Transcript 3 Basic Steps in Economic Evaluation

The Physician Market, Part 2
Professor Vivian Ho
Health Economics
Fall 2007
These slides draw from material in Santerre & Neun, Health Economics, Theories,
Insights and Industry Studies, Thomson Press 2007
Advantages of capitation for physicians
• Increased clinical autonomy
Physician financially responsible for cost
overruns
Eliminates need for external review
• Increased income
Physician compensated by risk pools
created from withholds if can reduce
utilization of hospital, outpatient,
diagnostics, other ancillary services
MCOs and Physician Conduct

HMOs combine the insurance and
production functions in health care.

They are different from traditional
indemnity (FFS) plans, in that they
attempt to control how health care is
provided.

How do HMOs influence physicians?
Types of Managed Care Orgs
Managed Care
HMO
Staff Model
Group Model
PPO/POS
Network Model
IPA Model
MCOs and Physician Conduct

Staff model HMOs pay physicians a
salary.


No incentive to over-provide care.
IPA HMOs usually pay physicians
discounted FFS.
Physicians have incentive to over-provide
care.
 How can the HMO control costs?

MCOs and Physician Conduct

Caution: Distinctions between different
types of HMOs are blurring over time.
 28%
of staff HMOs pay based on salary
only (Gold, 1996).
 90%
of PPOs use discounted FFS.
Financial Risk Arrayed on a Spectrum from Full Risk for
the Insurer to Full Risk for the Provider
HBS Case Study 9-698-060, Note on Managed Care
Additional MCO Compensation Tools

Risk sharing - The insurer can make the
physician bear some of the risk of
insuring the patient, so that the
physician will also feel the need to
restrain medical costs.
 Capitation
 Withholdings
 Bonuses
Additional MCO Compensation Tools

Capitation - Physician receives a fixed
payment per person in return for
providing medical services regardless of
the quantity of medical care delivered.

e.g. A physician may receive $9 per
member per month for each enrollee
who chooses an HMO plan and elects
him to be their primary care caregiver.
Additional MCO Compensation Tools

Capitation
 Physician
has an incentive to restrict # of
patient visits.
 Problem
- Physician can reduce visits by
referring patients to other providers in the
same HMO plan.

e.g. If the patient has high blood pressure,
refer her to a cardiologist.
 Solution
- Withholding
Additional MCO Compensation Tools

Even if docs paid thru capitation, HMO
responsible for costs of hospital
services, outpatient diagnostic tests,
physician referrals.

How can the HMO limit these costs?
 Withhold
a portion of physician payment
(PMPM) until end of fiscal year.
HMO Reimbursement Strategies

Assign these funds to specific expenditure
categories (e.g. lab tests).

At end of year, return a portion of the withhold
to physicians if surplus exists in that
expenditure category.

Can even change next year’s withhold or
capitation based on this year’s performance.
Additional MCO Compensation Tools
Bonuses - MCOs can give a portion of
their profits at the end of the year to
physicians who elect cost-effective
behavior.
e.g. Pay bonuses to primary caregivers
who reported lower number of specialist
referrals.
Advantages of capitation for physicians
• Improved cash flow
Physician receives fixed payment per
patient each month
Reduces bad debt expenses
• Better budgeting
Steady cash flow - well-defined budgets
Easier to identify and correct sources of
cost overruns
4 Components of a Capitated Contract
1) Covered Services
Definitions such as “primary care services within
the physician’s scope of practice” are too vague
Examples of capitated primary services:
SERVICE
Office visits
Emergency room visits
Preventive services
Simple blood tests
CPT Code
99201-99215
99281-99285
99381-99429
85018-85048
Examples of Current Procedure Terminology

99201
 Initial
office visit for an out-of-town patient
requiring topical refill (Dermatology)
 Initial
office visit for a 65-year-old male for
reassurance about an isolated seborrheic
keratosis on upper back (Plastic surgery)
 Initial
office visit for a 10-year old male, for
limited subungual hematoma not requiring
drainage (Internal Medicine)

Carve outs - specific services or
patients singled out in the capitation
contract for special consideration
 Usually
for expensive, infrequent services
 e.g.
HIV+ patients, mental health, organ
transplants
 Can
be paid on fee-for-service (FFS) basis,
or separate providers may contract for
carve outs
Components of a Capitated Contract
• Payment methods
 Capitation rate/schedule - Managed care
organizations employ actuaries who predict
the cost of care as a function of population
characteristics
Timing of payments
 Payment
of carve out services
 Payment withholds used to fund risk
pools, and method for risk pool
distribution
 Methods for limiting risk (e.g.
reinsurance, stop-loss)
 Insurer
may agree to assume treatment
costs that exceed a predefined threshold
amount
• List of other requirements
 Quality
assurance activities
May require reporting detailed patient data
 More sophisticated, costly record keeping

