More on managed care

1. More on managed care

2. Demand for MCOs • Patients and/or employers may wish lower cost alternative. • BUT, they might not like to have their options limited. • If patients already have strong relationships with current providers, they may be unwilling to seek MCO alternative.

3. Supply of MCOs May offer considerable cost advantages: • Reduce quantity and intensity of care. • Substitute lower cost care for higher cost care. • Provide economies of scale in the purchase and use of inputs. • Quicker to develop effective utilization review. • Adopt new technology more efficiently. • Encourage use of cost-effective preventive care. • Provide administrative economies.

4. Are HMO costs lower? • Without question, they have lower hospitalization costs. • Following “bottom lines” • Inpatient services account for a higher percentage of total expenditures than do outpatient services. • HMO plans use fewer services that are expensive, and/or have less costly alternatives. • HMOs provided more comprehensive coverage than did indemnity plans. • All of these imply that HMOs provide care at lower costs than do indemnity (FFS) plans.

5. Quality of Care? • What is quality? • Structure = quality and appropriateness of inputs and their organization. • Process = quality of the performance of the delivery of care. • Outcome = ultimate impact on health. • In a nutshell, it’s hard to conclude that HMOs are either better or worse. • This is important, because many people would assume that they are worse.

6. Disenrollment • Some of the financial and quality of care problems associated with patient disenrollments are well known. • Patients and providers face the difficulties of maintaining continuity of care and complete medical records. • HMOs face added financial burdens resulting from higher patient recruiting costs, disruption of cash flows, and upward pressure on premiums for continuing members if lower risks are more likely to disenroll. • Why emphasize preventive care for a patient who is not likely remain a member, when that care provides the greatest return in the form of averted future treatment costs? • Potential loss of patients may influence treatment decisions of FFS providers as well as HMOs, but capitation method of payment to HMOs renders the disenrollment problem particularly important. • FFS providers are paid for each unit of care. Aside from uncollectibles, they are not at risk of losing money on services provided currently or in the future.

7. Managed Care, in contrast … In contrast, by integrating insurance with the provision of health care, the HMO 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 HMO must consider the timing of expenditures and the financial losses of overspending on patients who may disenroll. One way for an HMO 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.

8. Disenrollment and Treatment Choice • What about alternative treatment methods. • Consider the longer term consequences that potential disenrollment can have on HMO treatment practices. • In the presence of expected disenrollment, HMOs will tend to use “low-tech” treatments with smaller up-front costs, even when the present discounted value (PDV) of the costs equals the PDV for “high-tech” treatments.

9. Disenrollment and Treatment Choice We can write a two-period model where an HMO 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 HMO 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 HMO faces the standard investment criterion, comparing first period costs with discounted future costs. Its decision here will be economically efficient.

10. Disenrollment and Treatment Choice • With the likelihood that increased competition through increased choice will raise g, managed competition and other competitive strategies must be more carefully examined. • If g, m [1 + (1-g)/(1+r)] , and continuing care m becomes the more financially viable option even if the PDVs are equal, and even if treatment M is more economically efficient in producing health. • In effect, HMOs self-insure against future disenrollment by reducing current costs through (low cost) continuing care rather than high-tech treatment.

11. Competitive Effects MC • What effects might occur? • In principle, it would lead to more competition, flatter demand curves. $ P1 P2 D2 • Shift demand curve to the left. • Shift the MR curve to the left. • Increase the demand elasticity at any price because there are now more competitors. • BUT, it competition based on QUALITY, rather than price? D1 MR2 Q1 Q2 MR1 Q