Chapter 12: The Physician Services Industry Health Economics

1. Chapter 12: The Physician Services IndustryHealth Economics

2. OUTLINE • Physician Market Structure • Conduct in the Physician Market • Physician Market Performance • Physician Practice Management Companies

3. Are there “too many” specialists 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.

4. Matching Physician Supply & Requirements • “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.

5. Why are there differences in specialty choice? • Elasticity of the % of residents in a given specialty with respect to: • expected earnings: .30 to .60 • expected hours worked: -1.2 to -2.0 • Specialty choice relatively unresponsive to length of residency requirement or indebtedness.

6. Why are there differences in 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?

7. Employed 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.

8. Managed Care Reimbursement of Physicians • 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.

9. 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. • Advantage • Protects public from incompetent doctors. • Disadvantage • State licensure boards controlled by physicians who can restrict entry to keep salaries high.

10. Is market reform better than 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.

11. Production, Costs, and Economies 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).

12. Physician 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.

13. Physician Market Conduct • The Supplier-induced demand hypothesis. • The legal environment and physician behavior. • The impact of managed care on physician conduct.

14. Has the over-supply of physicians led 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?

15. Has the over-supply of physicians led 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.

16. Defensive Medicine & 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.

17. Defensive Medicine & 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.

18. MCOs 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?

19. Types of Managed Care Orgs

20. MCOs 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?

21. MCOs 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.

22. 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

23. Additional 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. • Capitation • Withholdings • Bonuses

24. Additional 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.

25. Additional 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

26. Additional 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.

27. HMO 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.

28. Additional 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.