1. Managed Care and Physicians Chapter 10

2. 2 Overview Much less information on physician markets than on hospitals Much less information on physician markets than on hospitals Contracting with managed care Contracting with managed care Effects of managed care on physician incomes Effects of managed care on physician incomes Kralewski et al. (2000) study of group practice Kralewski et al. (2000) study of group practice Managed care payment Managed care payment Group payment Group payment Economies of scale and system membership Economies of scale and system membership Guidelines and profiling Guidelines and profiling Gatekeeping Gatekeeping Managed care and physician location decisions Managed care and physician location decisions

3. 3 Physicians and Managed Care Substantial involvement with managed care Substantial involvement with managed care 91 percent of physicians had one or more managed care contracts in 2001 91 percent of physicians had one or more managed care contracts in 2001 On average, physicians had contracts with 13 managed care plans On average, physicians had contracts with 13 managed care plans Received 46 percent of practice revenue from these plans Received 46 percent of practice revenue from these plans Source: CSHSC (2002)

4. 4 Most Physicians Have Contracts with Managed Care Plans Source: data from AMA (various years) Percent of Physicians with Contracts

5. 5 Payment Arrangements Vary … Billed charges Billed charges Fee schedule Fee schedule Billed charges with a withhold Billed charges with a withhold Discounted charges Discounted charges Capitation Capitation Full Full Physician charges only Physician charges only Ambulatory physician charges only Ambulatory physician charges only

6. 6 Percentage of Physician Income–1999 Source: data from AMA (2001), Tables 48 and 49

7. 7 Figure 10-1 Percentage of Physician Net Income from Capitation Percent Source: data from AMA (1998, table 4) and AMA (2001)

8. 8 Managed Care and Physician Earnings If selective contracting is common … If selective contracting is common … Some physicians will have contracts, some will not Some physicians will have contracts, some will not Those with contracts will see higher earnings Those with contracts will see higher earnings Lower prices but greater volume Lower prices but greater volume Those without contracts will see lower earnings Those without contracts will see lower earnings Stable prices but less volume Stable prices but less volume Net effect of lower average earnings Net effect of lower average earnings

9. 9 Percent Change in Average Physician Income, Adjusted for Inflation, 1995–1999 Source: data from CSHSC (2003)

10. 10 Figure 10-2 Inflation Adjusted Change in Median Physician Income, 1998–2004 Source: data from AMA (2001) and BLS (2006)

11. 11 “HMO Penetration and Physician Earnings” Income =f(Self-employed, Income =f(Self-employed, HMO penetration, HMO penetration, Physician characteristics, Physician characteristics, Demand for medical care) Demand for medical care) HMO penetration = f(Demand for managed care, HMO penetration = f(Demand for managed care, Demand for medical care) Demand for medical care) 1990 data from Robert Wood Johnson Foundation survey of young physicians 1990 data from Robert Wood Johnson Foundation survey of young physicians Age less than 45 Age less than 45 4,577 useable responses (52.8 percent response rate) 4,577 useable responses (52.8 percent response rate) Careful consideration of endogenous HMO penetration Careful consideration of endogenous HMO penetration Markets are defined as 57 largest MSAs Markets are defined as 57 largest MSAs Source: Hadley and Mitchell (1999)

12. 12 Findings A doubling of the average level of HMO penetration in the local market was estimated to: A doubling of the average level of HMO penetration in the local market was estimated to: Reduce annual earnings by 7 to 11 percent Reduce annual earnings by 7 to 11 percent Reduce hourly earnings by 6 to 9 percent Reduce hourly earnings by 6 to 9 percent Larger effects are for self-employed physicians Larger effects are for self-employed physicians Consistent with other evidence that HMO penetration leads to fewer self-employed physicians Consistent with other evidence that HMO penetration leads to fewer self-employed physicians A doubling of HMO penetration in this study was an increase from 17.8 to 35.6 percent A doubling of HMO penetration in this study was an increase from 17.8 to 35.6 percent Source: Hadley and Mitchell (1999)

13. 13 “Physician Fees and Managed Care Plans” A hierarchical model… A hierarchical model… Fee ij = g(H i, C i, S i ) + F j + e ij Fee ij = g(H i, C i, S i ) + F j + e ij Fee ij is the fee paid by a managed care organization (MCO) for service “i” in location “j” Fee ij is the fee paid by a managed care organization (MCO) for service “i” in location “j” H i is the historical FFS fee paid for service “i” H i is the historical FFS fee paid for service “i” C i is the relative value score for the service C i is the relative value score for the service S i are a set of service characteristics S i are a set of service characteristics Office/hospital, primary/specialty Office/hospital, primary/specialty F j are a set of MCO plan dummies F j are a set of MCO plan dummies Zwanziger, Inquiry (Summer 2002)

