Assignment 6-10

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Chapter 12

The Physician

Services Industry

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The Structure of the Physician Services Industry

The Number of Physicians in U.S.

Physician labor

Primary input in the production of physician services

80% involved in direct patient care in 2009

Physician-to-population ratio

Measure of relative supply of physician labor

Increased 80% from 1970 to 2006

Geographic maldistribution of physicians

Figure 12.1 - The Number of Physicians in U.S.

The Number of Physicians in U.S.

Will U.S. have an adequate supply of physicians in the year 2020?

Politzer et al. (1996)

Shortage of primary care physicians

Surplus of specialists

Gamliel et al. (1995)

Overall shortage of physicians

Shortage of primary care physicians

Surplus of specialist

Cooper et al. (2002) and Cooper (2004)

Shortage of physicians

Distribution of Primary Care and Specialty Care Physicians in U.S.

Primary care physicians include family practice, general practice, internal medicine, obstetrics and gynecology, and pediatrics

The number of specialty physicians in the United States over the last three decades increased at a faster pace than the number of primary care physicians.

Distribution of Primary Care and Specialty Care Physicians in U.S.

Too many specialists and too few primary care physicians

Problem - worsened over time

High health care costs

Specialists are more prone to overutilize costly new, high-technology medical procedures

Empirical evidence: higher proportion of specialists

Schroeder (1984, 1992)

GAO, 1994

Distribution of Primary Care and Specialty Care Physicians in U.S.

Efficiency of primary care physicians

Adequate supply of physician labor?

Empirical evidence

Weiner (2004)

Physician staffing patterns adopted by eight large prepaid group practices (PGPs)

PGPs may be able to provide medical care to the general population with far fewer physicians than is currently the case.

Salsberg and Forte (2004) – caution about Weiner’s (2004) results

Mode of Practice

Self-employed physicians

Dropped to under 56.3% in 2008

Trend away from smaller practices toward larger, multi-doctor modes of production

Reflect the economies of scope offered by large multi-doctor, multi-specialty practices

Or economies of scale

Buyers of Physician Services and Methods of Remuneration

Although government is a major player in the physician services market, ability to influence resource allocation may not be as great as in the market for hospital services.

The private sector accounts for a much greater share of revenues in the physician services market than it does in the hospital services market.

Reimbursement Practices of Managed Care Buyers of Physician Services

MCOs

Cost control mechanisms by MCOs diminish the autonomy physicians traditionally enjoyed in practicing medicine

Almost 90% of all physicians had at least 1 managed care contract

Barriers to Entry

Substantial barriers to entry:

High opportunity cost of becoming a medical doctor

Barriers exist

To protect public interest in light of market failure

To protect the economic interests of physicians by restricting supply

Production, Costs, and Economies of Scale

Production of physician services

Empirical evidence

Reinhardt (1972, 1973, 1975)

Marginal productivity of physician time is relatively high

Registered nurses and physician assistants increase efficiency

Physicians in group practices more efficient than physicians in a solo practice

Moderate economies of scale

Summary of the Structure of the Market for Physician Services

Physician services market

Increased dramatically in size over the past three decades

Movement toward multi-physician practices

MCOs – key role

More competitive despite barriers to entry due to large institutional buyers

The Conduct of the Physician Services Industry

Supplier-induced demand hypothesis,

Mcguire’s quantity-setting model,

The effects of various compensation schemes on physician behavior,

Geographical variations in the utilization of physician services,

Impact of managed care practices

The Supplier-Induced Demand Hypothesis

Supplier-induced demand (SID) hypothesis

Premise:

Physicians abuse their role as medical advisors to advance their own economic self-interests

Asymmetry of information

Consumers are relatively ill-informed concerning the proper amount of medical care to consume

Physicians - play a major part in determining the level of demand

Figure 12.2 - The Supplier-Induced Demand Model

Quantity of

physician services (Q)

Dollars

per

unit

In reaction to the decrease in the price of medical services, however, physicians induce the demand for their services and cause the demand curve to shift outward to D1. The result is that the equilibrium price and quantity for physician services increases to (P2, Q2).

Assume initially that the market for physician services is in equilibrium at point (Q0, P0) off the D0 demand curve and the S0 supply curve.

