Physicians in the Marketplace

1. Physicians in the Marketplace Physician Location Decisions Many countries actively manage the number of physicians in various specialties allowed to practice in different regions U.S. physicians can freely migrate -Policies intended to increase the # of physicians in underserved areas cannot succeed without understanding physician location decisions

2. Simple model of spatial competition - 1 dimensions along which physician’s “products” are differentiated is location (patient travel time) - New supplier will locate where it will face the greatest D - With 1 supplier, optimal location is near the center of the population, minimizing travel time - In equilibrium, sellers will be distributed such that each faces approximately the same expected D

3. Physician location in a hypothetical 3 town society - Populations 100,000, 20,000 & 5,000 - Similar incomes, health status, and preferences for care and prices - 12 docs: equilibrium distribution is 10 in large town, 2 in medium town, 0 in small town

4. Entry by new physicians - If a 13th doctor entered: greatest D in large town (100,000/11 = 9090 vs. 20,000/3 = 6,667 vs. 5,000/1 = 5000) - No doc enters small town until there are 25 docs (highest pat/doc ratio is in small town) - Individual preferences may determine individual choice of location (or specialty), but the aggregate location patterns are driven primarily by economic forces Table 1 HYPOTHETICAL DISTRIBUTIONS OF DOCTORS ACROSS TOWNS

5. Example assuming no monopoly pricing - Physicians enter markets with the highest expected π and distribute themselves such that expected π is similar across markets in long-run equilibrium - With monopoly pricing, the smallest town will get a physician sooner. 5000 patients with no competing physicians might be as attractive as 7000 patients per physician with 2 competitors. - Bresnahan and Reiss estimate entry thresholds for physicians in small towns. Towns get their first physician when the population reaches about 900, but do not get their second physician until the population rises to 3500.

6. Distribution of US physicians is consistent with spatial competition model • 1970s: Ratio of active physicians to population rose from 146/100,000 to 214/100,000 • Newhouse et al. (1982): specialties whose ranks were growing during the 1970s diffused into smaller towns • Polsky et al. (2000) examined relocation decisions of established physicians: -Early career specialists practicing in areas with growing managed care penetration were more likely to relocate -Little effect of managed care on more established physicians’ locations -Largest effect of managed care is on initial practice location of new physicians (Escarce et al., 1998)

7. Encouraging doctors to locate in “underserved” areas - Programs such as the National Health Service Corps pay tuition or repay student loans in exchange for an obligation to practice in an underserved area for several years - Long-term goal is to get doctors to stay beyond their service obligation - Retention rates have been poor and those who stay tend be in areas in which D had become sufficiently large that they could have attracted a non-NHSC physician (Held, 1976)

8. Competition in the Market for Physician Services • Monopoly -High rates of return to training suggest markets are not perfectly competitive -Amount of price dispersion seen for many physician services exceeds what might be expected on the basis of quality differences -Profit-maximizing firm sets Q such that MR=MC, which restricts Q below the competitive level and allows the seller to charge more than the competitive price -The less elastic the D curve faced by firm, the higher the “markup” above MC; firms facing inelastic D curves do not lose many sales by raising P Figure 1

9. Monopoly power Analysis is similar as long as the firm has some degree of monopoly power (faces downward sloping D) -As more firms enter, incumbent firms’ D curves shift in as market D is split between more firms -Any one firm’s D curve is greater than elasticity of the market D curve; industry as a whole loses sales only if consumers reduce total purchases but firm also loses sales if consumers switch to another firm -Entry makes D curves faced by existing firms more elastic (more alternatives if any one firm raises its price) -Under perfectly competition, each firm faces a horizontal D curve regardless of the elasticity of market D

10. Empirical Evidence - Elasticity facing a PCP in a large metropolitan area is about -3 compared to the RAND estimate of a market D elasticity of -0.2 to -0.3 - Presumption that more producers raise the elasticity of D faced by firms has been challenged with respect to the market for physician services (more later when we talk about search)

11. b. Monopolistic Competition • Markets for differentiated products are often described by the monopolistic competition model • Each physician’s services are likely to be viewed as unique by at least some consumers (location, office amenities, and practice style) • Even with free entry the D curve faced by each physician would not be horizontal - A physician raising fees slightly would not expect to see her appointment book go blank

12. Monopolistically competitive equilibrium - With free entry, firm charges P > MC, but earns π=0 because entry continues until the firm’s D curve is tangent to AC

13. Physician competition with barriers to entry With entry barriers to entry (e.g., licensure), entry is unlikely to force physicians’ D curves to be tangent to AC. P > AC, allowing > competitive returns. Anything that shifts the D for physician services down would reduce this return -Entry by more physicians -Greater scope of practice for non-physician providers -Growth of managed care (particularly for specialists) -Technical changes (e.g., H2 blockers reduced D for general surgeons)

14. Consumer Search Importance of search in moving the physician services market towards a competitive outcome: -Suppose consumers engage in no search: -Patients are randomly matched with physicians and do not switch -Each physician can charge monopoly P -If physicians’ MCs vary, we would see price dispersion since monopolist’s optimal P depends on MC

