The Physician Market Part 2


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  • The Physician Market Part 2

    1. 1. The Physician Market, Part 2 Professor Vivian Ho Health Economics Fall 2007 These slides draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies, Thomson Press 2007
    2. 2. Advantages of capitation for physicians <ul><li>Increased clinical autonomy </li></ul><ul><ul><li>Physician financially responsible for cost overruns </li></ul></ul><ul><ul><li>Eliminates need for external review </li></ul></ul><ul><li>Increased income </li></ul><ul><ul><li>Physician compensated by risk pools created from withholds if can reduce utilization of hospital, outpatient, diagnostics, other ancillary services </li></ul></ul>
    3. 3. MCOs and Physician Conduct <ul><li>HMOs combine the insurance and production functions in health care. </li></ul><ul><li>They are different from traditional indemnity (FFS) plans, in that they attempt to control how health care is provided. </li></ul><ul><li>How do HMOs influence physicians? </li></ul>
    4. 4. Types of Managed Care Orgs
    5. 5. MCOs and Physician Conduct <ul><li>Staff model HMOs pay physicians a salary. </li></ul><ul><ul><li>No incentive to over-provide care. </li></ul></ul><ul><li>IPA HMOs usually pay physicians discounted FFS. </li></ul><ul><ul><li>Physicians have incentive to over-provide care. </li></ul></ul><ul><ul><li>How can the HMO control costs? </li></ul></ul>
    6. 6. MCOs and Physician Conduct <ul><li>Caution: Distinctions between different types of HMOs are blurring over time. </li></ul><ul><ul><li>28% of staff HMOs pay based on salary only ( Gold, 1996 ). </li></ul></ul><ul><ul><li>90% of PPOs use discounted FFS. </li></ul></ul>
    7. 7. 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
    8. 8. Additional MCO Compensation Tools <ul><li>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. </li></ul><ul><ul><li>Capitation </li></ul></ul><ul><ul><li>Withholdings </li></ul></ul><ul><ul><li>Bonuses </li></ul></ul>
    9. 9. Additional MCO Compensation Tools <ul><li>Capitation - Physician receives a fixed payment per person in return for providing medical services regardless of the quantity of medical care delivered. </li></ul><ul><li>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. </li></ul>
    10. 10. Additional MCO Compensation Tools <ul><li>Capitation </li></ul><ul><ul><li>Physician has an incentive to restrict # of patient visits. </li></ul></ul><ul><ul><li>Problem - Physician can reduce visits by referring patients to other providers in the same HMO plan. </li></ul></ul><ul><ul><ul><li>e.g. If the patient has high blood pressure, refer her to a cardiologist. </li></ul></ul></ul><ul><ul><li>Solution - Withholding </li></ul></ul>
    11. 11. Additional MCO Compensation Tools <ul><li>Even if docs paid thru capitation, HMO responsible for costs of hospital services, outpatient diagnostic tests, physician referrals. </li></ul><ul><li>How can the HMO limit these costs? </li></ul><ul><ul><li>Withhold a portion of physician payment (PMPM) until end of fiscal year. </li></ul></ul>
    12. 12. HMO Reimbursement Strategies <ul><li>Assign these funds to specific expenditure categories (e.g. lab tests). </li></ul><ul><li>At end of year, return a portion of the withhold to physicians if surplus exists in that expenditure category. </li></ul><ul><li>Can even change next year’s withhold or capitation based on this year’s performance. </li></ul>
    13. 13. Additional MCO Compensation Tools <ul><li>Bonuses - MCOs can give a portion of their profits at the end of the year to physicians who elect cost-effective behavior. </li></ul><ul><ul><li>e.g. Pay bonuses to primary caregivers who reported lower number of specialist referrals. </li></ul></ul>
