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Supply and Demand of Physician Services. Econ 737.01. Supply and Demand of Physician Services: Outline. A. General Models B . Forms of Compensation C. Physician-Induced Demand. General Models: Outline. I. Supply of Physicians II. Supply of Physician Services

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supply and demand of physician services outline
Supply and Demand of Physician Services: Outline
  • A. General Models
  • B. Forms of Compensation
  • C. Physician-Induced Demand
general models outline
General Models: Outline
  • I. Supply of Physicians
  • II. Supply of Physician Services
    • a. Model with Complete Information
    • b. Incomplete Information
    • c. Objectives Besides Income
i supply of physicians
I. Supply of Physicians
  • Summary Statistics (U.S.; 1994)
    • 126 medical schools
    • 16,000 graduates per year
    • 550,000 practicing physicians
    • 254 physicians per 100,000 residents
    • Average net income : $182,400
    • Average work hours: 55/week
    • Physicians work a lot and make a lot
      • Market forces or shortage?
i supply of physicians5
I. Supply of Physicians
  • Market distortions
    • Barriers to entry
      • Educational and licensing requirements
      • AMA controls these; incentive to restrict supply too much?
      • This would reduce supply below socially optimal level
    • Medical school subsidies
      • Could raise supply above socially optimal level
i supply of physicians6
I. Supply of Physicians
  • Empirical Evidence
    • Difficult to measure physician shortages or excess returns on investments in medical education
    • 1900-1950
      • Supply side: new medical school graduates constant
      • Demand side: average age, real per capita GDP, and insurance coverage all increased dramatically
      • Consistent with excessively restricted entry
    • More recently
      • Output of medical schools has expanded dramatically in last 10-20 years
      • Weeks et al. (1994): returns to education for physicians, lawyers, dentists, and MBAs all similar
ii supply of physician services a model with complete information
II. Supply of Physician Servicesa. Model with Complete Information
  • Monopolistic Competition
    • Many sellers
    • Differentiated products (physicians are imperfect substitutes)
    • Some market power
  • Demand exogenous from physician’s perspective
  • Perfect information on both sides
  • Physicians maximize profit
  • Nonretradablegoods
ii supply of physician services a model with complete information8
II. Supply of Physician Servicesa. Model with Complete Information
  • Physician makes “all or nothing” offer to patient, who would prefer to consume less care at the given price
  • Physician can price discriminate
  • If price set by demand side (i.e. insurance companies/Medicare), physician responds by increasing quantity
  • Quality of service is another dimension to consider
ii supply of physician services b incomplete information
II. Supply of Physician Servicesb. Incomplete Information
  • Punch line from part a: Even with perfect information, the differentiated and nonretradable nature of medical goods can keep medical expenditures above competitive levels.
  • Relaxing the assumption of perfect information further enhances our understanding of why medical expenditures are so high.
ii supply of physician services b incomplete information10
II. Supply of Physician Servicesb. Incomplete Information
  • 1) Irreducible uncertainty
    • Doctors and patients have imperfect information about the underlying condition and effectiveness of treatments
    • Most doctors and patients are risk averse
    • => increased test frequency and treatment intensity
ii supply of physician services b incomplete information11
II. Supply of Physician Servicesb. Incomplete Information
  • 2) Principal-agent problem
    • Principal: patient
    • Agent: doctor
    • Doctors know more than patients about appropriate level of care (asymmetric information)
    • Outcomes are often difficult for patient to observe
    • Often gray areas about appropriate treatment
    • => Could lead to excessive provision of care
    • “Induced demand”
ii supply of physician services b incomplete information12
II. Supply of Physician Servicesb. Incomplete Information
  • 3) Unobservable physician quality
    • Large fixed cost with trying a new physician
    • Information asymmetry makes it hard to observe physician quality
    • => Prices may not fully adjust to an increase in competition
ii supply of physician services c objectives besides income
II. Supply of Physician Servicesc. Objectives Besides Income
  • Parts a and b assume that physicians act to maximize income. Other considerations:
    • 1) Medical ethics: legal and moral constraints
    • 2) Patient’s best interest (patient’s utility enters into doctor’s utility function)
      • Patient’s utility, not society’s utility. Why is this an important distinction?