14. 14 “Physician Fees & Managed Care” F j = g(D j, P j, M j, T) + n j F j = g(D j, P j, M j, T) + n j F j are the parameter estimates from the MCO plan dummies in the first equation F j are the parameter estimates from the MCO plan dummies in the first equation D j are demand factors D j are demand factors Percent older population, median income, etc. Percent older population, median income, etc. P j are plan characteristics P j are plan characteristics IPA, HMO, etc. IPA, HMO, etc. M j are market characteristics M j are market characteristics MCO penetration & concentration, physician supply MCO penetration & concentration, physician supply T are year dummies T are year dummies Zwanziger (2002)

15. 15 Data 1990–1992 survey of fees MCO negotiated with physicians for 41 common CPT-4 codes: 1990–1992 survey of fees MCO negotiated with physicians for 41 common CPT-4 codes: 1990—123 responding plans 1990—123 responding plans 1991—110 responding plans 1991—110 responding plans 1992—87 responding plans 1992—87 responding plans BUT only a 10 percent response rate BUT only a 10 percent response rate MSAs defined as the market MSAs defined as the market Source: Zwanziger (2002)

16. 16 Results CoefficientT-statistic IPA*-20.30-0.96 HMO*-32.69-1.94 Mixed plan type* -5.71-0.26 Percent > Age 64 -364.29-1.28 Median Income -0.32-0.29 Managed Care HHI -84.19-1.01 Managed Care Penetration -137.79-2.12 Physicians per capita -230.29-2.90 1990-30.60-1.86 1991-0.45-0.03 Source: data from Zwanziger (2002) Note: HHI = Herfindahl-Hirschman Index * Relative to PPO

17. 17 Conclusions Greater managed care penetration associated with lower physician fees Greater managed care penetration associated with lower physician fees Greater local supply of physicians associated with lower fees Greater local supply of physicians associated with lower fees Suggestion that PPOs are less effective in negotiating lower fees Suggestion that PPOs are less effective in negotiating lower fees BUT, potentially biased data set due to response rate and age of the data BUT, potentially biased data set due to response rate and age of the data Source: Zwanziger (2002)

18. 18 “Effects of Medical Group Practice and Physician Payment Methods on Costs of Care” Effects of: Effects of: Capitation Capitation Physician payment Physician payment Gatekeeping Gatekeeping Clinical guidelines Clinical guidelines Physician profiling Physician profiling Clinical information systems Clinical information systems Examine “Blue Plus” (MN-BCBS product) Examine “Blue Plus” (MN-BCBS product) 1995 survey of 86 medical groups 1995 survey of 86 medical groups Minnesota and Wisconsin, Iowa, South Dakota, North Dakota Minnesota and Wisconsin, Iowa, South Dakota, North Dakota 57,123 patients 57,123 patients Source: Kralewski et al. (2000)

19. 19 Model Ln $PMPY = f (Group payment Ln $PMPY = f (Group payment Physician payment Utilization Management Group Characteristics - group size - % primary care - for-profit clinic - member group practice system - member group practice w/ hosp - % female - Average experience Coverage Characteristics - HMO/POS/POS+/Drug Patient Characteristics Patient Characteristics - Age, sex, ACG case mix) Source: Kralewski et al. (2000)

20. 20 Table 10-1 Physician Group Payment Types Percent Capitation: Physician and hospital Physician and hospital Physician and some hospital risk Physician and some hospital risk Physician services Physician services Primary care physician services Primary care physician services 11.00.41.85.0 Fee for Service: With a withhold With a withhold Discounted or negotiated FFS Discounted or negotiated FFS Fee schedule Fee schedule21.612.427.0 Billed charges 20.8 Source: data from Kralewski et al. (2000)

21. 21 Table 10-2 Primary Care Physician Payment Types Percent Guaranteed or base salary 48.1 Individual physician productivity - billings, visits, etc. - billings, visits, etc.40.4 Individual physician quality - patient satisfaction, chart review - patient satisfaction, chart review1.2 Individual physician management of utilization - rate of referrals, lab, x-ray, etc. - rate of referrals, lab, x-ray, etc.0.4 Performance of the group - share of net revenue - share of net revenue9.9 Source: data from Kralewski et al. (2000)

22. 22 Utilization Management Tools Extent of gatekeeping Extent of gatekeeping 1. patients free to make appointments 1. patients free to make appointments 2. patients free to make some appointments 2. patients free to make some appointments 3. All appointments require a referral 3. All appointments require a referral Clinical guidelines Clinical guidelines Number of well-established clinical guidelines used—up to five Number of well-established clinical guidelines used—up to five Profiling Profiling Number of physician profiles used—up to 12 Number of physician profiles used—up to 12 Clinical information systems Clinical information systems Number of computer-based clinical systems in place—up to eight Number of computer-based clinical systems in place—up to eight Source: Kralewski et al. (2000)

