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A Theory of Prepayment, Managed Care, Deductibles and
Copayments Allen C. Goodman, Wayne State U.
Maia Platt, U. of Detroit – Mercy
Seminar
University of South Florida
March 30, 2012
Managed Care
• Managed Care has largely taken over the non-Medicare market for health care provision, and is making in-roads into Medicare.
• Fee-for-service is essentially moribund in the US. See following chart.
Theory of MCOs?
• There’s been no theory.
• What characterizes MCOs?
• Is the Veterans’ Administration an MCO? (Probably is).
Theory of MC?
• Kaiser Permanente– Vertically integrated– Very little choice– “Managed Care heavy”
• PPOs, POS, etc.– Less heavy handed– More choice– “Managed Care light”
Selective Contracting
• Morrisey argues that the ability to exclude some (higher cost, noncompliant) providers allows MCOs to reduce costs.
• Providers give up potentially higher payments per activity for the promise of more clients.
• Contracts are extraordinarily complicated. I can give personal examples.
How good are the information systems?
How well do theycommunicate with each other
Some point to the VAas a prime example of one that works!.
Shortell et al
Stylized Facts
• Economists love stylized facts!– Most Americans get their health care risk
pooling through the workplace (btw, PPACA won’t change that).
– Health insurance (HI) is largely (entirely?) paid for by the worker in the form of reduced wages.
– In many ways at least some portion of HI can be considered as “prepayment” for services.
More Stylized Facts
– Although coinsurance rates are negatively correlated with use,
– Deductibles are as often positively correlated as negatively correlated.
– Consumers most often have access to a few, discrete opportunities. How do they choose among them?
Who Pays – Firm LevelHigh loading costs may force
firms to hire fewer workers, or (with minimum wage) not offer insurance
Some Notation
• Household chooses among options in its health insurance package. The health insurance will essentially pre-pay for well-care, and some expected illness.
• The household also may need additional insurable care with probability w. How do they choose among MCO plans?
• At WSU we have 2 HMOs, 2 PPOs, and 1 FFS plan.
Some Notation
Suppose there are three plans n, where n = i, j, k, withw = probability of needing insurable care
Ei , Ej, Ek = expenditures necessary if care is needed.bi ,bj, bk = coinsurance rate faced by householdRi ,Rj, Rk = deductible faced by householdSi, Sj, Sk = out of plan expenditures
Annual Fees for levels of care
respectively.i j k
i j k
F ,F ,F
v ,v ,v
i k j i kQ = Q , Q > Q ,Q .Without loss of generality
Proposition 1
• Proposition 1: Criterion for choosing among MCOs – “less than or equal.”
• Unless a MCO matches household’s preferences (point A) for prepaid care exactly, with number of visits vA, the household will pick one that provides less care. – A household can purchase additional health care out-
of-plan, but cannot sell surplus care. – With the current individual’s preferences, then, plans i
and k dominate plan j. The insured may or may not choose to purchase additional care out of pocket. For purposes of this exposition, we will assume that Sn = 0, so that the insured uses care level i kv = v
PlanAnnualCost
Visits
Oth
er
Goo
dsMCOi, MCOk MCOj
i kv = v jv
Out of Plan, orDeductible (coinsurance rate = 1)
Pure Risk Premium
Av
A
Proposition 2
• Consumers sort themselves into MCOs based on expected need for insurable care, and on the characteristics of the MCOs as defined by coinsurance rate and deductible.
• For empirical work, across large numbers of MCOs, higher deductibles may very well be related to higher levels of utilization or expenditures rather than lower levels.
• In contrast, higher coinsurance rates, holding deductibles constant, will always, in this model, lead to more utilization and expenditures.
PlanAnnualCost
Visits
Oth
er
Goo
dsMCOi, MCOk MCOj
i kv = v jv
Out of Plan, orDeductible (coinsurance rate = 1)
Rk
Av
bkwEk(bk)Rk
kv i
v
A
B
biwEi(bi)Ri
MCOi, MCOk provide same basiccare. MCOi – higher deductible and lowercoinsurance rateMCOk – lower deductible, lower coinsurance rate.
Proposition 3
• There may be heterogeneous preferences within individual MCOs.
• Suppose that there are only 2 MCOs available, MCOi and MCOj, and there are two households as noted in Figure 3. In these circumstances, both households will prefer MCOi to MCOj. As drawn, however:– a low deductible and a high coinsurance rate will be
preferred by Household 1, – while a higher deductible and a lower coinsurance
rate will be preferred by Household 2.
Proposition 3 – cont.• At the lower deductible Rk and higher
coinsurance rate bk, Household 1, if faced with an insurable event will purchase visits, while Household 2 would purchase visits.
• By inspection, we can see that with a higher deductible Ri and a lower coinsurance rate bi Household 1 will be worse off, whereas Household 2 will purchase visits and be better off.
1+iv
2+iv
2++iv
PlanAnnualCost
Visits
Oth
er
Goo
dsMCOi, MCOk
i kv = v 2iv
A2
U1
U2
A1
A1 and A2 representideal amounts of prepaid care
U1
U2 U2
1iv 2
iv
Observations
• There’s a lot of public finance in this model.
• It suggests yet another reason why MCOs may “under-provide” services – i.e. consumers don’t want to pay for something they might not use.
• Suggests ways to model the willingness to pay for insurance, and the structures of copayments and deductibles.
Other Issues
• Given the taste and income distributions what is the optimal number of MCOs?
• Merging of MCOs?
• Disintegration of one MCO into 2 or more?
Other issues
• Does not model the production from MCOs. In other work, Goodman and Stano (2000) argue that there will be a bias toward MCOs that :– are too small;– offer too little service;– offer service that is too “low tech.”
A
Oth
er G
oods
V is its
R i
b iwE i(b i)
R k
b kwE k (b k )
iv
jvi kv v
MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .
{P lanAnnualC o s t
F igure 1 : C ho o s ing Am o ng M C O s
kv
B
Av
M C O i , M C O k M C O j
A
Oth
er G
oods
V is its
R i
b iwE i(b i)
R k
b kwE k (b k )
iv
jvi kv v
MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .
{P lanAnnualC o s t
F igure 1 : C ho o s ing Am o ng M C O s
kv
B
Av
M C O i , M C O k M C O j
This assumes NO “pure” insuranceagainst risk. If we want to showpure insurance, we have a paralleldownward shift and everything elsefollows as before.
A
Oth
er G
oods
V is its
R i
b iwE i(b i)
R k
b kwE k (b k )
iv
jvi kv v
MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .
{P lanAnnualC o s t
F igure 1 : C ho o s ing Am o ng M C O s
kv
B
Av
M C O i , M C O k M C O j