Managed Care

1. Managed Care The Emergence of Managed Care plan Development and Growth of Managed Care-Why did it take so long Modeling Managed Care where Managed Care differs from FFS

2. The Emergence of Managed Care plan • Dilemma: Health insurance is suppose to yield risk-reduction benefit. However, health insurance will generally increase consumers’ health care consumption. In other words, their consumption is beyond the point at which the marginal benefit equals its marginal cost. => The emergency of managed care plan overcomes the weakness of Fee for Service (cost-based payment)

3. Employer-Sponsored Managed care (Table 12-1) • Managed care plans for patients with employed-sponsored coverage come in three types.(1) Health Maintenance Organizations (HMOs) (a) HMOs require all care be delivered through the plan’s net-work . (b) Each subscriber is assigned a primary care physician (gatekeeper) upon joining the HMO. If health care services are provided but not authorized by the gatekeeper, then HMO does not cover the services.(c) HMOs that directly employ physicians in their network are called as staff model plan. Alternatively, plan that set up their network by contracting with physicians in geographically spread out, independent solo or small group practice associations (IPAs).

4. (2) Preferred Provider Organizations (PPOs) • (a)PPOs give subscribers two ties of coverage. When subscribers use the PPO’s preferred providers network, the required cost sharing with deductible or coinsurance is lower than when they use nonnetwork providers. • (b) PPOs have no gatekeeper. Rather, patients simply must pay more out-of-pocket if they choose to go outside the network. • (c) PPO contacts with the physicians and hospitals generally address the prices providers will charge the PPOs. In returning for promising to charge a lower than average price, selective providers become a part of the PPO’s preferred network. • (d) Most PPOs require preadmission certification for a hospital stay. About half require second opinion for a recommendation of surgery.

5. (3) Point-of-Service (POS) • (a) POS plans are a hybrid of HMOs and PPOs. Like PPOs, POS plans offer two tires 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. • (b) Like HMOs, 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. Most POS plans do not require authorization for a member to use out-of-network services, but such care is covered on less-generous terms. • (c) Most HMOs and POS plans pay their network physicians on a capitation basis. Under capitation, the plan pays the physician’s practice a fixed fee, generally an actuarial per-member-per-month (PMPM). Thus, HMO and POS plans shifts the cost of care, as well as the risk associated with those costs, directly onto physician practices. In contrast, PPO specify the discounted fees for various services that the plan will pay in exchange for the privilege of being in that plan’s network.

6. Empirical studies-Zwanziger and Meirowitz (1998) • Managed care plan prefers to contact with nonprofit, preferring even public hospitals to for-profit ones. • Plan 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.

7. Development and Growth of Managed Care-Why did it take so long • HMO enrollment jumped from approximately 3 million consumers in 1970 to about 81 million consumers in 2000. A variety of institutional, economic, and political forces has influenced the pattern of Managed care’s growth. • (1) The Economics of Price Discrimination (Figure 12-3): Unlike FFS, for the following reasons, price discrimination is difficult or impossible under the contracts that characterize prepayment-based organizations. First, providers will find it difficult to determine how much individual consumers value the service. Second, the prepayment-based organizations may be able to shop among providers, thus limiting the providers’ monopoly power. Figure 12-4 shows the impacts of managed care on treatment and expenditures: both decreased price per unit of care and decreased quantity of care contribute to decreased expenditures.(2) Barriers to managed care by organized medicine: organized medical groups oppose physicians’ participation in plans. Such restrictions were challenged successfully in the 1970s.(3) Federal policy : The HMO Act of 1973 promoted the development of managed care.

