Managed Care

1
Managed Care
2
Why?

• Weve talked about insurance and technology and
  costs.
• Managed care analysis combines some of this.
• 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 (IPAs), are
  means to restore competition to the health care
  sector, and to control expanding health care
  costs.

3
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
  consumers imperfect information about medicine,
  when combined with FFS remuneration, would
  provide the incentives for substantial
  overconsumption.
• This is certainly an information problem. We
  looked at it in Chapter 7.
• Organizational form of HMOs would seem to
  eliminate over- consumption incentives and
  replace them with cost-control incentives, and
  possibly incentives toward underconsumption.

4
Managed Care

• It is instructive to provide a general
  description of managed care, leading to a more
  specific discussion of HMO, 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. Most
  often the organized delivery system is and is
  defined by its association with an insurance
  product.

5
Defined populations(s) and benefit plans
Insurance Role

• Alternative
• payment
• mechanisms
• full capitation
• capitation mixed
• with FFS

• System/network integrator or
• organizer
• Hospital/health system
• Physician group
• Insurance Company

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Defined populations(s) and benefit plans
Insurance Role

• Alternative
• payment
• mechanisms
• full capitation
• capitation mixed
• with FFS

• System/network integrator or
• organizer
• Hospital/health system
• Physician group
• Insurance Company

Primary care providers
Information Systems
Hospitals
Specialists
Subacute units
Amb. care centers
Nursing homes
Hospice
Home health
7
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.

8
Managed Care

• 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.

9
Organizational Structures
Gatekeeper
No
Yes
Provider Network
Fee for Service (FFS)
Point of Service (POS)
No
Health Maintenance Organization (HMO)
Preferred Provider Organization (PPO)
Yes
10
Some key aspects

• An economic analysis of this model, shows the
  importance of integrating the information among
  the various services. In Figure 12.1,
  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 are budgeting 100 million
  or more apiece over the next several years to
  integrate systems that were often developed
  separately, and almost never talk to each other.

11
Price Discrimination

• Under FFS, there could be price discrimination.
• How?

• Charge a lot to those who can afford it.
• Charge less to those who cant.

Low Valuation
High Valuation


PH
pH
MCAC
PL
pL
P
QH
QL
QH
QL
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Price discrimination is hard in HMOs
DF
F FFS

• Providers find it difficult to determine how much
  individual consumers value their services.
• Prepayment-based organization can shop among
  providers, thus limiting providers monopoly
  power.
• Can cut providers OUT of the organization if
  prices are too high.

DM
M MC

PF
Total Exp. FFS
PM
Total Exp. MC
QF
QM
Quantity
13
Some key aspects

• A second feature is a 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.
• It is apparent that 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.

14
Managed Care and Spending Growth

• There is a strong consensus that managed care
  reduces utilization, especially of hospital care.
  
• A different, but related question is whether
  managed care organizations also have lower growth
  rates in spending.
• If they do, a continued shift toward managed care
  will result not only in reductions in spending
  levels, but also in the long-term rate of
  increase.
• It is important to provide a framework for
  discussing the relationship among FFS, managed
  care organizations (MCO) and total costs.
• Suppose that we are concerned about costs per
  person for treating a particular illness over 3
  periods. Let us assume that people use either
  FFS or MCO, and that the population is fixed. We
  can calculate the total treatment costs as

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Managed Care and Spending Growth

• Total Treatment Costs (Number in FFS) (FFS
  Costs/Person)
• (Number in MCO) (MCO Costs/Person)
• Dividing both sides by the population we get
• Treatment Costs/Person (Fraction in FFS) (FFS
  Costs/Person)
• (Fraction in MCO) (MCO Costs/Person)
• Suppose, in Period 1, that FFS treatment costs
  200, MCO treatment costs 100, that 60 use FFS
  and that 40 use MCO care. The treatment costs
  per person will be
• Treatment Costs/Person (0.6) 200 (0.4)
  100 120 40 160.
• Lets put together a table.

16
Managed Care and Cost Containment
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What does this tell us?

• If MC costs are increasing as fast as FFS, then
  rate of growth is impacted ONLY when people
  switch to managed care settings or practices.
• EXAMPLE. Drive-Through Deliveries.
• Weve cut hospital stays from 3 days to 1 day.
• At a cost of 600-700 per day multiplied by
  about 4 million normal births per year, were
  saving
• 600/day 2 days/birth 4 million births 4.8
  billion PER YEAR.
• But weve DONE it already. Other costs may
  continue to grow.