More on managed care

1
More on managed care
2
Demand for MCOs

• Patients and/or employers may wish lower cost
  alternative.
• BUT, they might not like to have their options
  limited.
• If patients already have strong relationships
  with current providers, they may be unwilling to
  seek MCO alternative.

3
Supply of MCOs

• May offer considerable cost advantages
• Reduce quantity and intensity of care.
• Substitute lower cost care for higher cost care.
• Provide economies of scale in the purchase and
  use of inputs.
• Quicker to develop effective utilization review.
• Adopt new technology more efficiently.
• Encourage use of cost-effective preventive care.
• Provide administrative economies.

4
Are HMO costs lower?

• Without question, they have lower hospitalization
  costs.
• Following bottom lines
• Inpatient services account for a higher
  percentage of total expenditures than do
  outpatient services.
• HMO plans use fewer services that are expensive,
  and/or have less costly alternatives.
• HMOs provided more comprehensive coverage than
  did indemnity plans.
• All of these imply that HMOs provide care at
  lower costs than do indemnity (FFS) plans.

5
Quality of Care?

• What is quality?
• Structure quality and appropriateness of inputs
  and their organization.
• Process quality of the performance of the
  delivery of care.
• Outcome ultimate impact on health.
• In a nutshell, its hard to conclude that HMOs
  are either better or worse.
• This is important, because many people would
  assume that they are worse.

6
Disenrollment

• Some of the financial and quality of care
  problems associated with patient disenrollments
  are well known.
• Patients and providers face the difficulties of
  maintaining continuity of care and complete
  medical records.
• HMOs face added financial burdens resulting from
  higher patient recruiting costs, disruption of
  cash flows, and upward pressure on premiums for
  continuing members if lower risks are more likely
  to disenroll.
• Why emphasize preventive care for a patient who
  is not likely remain a member, when that care
  provides the greatest return in the form of
  averted future treatment costs?
• Potential loss of patients may influence
  treatment decisions of FFS providers as well as
  HMOs, but capitation method of payment to HMOs
  renders the disenrollment problem particularly
  important.
• FFS providers are paid for each unit of care.
  Aside from uncollectibles, they are not at risk
  of losing money on services provided currently or
  in the future.

7
Managed Care, in contrast

• In contrast, by integrating insurance with the
  provision of health care, the HMO receives a
  fixed payment per enrollee to cover costs in the
  current period, and over time, for those who
  remain enrolled.
• Thus, unlike FFS care, where payment in every
  period is very likely to cover costs, the HMO
  must consider the timing of expenditures and the
  financial losses of overspending on patients who
  may disenroll.
• One way for an HMO to self-insure against long
  term losses attributable to disenrollment is to
  economize on care for those currently enrolled.
• This would mean
• Enrolling fewer patients.
• Providing less care.

8
Disenrollment and Treatment Choice

• What about alternative treatment methods.
• Consider the longer term consequences that
  potential disenrollment can have on HMO treatment
  practices.
• In the presence of expected disenrollment, HMOs
  will tend to use low-tech treatments with
  smaller up-front costs, even when the present
  discounted value (PDV) of the costs equals the
  PDV for high-tech treatments.

9
Disenrollment and Treatment Choice

• We can write a two-period model where an HMO
  provides either
• high tech treatment M the first period no
  treatment the second period.
• low tech treatment m in each period.
• r is the rate of interest and g is the
  disenrollment rate.
• It turns out that the HMO will provide high tech
  treatment if
• M lt m1 (1-g)/(1r),
• and low-tech if
• M gt m1 (1-g)/(1r).
• Thus the higher the disenrollment rate g, the
  more important is the disenrollment effect. If g
  0, the HMO faces the standard investment
  criterion, comparing first period costs with
  discounted future costs. Its decision here will
  be economically efficient.

10
Disenrollment and Treatment Choice

• With the likelihood that increased competition
  through increased choice will raise g, managed
  competition and other competitive strategies must
  be more carefully examined.
• If g ?, m 1 (1-g)/(1r) ?, and continuing
  care m becomes the more financially viable option
  even if the PDVs are equal, and even if treatment
  M is more economically efficient in producing
  health.
• In effect, HMOs self-insure against future
  disenrollment by reducing current costs through
  (low cost) continuing care rather than high-tech
  treatment.

11
Competitive Effects
MC

• What effects might occur?
• In principle, it would lead to more competition,
  flatter demand curves.

P1
P2
D2

• Shift demand curve to the left.
• Shift the MR curve to the left.
• Increase the demand elasticity at any price
  because there are now more competitors.
• BUT, it competition based on QUALITY, rather
  than price?

D1
MR2
Q1
Q2
MR1
Q