The Physician Market, Part 1 Professor Vivian Ho Health Economics Fall 2007 These slides draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies, Thomson 2007.

OUTLINE l Physician Market Structure l Conduct in the Physician Market l Physician Market Performance l Physician Practice Management Companies

Physician Market Structure

*The AMA defines primary care as including family practice, general practice, internal medicine, obstetrics/gynecology, and pediatrics. Physician Market Structure (cont.)

Are there “too many” specialists and “too few” primary care docs? l 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 procedues.  May explain why U.S. medical costs per capita are highest in the world.

Matching Physician Supply & Requirements l “Future physician supply does not appear well-matched with requirements. (Politzer, 1996) l A shortage of 33,000 primary care physicians is predicted by l The same set of assumptions also generates a surplus of specialists.

Distribution of Physicians by Mode of Practice lMost docs self-employed, but % is dropping. lFall in solo practice docs, rise in salaried docs. lReflects rise in ambulatory care by HMOs.

Distribution of Physician Revenues by Source of Payer l% of revenues from Medicare/Medicaid high, but lower than for hospital sector. l% of revenues paid out-of-pocket also higher than for hospital sector.

Managed Care Reimbursement of Physicians l MCOs hope to modify physician behavior in order to control costs. l 91% of all practicing docs in 1999 had at least one managed care contract. l In 1999, 49¢ of every $1 of physician revenue came from an MCO.  7¢ of every $1 came from a capitated contract.

Are there barriers to entry? l Requirements for licensure to practice  M.D. from accredited med school.  Internship or residency at recognized institution.  Pass a medical exam. l Advantage  Protects public from incompetent doctors. l Disadvantage  State licensure boards controlled by physicians who can restrict entry to keep salaries high.

Is market reform better than government licensure? l 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.

Production, Costs, and Economies of Scale l 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).

Production, Costs, and Economies of Scale l Analysis of physician practice costs based on the AMA 1989 Socioeconomic Monitoring System. (Escarce & Pauly 1998)  Survey of physician practice costs, outputs, and practice characteristics.  Physicians receive payments from patients and insurers. l But they then docs have several costs to cover. l Nurses, admin & clerical workers, technicians and aids.

Production, Costs, and Economies of Scale OutputFull Marginal Cost Marginal non- phys. Costs Office visit, new patient $59.99* (1.68) $66.34** (2.00) Office visit, est. patient $22.14*** (3.26) $14.77*** (2.91) Hospital visit$12.14** (2.16) $4.84 (1.35) Test interpretation $35.36** (2.12) $7.26 (1.08)

Physician Market Structure Summary l Physicians have outpaced growth in the general population. l The U.S. may have too many specialists and too few generalists. l A move towards multi-physician practices.  Production & cost advantages.  Pressures of managed care. l Despite barriers to entry, competition is increasing.

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

Has the over-supply of physicians led to “physician-induced demand?” l 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. l How much care can physicians induce?  Easier with surgery?  Is the physician willing to induce? l Can insurers limit demand inducement?

Has the over-supply of physicians led to “physician-induced demand?” l Can insurers limit demand inducement? l 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.

Defensive Medicine & Malpractice Reform l Physician malpractice premiums account for 1% of US health care spending. l 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.

Defensive Medicine & Malpractice Reform l States which implemented direct reforms to their malpractice system (caps on damages, abolition of punitive damages) reduced hospital expenditures 5 to 9%. l Indirect reforms (caps on contingency fees, mandatory periodic payments) had no measurable impact on costs.

Why do we have a malpractice system? l The malpractice system compensates victims for negligence and deters future negligence.  Tort Law: entitles an injured person to compensation as a result of someone’s negligence. l Damages include economic losses and “pain and suffering.”

PROBLEMS WITH THE CURRENT SYSTEM l Physician Advocates  Too many of the claims filed are not due to negligence.  Juries award large sums unrelated to actual damages.  The threat of claims leads to “defensive” medicine, which adds billions to the nation’s health expenditures.

PROBLEMS WITH THE CURRENT SYSTEM l Patient Advocates  The number of claims filed grossly underestimates the extent of physician negligence.  Large jury awards are infrequent.  Current quality control mechanisms are inadequate.  Defensive medicine is a byproduct of generous insurance coverage for patients, not malpractice insurance.

Harvard Medical Practice Study (HMPS) 1) What is the incidence of “adverse events” and “negligent adverse events” in hospitals? 2) What are the total economic losses patients suffer from adverse events? --What fraction is covered by the tort system and other insurance? 3) What percentage of adverse events (negligent and non-negligent) lead to malpractice claims?

