Managed Care / Technology

© Allen C. Goodman, 2010

Why?• We’ve talked about insurance and technology … and costs.• Managed care analysis combines some of this.• We’ll spend a little bit of time on this here. Dr. Jensen spends

considerably more time.• It is tempting to suppose that insurance necessarily leads to higher costs

and perhaps to waste. Many feel that various forms of “managed care” may address some of these problems.

• One might argue that physician practice must be managed in order to address high health care costs, and networks of providers, including Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Individual Practice Organizations (IPOs), are means to restore competition to the health care sector, and to control expanding health care costs.

Fee for Service Remuneration

• Under FFS, provider both provides health care and advises the consumer on how much is needed.

• At first glance, it would appear that the consumer’s imperfect information about medicine, when combined with FFS remuneration, would provide the incentives for substantial overconsumption.

• Overconsumption of this type -- supplier-induced demand or SID -- is addressed in Chapter 15.

• Organizational form of MCOs would seem to eliminate over- consumption incentives and replace them with cost-control incentives, and possibly incentives toward underconsumption.

Managed Care• It is instructive to provide a general description of managed care,

leading to a more specific discussion of MCO, while recognizing that the concept of managed care is undergoing constant changes.

• Most generally, analysts speak of an organized delivery system as a network of organizations (for example, hospitals, physicians, clinics, hospices) that provides or arranges to provide a coordinated continuum (from well-care to emergency surgery) of services, to a defined population.

• This system is willing to be held clinically and fiscally accountable for the outcomes and the health status of the population served. It is tied together by its clinical (it must TREAT them) and fiscal (it must FINANCE the treatment) accountability for the defined population. Often the organized delivery system is and is defined by its association with an insurance product.

Managed Care

• Shortell and his colleagues view the key feature of managed care as the provision of care to a defined number of enrollees at a capitated, or fixed, rate per member per month.

• As a result, cost centers such as hospitals, physician groups, clinics, and nursing homes, must be managed under a fixed budget. Under traditional fee-for-service, since cost centers generate revenue, more volume means more profit.

• Under managed care, more volume means less profit.

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

Some key aspects

• An economic analysis of this model, shows the importance of integrating the information among the various services. In Figure 12.1 (from FGS/4), information systems are the hub of the wheel; Shortell and his colleagues note that the “embryonic” development of most clinical information systems is a fundamental barrier to the success of managed care systems.

• Large health centers have budgeted hundreds of millions of dollars to integrate systems that were often developed separately, and almost never “talk to each other.”

• Information is still a SERIOUS impediment – just think about it.

• Managed care creates incentives for keeping people well by emphasizing prevention and health promotion practices, and when people become sick, by treating them at the most cost-effective (least cost per unit care) location in the continuum of care.

• Clearly, there are also incentives to underuse services, and this may be harmful to patients. Through a more centralized management of services, the goal is to provide additional quality-enhancing features for a given price, or to provide a given set of quality attributes or outcomes for a lower price.

• The primary provider has a paramount role as the “gatekeeper” to further, and more expensive, services.

Managed Care

Point of Service (POS)Fee for Service (FFS)

Health Maintenance Organization (HMO)

Preferred ProviderOrganization (PPO)

Organizational StructuresGatekeeper

Provider Network

No Yes

No

Yes

Least Restrictive

Most RestrictiveMost Restrictive

Some key aspects• Studied de-emphasis of the acute care hospital model. Hospitals provide

expensive care, and moving toward cost-effective models necessarily moves away from hospital care. Often, primary care physicians are the gatekeepers of managed care systems, directing patients to appropriate (i.e. cost-effective) treatment settings. If they are induced to “feed” patients into the hospital, instead, this will lead to increased costs.

• Managed care seeks a vertical integration of what had previously been a generally unintegrated system of health care treatment. Such integration, through coordination of care and improved information, has the potential to address the health care costs in a manner that would appear to address criteria of economic efficiency. Yet, the integration is costly, and the quality of the resulting care may not match all consumer preferences.

Disenrollment• Patients and providers face the difficulties of maintaining continuity of care

and complete medical records. • MCOs face added financial burdens resulting from higher patient recruiting

costs, disruption of cash flows, and upward pressure on premiums for continuing members if lower risks are more likely to disenroll.

• Why emphasize preventive care for a patient who is not likely remain a member, when that care provides the greatest return in the form of averted future treatment costs?

