The Physician Market, Part 2

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The Physician Market, Part 2

• Professor Vivian Ho
• Health Economics
• Fall 2007

These slides draw from material in Santerre
Neun, Health Economics, Theories, Insights and
Industry Studies, Thomson Press 2007
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Advantages of capitation for physicians

• Increased clinical autonomy
• Physician financially responsible for cost
  overruns
• Eliminates need for external review
• Increased income
• Physician compensated by risk pools created from
  withholds if can reduce utilization of hospital,
  outpatient, diagnostics, other ancillary services

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MCOs and Physician Conduct

• HMOs combine the insurance and production
  functions in health care.
• They are different from traditional indemnity
  (FFS) plans, in that they attempt to control how
  health care is provided.
• How do HMOs influence physicians?

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Types of Managed Care Orgs
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MCOs and Physician Conduct

• Staff model HMOs pay physicians a salary.
• No incentive to over-provide care.
• IPA HMOs usually pay physicians discounted FFS.
• Physicians have incentive to over-provide care.
• How can the HMO control costs?

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MCOs and Physician Conduct

• Caution Distinctions between different types of
  HMOs are blurring over time.
• 28 of staff HMOs pay based on salary only (Gold,
  1996).
• 90 of PPOs use discounted FFS.

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Financial Risk Arrayed on a Spectrum from Full
Risk for the Insurer to Full Risk for the Provider
HBS Case Study 9-698-060, Note on Managed Care
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Additional MCO Compensation Tools

• Risk sharing - The insurer can make the physician
  bear some of the risk of insuring the patient, so
  that the physician will also feel the need to
  restrain medical costs.
• Capitation
• Withholdings
• Bonuses

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Additional MCO Compensation Tools

• Capitation - Physician receives a fixed payment
  per person in return for providing medical
  services regardless of the quantity of medical
  care delivered.
• e.g. A physician may receive 9 per member per
  month for each enrollee who chooses an HMO plan
  and elects him to be their primary care caregiver.

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Additional MCO Compensation Tools

• Capitation
• Physician has an incentive to restrict of
  patient visits.
• Problem - Physician can reduce visits by
  referring patients to other providers in the same
  HMO plan.
• e.g. If the patient has high blood pressure,
  refer her to a cardiologist.
• Solution - Withholding

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Additional MCO Compensation Tools

• Even if docs paid thru capitation, HMO
  responsible for costs of hospital services,
  outpatient diagnostic tests, physician referrals.
• How can the HMO limit these costs?
• Withhold a portion of physician payment (PMPM)
  until end of fiscal year.

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HMO Reimbursement Strategies

• Assign these funds to specific expenditure
  categories (e.g. lab tests).
• At end of year, return a portion of the withhold
  to physicians if surplus exists in that
  expenditure category.
• Can even change next years withhold or
  capitation based on this years performance.

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Additional MCO Compensation Tools

• Bonuses - MCOs can give a portion of their
  profits at the end of the year to physicians who
  elect cost-effective behavior.
• e.g. Pay bonuses to primary caregivers who
  reported lower number of specialist referrals.

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Advantages of capitation for physicians

• Improved cash flow
• Physician receives fixed payment per patient each
  month
• Reduces bad debt expenses
• Better budgeting
• Steady cash flow - well-defined budgets
• Easier to identify and correct sources of cost
  overruns

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4 Components of a Capitated Contract
1) Covered Services Definitions such as primary
care services within the physicians scope of
practice are too vague
Examples of capitated primary services
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Examples of Current Procedure Terminology

• 99201
• Initial office visit for an out-of-town patient
  requiring topical refill (Dermatology)
• Initial office visit for a 65-year-old male for
  reassurance about an isolated seborrheic
  keratosis on upper back (Plastic surgery)
• Initial office visit for a 10-year old male, for
  limited subungual hematoma not requiring drainage
  (Internal Medicine)

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• Carve outs - specific services or patients
  singled out in the capitation contract for
  special consideration
• Usually for expensive, infrequent services
• e.g. HIV patients, mental health, organ
  transplants
• Can be paid on fee-for-service (FFS) basis, or
  separate providers may contract for carve outs

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• Components of a Capitated Contract
• Payment methods
• Capitation rate/schedule - Managed care
  organizations employ actuaries who predict the
  cost of care as a function of population
  characteristics