8. Modeling Managed Care • Modeling Individual HMO: HMO treatment costs are assumed to be related to member health status, which is function of care received at the HMO. Because patients live for many years, treatment decisions at one HMO may affect treatment costs at other HMOs. An individual HMO may not account for this externality. • (1) How much care? In Figure 12-5, without externality, HMO1 optimizes at point A, providing an economically inefficient quality level, x1(mkt). The optimal quality level of x1 at point B, or x1(opt), in which the effect of the health externality on the cost facing other HMOs are recognized. • (2) What types of care? Assume that patients stay in HMO for two periods, which might be considered as early and late in their lives. The HMO may offer (i) high-tech procedures leading to high Period 1 costs and zero Period 2 costs; (ii) Low-tech procedures leading to low costs in both periods. Because the revenues are the same with both choices. The HMO’s problem is to minimize costs, using the cheaper (over time) of the two procedures.

9. where Managed Care differs from FFS-dumping,creaming, and skimping Hospitals and other FFS providers are paid for each treatment in order to cover costs. HMOs are fixed rate per person irrespective of the amount of treatment used. These differences lead to the following three purported practices: • Dumping-refusing to treat less healthy patients who might use services in excess of their premiums. • Creaming-seeking to attract more healthy patients who will use services costing less than their premiums. • Skimping-providing less than the optimal quantity of services for any given condition in any given time period.

10. Equilibrium And Adverse Selection in a market with HMO Cutler and Reber (1998)demonstrates the potential adverse selection of sicker consumers toward FFS care and healthier patients toward HMOs. e.g.Compared with that of HMOs, the extra cost E of FFS to be: E=FFS cost-HMO cost=(Deductibles+FFS copay)-HMO price (12.1) E=(D+r*s)-P(HMO) where s is the severity of treatment Under perfect competition, both FFS and HMO providers earn zero profits. For FFS provider, profit for average patient is pi(F)=D+r*s(F)-s(F) where s(F) is average FFS patients’ severity of treatment. The cost for each unit is one dollar => D=(1-r)s(F) For HMO, pi(H)=P(HMO)-a*s(H)=0 where parameter a reflect HMO achieve efficiencies in providing care, as well as restricting the amount of hospital care provided, reducing the cost of care. (with no cost reduction a=1; Cutler and Reber assert a=0.9 in the real world) After arrangement, (12.1) becomes E=[(1-r)s(F)-as(H)]+rs. Assume each unit of s is valued equally, so a 45 degree V line is drawn in Figure 12-6. Conclusions: (1) adverse selection: When individual is young, s=0. The extra FFS cost is higher than the average the value he put on them (the E curve is above the V curve) (2) If FFS increase its coinsurance rate (r). Then FFS plan becomes less attractive; this can be seen by E shift to E2. Thus, the healthiest among the former FFS becomes a the sickest HMo members. As a result, the average severity in both plans increases.

11. How does managed care differ-empirical result • Theoretical Prediction: compared with FFS, managed care organizations will spend less per member, reducing health care costs. If fewer resources are used, quality of care may also suffer. • Methodological Issues-Selection Bias and Quality of Care(1) To test theoretical prediction, the empirical study require that patients are randomly assigned to either HMO or FFS. In the real world, if HMO offer better benefits, then it may attract sicker members. If this is not addressed, studies may make HMOs look more expensive.(2) Managed care provides incentives to reduce costs of care. Does it also provide incentive to cut corners by reducing quality of care? In fact, cutting health quality would likely lower cost in the short term, but it might increase the long-term cost if patients required additional services later.

12. The measurement of quality-Donabedian (1980) • Structure-The quality and appropriateness of the available inputs and their organizations. • Process-The quality of the delivery of care. • Outcome-The ultimate quality of care but the most difficult to measure scientific.

13. Comparative utilization and costs • Luft (1978, 1981) found that HMO enrollees, especially prepaid group practice members, had lower hospitalization rates. No clear evidence showed that these lower rates were attributable to reductions in the less important, discretionary procedures. Furthermore, the evidence at hand could not dismiss the possibilities that biased self-selection of HMO membership or underutilization in HMOs was responsible for the observed differences. • Arnould and colleagues (1984) confirmed Luff’s conclusion that length of stay is not significantly differences between the HMO and the FFS parties. • The Randy study-a randomized experiment found not all observations that a shifts from FFS to HMOs would lead to saving.