• Potential loss of patients may influence treatment decisions of FFS providers as well as MCOs, but capitation method of payment to MCOs renders the disenrollment problem particularly important.

• FFS providers are paid for each unit of care. Aside from uncollectibles, they are not at risk of losing money on services provided currently or in the future.

Managed Care, in contrast …

In contrast, by integrating insurance with the provision of health care, the MCO receives a fixed payment per enrollee to cover costs in the current period, and over time, for those who remain enrolled.

Thus, unlike FFS care, where payment in every period is very likely to cover costs, the MCO must consider the timing of expenditures and the financial losses of overspending on patients who may disenroll.

One way for an MCO to “self-insure” against long term losses attributable to disenrollment is to economize on care for those currently enrolled.

Some Models - Random Dis-enrollment (1)

Begin with an MCO providing coverage (services) xi per enrollee to its insured ki who are representative of the population.

MCOs vary by levels k and x, with members changing MCOs due to changing tastes for x, or due to employment-related conditions.

Assume that the structure of the firm represents a staff model MCO (in which physicians are firm employees), although the model also applies to other forms of integrated service delivery.

Some Models - Random Disenrollment (2)

It is appropriate to presume that the MCO recognizes that its pricing decisions may influence its enrollment k.

The MCO faces inverse demand curve p = P (k, x), where Pk < 0, and Px > 0. Suppose that there are a large number of consumers with unit demands (they join this MCO, join another one, purchase from providers in the fee-for-service sector, or make no purchases at all).

Purchasing MCO coverage

P (r, x) is the maximum annual premium (including the employer’s contribution) that consumer r is willing to pay for a unit of MCO coverage of quality x.

P

Number of Consumers

P*

ConsumerSurplus

rk

CostsLet Ci represent the MCO’s total annual cost to provide

expected level xi of health services to its ki enrolled members.

Total cost Ci is related positively to xi, positively to number of person-years of membership ki, and negatively to “health” y of those who happen to be members at the time.

Having ki as an argument in the cost function allows increasing and/or decreasing returns to scale for both ki and xi.

xi = services levelki = # of members

CostsAssume that health y is positively related to the level of

services by all providers. Since at any time in the future, these individuals may be members, average health status y of the population equals ki xi divided by population K.

A constant in the denominator is unimportant in our analysis, so we normalize it as 1; hence y = ki xi.

xi = services levelki = # of members

Profit-maximizing MCOs – How much k?Profits for MCOi can be defined as:

i = ki Pi (ki, xi) - Ci (ki, xi, y)

with Cik > 0, Ci

x > 0, and Ciy < 0 (with Ci

kk, Cixx, and Ci

yy all positive).

<What do these all mean?>

The first decision (optimizing with respect to ki) leads to the condition:

i / ki P (ki, xi) + ki Pik(ki, xi) = Ci

k

which states that the premium (i.e. marginal revenue product per enrollee) must equal the marginal cost of the enrollee. Since an individual MCO is small compared to the entire population, the MCO does not recognize its impact through ki on population health status y.

xi = services levelki = # of members

Profit-maximizing MCOs – How much x?

The second decision is how much xi to provide. Again, here through xi, MCO does not recognize impact on population health status y. Thus, for any ki, the maximization is:

i / xi ki Px (ki, xi) = Cix.

Marginal revenue of providing one more unit of quality (services) to the entire enrollment ki equals the marginal cost of providing that additional unit.

xi = services levelki = # of members

The Health Externality

Compare the market optimum of marginal revenue equaling marginal cost, to an optimum derived alternatively by a “planner” who is aware of the externality of each MCO’s level of x on health y, or by an entrepreneur seeking to maximize the joint profits of a group of two or more MCOs.

Consider a situation with two firms (can generalize to n firms). The entrepreneur seeks to maximize total profits T, or with appropriate substitutions:

T = 1 + 2 = k1 P1 (k1, x1) + k2 P2 (k2, x2) - C1 (k1, x1, y) - C2 (k2, x2, y)

To maximize profits, the entrepreneur must consider the impacts of health services x1 and x2 on the health of others elsewhere. Differentiating with respect to x1 and x2 yields:

k1 P1x (k1, x1) = C1

x + k1 (C1y + C2

y), and

k2 P2x (k2, x2) = C2

x + k2 (C1y + C2

y).