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• Timing of payments
• Payment of carve out services
• Payment withholds used to fund risk pools, and
  method for risk pool distribution
• Methods for limiting risk (e.g. reinsurance,
  stop-loss)
• Insurer may agree to assume treatment costs that
  exceed a predefined threshold amount

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• List of other requirements
• Quality assurance activities
• May require reporting detailed patient data
• More sophisticated, costly record keeping
• Required office/call hours
• Use of physician extenders
• Copayment procedures
• most-favored-nation clause
• Additional professional liability insurance
  coverage

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• Process for termination
• Provisions for termination without cause
• Can be financially risky to physician
• Provisions for termination with cause
• Should specify specific conditions
• e.g. failure to comply w/ quality assurance
  requirements
• Contract should specify physician
  responsibilities if managed care organization
  insolvent
• Continuation of care requirements
• Usually must complete patients course of
  treatment until satisfactory arrangements made to
  secure treatment elsewhere

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Evidence on Physicians MCO Compensation

• 57 of MCOs base pay on utilization or costs
  measures
• Almost half of MCOs consider patient complaints
  and quality measures

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Evidence on Physicians MCO Compensation

• MCOs paying physicians a salary had 13.1 fewer
  hospitalization days per 1,000 enrollees per yr.
  relative to FFS
• Capitation led to 7.5 fewer hospitalization days
• Physicians faced w/ withholds had 10.5 fewer
  visits per enrollee
• Caution The studies did not determine whether
  profits rose, or whether quality of patient care
  was affected

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Physician Market Performance

• Physician expenditures have slowed in the 1990s,
  more in line with the growth of the overall
  economy. But they may be on the rise again

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Physician Market Performance
Revenue per Self-Employed Physician, (1,000s)
Increases in revenues are due to increases in
expenses AND higher income for physicians
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Physician salaries remain high

• When managed care grows, salary growth for
  specialists slows, while pay for primary care
  docs rises
• Physician groups getting large enough to want
  their own specialists
• Female docs salaries exceed males in a dozen or
  so specialties

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Employed vs. Independent Physicians

• Employed physicians worked 5-7 fewer hours a week
• Employed physicians median net income was
  142,000 in 1996, vs. 198,000 for all
  private-practice physicians
• Practice mgmt. Companies typically pay physicians
  300,000-400,000 per physician for practice
  assets (land, equipment)
• Tradeoff ?20 of practices net revenues

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Physician Practice Management (PPMs)

• PPMs act as liaisons between insurers and doctors
  by acquiring physician practices
• Advantages
• Economies of scale in operational costs
• Improved risk assessment for managed care
• Finance new information systems
• Retain patient revenues by keeping referrals
  within the PPM network

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Fortune Magazine, March 3, 1997
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• MedPartners Provider Network acts as an
  intermediary, accepting capitated payments from
  HMOs paying claims to the companys network
  providers
• Patients buy insurance from PacifiCare Health
  Systems, Foundation Health Systems Inc., etc.
• Had up to 19,200 doctors in the PPM division in
  hundreds of physician clinics at one point

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• MedPartners posted a net loss of 1.26b on
  revenues of 2.6b in 1998
• Loss of 821m on 2.4b in revenues in 1997

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What Went Wrong

• Failure to integrate its operations or provide
  systems to operate more efficiently than they had
  done independently
• Lacked actuarial expertise to predict medical
  costs
• California Plan underestimated
  incurred-but-not-reported claims liability
  could not estimate a dollar value for the large
  backlog of unprocessed claims
• Failed to invest in information systems, medical
  equipment, or expansion of medical services to
  boost a groups internal growth

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What Went Wrong

• MedPartners bought new practices at a furious
  rate, often at hefty prices
• Industry buying spree boosted the prices of
  physician practices
• Doctors didnt react well to becoming employees
  of remote national companies
• Physicians who sold their practices didnt feel
  the need to work as hard, younger doctors
  salaries lower due to cut taken by the PPM

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MedPartners Reaction

• MedPartners exited the PPM business and became
  Caremark, which is in the Pharmaceutical Benefits
  Management (PBM) market

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The Future of PPMs

• Doctors will continue to organize in larger
  groups to avoid hassles of office admin and
  managed-care contracting
• Smaller single-specialty PPMs seem more committed
  to improving operations
• of publicly traded PPMs (30) may shrink by 50