Transcript Managed Care in ppt.

Managed Care
Overview
• Health Insurance tends to lead to an overconsumption of healthcare by
the insured because the insured person only considers out-of-pocket
expenses and not the “full” cost at point of purchase.
– i.e., purchases of healthcare beyond the point where marginal benefit equals marginal
cost
• Can also have overprovision of healthcare services because of SID and SAV.
• Response to overconsumption or overprovision: set up a system where
physician practice must be managed in order to address high healthcare
costs and the overprovision of services.
Abrevations used in the lecture
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MCO = managed care organization
HMO = health managed organization
FFS = fee-for-service
PPO = preferred provider organization
POS = point of service
WHAT IS THE ORGANIZATIONAL
STRUCTURE?
Managed Care Organizations Defined
• Analysts speak of an organized delivery system as a network of
organizations (for example, hospitals, physicians, clinics, and
hospices) that provides or arranges to provide a coordinated
continuum (from well care to emergency surgery) of services to
a defined population.
Managed Care Organizations Defined
• This system is held clinically and fiscally accountable for the
outcomes and the health status of the population served. It is
tied together by its clinical (treatment) and fiscal (financial)
accountability for the defined population.
– This means that there could be financial penalties on physicians that
have higher volumes of services
• Often the organized delivery system is defined
by its association with an insurance product.
What can a MCO do?
• Can contain costs and perhaps improve the
quality of care by using three mechanisms:
– Selective contracting: payer negotiate prices with
selected physicians and hospitals
– Steering: send enrollees to providers in the network
– Utilization Review: review appropriateness of provider
practices, in a few different ways
• We’ll discuss the first two in a little more detail
later, but first we’ll consider utilization review
Utilization Review
• Examines the appropriateness of medical care for
necessity and appropriateness before, during and
after medical care:
– Prospective (before care): e.g., require mandatory
second opinions and pre-admission certification to
determine whether surgery and length of hospital stay
that are appropriate
– Concurrent (during care): occurs during hospitalization
and determines the appropriateness of treatment
relative to diagnosis and discharge planning
– Retrospective (after treatment): reviews
treatment after discharge to determine whether
treatment was necessary and appropriate and
whether they were actually provided; can also be
used to determine practice patterns which
identify providers and facilities that are providing
treatment in a cost-effective manner and those
that are not.
• Differences between managed care and fee-forservice arrangements have to be measured along
several dimensions, which would include: health
of people receiving treatment; price of care; and,
quality of care.
• Common characteristics of managed care are that
most (if not all) care for a patient is provided in a
network and resources are centralized in the
network (via utilization review).
WHAT ARE THE ECONOMIC
CHARACTERISTICS?
Overview
• Managed care features a health care delivery
structure involving the integration of insurers,
payment mechanisms, and a host of providers,
including physicians and hospitals.
• There are three different types of managed
care organizations that we will consider.
Table 12-1 Summary of Different
Health System Organizational
Structures
Health Maintenance Organizations
(HMOs)
• Provide relatively comprehensive health care,
entail few out-of-pocket expenses, but
generally require that all care be delivered
through the plan’s network and that the
primary care physician authorize any services
provided.
Preferred Provider Organizations
(PPOs)
• Provides two distinct tiers of coverage. When
subscribers use the PPO’s preferred provider
network, the required cost sharing with
deductibles or coinsurance is lower than when
they use nonnetwork providers. Although a
network is formed, PPOs have no physician
gatekeepers.
Point of Service (POS) Plans
• Are a hybrid of HMOs and PPOs. Like PPOs,
POS plans offer two tiers of insurance
benefits. Coverage is greater (out-of-pocket
costs are lower) when members use network
providers and less generous (out-of-pocket
costs are higher) when they use nonnetwork
providers. Like HMOs, however, POS plans
assign each member a physician gatekeeper,
who must authorize in-network care in order
for the care to be covered on in-network
Managed Care Contracts with
Physicians
• Most HMO and POS plans pay their network
physicians on a capitation basis.
• Under capitation, the plan pays the physician’s
practice a fixed fee, generally an actuarial permember-per-month (PMPM) dollar amount,
in return for the treatments provided to
members of the insurance plan.
