Managed Care

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• Managed Care

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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.

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Abrevations used in the lecture

• MCO managed care organization
• HMO health managed organization
• FFS fee-for-service
• PPO preferred provider organization
• POS point of service

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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.

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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.

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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
• Well discuss the first two in a little more
  detail later, but first well consider
  utilization review

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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

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• 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.

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• Differences between managed care and
  fee-for-service 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).

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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.

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Table 12-1 Summary of Different Health System
Organizational Structures
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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
  plans network and that the primary care
  physician authorize any services provided.

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Preferred Provider Organizations (PPOs)

• Provides two distinct tiers of coverage. When
  subscribers use the PPOs 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.

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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
  terms.

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Managed Care Contracts with Physicians

• Most HMO and POS plans pay their network
  physicians on a capitation basis.
• Under capitation, the plan pays the physicians
  practice a fixed fee, generally an actuarial
  per-member-per-month (PMPM) dollar amount, in
  return for the treatments provided to members of
  the insurance plan.

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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
  plans network.
• Utilization review procedures are commonly
  covered in managed care contracts, whether they
  are HMO, PPO, or POS plans.

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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.

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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.

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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.

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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

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1. Price Discrimination

• If you have perfect competition (suppose MCAC,
  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 price discrimination

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• 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

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• 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

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In market with elastic demand
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In market with inelastic demand
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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.

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• 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.

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2. Lowering Prices

• It can also reduce the demand for care by
  reducing the potential for SID as well as SAV

• For a consumer, managed care can reduce the price
  paid for services, i.e, the MC of services will
  be lower

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Managed Care vs fee-for service
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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