    14. 15. Advantages of capitation for physicians <ul><li>Improved cash flow </li></ul><ul><ul><li>Physician receives fixed payment per patient each month </li></ul></ul><ul><ul><li>Reduces bad debt expenses </li></ul></ul><ul><li>Better budgeting </li></ul><ul><ul><li>Steady cash flow - well-defined budgets </li></ul></ul><ul><ul><li>Easier to identify and correct sources of cost overruns </li></ul></ul>
    15. 16. 4 Components of a Capitated Contract 1) Covered Services Definitions such as “primary care services within the physician’s scope of practice” are too vague Examples of capitated primary services:
    16. 17. Examples of Current Procedure Terminology <ul><li>99201 </li></ul><ul><ul><li>Initial office visit for an out-of-town patient requiring topical refill (Dermatology) </li></ul></ul><ul><ul><li>Initial office visit for a 65-year-old male for reassurance about an isolated seborrheic keratosis on upper back (Plastic surgery) </li></ul></ul><ul><ul><li>Initial office visit for a 10-year old male, for limited subungual hematoma not requiring drainage (Internal Medicine) </li></ul></ul>
    17. 18. <ul><li>Carve outs - specific services or patients singled out in the capitation contract for special consideration </li></ul><ul><ul><li>Usually for expensive, infrequent services </li></ul></ul><ul><ul><li>e.g. HIV+ patients, mental health, organ transplants </li></ul></ul><ul><ul><li>Can be paid on fee-for-service (FFS) basis, or separate providers may contract for carve outs </li></ul></ul>
    18. 19. <ul><li>Components of a Capitated Contract </li></ul><ul><li>Payment methods </li></ul><ul><ul><li>Capitation rate/schedule - Managed care organizations employ actuaries who predict the cost of care as a function of population characteristics </li></ul></ul>
    19. 24. <ul><li>Timing of payments </li></ul><ul><ul><li>Payment of carve out services </li></ul></ul><ul><ul><li>Payment withholds used to fund risk pools, and method for risk pool distribution </li></ul></ul><ul><ul><li>Methods for limiting risk (e.g. reinsurance, stop-loss) </li></ul></ul><ul><ul><ul><li>Insurer may agree to assume treatment costs that exceed a predefined threshold amount </li></ul></ul></ul>
    20. 25. <ul><li>List of other requirements </li></ul><ul><ul><li>Quality assurance activities </li></ul></ul><ul><ul><ul><li>May require reporting detailed patient data </li></ul></ul></ul><ul><ul><ul><li>More sophisticated, costly record keeping </li></ul></ul></ul><ul><ul><li>Required office/call hours </li></ul></ul><ul><ul><li>Use of physician extenders </li></ul></ul><ul><ul><li>Copayment procedures </li></ul></ul><ul><ul><li>“ most-favored-nation” clause </li></ul></ul><ul><ul><li>Additional professional liability insurance coverage </li></ul></ul>
    21. 26. <ul><li>Process for termination </li></ul><ul><ul><li>Provisions for termination without cause </li></ul></ul><ul><ul><ul><li>Can be financially risky to physician </li></ul></ul></ul><ul><ul><li>Provisions for termination with cause </li></ul></ul><ul><ul><ul><li>Should specify specific conditions </li></ul></ul></ul><ul><ul><ul><li>e.g. failure to comply w/ quality assurance requirements </li></ul></ul></ul><ul><ul><li>Contract should specify physician responsibilities if managed care organization insolvent </li></ul></ul><ul><ul><ul><li>“ Continuation of care” requirements </li></ul></ul></ul><ul><ul><ul><li>Usually must complete patient’s course of treatment until satisfactory arrangements made to secure treatment elsewhere </li></ul></ul></ul>
    22. 27. Evidence on Physicians & MCO Compensation <ul><li>57% of MCOs base pay on utilization or costs measures </li></ul><ul><li>Almost half of MCOs consider patient complaints and quality measures </li></ul>
    23. 28. Evidence on Physicians & MCO Compensation <ul><li>MCOs paying physicians a salary had 13.1% fewer hospitalization days per 1,000 enrollees per yr. relative to FFS </li></ul><ul><li>Capitation led to 7.5% fewer hospitalization days </li></ul><ul><li>Physicians faced w/ withholds had 10.5% fewer visits per enrollee </li></ul><ul><li>Caution: The studies did not determine whether profits rose, or whether quality of patient care was affected </li></ul>
