Policies To Contain Costs

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Policies To Contain Costs
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Policy Options

• TE S Pi Qi
• Price Controls
• Managed Care
• Market Alternatives

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Economics of Price ControlsCompetitive Market
Price

• Free Market P0, Q0
• Govt imposes price ceiling at P1
• At P1 Qd gt Qs
• ? shortage results
• Non-Price Rationing
• Black Market
• Bribes
• Discrimination
• Wait / Search

S1
P2
P0
P1
D1
Health Care
Q0
QS
QD
Shortage
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Economics of Price ControlsMonopoly Market
Price

• Monopoly P0, Q0
• Govt imposes price ceiling at P1
• At P1 there is no shortage monopolist produces
  Q1

MC1
P0
P1
D1
MR1
Health Care
Q0
Q1
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Price Controls in Health Care

• Mandated fee schedules
• Physician-induced demand shifts
• Unbundling of services
• Global budgeting (capitation)
• Services delayed
• Personnel take unpaid vacations
• Resource rationing
• Mandating primary care (gatekeepers)
• Limits on new facilities (CONs)
• Waiting lists

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Waiting List for Organ Donations April 2008
Source Organ Procurement and Transplantation
Network, available at http//www.optn.org/latestDa
ta/rptData.asp (April 20, 2008)
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U.S. Cost-containment Strategies

• Hospitals Diagnosis-related groups (DRGs)
• Prospective payment based on point system

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DRGs by WeightFive Highest and Five Lowest
Source The Economics of Health and Health Care,
Folland, Goodman, and Stano (2007), Table 20-2a.
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U.S. Cost-containment Strategies

• Hospitals Diagnosis-related groups (DRGs)
• Prospective payment based on point system
• Economic impact of DRGs
• Reduced hospitalization shorter stays
• Increase in outpatient care
• DRG creep
• Physicians practices Resource-based Relative
  Value Scale (RBRVS)
  
• Establishing a value scale
• Work effort
• Overhead cost
• Liability insurance premiums
• Monetary conversion factor (6 units) x 38
  228
• Economic impact of fee schedule
• Shift toward general practitioners fewer
  specialists

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Managed Care Strategies

• Types
• HMOs
• PPOs
• Cost Control Strategies
• Practice guidelines

Restricted choice of providers Second opinions
required Prior authorization Case management
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• Root cause of increased spending, limited
  cost-conscious behavior of buyers and sellers, is
  not addressed

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Market Alternatives

• Managed competition
• Require employers to offer employees a choice of
  health plans
• Medical savings accounts
• Tax-free savings accounts for routine medical
  expenses
• High deductible catastrophic insurance

Suppose employer pays 7000 for your familys
major medical and routine insurance coverage
Employer buys 3500 catastrophic insurance policy
and deposits other 3500 into MSA
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Capitation

• creates pressures to provide fewer services
• is a fixed payment determined in advance to pay
  for all medically-necessary care
• is the maximum allowable fee in a fee-for-service
  system
• shifts financial risk onto patients
• Both a) and b) are correct

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The amount that a hospital will be paid for
treating a Medicare patient is determined

• before the patient ever sees a physician
• at the point when the diagnosis is made
• after medical services are provided.
• after the hospital bill is reviewed by Medicare
  auditors