the physician market part 1

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  • 1. The Physician Market, Part 1 Professor Vivian HoHealth Economics Fall 2007 These slides draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies, Thomson 2007.


  • Physician Market Structure
  • Conduct in the Physician Market
  • Physician Market Performance
  • Physician Practice Management Companies

3. 4. Physician Market Structure 5. *The AMA defines primary care as including family practice, general practice, internal medicine, obstetrics/gynecology, and pediatrics. Physician Market Structure(cont.) 6. Are there too many specialists and too few primary care docs?

  • Proportion of specialists in U.S. higher than in W. European countries and Canada (60% vs. 25-50%).
    • Specialists more prone to use new, high-tech medical procedues.
    • May explain why U.S. medical costs per capita are highest in the world.

7. Matching Physician Supply & Requirements

  • Future physician supply does not appear well-matched with requirements.
  • (Politzer, 1996)
  • A shortage of 33,000 primary care physicians is predicted by 2020.
  • The same set of assumptions also generates a surplus of specialists.

8. Distribution of Physicians by Mode of Practice

  • Most docs self-employed, but % is dropping.
  • Fall in solo practice docs, rise in salaried docs.
  • Reflects rise in ambulatory care by HMOs.

9. Distribution of Physician Revenues by Source of Payer

  • % of revenues from Medicare/Medicaid high, but lower than for hospital sector.
  • % of revenues paid out-of-pocket also higher than for hospital sector.

10. Managed Care Reimbursement of Physicians

  • MCOs hope to modify physician behavior in order to control costs.
  • 91% of all practicing docs in 1999 had at least one managed care contract.
  • In 1999, 49 of every $1 of physician revenue came from an MCO.
    • 7 of every $1 came from a capitated contract.

11. Are there barriers to entry?

  • Requirements for licensure to practice
    • M.D. from accredited med school.
    • Internship or residency at recognized institution.
    • Pass a medical exam.
  • Advantage
    • Protects public from incompetent doctors.
  • Disadvantage
    • State licensure boards controlled by physicians who can restrict entry to keep salaries high.

12. Is market reform better than government licensure?

  • Market reform may encourage physician monitoring better than government regulation.
    • More salaried docs are being monitored by HMOs.
    • Laws shifting medical malpractice liability towards hospitals and HMOs.
    • For-profit providers have direct financial stake in quality of their physicians.

13. Production, Costs, andEconomies of Scale

  • Do certain physician organizations have a production or cost advantage?
    • Group practice physicians are 22% more productive than those in solo practice.(Brown, 1988).
    • The lowest-cost practice size has been estimated at 5.2 physicians(Pope & Burge, 1996).
    • Economies of scale may exist for practices as large as 100 physicians(Marder & Zuckerman, 1985) .

14. Production, Costs, andEconomies of Scale

  • Analysis of physician practice costs based on the AMA 1989 Socioeconomic Monitoring System.(Escarce & Pauly 1998)
    • Survey of physician practice costs, outputs, and practice characteristics.
    • Physicians receive payments from patients and insurers.
      • But they then docs have several costs to cover.
      • Nurses, admin & clerical workers, technicians and aids.

15. Production, Costs, andEconomies of Scale $7.26 (1.08) $35.36** (2.12) Test interpretation $4.84 (1.35) $12.14** (2.16) Hospital visit $14.77*** (2.91) $22.14*** (3.26) Office visit, est. patient $66.34** (2.00) $59.99* (1.68) Office visit, new patient Marginal non-phys. Costs Full Marginal Cost Output 16. Physician Market Structure Summary

  • Physicians have outpaced growth in the general population.
  • The U.S. may have too many specialists and too few generalists.
  • A move towards multi-physician practices.
    • Production & cost advantages.
    • Pressures of managed care.
  • Despite barriers to entry, competition isincreasing.

17. Physician Market Conduct

  • The Supplier-induced demand hypothesis.
  • The legal environment and physician behavior.
  • The impact of managed care on physician conduct.

18. Has the over-supply of physicians led to physician-induced demand?

  • Defn: physicians may take advantage of asymmetric information to convince their patients to consume more medical care than would be in their self-interest.
  • How much care can physicians induce?
    • Easier with surgery?
    • Is the physician willing to induce?
  • Can insurers limit demand inducement?

19. Has the over-supply of physicians led to physician-induced demand?

  • Can insurers limit demand inducement?
  • The empirical evidence on physician-induced demand is limited.
    • The exception may be the market for surgical services, where surgeons have a greater ability to manipulate demand.

20. Defensive Medicine &Malpractice Reform

  • Physician malpractice premiums account for 1% of US health care spending.
  • Physicians may over-provide care in order to avoid malpractice suits.
    • Defensive medicine may add another $4b to $25b to the nations health care bill.

21. Defensive Medicine &Malpractice Reform

  • States which implemented direct reforms to their malpractice system (caps on damages, abolition of punitive damages) reduced hospital expenditures 5 to 9%.
  • Indirect reforms (caps on contingency fees, mandatory periodic payments) had no measurable impact on costs.

22. Why do we have a malpractice system?

  • The malpractice systemcompensatesvictims for negligence anddetersfuture negligence.
    • Tort Law:entitles an injured person to compensation as a result of someones negligence.
      • Damages include economic losses and pain and suffering.


  • Physician Advocates
    • Too many of the claims filed are not due to negligence.
    • Juries award large sums unrelated to actual damages.
    • The threat of claims leads to defensive medicine, which adds billions to the nations health expenditures.


  • Patient Advocates
    • The number of claims filed grossly underestimates the extent of physician negligence.
    • Large jury awards are infrequent.
    • Current quality control mechanisms are inadequate.
    • Defensive medicine is a byproduct of generous insurance coverage for patients, not malpractice insurance.

25. Harvard Medical Practice Study (HMPS)

  • 1)What is the incidence of adverse events
  • and negligent adverse events in
  • hospitals?
  • 2)What are the total economic losses
  • patients suffer from adverse events?
  • --What fraction is covered by the tortsystem and other insurance?
  • 3)What percentage of adverse events
  • (negligent and non-negligent) lead to
  • malpractice claims?


  • From 51 nonfederal, acute care hospitals in New York
  • 31,429 patients discharged in 1984
  • Stratified sample based on hospital and patient characteristics
    • e.g.Geographic region, patients in high- risk specialties

27. Criteria for an Adverse Event

  • A definable injury caused at least in part by medical management (negligent or not).
  • The injury must have produced measurable disability that prolonged the hospital stay or reduced function at time of discharge.
  • The injury must have been unintended.

NEJM 1989 28. Which of the following is NOT an adverse event?

  • Intracerebral hemorrhage caused by anticoagulants
  • Incisional hernia
  • Amputation of a gangrenous leg