Post on 06-Apr-2018
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Managed Care
Dr. Katherine Sauer
Metropolitan State College of Denver
Health Economics
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Overview:
I. The Structure of an Organized Delivery System
II. Managed Care
III. History
IV. Modeling Managed CareV. Empirical Results
VI. Spending and Competition
VII. The Managed Care Backlash
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The previous chapter described how health insurance
will generally increase consumers health care
utilization.
One might argue that physician practice must be
managed in order to address high health care costs.
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Networks of providers, including
HMOs (health maintenance organizations)
PPOs (professional provider organizations)
individual practice associations (IPAs)
are widely seen as means to
restore competition to the health care sector
control expanding heath care costs.
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I. Structure of an Organized Delivery System
An organized delivery system is a network of
organizations.
- hospitals, physicians, clinics, hospices
It provides or arranges to provide a coordinated
continuum of services to a defined population.
- from preventative care to emergency surgery
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This system is held clinically and fiscally accountable
for the outcomes and the health status of the
population served.
Often the organized delivery system is defined by itsassociation with an insurance product.
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II. Managed Care
A. Characteristics
1. health care delivery structure involving the integration
of insurers, payment mechanisms, and a variety of
providers
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2. cost containment / quality improvement
a. selective contracting- payers negotiate prices and contract selectively
with local providers such as physicians and
hospitals
b. steering of enrollees to the selected providers
c. quality assurance through meeting voluntary
accreditation standards
d. utilization review of the appropriateness of provider
practices
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Managed care reduces the
demand for treatment andlowers price of treatment.
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B. Difference Between MCOs and Fee-For-Service
Plans (FFS)
1. difference in health
- the MCO may provide reduced health (relative
to FFS) due to reduced treatment
2. cost savings
- the MCO may provide savings due either to
less treatment or cheaper treatment
3. financial risk from different out-of-pocket payments
- an MCO may require smaller out-of-pocket
payments
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C. Types of Managed Care Plans
1. Health Maintenance Organizations (HMOs)
- provide relatively comprehensive health care
- few out-of-pocket expenses- generally require that all care be delivered
through the plans network
- the primary care physician authorize any services
provided
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2. Preferred ProviderOrganizations (PPOs)
- provides two distinct tiers of coverage
- in the network, lower cost- out of network, higher cost
- no physician gatekeepers
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3. Point of Service Plans (POS)
- hybrid of HMOs and PPOs.
Like PPOs, POS plans offer two tiers of insurance
benefits.
- coverage is greater in network
- coverage is less generous out of network
Like HMOs, POS plans assign each member a
physician gatekeeper, who must authorize in-network
care in order for the care to be covered.
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4. Medicaid Managed Care Plans
Medicaid managed care plans vary considerably.
- some states have contracted directly with HMOs
that already exist in local markets
- some states have created their own provider
networks, which contract with selected providers
for discounted services and use physician
gatekeeping to control utilization
- some states use a combination of the two
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D. Contracts with Physicians
Most HMO and POS plans pay their network physicianson a capitation basis.
- plan pays the physicians practice a fixed fee
- per-member-per-month (PMPM) dollar
amount- physician provides treatment to members of the
insurance plan
PPO contracts with physicians rarely involve capitation.- specify the discounted fees for various services
that the plan will pay in exchange for the privilege
of being in that plans network
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Utilization review procedures are commonly covered in
managed care contracts, whether they are HMO, PPO, or
POS plans.
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E. Contracts with Hospitals
HMO and PPO plans contract with only a subset of the
providers (physicians and hospitals) in the areas that they
serve.
This key feature of the managed care sector allows plans
to promote price competition among hospitals that might
otherwise lose plan business.
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The probability and characteristics of contracts betweenindividual managed care organizations and hospitals
depend on three sets of factors:
1. plan characteristics- type of managed care organization
- plan size
- plan location (one area, several)
- how old the plan is
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2. hospital characteristics
- size- ownership (for-profit versus nonprofit)
- location (city versus suburb)
- teaching status
- cost structure (reflecting prices)
3. market characteristics
- metropolitan area level
- prevalence of managed care plans- growth rate of managed care plans
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Empirics:
Zwanziger and Meirowitz (1998) examine the
determinants of plan contracts with hospitals. For HMOs
and PPOs in 13 large, metropolitan statistical areas, they
report:
Managed care plans prefer to contract with nonprofit
hospitals, preferring even public hospitals to for-profit
ones.
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Plans will more likely contract with large hospitalscompared with medium-sized hospitals, and with
medium-sized hospitals compared with small ones.
Hospital cost factors (which reflect hospital prices) donot significantly affect contracts.