Managed Care Contracts with
Physicians - continued
• PPO contracts with physicians rarely involve
capitation. Instead, they specify the
discounted fees for various services that the
plan will pay in exchange for the privilege of
being in that plan’s network.
• Utilization review procedures are commonly
covered in managed care contracts, whether
they are HMO, PPO, or POS plans.
Managed Care Contracts with
Hospitals
• HMO and PPO plans contract with only a
subset of the providers (physicians and
hospitals) in the areas that they serve. This
key feature of the managed care sector allows
plans to promote price competition among
hospitals that might otherwise lose plan
business.
Managed Care Contracts with
Hospitals - continued
• The probability and characteristics of contracts between
individual managed care organizations and hospitals appear
to depend on three sets of factors:
- Plan characteristics, including whether it was a PPO or an HMO (and
possibly what type of HMO), plan size, whether the plan serves several
localities, and how old the plan is.
- Hospital characteristics, including size, ownership (including for-profit
versus nonprofit status), location (city versus suburb), teaching status,
and cost structure (reflecting prices).
- Market characteristics, generally measured at the metropolitan area
level, including the penetration and rate of growth of managed care
plans.
Managed Care Contracts with
Hospitals - continued
• Zwanziger and Meirowitz (1998) examine the determinants of
plan contracts with hospitals in a study that looks at the three
categories. For HMOs and PPOs in 13 large, metropolitan
statistical areas (MSAs), they report:
- Managed care plans prefer to contract with nonprofit hospitals,
preferring even public hospitals to for-profit ones.
- Plans will more likely contract with large hospitals compared with
medium-sized hospitals, and with medium-sized hospitals compared
with small ones.
- Hospital cost factors (which reflect hospital prices) do not significantly
affect contracts.
Economic Implications of Managed Care
• There are a few economic different aspects of managed care
that we will consider. This will be from the perspective of the
U.S. health care system, but some contrasts to Canada will
also appear (and be discussed later in the course).
• There are two potential benefits of managed care:
– Reducing price discrimination
– Reducing prices
1. Price Discrimination
• If you have perfect competition (suppose
MC=AC, so supply curve is horizontal) then
health care providers are price takers.
– This is a very appropriate description of how the
health care markets work in Canada.
• However, in the U.S. not all physicians are
price takers. In fact, some (or many) can
viewed as having some sort of monopoly
power, they can charge different prices to
different consumers, which is referred to as
• To price discriminate you need two basic
conditions to hold
– You need to be able to distinguish between
different consumers and hence their demand
curves
– You need to be able to prevent the resale of goods
from one type of consumer to another type of
consumer
• For example, socioeconomic status is known
to tell you a lot about the demand for health
care services
– Persons with higher socioeconomic status tend to
have more inelastic demand for health care
services
• If a physician has monopoly power and is able to
distinguish between different segments of the market
and there is no resale between markets can treat
markets separately:
In market with elastic demand
In market with inelastic demand
Implications of Price
Descrimination
• In the market with the
more inelastic demand
the price is higher than
in the market with the
more elastic demand
curve; so the more
inelastic demand is the
higher the price for
medical services
• In the limit, if the
physician could
distinguish between all
the different demand
curves there would be
perfect price
discrimination, so every
consumer pays a
different price.
• Price discrimination means that the physician
will extract more of the consumer surplus
than if the physician did not price
discriminate.
• Perfect price discrimination means that the
physician will extract all the consumer surplus.
2. Lowering Prices
• For a consumer,
managed care can
reduce the price paid
for services, i.e, the MC
of services will be lower
• It can also reduce the
demand for care by
reducing the potential
for SID as well as SAV
Managed Care vs fee-for service
Why?
• Changed incentives in managed care should
constrain utilization/provision of services and
the prices for services.
– Incentives mean the healthcare provider shares
risks with the insurer and so reduces the volume
of services they can provide
Can managed care work in
Canada?
Projected 5-Year Age-Weighted Population
Growth Rate by Region, 2006 to 2011
25%
% Projected
Age-Weighted
Population
Growth
0%
32
Hospital and Homecare Expenditures by LHIN
6%
-12%
33