

This chapter focuses on the market for physicians’ services, followed by short discussions of nurses and dentists. Specialty mix and geographic distribution precede a discussion of physicians’ compensation issues. As a primary determinant of the supply of physicians, the role of medical education is addressed. Important topics discussed include the shortage of physicians, international medical graduates, and reform.

Check these out on the PowerPoint file:

a. The theory of labor markets

b. Input pricing, Demand for inputs

c. Human capital investment

d. The market for physicians’ services

e. Specialty distribution, Geographic distribution

f. Physician compensation

g. Alternative Payment Practices

h. Pricing of physicians’ services

i. Organization of physicians’ practices

j. Models of physician behavior

k. The physician as monopolistic competitor

l. The physician as imperfect agent

m. Influencing physician behavior

n. Do physicians respond to incentives?

o. The market for nursing services

p. The market for dental services

Issues in Medical Care Delivery	Back-of-the-Envelope
· The Future Physician Shortage · An Endangered Species: The Male Gynecologist · Differences in Treatment Patterns: Medicare versus Private Insurance · Do We Really Want Low-Cost Primary Care? · The Demand for Dental Care · Silicone Breast implant litigation: A case of rent-seeking behavior	· Estimating Rates of Return for Schooling · Is There an Optimal Physician-Population Ratio? · Price Discrimination in Medical Care · Monopsony Power in the Market for Registered Nurses

Objectives

1. Understand the central role of physicians in controlling cost in medical care.

2. Summarize the major supply-side issues in medical care delivery.

3. Identify the major institutional factors affecting medical education in the U.S.

4. Prescribe alternatives for reforming medical education and summarize their impacts.

Key Points:

1. Patient Demand: If there are few treatment alternatives or the procedures are minimally invasive, physicians have more power to induce patient demand. This would imply that the more price inelastic demand, the better able physicians are to induce demand. Calculate demand elasticities to determine where potential problems may be. The types of surgeries where physicians have more latitude may be speculative—CABGs, hernia repair.

2. Physicians must be monitored closely to ensure they do not recommend unnecessary treatments. As adviser they recommend treatments they provide. The possibility of demand inducement is increased when physicians are investors in diagnostic and testing facilities. This increases the likelihood of self referral. Since patients are responsible for only a small percentage of the bill, they are not as critical in their oversight. Natural limits are determined by the integrity and ethics of individual physicians.

3. Supply is an important element of the medical market. In theory, we expect that an increase in supply (relative to demand) to lower price and increase quantity. The impact on physicians’ incomes will depend on the price elasticity of demand for physicians’ services. The evidence seems to indicate that the more physicians, the higher the price, while at the same time physicians’ incomes keep rising.

4. Who better to determine the scope of legitimate medical care activities than practitioners of the trade? Then again, it is in their best interest to limit competition and thus set standards so high as to disqualify all non-MD competition.

5. The issue of entering Medical profession is the high income and the cost of investment. High incomes are important, but so is a decent rate of return on the investment. This can also be improved by subsidies, scholarships and grants, during medical school and reducing the training period. Also, consider the income foregone (loss the opportunity of earning income from other jobs) while attending the medical school.

6. In the US, there are twice as many specialists as there are generalists. Is this an issue? Think of what positive and negative of the situation.

7. According to surveys by the Medical Group Management Association, the average primary care physician earned approximately $200,000 in 2010. In 2010, the medical specialty that earned the highest rate of return on investment was orthopedic surgery.

8. Medical Malpractice:Impact on providers, patients, and third-party payers; compares and contrasts the U.S medical malpractice law to other developed countries. The impact of the tort law on the health care spending.

9. Physicians who own their own diagnostic testing facilities tend to order more tests, charge higher fees for them, and have higher total bills to patients. This practice of self-referral is an example of physician-induced demand.

10. The observed variations in practice patterns in different regions of the country are difficult to eliminate,

because of the many alternative treatment options available for most ailments: due to the localized nature of most medical practice, it is difficult to change the preferences of physicians and patients; the observed variations are so minor that they are of little concern to policy makers.

11. Physicians salaries increased substantially over the decade 1995-2005 from an average of $215,000 to $315,000. This indicates that the demand for physicians has increased, and there is a shortage of physicians.

To address the shortage of physicians on the horizon, it will be necessary to build more medical schools, provide more grants and scholarships for medical education, allow the admission of more foreign-educated physicians.

12. Input demand is called derived demand becausedemand for an input is derived from demand for the product or service it produces.

13. An important element in estimating the present value of an investment is the calculation of the discount factor. The discount factor may be expressed as: 1/(1 + r)nwhere r is the discount rate and n is the number of years the investment is held.

14. Empirical studies that suggest differences in utilization rates between fee-for-service and managed care plansare unable to differentiate between the impacts due to financial incentives and those due to clinical rules.

Questions to think about:

1. It has been argued that medical practitioners have the ability to generate demand for their own services. What is the theory behind this hypothesis? What assumption of the perfectly competitive model must be violated? What is the empirical evidence used to support the theory of physician-induced demand?

2. Unions have improved wages and working conditions in many different employment settings. The decision to strike raises certain moral and ethical issues in medical care. The American Nurses’ Association once considered the use of strikes unprofessional, but in 1968 rescinded that position and now views the strike threat as a necessary part of collective bargaining. The moral and ethical issues aside, what is the economic impact of union activity in nursing? Use both the perfectly competitive and monopsony models to address this issue.

3. Do regional variations in surgeries mean that some physicians over-treat and other under-treat? Do these differences indicate inappropriate and unnecessary care?

4. One factor that enters the specialty choice of new medical school graduates is the income potential of the specialties. If these incomes are not determined in a competitive labor market, then it is possible that the number entering a given specialty will not meet efficient level. The current system, dominated by Medicare and large insurance companies, is not competitive. Some claim that lack of competition in the market is responsible for shortages in some specialties.

a. What are the conditions for a competitive market for specific medical specialties? Are these conditions met in our health care system?

b. What factors influence the demand for medical services? Is it possible for patients to demand more physicians than government or private payers’ desire?

c. Is there a shortage of primary care physicians? How do economists answer this question? How can we address this issue?

5. The growing effort to involve consumers in reducing health-care costs has been stymied by the fact that most people just don't know what medical care costs. Aetna Inc. plans to make available online the exact prices it has negotiated with Cincinnati-area doctors for hundreds of medical procedures and tests. The price schedules include every Cincinnati-area primary-care physician or specialist in Aetna's network, and prices for 600 common services for which the Hartford, Conn.-based insurer receives medical claims. For instance, an internist in the University of Cincinnati area charges Aetna or its members $161.32 for a visit from a new patient with moderate to severe problems, while another physician a few blocks away charges $132.23 for the same office visit. The first doctor also charges $41.89 for a chest X-ray taken from two angles, while the latter's price is $34.34.

a. Why do prices vary from doctor to doctor?

b. How will health care markets improve if patients know what doctors are charging for services?

c. What other issues are important in determining your choice of doctor? Is price all that matters?

d. Do you think that it is possible to get the right information to consumers when they need it?