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III. History
A. Federal Involvement
The HMOAct of 1973 enabled HMOs to become
federally qualified if they provided enrollees with
comprehensive benefits and met various other
requirements.
A federally qualified HMO could require firms in its area
with 25 or more employees to offer the HMO as an
option.
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B. Growth in Managed Care
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C. Number of HMOs and HMO Enrollment
by Selected Characteristics, 2004
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IV. Modeling Managed Care
A. Individual HMOs
Individual HMOs need to determine- number of consumers to serve (quantity)
- level of service to provide (quality)
Assume- provide only one type of service (visits)
- are differentiated in quality by how many visits
each offers
- treatment costs are related to member health status- total annual costs are higher if it provides more
services per enrollee (quality) or if it has more
members (quantity)
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Level of service to provide?
MR
MC
Level of service (quality)
MR, MC
x1
From the HMOs
point of view, the
optimal level of
service to provide isx1.
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MR
MC
Level of service (quality)
MR, MC
x1
An individual HMOmay not realize their
system-wide cost-
lowering impact.
x2 is actually the
optimal level of
service.
Social
MC
x2
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What types of care to provide?
Suppose that increased competition through increased
choice raises dis-enrollment rates.
In evaluating how much and what types of care are
offered by HMOs, we see that the HMO faces an
economic externality because it cannot capture fully
the gains of its treatment over time.
As a result, it will offer less care and lower-tech care
than FFS plans.
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This model provides a framework for addressing
possible HMO cost savings relative to FFS plans.
FFS plans encourage overutilization to the point where
marginal private benefits can be far less than marginal
costs.
HMOs are widely believed to discourage this
deadweight loss and other forms of overutilization,
such as supplier-induced demand.
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On the other hand, HMOs might do the following:
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
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B. An Equilibrium Analysis
value, costs ($)
severity of
treatment
VThe value line (V)represents the extra
benefit of FFS
relative to HMO.
The cost line (E)
represents the extra
cost of FFS relative
to HMO.
E
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value, costs ($)
severity of
treatment
V Up to severity level s1, a
patient would prefer an
HMO plan.
- extra value from FFS
plan does not exceed
extra costs
E
s1HMO FFS
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value, costs ($)
severity of
treatment
V
Suppose the FFS plan
increases its coinsurancerate.
- the extra cost line
would rotate upward
- the threshold where
HMOs become less
attractive increases
E
s1
E2
s2
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V. Empirical Results
Economic theory suggests that managed care will differ
from fee-for-service plans.
One might predict that managed care organizations will
spend less per member, reducing health care costs.
Theory would also predict, however, that if fewer
resources are used, quality of care may suffer.
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A. Methodological Issues
1. Selection Bias
HMOs offer comprehensive benefits and so they may
attract and retain sicker members.
- may make HMOs look more expensive
HMOs may attract disproportionately younger members
and families who tend to be healthier and for whom the
costs of care tend to be relatively lower.- may make HMOs look less expensive
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2. Quality of Care
Quality of care is not easy to measure.
Donabedian (1980) provides three general descriptors:
Structure
- quality and appropriateness of the available inputs
Process
- quality of the delivery of care
Outcome
- ultimate quality of care but the most difficult to
measure scientifically
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B. The RAN
D StudyA Randomized Experiment
The RAND study (Manning et al., 1984) randomly
assigned participants to either a FFS or HMO plan.
- eliminating selection bias
Would HMO costs still be lower?
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The FFS individuals were in one of four groups:
Free care
25 percent of expenses up to a maximum out-of-
pocket liability of $1,000 per family
95 percent of expenses up to a maximum out-of-
pocket liability of $1,000 per family
95 percent coinsurance on outpatient services, up
to a limit of $150 per person ($450 per family)
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C. Recent Evidence
In a series of studies, Miller and Luft (1994
, 1997,2002
)have summarized findings regarding quality of care,
utilization, and customer satisfaction.
In the late 1980s and early 1990s, Managed Careplan enrollees received more preventive tests,
procedures, and examinations.
Outcomes on a wide range of conditions were betteror equivalent to those using FFS plans.
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HMO enrollees were less satisfied with quality of care
and physician-patient interactions but more satisfiedwith costs.
HMO plans and providers cut hospitalization and use of
more costly tests and procedures, often with little visibleeffect on quality of care.
Compared with non-HMOs, HMOs had similar quality
of care, more prevention activities, less use of hospitaldays and other expensive resources, and lower access
and satisfaction ratings.
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VI. Spending and Competition
A. SpendingAnalysts believe that managed care reduces utilization,
especially of hospital care.
A different but related question is whether managed careorganizations 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.
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Early studies by Luft (1981) and Newhouse and
colleagues (1985) found the growth rate of HMO
spending to be roughly the same as the growth rate under
FFS, and recent studies have not contradicted thosefindings.