SAMPLE l From 51 nonfederal, acute care hospitals in New York l 31,429 patients discharged in 1984 l Stratified sample based on hospital and patient characteristics  e.g. Geographic region, patients in high- risk specialties

Criteria for an Adverse Event l A definable injury caused at least in part by medical management (negligent or not). l The injury must have produced measurable disability that prolonged the hospital stay or reduced function at time of discharge. l The injury must have been unintended. NEJM 1989

Which of the following is NOT an adverse event? l Intracerebral hemorrhage caused by anticoagulants l Incisional hernia l Amputation of a gangrenous leg l Fall from a hospital bed l Failure to diagnose an ectopic pregnancy NEJM 1989

Criterion for a “negligent adverse event” l An injury caused by the failure to meet standards reasonably expected of the average physician, other provider, or institution. l Rated on a 6-point scale. 1 Little or no evidence 2 Slight evidence 3 < 50:50 odds, but close call 4 > 50:50 odds, but close call 5 Strong evidence 6 Virtually certain evidence

Was the following adverse event “negligible?” During a therapeutic abortion after 13 weeks of pregnancy, the physicians unknowingly perforated the patient’s uterine wall with a suction device and lacerated the colon. The patient reported severe pain, but was discharged without evaluation. She returned one hour later to a hospital emergency room with even greater pain and evidence of internal bleeding. She required a two-stage surgical repair over the ensuing four months.

Was the following adverse event “negligible?” A patient with peripheral vascular disease required angiography. After the procedure, which was performed in standard fashion, the patient’s renal function deteriorated as a result of exposure to angiographic dye. The hospital course was stormy because of kidney failure, but the patient’s renal function slowly returned to normal. The adverse event caused a prolonged hospital stay.

Determination of negligence is often difficult l Many medical procedures are inherently risky. There are uncertainties in diagnoses and treatments. l Physicians differ in the quality of care and success rates for reasons other than negligence. l Patients’ underlying health conditions differ.

Determination of Adverse Events from Medical Records l Nurses and medical records administrators screened records for signals of adverse events.  Examples: Admission to any hospital after discharge, unfavorable drug reaction in hospital, neurologic defect at discharge. l Two board-certified internists of surgeons reviewed each screened record.

RESULTS 31,429 in original sample 30,195 located on first review 22,378 negative for screening criteria 7817 positive for screening criteria 7743 reviewed by physicians 6465 without adverse events 1278 with adverse events 972 with no negligence 306 with negligence Figure 1. The Record-Review Process. Numbers of medical records are shown.

Did the study cases sue for malpractice? l Further analysis was limited to 280 negligence cases which occurred or were discovered in the index hospitalization. l 98 / 31,429 patients filed claims against 151 health care providers.  Not all of these patients were victims of negligence, according to HMPS. l The sample estimates were re-weighted to represent the population of 2.7m discharges in 1984.

STATEWIDE ESTIMATES 27,197 adverse events due to negligence 26,764 with no malpractice claims (98%) 415 malpractice claims (2%) 14,180 with strong evidence of negligence 12,858 with disability 7462 with disability <6mo (58%) 5396 with disability >6mo (42%) 2834 patients <70yo (53%) 2562 patients  70yo (47%)

CONCLUSIONS l < 2% of patients identified as victims of negligence filed a malpractice claim. l Of the estimated 3570 statewide claims made in 1984, only 415 were defined by HMPS as negligent care. Ý Both patient and physician advocates have legitimate complaints. The current malpractice system does not do a good job compensating victims for negligence.

FURTHER RESULTS l Only 50% of patient claims filed eventually receive some compensation. l About 1% of negligence victims receive some compensation. l The rate of adverse events differs by medical specialty, although the negligence rate is constant.  However, negligence rates vary across hospitals.

Rates of Adverse Events and Negligence SpecialtyAdverse EventsNegligence (percentage) (percentage) Orthopedics Urology Neurosurgery Thoracic & Cardiac Surgery Vascular Surgery Obstetrics Neonatology General Surgery General Medicine Other P value <

Does the malpractice system deter negligence? Critics: l If < 2% of negligence victims filed claims, how can this be an effective deterrent? l Most malpractice insurance does not “experience rate” physicians. l Not all physicians who are sued are incompetent.  May explain lack of experience rating. l The current system compels doctors to over- order tests and services.

Defenders of the Malpractice System l The mere threat of a legal suit causes physicians to act carefully.  Physicians systematically overestimate the risk of being sued.  Not all costs of being sued are insurable (financial and psychological) l The costs of defensive medicine may be due more to patients’ insurance than malpractice fears. l Removing the tort system leaves few alternatives for monitoring and disciplining physicians.

Recent Evidence on Defensive Medicine (Kessler & McClellan, 1996) l Analysis of hospital expenditures on patients in states with and without liability-reducing law reforms. l Medicare patients with cardiac illness hospitalized in 1984, 1987, and l Reductions in medical malpractice tort liability led to reductions in hospital expenditures, but not to increase in adverse health outcomes. l Reductions were 5 - 9% of total expenditures.