Chapter 12: The Physician Chapter 12: The Physician Services IndustryServices Industry

Health EconomicsHealth Economics

OUTLINEOUTLINE

Physician Market Structure

Conduct in the Physician Market

Physician Market Performance

Physician Practice Management Companies

Are there “too many” specialists Are there “too many” specialists and “too few” primary care docs?and “too few” primary care docs?

Proportion of specialists in U.S. higher than in W. European countries and Canada (60% vs. 25-50%).Specialists more prone to use new, high-

tech medical procedures.

May explain why U.S. medical costs per capita are highest in the world.

Matching Physician Supply & Matching Physician Supply & RequirementsRequirements

“Future physician supply does not appear well-matched with requirements.

(Politzer, 1996)

A shortage of 33,000 primary care physicians is predicted by 2020.

The same set of assumptions also generates a surplus of specialists.

Why are there differences in Why are there differences in specialty choice?specialty choice?

Elasticity of the % of residents in a given specialty with respect to:expected earnings: .30 to .60expected hours worked: -1.2 to -2.0

Specialty choice relatively unresponsive to length of residency requirement or indebtedness.

Why are there differences in Why are there differences in specialty choice?specialty choice?

Nonprimary care specialists are motivated by:Higher expected income.Prestige.Opportunity for research.More regular working hours.

Choice of primary care motivated by:Interest in working directly with patients.Interest in providing continuity of care.

Can gov’t shift the balance towards more primary care?

Employed vs. Independent PhysiciansEmployed vs. Independent Physicians

Employed physicians worked 5-7 fewers hours a week.

Employed physicians’ median net income was $142,000 in 1996, vs. $198,000 for all private-practice physicians.

Practice mgmt. Companies typically pay physicians $300,000-$400,000 per physician for practice assets (land, equipment). Tradeoff: 20% of practice’s net revenues.

Managed Care Reimbursement of Managed Care Reimbursement of PhysiciansPhysicians

MCOs hope to modify physician behavior in order to control costs.

94% of all practicing docs in 1998 had at least one managed care contract.

In 1998, 52¢ of every $1 of physician revenue came from an MCO.8¢ of every $1 came from a capitated

contract.

Are there barriers to entry?Are there barriers to entry? Requirements for licensure to practice

M.D. from accredited med school.Internship or residency at recognized

institution.Pass a medical exam.

AdvantageProtects public from incompetent doctors.

DisadvantageState licensure boards controlled by

physicians who can restrict entry to keep salaries high.

Is market reform better than Is market reform better than government licensure?government licensure?

Market reform may encourage physician monitoring better than government regulation.More salaried docs are being monitored by

HMOs.Laws shifting medical malpractice liability

towards hospitals and HMOs.For-profit providers have direct financial

stake in quality of their physicians.

Production, Costs, and Production, Costs, and Economies of ScaleEconomies of Scale

Do certain physician organizations have a production or cost advantage?Group practice physicians are 22% more

productive than those in solo practice. (Brown, 1988).

The lowest-cost practice size has been estimated at 5.2 physicians (Pope & Burge, 1996).

Economies of scale may exist for practices as large as 100 physicians (Marder &

Zuckerman, 1985).

Physician Market Structure SummaryPhysician Market Structure Summary

Physicians have outpaced growth in the general population.

The U.S. may have too many specialists and too few generalists.

A move towards multi-physician practices.Production & cost advantages.Pressures of managed care.

Despite barriers to entry, competition is increasing.

Physician Market ConductPhysician Market Conduct

The Supplier-induced demand hypothesis.

The legal environment and physician behavior.

The impact of managed care on physician conduct.

Has the over-supply of physicians led Has the over-supply of physicians led to “physician-induced demand?”to “physician-induced demand?”

Def’n: physicians may take advantage of asymmetric information to convince their patients to consume more medical care than would be in their self-interest.

How much care can physicians induce?Easier with surgery?Is the physician willing to induce?

Can insurers limit demand inducement?

Has the over-supply of physicians led Has the over-supply of physicians led to “physician-induced demand?”to “physician-induced demand?”

Can insurers limit demand inducement?

The empirical evidence on physician-induced demand is limited.The exception may be the market for

surgical services, where surgeons have a greater ability to manipulate demand.

Defensive Medicine &Defensive Medicine & Malpractice Reform Malpractice Reform

Physician malpractice premiums account for 1% of US health care spending.

Physicians may over-provide care in order to avoid malpractice suits.Defensive medicine may add another $4b

to $25b to the nation’s health care bill.

Defensive Medicine &Defensive Medicine & Malpractice Reform Malpractice Reform

States which implemented direct reforms to their malpractice system (caps on damages, abolition of punitive damages) reduced hospital expenditures 5 to 9%.

Indirect reforms (caps on contingency fees, mandatory periodic payments) had no measurable impact on costs.

MCOs and Physician ConductMCOs and Physician Conduct

HMOs combine the insurance and production functions in health care.

They are different from traditional indemnity (FFS) plans, in that they attempt to control how health care is provided.

How do HMOs influence physicians?

Types of Managed Care Orgs Types of Managed Care Orgs

S ta ff M od e l G ro up M o d e l N e tw o rk M o d e l IP A M o d e l

H M O P P O /P O S

M a n ag e d C a re

MCOs and Physician ConductMCOs and Physician Conduct

Staff model HMOs pay physicians a salary. No incentive to over-provide care.

IPA HMOs usually pay physicians discounted FFS. Physicians have incentive to over-provide

care. How can the HMO control costs?

MCOs and Physician ConductMCOs and Physician Conduct

Caution: Distinctions between different types of HMOs are blurring over time.

28% of staff HMOs pay based on salary only (Gold, 1996).

90% of PPOs use discounted FFS.

Financial Risk Arrayed on a Spectrum from Full Risk for the Insurer to Full Risk for the Provider

HBS Case Study 9-698-060, Note on Managed Care

Additional MCO Compensation ToolsAdditional MCO Compensation Tools

Risk sharing - The insurer can make the physician bear some of the risk of insuring the patient, so that the physician will also feel the need to restrain medical costs.

CapitationWithholdingsBonuses

Additional MCO Compensation ToolsAdditional MCO Compensation Tools

Capitation - Physician receives a fixed payment per person in return for providing medical services regardless of the quantity of medical care delivered.

e.g. A physician may receive $9 per member per month for each enrollee who chooses an HMO plan and elects him to be their primary care caregiver.

Additional MCO Compensation ToolsAdditional MCO Compensation Tools

Capitation Physician has an incentive to restrict # of

patient visits.

Problem - Physician can reduce visits by referring patients to other providers in the same HMO plan.

e.g. If the patient has high blood pressure, refer her to a cardiologist.

Solution - Withholding

Additional MCO Compensation ToolsAdditional MCO Compensation Tools

Even if docs paid thru capitation, HMO responsible for costs of hospital services, outpatient diagnostic tests, physician referrals.

How can the HMO limit these costs? Withhold a portion of physician payment

(PMPM) until end of fiscal year.

HMO Reimbursement StrategiesHMO Reimbursement Strategies

Assign these funds to specific expenditure categories (e.g. lab tests).

At end of year, return a portion of the withhold to physicians if surplus exists in that expenditure category.

Can even change next year’s withhold or capitation based on this year’s performance.

Additional MCO Compensation ToolsAdditional MCO Compensation Tools

Bonuses - MCOs can give a portion of their profits at the end of the year to physicians who elect cost-effective behavior.

e.g. Pay bonuses to primary caregivers who reported lower number of specialist referrals.