Now assume that there is an increase in the number of physicians practicing medicine and the supply curve for physician services shifts outward from S0 to S1. Under ordinary circumstances, the equilibrium price for physician services would fall to P1 while the equilibrium quantity would increase to Q1.

The Supplier-Induced Demand Hypothesis

Supplier-induced demand (SID) model

Physician (agent) hired to address the health concerns of the patient (principal)

Empirical evidence on SID

Surgeons induce demand for surgeries:

Fuchs (1978), Cromwell and Mitchell (1986), Rossiter and Wilensky (1984) and McCarthy (1985)

Support for SID weakening in recent years

Physician-based practice data, more sophisticated models, contemporary data sets

The Supplier-Induced Demand Hypothesis

Self-referral of patients by physicians to to medical facilities they own or where they have a compensation relationship

May lead to consumption of medically unnecessary care because private insurers pay more

Can provide continuity of care for patients

Incentive for physicians to invest in areas with insufficient medical facilities

Research on self-referral and quality and cost of medical care is in its infancy

McGuire’s Quantity-Setting Model

Monopolistic competition

Many sellers

Each seller - downward-sloping demand curve

McGuire’s model

Physicians - quantity setters

Physicians respond to a lower administered price by increasing quantity supplied

Figure 12.3 - McGuire’s Basic Quantity-Setting Model

Quantity of

physician services (Q)

Dollars

per

unit

NB0

Thus, Dr. Maxwell will require the average consumer to consume no more than Q0 amount of medical care at price P0. At this combination of price and quantity the patient is indifferent between having all or none of the care provided by Dr. Maxwell.

The MB curve represents the marginal benefits the consumer receives from consuming each additional unit of medical care and the MC curve equals the marginal cost of producing physician services. NB0 represents the net benefit the consumer receives if she visits an alternative physician. Dr. Maxwell chooses P and Q such that profits are maximized and the consumer receives at least NB0 amount of net benefits.

NB0

Figure 12.4 - McGuire’s Quantity-Setting Model with Administered Pricing and Insurance

Quantity of

physician services (Q)

Dollars

per

unit

cˣP

The c ˣ P line represents the out-of-pocket price for physician services. Dr. Maxwell chooses the quantity of services, Q0, such that the patient is indifferent between receiving all or no care from the doctor and profits are maximized.

The MB and MC curves represent the marginal benefit and marginal cost curves, respectively. The price ceiling, P, which is established by a third party, lies above the MC curve to ensure physician participation in the plan.

The Impact of Alternative Compensation Schemes on Physician Behavior

Compensation schemes

Fee-for-service method of payment creates incentive for overutilization of medical care

Pay-for-performance payment schemes provide incentives to health care providers to improve the quality and/or reduce the cost of medical care provided

May not elicit desired outcome as physicians may opt for leisure instead of extra income, not fill out paperwork, or find the rewards too small

Geographical Variations in the Utilization of Physician Services

Small area variations

In the delivery and consumption of physician services across geographic regions

Selected medical services are over-utilized

Physician practice hypothesis

Per capita variations in the use of medical care reflect systematic differences in clinical opinions

Different “practice style”

Geographical Variations in the Utilization of Physician Services

Physician practice hypothesis

Different “practice style”

Uncertainty surrounding the practice of medicine

Complicated diagnosis

New medical procedure

Rate at which medical technology and knowledge are diffused

Background and set of beliefs of the individual physician

Different local “schools of thought”

Geographical Variations in the Utilization of Physician Services

Enthusiasm hypothesis, Chassin (1993)

Certain physicians become “enthusiastic” about a particular medical procedure and use it more frequently than other procedures

Empirical evidence

Folland and Stano (1990) and Stano (1991)

Significant portion of the variation in the consumption of medical services can be explained by traditional supply and demand factors; physician practice style may not play a large role

The Impact of Utilization Review on the Physician Services Market

Utilization review (UR)

One of the most frequently used methods to contain costs

Prospective, concurrent, and retrospective reviews

Evaluate the medical decisions of hospitals and physicians to minimize medical costs by

Eliminating unnecessary medical care

Educating patients and physicians concerning proper medical treatments

The Impact of Utilization Review on the Physician Services Market

Empirical evidence

Wickizer and Lessler (2002)

Cost saving from UR programs – modest

Feldstein et al. (1988)