15. Consumer Search (cont.) -If consumers search: -Physicians must charge lower Ps or provide higher quality or amenities to keep their patients from leaving (firm-level D curve becomes more elastic) -High cost physicians are less likely to be able to maintain higher prices than other physicians

16. Effects of insurance on search Obvious effect is to decrease search by decreasing the incentive to be P conscious: -If c = 0.2 and I locate a physician charging $10 less, I only keep $2 of the savings -If I’m poorly informed and assume that a higher priced doctor is better, I might not even react to the $2 savings -More subtle effect: insurance reduces the cost of “trying out” a new doctor. For services purchased repeatedly (e.g., primary care), insurance might encourage search for a better patient/physician match. -Thus, insurance might decrease price search but increase quality search

17. The Consumer Confusion Hypothesis Increased # of sellers per customer should decrease prices • Ps of physician services are often positively correlated with physician density (Pauly and Satterthwaite, 1981) - 1 explanation is that search is more difficult when there are more providers -In communities with few physicians, low population turnover, and strong social bonds, physicians develop well-known reputations -In a large city, meeting many patients of any particular physician is unlikely - Alternative explanations: -If residents of some areas prefer longer visits or shorter waiting times, these markets will have more physicians and, because of the higher costs of this practice style, higher Ps -Higher D areas are likely to have higher Ps and attract more physicians

18. How can search be increased? Reduce the cost of information -Advertising might help -Some states still ban advertising by health care professionals and some professional organizations consider advertising unethical -Argument against advertising is that incompetent practitioners would use it to fool consumers -Opposition may reflect fear that advertising reduces Ps; Ps of items such as eyeglasses are lower in states that allow advertising -Ads most common for physicians new to an area (information on training, certification, hours, location), new services (laser eye surgery), non-insured services (cosmetic surgery) or services with competition from NPPs (weight loss clinics)

19. Licensure • Physicians and many other occupations are licensed • Stated purpose is protecting public from incompetent practitioners • Are some licensed professions (e.g., barbers) more dangerous to the public than unlicensed professions (e.g., economists)? • Licensure of health professions provides some quality assurance at the cost of creating a legal barrier to entry and decreasing competition • Board certification, which is not mandatory, may be more desirable: provides quality signal without barring entry - Licensure and certification share a weakness: they say something about the quality of an input, but do not measure quality of the actual process or outcome of care

20. Supplier-Induced Demand The patient/doctor relationship can be thought of in terms of the theory of “agency”: -The principal (patient) delegates authority to the agent (doctor) to make some decisions -Principal cannot readily monitor the agent (agent is more knowledgeable about diagnosis and treatment) -Principal’s goals conflict with agent’s (consider FFS vs. salary or capitation)

21. Supplier-Induced Demand (cont.) If physicians exploit patients’ inferior knowledge, much of what we have said must be reconsidered: 1) Interpretation of D curve as reflecting the value of care -If physicians act as perfect agents, this I interpretation works (and is strengthened because the physician provides the information patients need to judge value) -Medical ethics is an attempt to encourage physicians to act in their patients’ interests -However, if physicians use their recommendations to shift the patients’ D curve for the physician’s gain, D curve no longer provides a reasonable measure of value

22. Supplier-Induced Demand (cont.) • We said that salary or capitation could create doctor/ patient conflict. With SID, doctors’ and patients’ would already have been in conflict under FFS. -Hickson et al. (1987) use RCT to test response to payment method -1/2 of physicians paid FFS -1/2 salaried -FFS saw patients more often, primarily for well-care visits (discretionary) -FFS more likely to exceed American Academy of Peds well-care guidelines; salaried more likely to fall short

23. Supplier-Induced Demand (cont.) 2 studies from opposite sides of the SID debate: • Dranove and Wehner (JHE, 1994): -Used statistical methods of previous studies that found evidence of D inducement -Concluded that obstetricians induce D for child births! -Since this is obviously ridiculous, they question studies that claim to show inducement using the same methodology • Tai-Seale and Rice (HE, 1998) -Examined response to Medicare’s 1989-90 reductions in fees for “overvalued” procedures -Physicians in several specialties attempted to make up lost income by performing more procedures -Observed physicians’ responses among all payers and services rather than only in volume of Medicare overvalued procedures -Volume performance standards used in deriving the annual updates in the Medicare fee schedule do not account for spillovers to the private sector

24. What factors may limit the extent of SID? -Physicians’ reputations for aggressiveness and patients’ wariness about aggressive recommendations (Dranove, Ec Inq 1988) -Second opinions (Rochaix, JHE 1989) -Physicians’ desire for leisure and dislike of misleading their patients (McGuire and Pauly, JHE 1991; Hirth and Chernew, Ec Inq 1999) Once fee drops below MC (as is the case under salary or capitation), incentive to induce D disappears -FFS insurers must find ways to control utilization if they hope to keep premiums competitive with MCOs