More on managed care. Demand for MCOs. Patients and/or employers may wish lower cost alternative. BUT, they might not like to have their options limited. In the past, if patients already have strong relationships with current providers, they might be unwilling to seek MCO alternative.
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Out of Plan, or
Deductible (coinsurance rate = 1)
Pure Risk Premium
May offer considerable cost advantages:
In contrast, by integrating insurance with the provision of health care, the MCO receives a fixed payment per enrollee to cover costs in the current period, and over time, for those who remain enrolled.
Thus, unlike FFS care, where payment in every period is very likely to cover costs, the MCO must consider the timing of expenditures and the financial losses of overspending on patients who may disenroll.
One way for an MCO to “self-insure” against long term losses attributable to disenrollment is to economize on care for those currently enrolled.
This would mean:
Enrolling fewer patients.
Providing less care.
xi= services level
ki = # of membersCosts
Ci = the MCO’s total annual cost to provide expected level xi of health services to its ki enrolled members.
Total cost Ci is related positively to xi, positively to number of person-years of membership ki, and negatively to “health” y of those who happen to be members at the time.
With ki as an argument in the cost function we can have either increasing and/or decreasing returns to scale for both ki and xi.
This is easily shown. Without the externality, MCO1 optimizes at point A, giving level x1mkt.
C1x + k1 (C1y+ C2y)
The optimal level of x1 at point B is x1opt, as noted by the downward shift in the right hand side by the factor k1 (C1y+ C2y), which is unambiguously negative.
This indicates an inefficiently small level of MCO care x, and by implication a substitution of non-MCO and/or non-health care inputs (such as the patient’s own time) for the MCO care.
k1 (C1y+ C2y)
Inputs (services) x1
We can write a two-period model where an MCO provides either
high tech treatment M the first period; no treatment the second period.
low tech treatment m in each period.
r is the rate of interest and g is the disenrollment rate.
It turns out that the MCO will provide high tech treatment if:
M < m[1 + (1-g)/(1+r)],
and low-tech if:
M > m[1 + (1-g)/(1+r)].
Thus the higher the disenrollment rate g, the more important is the disenrollment effect. If g = 0, the MCO faces the standard investment criterion, comparing first period costs with discounted future costs. Its decision here will be economically efficient.