Compare above to

i / xi ki P1x (ki, xi) = Ci

x.

but Ciy < 0 implies that the social optimum leads to more

treatment xi than the competitive monopolistic market.

The Health Externality

The Health Externality

This is easily shown. Without the externality, MCO1 optimizes at point A, giving level x1

mkt.

P

Inputs (services) x1

k1 P1x

C1x

x1mkt

A

x1opt

C1x + k1 (C1

y + C2y)

k1 (C1y + C2

y)

The optimal level of x1 at point B is x1opt, as noted by the downward

shift in the right hand side by the factor k1 (C1y + C2

y), which is unambiguously negative.

This indicates an inefficiently small level of MCO care x, and by implication a substitution of non-MCO and/or non-health care inputs (such as the patient’s own time) for the MCO care.

Disenrollment and Treatment Choice

• We have established that disenrollment can affect the levels of services xi provided.

• However, by distinguishing only among levels of xi, we have not distinguished among alternative treatment methods.

• Consider the longer term consequences that potential disenrollment can have on MCO treatment practices.

• In the presence of expected disenrollment, MCOs will tend to use “low-tech” treatments with smaller up-front costs, even when the present discounted value (PDV) of the costs equals the PDV for “high-tech” treatments.

Consider an infinitely-lived MCO that serves overlapping cohorts of customers for either one or two periods. The MCO receives constant revenue per patient each period, so its goal is to minimize costs. Costs are modeled for Cohort 1 entering in Period 1:

For “high-tech,” possibly capital-intensive procedures, the MCO incurs costs M1 in Period 1, and 0 in Period 2.

For low-tech, less capital-intensive procedures, the MCO incurs costs m11 and m12 in Periods 1 and 2, where mij refers to cohort i at time j.

Disenrollment and Treatment Choice

Goal!Minimize Costs

For Cohort 1, the MCO would plan “high-tech” procedures if:M1 < m11 + m12 / (1 + r). where r is the appropriate interest rate for discounting.

However, suppose that potential MCO members use expenditures Mt and mtt as indicators of MCO quality. So the MCO uses high-tech procedures for Cohort 1 if:M1 < m11 +(1 - g) m12 / (1 + r).

To maintain revenue, Cohort 2, of size g, must be enrolled in Period 2. The Cohort 2 MCO decision is similar to the Cohort 1 decision if:M2 < m22 + (1 - g) m23 / (1 + r).

So, for any two period sequence, the firm chooses the high-tech treatment if:

M1 + M2/(1 + r) < m11 +(1 - g) m12 / (1+ r) + m22 /(1 + r) + (1 - g) m23 /(1+ r)2.

Disenrollment and Treatment Choice

Over time, the MCO will be indifferent between high-tech and low-tech options if:

Mt (1+r)1-t = [mtt (1+r)1-t + (1-g) mtt+1 (1+r)-t].

Assuming that all Mt = M, and that all mij = m, expanding both sides, and taking limits as t , the MCO chooses high-tech if:

M < m[1 + (1-g)/(1+r)],and low-tech if:

M > m[1 + (1-g)/(1+r)].Thus the higher the disenrollment rate g, the more important is the

disenrollment effect. If g = 0, the MCO faces the standard investment criterion, comparing first period costs with discounted future costs. Its decision here will be economically efficient.

Disenrollment and Treatment Choice

Disenrollment and Treatment Choice

• With the likelihood that increased competition through increased choice will raise g, managed competition and other competitive strategies must be more carefully examined.

• If g , m [1 + (1-g)/(1+r)] , and continuing care m becomes the more financially viable option even if the PDVs are equal, and even if treatment M is more economically efficient in producing health.

• In effect, MCOs self-insure against future disenrollment by reducing current costs through (low cost) continuing care rather than high-tech treatment.

Potential Issues: Dumping, Creaming, Skimming

• Dumping – Refusing to treat less healthy patients who might use services in excess of their premiums.

• Creaming – Seeking to attract more healthy patients who will use services costing less than their premiums.

• Skimping – Providing less than the optimal quantity of services for any given condition in a given time period.

MCO: Probably.FFS: Probably not – Reimbursement

will cover.

MCO: Probably.FFS: Probably.

MCO: Probably.FFS: Probably not – Reimbursement

will cover.