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The Physician Market Part 2
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The Physician Market Part 2

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    • 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. Advantages of capitation for physicians
      • Increased clinical autonomy
        • Physician financially responsible for cost overruns
        • Eliminates need for external review
      • Increased income
        • Physician compensated by risk pools created from withholds if can reduce utilization of hospital, outpatient, diagnostics, other ancillary services
    • 3. 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?
    • 4. Types of Managed Care Orgs
    • 5. 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?
    • 6. 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.
    • 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. 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
    • 9. 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.
    • 10. 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
    • 11. 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.
    • 12. 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.
    • 13. 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.
    • 14.  
    • 15. Advantages of capitation for physicians
      • Improved cash flow
        • Physician receives fixed payment per patient each month
        • Reduces bad debt expenses
      • Better budgeting
        • Steady cash flow - well-defined budgets
        • Easier to identify and correct sources of cost overruns
    • 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:
    • 17. Examples of Current Procedure Terminology
      • 99201
        • Initial office visit for an out-of-town patient requiring topical refill (Dermatology)
        • Initial office visit for a 65-year-old male for reassurance about an isolated seborrheic keratosis on upper back (Plastic surgery)
        • Initial office visit for a 10-year old male, for limited subungual hematoma not requiring drainage (Internal Medicine)
    • 18.
      • Carve outs - specific services or patients singled out in the capitation contract for special consideration
        • Usually for expensive, infrequent services
        • e.g. HIV+ patients, mental health, organ transplants
        • Can be paid on fee-for-service (FFS) basis, or separate providers may contract for carve outs
    • 19.
      • Components of a Capitated Contract
      • Payment methods
        • Capitation rate/schedule - Managed care organizations employ actuaries who predict the cost of care as a function of population characteristics
    • 20.  
    • 21.  
    • 22.  
    • 23.  
    • 24.
      • Timing of payments
        • Payment of carve out services
        • Payment withholds used to fund risk pools, and method for risk pool distribution
        • Methods for limiting risk (e.g. reinsurance, stop-loss)
          • Insurer may agree to assume treatment costs that exceed a predefined threshold amount
    • 25.
      • List of other requirements
        • Quality assurance activities
          • May require reporting detailed patient data
          • More sophisticated, costly record keeping
        • Required office/call hours
        • Use of physician extenders
        • Copayment procedures
        • “ most-favored-nation” clause
        • Additional professional liability insurance coverage
    • 26.
      • Process for termination
        • Provisions for termination without cause
          • Can be financially risky to physician
        • Provisions for termination with cause
          • Should specify specific conditions
          • e.g. failure to comply w/ quality assurance requirements
        • Contract should specify physician responsibilities if managed care organization insolvent
          • “ Continuation of care” requirements
          • Usually must complete patient’s course of treatment until satisfactory arrangements made to secure treatment elsewhere
    • 27. Evidence on Physicians & MCO Compensation
      • 57% of MCOs base pay on utilization or costs measures
      • Almost half of MCOs consider patient complaints and quality measures
    • 28. Evidence on Physicians & MCO Compensation
      • MCOs paying physicians a salary had 13.1% fewer hospitalization days per 1,000 enrollees per yr. relative to FFS
      • Capitation led to 7.5% fewer hospitalization days
      • Physicians faced w/ withholds had 10.5% fewer visits per enrollee
      • Caution: The studies did not determine whether profits rose, or whether quality of patient care was affected
    • 29. Physician Market Performance
      • 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
    • 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
    • 31. Physician salaries remain high
      • When managed care grows, salary growth for specialists slows, while pay for primary care docs rises
        • Physician groups getting large enough to want their own specialists
      • Female docs’ salaries exceed males in a dozen or so specialties
    • 32. Employed vs. Independent Physicians
      • Employed physicians worked 5-7 fewer 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
    • 33. Physician Practice Management (PPMs)
      • PPMs act as liaisons between insurers and doctors by acquiring physician practices
      • Advantages:
        • Economies of scale in operational costs
        • Improved risk assessment for managed care
        • Finance new information systems
        • Retain patient revenues by keeping referrals within the PPM network
    • 34. Fortune Magazine, March 3, 1997
    • 35.
      • MedPartners Provider Network acts as an intermediary, accepting capitated payments from HMOs & paying claims to the company’s network providers
        • Patients buy insurance from PacifiCare Health Systems, Foundation Health Systems Inc., etc.
        • Had up to 19,200 doctors in the PPM division in hundreds of physician clinics at one point
    • 36.
      • MedPartners posted a net loss of $1.26b on revenues of $2.6b in 1998
      • Loss of $821m on $2.4b in revenues in 1997
    • 37. What Went Wrong
      • Failure to integrate its operations or provide systems to operate more efficiently than they had done independently
        • Lacked actuarial expertise to predict medical costs
        • California: Plan underestimated incurred-but-not-reported claims liability & could not estimate a dollar value for the large backlog of unprocessed claims
        • Failed to invest in information systems, medical equipment, or expansion of medical services to boost a group’s internal growth
    • 38. What Went Wrong
      • MedPartners bought new practices at a furious rate, often at hefty prices
        • Industry buying spree boosted the prices of physician practices
      • Doctors didn’t react well to becoming employees of remote national companies
        • 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
    • 39. MedPartners’ Reaction
      • MedPartners exited the PPM business and became Caremark, which is in the Pharmaceutical Benefits Management (PBM) market
    • 40. The Future of PPMs
      • Doctors will continue to organize in larger groups to avoid hassles of office admin and managed-care contracting
      • Smaller single-specialty PPMs seem more committed to improving operations
      • # of publicly traded PPMs (~30) may shrink by 50%

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