UR programs – one time effect

Scheffler et al. (1991)

UR programs - decreased hospital patient days and inpatient payments

Felt-Lisk & Mays (2002)

MCOs reduced reliance on prospective UR

The Impact of Utilization Review on the Physician Services Market

Disease management programs

Second surgical opinion programs

Voluntary or mandatory in nature

Objectives

Reduce the asymmetry-of-information problem

To establish a procedure whereby physicians’ decisions are routinely scrutinized by their peers

Reduce the number of unnecessary or avoidable operations and thereby reduce medical costs

The Impact of Utilization Review on the Physician Services Market

Empirical evidence

Second-opinion programs have failed to significantly reduce medical costs

Voluntary programs – little or no impact

Impact of MCOs on the utilization of physician services – inconclusive

The Impact of Utilization Review on the Physician Services Market

Development of clinical practice guidelines for physicians

Provide physicians and patients with the preferred methods of treating different types of medical conditions

Objective

Improve the quality of medical care

Lower costs by providing timely information to physicians concerning the efficacy of various medical procedures

Medical Negligence and Malpractice Insurance

Malpractice liability law

Compensates victims for any damages caused by the negligence of health care providers

Helps deter health care providers from engaging in future acts of negligence

Physician liability costs

Medical malpractice insurance costs

Defensive medicine

Medical Negligence and Malpractice Insurance

Recent rise in medical malpractice premium rates

Rising severity in malpractice awards

Drop in investment income (medical insurers)

Changes in the structural competitiveness of the malpractice insurance market

Underwriting, or profitability, cycle

Medical Negligence and Malpractice Insurance

State tort reforms

Damage caps

Certificate of Merit

Limits on attorney fees

Pretrial Screening Panels

Joint and several liability

Medical Negligence and Malpractice Insurance

Who has been paying for the increasing cost of malpractice insurance?

Pauly et al. (2006)

Increasing malpractice premiums cannot be linked to reductions in net income

Physicians pass the cost forward by a combination of greater quantities of medical care and higher prices

Mello et al. (2007)

Weak relation at best between rising malpractice premiums and physician location

Medical Negligence and Malpractice Insurance

Empirical evidence

Defensive medicine - estimating the cost of defensive medicine - very difficult

Kessler and McClellan (1996)

Malpractice reforms - reduced medical expenditures by between 5 and 9%

Medical Negligence and Malpractice Insurance

Negative defensive medicine

May encourage physicians to cut back on certain medical services to avoid the possibility of lawsuits

Avoid treating high-risk patients

Avoid providing high-risk procedures

Dubay et al. (2001) – impact of higher malpractice premiums

Some obstetricians – hold back on high-risk medical services

Table 12.1 - The Performance of the Physician Services Industry

Figure 12.5 - The Performance of the Physician Services Industry

The Performance of the Physician Services Industry

Inflation of physician fees – overstated because

Figures fail to consider any improvements in the quality of physician services

Figures do not adequately reflect many of the technological improvements

The Performance of the Physician Services Industry

Utilization of physician services

1990 to 2010

Physician expenditures increased by more than three fold

CPI doubled

Real expenditures grew by around 3 percent from 1990 to 2010

The Performance of the Physician Services Industry

Physician Income

Nominal income

Increased from $180.9 thousand to $202.9 thousand

12% increase

Real income declined

From $180.9 thousand to $168.1 thousand

Growth in managed care

Increased use of financial incentives directed toward physicians

Implementation of tighter fee controls by the Medicare and Medicaid programs

Figure 12.6 - Physician Income

Provisions of the Patient Protection and Affordable Care Act (PPACA) of 2010 relating to the Physician Services Market

Health insurance mandate will:

Increase the number of physician visits

Increase revenues for physicians

Exacerbate the looming shortage of physicians

To address the shortage:

Provisions for scholarship and student-loan forgiveness programs for medical students

Adjust the fee payment schedules for Medicaid and Medicare

Provisions of the Patient Protection and Affordable Care Act (PPACA) of 2010 relating to the Physician Services Market

Formation of the Independent Payment Advisory Board (IPAB)

Formation of Accountable Care Organizations (ACOs)

Support for comparative effectiveness research that will assist physicians in making informed decisions

Provides demonstration project grants to states