the physician market part 2

The Physician Market, Part 2The 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

Advantages of capitation for physiciansAdvantages of capitation for physicians

• Increased clinical autonomy Physician financially responsible for cost

overrunsEliminates 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

MCOs and Physician ConductMCOs 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?

Types of Managed Care Orgs Types of Managed Care Orgs

S ta ff M od e l G ro up M o d e l N e tw o rk M o d e l IP A M o d e l

H M O P P O /P O S

M a n ag e d C a re


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?


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.

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

Additional MCO Compensation ToolsAdditional 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.

CapitationWithholdingsBonuses


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.


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


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.

HMO Reimbursement StrategiesHMO 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 year’s withhold or capitation based on this year’s performance.


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.

Advantages of capitation for physiciansAdvantages of capitation for physicians

• Improved cash flow Physician receives fixed payment per

patient each monthReduces bad debt expenses

• Better budgeting Steady cash flow - well-defined budgets Easier to identify and correct sources of

cost overruns

4 Components of a Capitated Contract4 Components of a Capitated Contract

SERVICE CPT CodeOffice visits 99201-99215Emergency room visits 99281-99285Preventive services 99381-99429Simple blood tests 85018-85048

1) Covered Services

Definitions such as “primary care services within the physician’s scope of practice” are too vague

Examples of capitated primary services:

Examples of Current Procedure TerminologyExamples of Current Procedure Terminology

99201Initial 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)

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

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

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

• 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

• 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 patient’s course of

treatment until satisfactory arrangements made to secure treatment elsewhere

Evidence on Physicians & MCO Evidence on Physicians & MCO CompensationCompensation

57% of MCOs base pay on utilization or costs measures

Almost half of MCOs consider patient complaints and quality measures

Evidence on Physicians & MCO Evidence on Physicians & MCO CompensationCompensation

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

Physician Market PerformancePhysician Market Performance

Total Expenditures

Annual Rate of

Increase*Per Capita

Amount1980 47.1b --- 2051990 157.5 12.9% 6201993 201.2 8.5% 7651995 220.5 4.7% 8202000 288.6 5.5% 10202005 421.2 7.9% 1418

*Average since previous year listed

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

Physician Market PerformancePhysician Market Performance

1986 1990 1995 1997 1998Practice Expenses

per physician 118.4 150.0 201.6 228.6 261.9Before-tax income 131.1 185.6 230.8 228.2 224.3

249.5 335.6 432.4 460.1 496.7

Revenue per Self-Employed Physician, ($1,000s)

Increases in revenues are due to increases in expenses AND higher income for physicians

Physician salaries remain highPhysician salaries remain high

MeanInternal Medicine $191,525Family Practice $178,859Pediatrics $188,496

2006 PHYSICIAN SALARIES

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

Employed vs. Independent PhysiciansEmployed 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 practice’s net revenues

Physician Practice Management (PPMs)Physician Practice Management (PPMs)

PPMs act as liaisons between insurers and doctors by acquiring physician practices

Advantages:Economies of scale in operational costsImproved risk assessment for managed

careFinance new information systemsRetain patient revenues by keeping

referrals within the PPM network

Fortune Magazine, March 3, 1997

MedPartners Provider Network acts as an intermediary, accepting capitated payments from HMOs & paying claims to the company’s 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

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

What Went WrongWhat 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 group’s internal growth

What Went WrongWhat Went Wrong

MedPartners bought new practices at a furious rate, often at hefty prices Industry buying spree boosted the prices of

physician practices

Doctors didn’t react well to becoming employees of remote national companies Physicians who sold their practices didn’t feel

the need to work as hard, younger doctors’ salaries lower due to cut taken by the PPM

MedPartners’ ReactionMedPartners’ Reaction

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

The Future of PPMsThe 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%

the physician market part 2

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