23. 23 Forms of Insurance Coverage HMO (14.9 percent) HMO (14.9 percent) Select primary care clinic Select primary care clinic No copays for in-plan use No copays for in-plan use No coverage for out-of-plan use No coverage for out-of-plan use Point of Service (POS) (75.2 percent) Point of Service (POS) (75.2 percent) Select primary care clinic Select primary care clinic No copays for in-plan use No copays for in-plan use May self-refer within network—20 percent copay May self-refer within network—20 percent copay May self-refer outside network—50 percent copay May self-refer outside network—50 percent copay POS with copays (9.9 percent) POS with copays (9.9 percent) Select primary care clinic Select primary care clinic Same as POS, but Same as POS, but Copay for in-plan use Copay for in-plan use Prescription Drug Coverage (88.0 percent) Prescription Drug Coverage (88.0 percent) Source: Kralewski et al. (2000)

24. 24 Results CoefficientP-value Proportion of clinic revenue from: Capitation (TSLS estimate) Capitation (TSLS estimate) Other Other-.004 Reference category 0.000 Proportion of physician payment in clinic based on: Salary Salary Individual physician productivity Individual physician productivity Individual physician quality Individual physician quality Individual physician management of resources Individual physician management of resources Some share of net clinic revenue Some share of net clinic revenue.003.001-.003-.032 Reference category 0.0000.0110.1790.000 Source: data from Kralewski et al. (2000) Note: TSLS = two-stage least squares estimate

25. 25 Results (continued) CoefficientP-value Proportion of doctors in primary care.2850.000 Average years of experience -.0160.000 Number of full-time doctors.0010.133 For-profit clinic -.0550.000 Member of group practice system.1460.000 Member of group practice system with hospital.0870.000 More restrictive gatekeeper system -.0120.155 More extensive computer-based clinical information system.0030.565 More use of clinical guidelines -.0150.000 More use of physician profiles -.0040.004 Source: data from Kralewski et al. (2000)

26. 26 Results (continued) CoefficientP-value Patient has HMO coverage -.0360.016 Patient has POS with copay -.0390.030 Patient has POS coverage Reference category Patient has prescription drug coverage -.0320.048 Source: data from Kralewski et al. (2000)

27. 27 Conclusions Capitation reduces costs Capitation reduces costs FFS with a withhold is less effective FFS with a withhold is less effective Greater use of profit-sharing reduces costs Greater use of profit-sharing reduces costs Gatekeeping does not reduce costs Gatekeeping does not reduce costs Use of clinical guidelines and profiling reduces costs Use of clinical guidelines and profiling reduces costs Information systems did not Information systems did not Higher proportion of primary care doctors raised costs Higher proportion of primary care doctors raised costs More referrals out? More referrals out? No economies of scale beyond 8 to 10 physicians No economies of scale beyond 8 to 10 physicians No economies of group system membership No economies of group system membership Source: Kralewski et al. (2000)

28. 28 Managed Care and Physician Location Decisions Effects of HMO penetration on active patient care physicians, 1986–1996—316 MSAs Effects of HMO penetration on active patient care physicians, 1986–1996—316 MSAs No effects of HMO penetration, per se, but No effects of HMO penetration, per se, but Faster growth in HMO market share associated with: Faster growth in HMO market share associated with: Smaller increases in specialists Smaller increases in specialists Greater increase in proportion of generalist doctors Greater increase in proportion of generalist doctors 10 percentage point increase in HMO market share between 1986 and 1996 reduced the rate of increase in specialists by over 10 percent and total physicians by 7.2 percent 10 percentage point increase in HMO market share between 1986 and 1996 reduced the rate of increase in specialists by over 10 percent and total physicians by 7.2 percent Source: Escarse et al. (2000)

29. 29 Discussion Questions Suppose you are part of a medical group of cardiologists concerned about the effects managed care has had on your earnings. What sort of efforts would you encourage your fellow specialists to undertake to improve their well-being? Are there actions you would encourage your state medical schools and licensure agencies to consider? Suppose you are part of a medical group of cardiologists concerned about the effects managed care has had on your earnings. What sort of efforts would you encourage your fellow specialists to undertake to improve their well-being? Are there actions you would encourage your state medical schools and licensure agencies to consider?

30. 30 Discussion Questions In the mid-1990s, some academic health centers purchased local primary care practices to assure a flow of patients to their hospitals. In these acquisitions, the academic health centers allegedly bought out the physician-owners of the practices and then hired them back, on salary, to continue to provide clinical services to their patients. The health centers are said to have discovered that the primary care practices were not nearly as profitable after the acquisitions as they were before. What likely happened? In the mid-1990s, some academic health centers purchased local primary care practices to assure a flow of patients to their hospitals. In these acquisitions, the academic health centers allegedly bought out the physician-owners of the practices and then hired them back, on salary, to continue to provide clinical services to their patients. The health centers are said to have discovered that the primary care practices were not nearly as profitable after the acquisitions as they were before. What likely happened?

31. 31 Discussion Questions Suppose patients came to dislike the narrow choice of physicians and the gatekeeping models required of them by managed care plans. If they were to switch to plans that provided greater choice of providers, what effect would this have on managed care costs? What would it do to physician incomes? Suppose patients came to dislike the narrow choice of physicians and the gatekeeping models required of them by managed care plans. If they were to switch to plans that provided greater choice of providers, what effect would this have on managed care costs? What would it do to physician incomes?