    • 3) Target income
ii supply of physician services c objectives besides income14
II. Supply of Physician Servicesc. Objectives Besides Income
  • 3) Target income
    • Motivation: explain positive association between physicians per capita and prices of services, negative association between fees paid and quantity supplied
    • Physicians aim to maintain a “target income”
    • If increased competition lowers their income, they take advantage of their market power by raising prices or inducing demand to keep income relatively stable
    • What does this say about physician behavior before the increase in competition?
ii supply of physician services c objectives besides income15
II. Supply of Physician Servicesc. Objectives Besides Income
  • 3) Target income
    • Taken seriously for a long time
    • Generally rejected now, though still subject of debate in literature
    • If target income hypothesis is true, there should be large income effects on supply (identified using non-labor income), and this doesn’t seem to be the case
  • Can you think of other explanations for the apparent paradoxes?
forms of compensation
Forms of Compensation
  • I. Fee-for-service
  • II. Capitation
  • III. Salary
  • IV. Pay-for-performance
i fee for service
I. Fee-for-service
  • Physicians are paid an additional amount of money for each service they provide
  • Would expect this to increase the amount of care provided
  • Open question how much these additional services would improve health
  • Schuster et al. (1998) estimate up to 30% of services are not medically necessary
  • Often supplemented with incentives to economize
i fee for service18
I. Fee-for-service
  • Who sets the fees?
    • Used to be physicians
    • In response to incentive problems, insurance plans began negotiating fees and Medicare began setting fees
    • These groups can do this because they are large enough that they have market power (monopsony)
    • How does this tie into the “public option” debate?
ii capitation
II. Capitation
  • Physicians receive fixed amount of money for providing services to a patient for a particular period of time
  • Incentive to keep long patient roster but give them each as little attention as possible
  • Could lead to higher referral rates
    • Various schemes to makes physicians share in financial risk
  • Still need to provide enough care to attract and retain patients
  • Incentive to select healthy patients (cream skimming; cherry picking)
    • Fee for a patient is “risk adjusted” based on expected utilization
    • This adjustment only accounts for 10% of variation
  • Often supplemented with incentives to ensure sufficient quality of care
  • Could be combined with ffs in a “mixed” system
ii capitation20
II. Capitation
  • Quantity
    • Capitation seems to be effective in reducing quantity and expenditures (is this good?)
    • Stearns et al. (1992)
      • Group of WI employees enrolled in IPA
      • Change from ffs to capitation system where physicians shared in financial risk of hospitatlization and specialty costs
      • Increased primary care visits by 18%
      • Decreased specialist visits by 45%, hospital visits by 16%, and length of stay by 12%
ii capitation21
II. Capitation
  • Quantity
    • Ogden et al. (1990)
      • Group of IL employees enrolled in IPA
      • Switched from ffs to capitation with shared financial risk
      • Specialist costs increased 2% compared to 12% the previous year
      • Hospital outpatient costs dropped 7% compared to increasing 12% the previous year
      • Little change in inpatient hospital utilization
ii capitation22
II. Capitation
  • Quantity
    • Mooney (1994)
      • GPs in Copenhagen, Denmark switched from capitation to mixed capitation-ffs
      • Provision of services that provided extra fees increased dramatically
      • Decrease in referrals to specialists and hospitals
ii capitation23
II. Capitation
  • Quality
    • Sorbero et al. (2003): patients 36% more likely to switch physicians under capitation than ffs
    • Shen et al. (2004): survey with hypothetical treatment decisions; physicians more “bothered” by their decisions under capitation than ffs
ii capitation24
II. Capitation
  • Referral rate
    • Capitation does seem to lead to more referrals on the margin, both theoretically and empirically, if the GP does not share in the financial risk
      • Theoretical: Barros and Martinez-Giralt (2003); Iverson and Luras (2000b)
      • Empirical: Forrest et al. (2003); Carlsen and Norheim (2003)
iii salary
III. Salary
  • Provides fixed income to physician over a particular time period
  • Ex. in US: Staff HMOs
  • Incentive to do as little as possible to keep job
  • Often supplemented with incentives to ensure reasonable quantity and quality of care
  • Less common than others, but do see it in national health systems like UK and staff HMOs in US
iv pay for performance
IV. Pay-for-performance
  • Ties part of physician or hospital reimbursement to meeting performance thresholds (clinical outcomes, patient satisfaction, etc.)
  • New and largely untested
  • >20 million in US covered (Rosenthal et al., 2004)
  • Difficult to measure “performance”
  • What incentive problems might result from paying on the basis of outcomes?
physician induced demand
Physician-Induced Demand
  • I. Theory
  • II. Evidence from Increased Competition
  • III. Evidence from Decreased Fees
  • IV. Summary
i theory
I. Theory
  • Physician-induced demand (PIP): “when the physician influences a patient’s demand for care against the physician’s interpretation of the best interest of the patient” (Handbook, p. 504)
  • Physician exploits role as agent to alter the patient’s demand curve
  • Distinctions that make PID challenging to identify empirically (not enough to just look at quantity)
    • Useful agency v. inducement
    • Demand shifting v. quantity setting
i theory29
I. Theory
  • Model
  • Where Y=income, I=inducement, N=number of patients, m=margin, x=quantity, i=inducement
  • Solving yields
i theory30
I. Theory
  • Testable prediction 1
    • N down => Y down and I down => UI less negative and UY up => -UI/UY down => x1’ and x2’ down => i1 and i2 up.
