MANAGED CARE AND HMOs

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MANAGED CARE AND HMOs
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Management of Health Care

• If traditional fee-for-service creates incentives
  for overprovision, is it possible to manage
  health care delivery so as to overcome this
  effect?
• Do some forms of managed care generate incentives
  for underprovision?

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What is Managed Care?

• Provision of care to defined enrollees at a fixed
  (capitated) rate
• Means all levels of care (outpatient, inpatient,
  hospital services, labs, etc.) must be integrated
  under a fixed budget (vertical integration)
• Under FFS, more volume means more profit under
  managed care, more volume means less profit

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HMOs

• Organization that provides enrollees with
  comprehensive care in exchange for a prepaid
  premium
• Staff model HMO hires salaried staff physicians
• Group model HMO is primarily an insurance
  provider which contracts with physician group to
  provide the care

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Incentives

• HMO incurs the cost of treatment
• Thus, incentive to reduce cost of each treatment
  and to reduce treatments
• Also incentive to avoid need to treat
• preventive care

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PPOs

• Consumer given financial incentives to receive
  health care from selected panel of providers
• Providers chosen on basis of low cost practice
  styles
• Can PPOs successfully choose providers with
  efficient practice styles?

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Development of HMOs

• Slow, until recently
• Organized medicine resisted
• resisted loss of physician control
• HMOs prevent price discrimination

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Price Discrimination

• If a monopolist can separate customers into
  groups that have different demands, then price
  discrimination is possible
• Different prices for different customers
• Price discrimination increases the monopolys
  profits
• Only possible if the good or service cannot be
  resold

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Price Discrimination Illustrated

Area A Profit w/o price discrimination Area
(ABC) Profit w/ discrimination
B
A
C
MCAC
DMR (w/ discrimination)
Output
Qno disc
Qdisc
0
MR (w/o discrimination)
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The Pros and Cons of HMOs

• The pros
• typically provide comprehensive coverage
• typically include preventive care
• little or no copayment or deductible
• waiting time short w/ appointment
• these make HMOs attractive both to those who
  expect little health care needs and those who
  expect a lot

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• The cons
• limited choice of providers
• access to hospitals is limited
• travel time to provider and hospital may be
  longer
• access to specialist only through gatekeeper
• ability to maintain long-term relationship with
  provider difficult
• HMOs unattractive to those who value long-term
  relationships and choice

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HMO Cost Advantages

• May reduce quantity and intensity of treatment
• no incentive to provide unnecessary care or
  diagnostic procedures
• May substitute lower-cost care for higher-cost
  care
• no insurance induced bias toward inpatient care
• incentive to use generics

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• May have scale economies and bulk purchasing
  advantages
• May be quicker to employ effective utilization
  review
• HMOs have clear incentive to monitor providers,
  FFSs dont
• No incentive to over-capitalize
• May be more likely to use effective preventive
  care
• May be better able to spread fixed administrative
  costs

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Are HMO Costs Lower?

• Empirical studies support expectation that HMOs
  use less costly services and offer more
  comprehensive coverage

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The Problem of Selection Bias

• Is the lower cost due to the characteristics of
  HMOs or to selection bias?
• do HMOs attract healthier patients?
• case study by Strumwasser et al. (1989) found
  that employees of a firm who switched to HMO were
  younger, had much lower utilization rates, and
  had incurred much lower costs in the previous
  year
• Regression techniques
• control for patient characteristics

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The Rand Experimental Study

• Random assignment to an HMO and to FFS plans with
  various copayments
• Also compared to a control group of previously
  enrolled HMO customers
• HMO groups had considerably lower costs due to
• lower rate of inpatient admissions
• shorter inpatient stays
• Ambulatory care about the same
• Somewhat more preventive care by HMO

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Quality of Care

• Do HMOs reduce costs by cutting corners with
  quality of care?
• Limits to reducing quality
• may increase costs down the road
• reputation damage
• the importance of competition

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Empirical Results

• Studies by Luft (1981) and Miller and Luft (1994,
  1997) indicate
• HMO patients receive more preventive care
• outcomes at least as good as FFS, if not better
• patient survey shows
• greater satisfaction with cost to patient
• less satisfaction with quality of care
• less satisfaction with patient-doctor
  interactions

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Growth In Costs

• Does the growth in costs differ?
• Studies indicate that the growth in health care
  costs about same in FFS and HMO settings
• Thus, cost advantage of HMOs not eroding over
  time but the problem of the growth in costs at a
  faster rate than in other sectors still evident