    24. 29. Physician Market Performance <ul><li>Physician expenditures have slowed in the 1990s, more in line with the growth of the overall economy. But they may be on the rise again </li></ul>
    25. 30. Physician Market Performance Revenue per Self-Employed Physician, ($1,000s) Increases in revenues are due to increases in expenses AND higher income for physicians
    26. 31. Physician salaries remain high <ul><li>When managed care grows, salary growth for specialists slows, while pay for primary care docs rises </li></ul><ul><ul><li>Physician groups getting large enough to want their own specialists </li></ul></ul><ul><li>Female docs’ salaries exceed males in a dozen or so specialties </li></ul>
    27. 32. Employed vs. Independent Physicians <ul><li>Employed physicians worked 5-7 fewer hours a week </li></ul><ul><li>Employed physicians’ median net income was $142,000 in 1996, vs. $198,000 for all private-practice physicians </li></ul><ul><li>Practice mgmt. Companies typically pay physicians $300,000-$400,000 per physician for practice assets (land, equipment) </li></ul><ul><ul><li>Tradeoff:  20% of practice’s net revenues </li></ul></ul>
    28. 33. Physician Practice Management (PPMs) <ul><li>PPMs act as liaisons between insurers and doctors by acquiring physician practices </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>Economies of scale in operational costs </li></ul></ul><ul><ul><li>Improved risk assessment for managed care </li></ul></ul><ul><ul><li>Finance new information systems </li></ul></ul><ul><ul><li>Retain patient revenues by keeping referrals within the PPM network </li></ul></ul>
    29. 34. Fortune Magazine, March 3, 1997
    30. 35. <ul><li>MedPartners Provider Network acts as an intermediary, accepting capitated payments from HMOs & paying claims to the company’s network providers </li></ul><ul><ul><li>Patients buy insurance from PacifiCare Health Systems, Foundation Health Systems Inc., etc. </li></ul></ul><ul><ul><li>Had up to 19,200 doctors in the PPM division in hundreds of physician clinics at one point </li></ul></ul>
    31. 36. <ul><li>MedPartners posted a net loss of $1.26b on revenues of $2.6b in 1998 </li></ul><ul><li>Loss of $821m on $2.4b in revenues in 1997 </li></ul>
    32. 37. What Went Wrong <ul><li>Failure to integrate its operations or provide systems to operate more efficiently than they had done independently </li></ul><ul><ul><li>Lacked actuarial expertise to predict medical costs </li></ul></ul><ul><ul><li>California: Plan underestimated incurred-but-not-reported claims liability & could not estimate a dollar value for the large backlog of unprocessed claims </li></ul></ul><ul><ul><li>Failed to invest in information systems, medical equipment, or expansion of medical services to boost a group’s internal growth </li></ul></ul>
    33. 38. What Went Wrong <ul><li>MedPartners bought new practices at a furious rate, often at hefty prices </li></ul><ul><ul><li>Industry buying spree boosted the prices of physician practices </li></ul></ul><ul><li>Doctors didn’t react well to becoming employees of remote national companies </li></ul><ul><ul><li>Physicians who sold their practices didn’t feel the need to work as hard, younger doctors’ salaries lower due to cut taken by the PPM </li></ul></ul>
    34. 39. MedPartners’ Reaction <ul><li>MedPartners exited the PPM business and became Caremark, which is in the Pharmaceutical Benefits Management (PBM) market </li></ul>
    35. 40. The Future of PPMs <ul><li>Doctors will continue to organize in larger groups to avoid hassles of office admin and managed-care contracting </li></ul><ul><li>Smaller single-specialty PPMs seem more committed to improving operations </li></ul><ul><li># of publicly traded PPMs (~30) may shrink by 50% </li></ul>