    • So, increased competition for patients should increase the per-patient quantity of services
      • Supply side: more physicians in market
      • Demand side: less need for services
    • Depends on changing tradeoff between I and Y as income changes (income effect)
i theory31
I. Theory
  • Testable prediction 2
    • m1 down => UY up => -UI/UY down => i1 and i2 up
      • Income effect
    • m1 down => lower return to inducement in sector 1 => i1 down and i2 up
      • Substitution effect
    • Net effect on i1 ambiguous; net effect on i2 down
    • So, a drop in fees from one payer should increase quantity among patients with another payer
ii evidence from increased competition
II. Evidence from Increased Competition
  • Effect of increase in per capita number of physicians on quantity
  • Problems
    • Really tests joint hypothesis of induced demand and income effects
    • Endogeneity of number of physicians (likely a response to demand)
ii evidence from increased competition33
II. Evidence from Increased Competition
  • Fuchs (1978)
    • Effect of supply of surgeons on surgeries
    • 22 metropolitan areas, pooled cross sections from 1963 and 1970
    • IVs: metro area, hotel receipts, percent white
    • 10% increase in surgeons => 3% increase in surgeries
  • Cromwell and Mitchell (1986)
    • More years, more areas, better controls
    • Same identification strategy
    • Same sign, smaller effect
  • Birch (1988) and Grytten el at. (1990)
    • More dentists per capita => more dental visits
ii evidence from increased competition34
II. Evidence from Increased Competition
  • Rossiter and Wilensky (1983, 1984); Scott and Shell (1997)
    • Small effects of physician density on quantity for some procedures
  • Dranove and Wehner (1994)
    • Falsification test: estimated “effect” of number of obstetricians on volume of births
    • Similar IV methodology to Fuchs and Cromwell and Mitchell
    • Found positive effect; suggests methodology is suspect
ii evidence from increased competition35
II. Evidence from Increased Competition
  • Gruber and Owings (1996)
    • 13.5% fall in fertility from 1970-1982 represents exogenous shock to incomes of OB/GYNs
    • Exploited between-state over-time variation in fertility rates to identify effect on Caesarian section deliveries (more lucrative)
    • 10% drop in fertility => 0.6% increase in P(C-section)
ii evidence from increased competition36
II. Evidence from Increased Competition
  • Pauly (1980)
    • Used large individual-level dataset
    • Least informed patients should be the most susceptible to demand inducement
    • Poor patients in big cities should be the least informed
    • Found (small) effect of number of physicians on quantity of ambulatory care for this group
iii evidence from decreased fees
III. Evidence from Decreased Fees
  • Hadley and Lee (1978); Mitchell et al (1989)
    • Medicare price freezes during 1970s and 1980s led to increased utilization
  • Hurley et al. (1990); Hurley and Labelle (1995); Escarce (1993b)
    • No clear evidence of effect of own-fee changes on utilization
    • Not surprising; theoretical prediction ambiguous
  • Rochaix (1993)
    • GPs in Quebec changed mix of services in response to lowering of fees
iii evidence from decreased fees38
III. Evidence from Decreased Fees
  • Rice (1983)
    • 1977: Medicare began setting fees in Colorado based on state-wide averages
    • Reduced fees in Denver-Boulder area; increased them in other areas
    • Physicians facing declining rates increased provision of surgery, medical services, and tests
iii evidence from decreased fees39
III. Evidence from Decreased Fees
  • Nguyen and Derrick (1997)
    • Impact of Medicare fee reductions for “overpriced procedures”
    • For 20% of physicians who experienced the largest price reductions, 1% reduction in price => 0.4% increase in volume.
  • Yip (1998)
    • Reductions in Medicare fees for thoracic surgeons led to large increases in volume
    • Surgeons recouped 70% of lost income
iv summary
IV. Summary
  • There is no perfect test for demand inducement, but theory generates predictions that lead to tests that are suggestive.
  • “It appears that, in response to economic considerations … physicians can induce demand for their services, they sometimes do induce demand, but that such responses are nether automatic nor unrestrained” (Elgar p. 265, citing Hurley and Lebelle, 1995).