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B. Competition
Up to this point, we have concentrated on the direct
effects of managed care and managed care
organizations.
But, what effects are created in the market as existing
health providers respond to competition from the
managed care sector?
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1. Theoretical Issues
In theory, entry of new firms will reduce the demand for
existing service providers and reduce their total
revenue.
Existing firms also may respond in other ways.
- attempt to reduce administrative costs
- market plans that limit utilization of services
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We will focus on three possible impacts:
- hospital markets
- insurance markets- adoption of technological change
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a. Hospital Markets
Dranove, Simon, andWhite (1998) use a demand-supply
framework to address this question.
The authors express concern that the low rate of managed
care penetration in more concentrated markets may imply
anticompetitive behaviors, meriting antitrust
considerations.
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McLaughlin (1988) argues that the providers are
responding not with classical cost-containing price
competition but, instead, with cost-increasing rivalry,
characterized by increased expenditures to promote actual
or perceived product differentiation.
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Feldman and colleagues (1990) found that HMOs
generally did not extract major discounts.
Price did not seem to be the major HMO consideration
in the selection of hospitals with whom to affiliate.
It was hospital location and the range of services that
the hospital offered that was a consideration.
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Melnick and colleagues (1992):
Controlling for other factors, the PPO paid a higher price
to hospitals located in less competitive markets.
If the PPO had a larger share of the hospitals business,
it was able to negotiate a lower price.
The more dependent the PPO was on a hospital, the
higher price the PPO paid.
Hospitals with high occupancy located in markets with
high average occupancy charged the PPO higher prices.
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b. Insurance Markets
Frech and Ginsburg (1988) identified the dramatic
changes that occurred after 1977 when the insurance
market was divided about equally between the Blues and
commercial insurers.
The growth of HMOs and PPOs was accompanied by
substantial increases in patient cost sharing, increased
utilization review, and self-insurance by many largefirms.
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Baker and Corts (1995, 1996) identify two conflicting
effects of increased HMO activity on conventional
insurance premiums:
Market discipline
HMO competition may limit insurers ability to
exercise market power, thus driving down prices, astandard competitive argument.
Market segmentation
HMOs may skim the healthiest patients from thepool, thus driving insurers costs and prices up.
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Joesch,Wickizer, and Feldstein (1998) investigated
nonprice impacts of HMO market competition.
- found that increased HMO penetration reduced
insurers likelihood of increasing insurancedeductibles, or stop-loss levels (the levels
limiting losses to those insured).
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c. Technological Adoption
Baker and Spetz (2000) compiled an index using 18
technologies available in 1983 and found that HMO
market shares did not matter.
Although modest variations were detected, no
substantive differences were seen in technology at given
points in time or in the dispersion of technologies over
time.
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VII. Managed Care BacklashA. Public Anxiety
In the first half of the 1990s, many managed care plans
placed increasingly severe restrictions on patient choices,including prior approval for access to specialists and
certain high-cost procedures.
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Blendon and colleagues (1998) documented the
publics anxiety about the direction of managed care at
that time.34 percent of American adults who were
surveyed thought that MCOs were doing a good
job
51 percent believed that MCOs had decreased the
quality of care
52 percent favored government regulation even ifit would raise costs
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B. Drive Through Delivery
MCOs were a pivotal force in reducing the length of stay
for mothers following a normal childbirth from 3+ days
in 1980 to 1.7 days in 1995.
This movement toward drive through delivery served
as a focal point for those opposed to the MCO
movement.
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C. Response
Many states passed legislation requiring insurers to
cover at least two nights of hospital stay to all mothers
with normal deliveries.
Marquis and colleagues (2004, 2005) examined HMO
market penetration and found little evidence of
substantial consumer exit and plan switching even in
markets where consumers had more options.
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Concluding Thoughts:
Managed care delivery systems combine the functions ofinsuring patients and providing their care.
HMOs and other care managers have incentives to
curtail costs because they serve as both insurers andproviders.
One key finding is that managed care organizations tend
to reduce hospitalization.
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Little evidence suggests that the quality of the care
provided in HMOs is inferior to FFS care.
Another key finding is that MCOs have been able to
reduce fees paid to providers.
By200
7, traditional fee-for-service (FFS) health careenrollment for covered workers had fallen to 3 percent,
from 73 percent less than two decades earlier.
Customers also rebelled against the more stringent costcontrols of HMO plans, preferring what some analysts
refer to as managed care lightas exemplified by
PPO or POS plans.
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Discussion Question:
If everyone chose to join an HMO, would average HMOexpenditures per case tend to rise or fall? Would national
health expenditures rise or fall?
If traditional FFS leads to demand inducement, what
constrains the HMO from under-providing care?