1. Chapter 12: The Physician Services Industry Health 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 %).
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 , 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.