 Required
office/call hours
 Use of physician extenders
 Copayment procedures
 “most-favored-nation” clause
 Additional professional liability insurance
coverage
• Process for termination
 Provisions

Can be financially risky to physician
 Provisions


for termination without cause
for termination with cause
Should specify specific conditions
e.g. failure to comply w/ quality assurance
requirements
 Contract
should specify physician
responsibilities if managed care organization
insolvent
“Continuation of care” requirements
 Usually must complete patient’s course of
treatment until satisfactory arrangements made
to secure treatment elsewhere

Evidence on Physicians & MCO
Compensation

57% of MCOs base pay on utilization or
costs measures

Almost half of MCOs consider patient
complaints and quality measures
Evidence on Physicians & MCO
Compensation




MCOs paying physicians a salary had 13.1%
fewer hospitalization days per 1,000 enrollees
per yr. relative to FFS
Capitation led to 7.5% fewer hospitalization
days
Physicians faced w/ withholds had 10.5%
fewer visits per enrollee
Caution: The studies did not determine
whether profits rose, or whether quality of
patient care was affected
Physician Market Performance
Annual
Total
Rate of
Expenditures Increase*
1980
47.1b
--1990
157.5
12.9%
1993
201.2
8.5%
1995
220.5
4.7%
2000
288.6
5.5%
2005
421.2
7.9%
Per Capita
Amount
205
620
765
820
1020
1418
*Average since previous year listed
Physician expenditures have slowed in the 1990s, more in line with the
growth of the overall economy. But they may be on the rise again
Physician Market Performance
Revenue per Self-Employed Physician, ($1,000s)
Practice Expenses
per physician
Before-tax income
1986
1990
1995
1997
1998
118.4
131.1
249.5
150.0
185.6
335.6
201.6
230.8
432.4
228.6
228.2
460.1
261.9
224.3
496.7
Increases in revenues are due to increases in expenses AND higher
income for physicians
Physician salaries remain high
2006 PHYSICIAN SALARIES
Mean
Internal Medicine
$191,525
Family Practice
$178,859
Pediatrics
$188,496
When managed care grows, salary growth for
specialists slows, while pay for primary care docs rises

Physician groups getting large enough to want their
own specialists

Female docs’ salaries exceed males in a dozen or so
specialties

Employed vs. Independent Physicians

Employed physicians worked 5-7 fewer hours
a week

Employed physicians’ median net income
was $142,000 in 1996, vs. $198,000 for all
private-practice physicians

Practice mgmt. Companies typically pay
physicians $300,000-$400,000 per physician
for practice assets (land, equipment)
 Tradeoff:
20% of practice’s net revenues
Physician Practice Management (PPMs)
PPMs act as liaisons between insurers
and doctors by acquiring physician
practices
 Advantages:

 Economies
of scale in operational costs
 Improved risk assessment for managed
care
 Finance new information systems
 Retain patient revenues by keeping
referrals within the PPM network
Fortune Magazine, March 3, 1997

MedPartners Provider Network acts as an
intermediary, accepting capitated payments
from HMOs & paying claims to the company’s
network providers
 Patients
buy insurance from PacifiCare Health
Systems, Foundation Health Systems Inc., etc.
 Had
up to 19,200 doctors in the PPM division
in hundreds of physician clinics at one point


MedPartners posted a net loss of $1.26b
on revenues of $2.6b in 1998
Loss of $821m on $2.4b in revenues in
1997
What Went Wrong

Failure to integrate its operations or provide
systems to operate more efficiently than they
had done independently
 Lacked
actuarial expertise to predict medical
costs
 California: Plan underestimated incurred-butnot-reported claims liability & could not
estimate a dollar value for the large backlog of
unprocessed claims
 Failed to invest in information systems,
medical equipment, or expansion of medical
services to boost a group’s internal growth
What Went Wrong

MedPartners bought new practices at a
furious rate, often at hefty prices
 Industry
buying spree boosted the prices of
physician practices

Doctors didn’t react well to becoming
employees of remote national companies
 Physicians
who sold their practices didn’t feel
the need to work as hard, younger doctors’
salaries lower due to cut taken by the PPM
MedPartners’ Reaction

MedPartners exited the PPM business
and became Caremark, which is in the
Pharmaceutical Benefits Management
(PBM) market
The Future of PPMs

Doctors will continue to organize in larger
groups to avoid hassles of office admin and
managed-care contracting

Smaller single-specialty PPMs seem more
committed to improving operations

# of publicly traded PPMs (~30) may shrink
by 50%