Tor Iversen Lecture 11: Economic incentives and the organization of private physician practice I

2 Challenges: Till now emphasis has been on demand for health, health insurance and health services. But the production of health services depends on the supply side – the providers of health services As Kari has already gone through, the regulation of providers is a particular challenge in the health sector because of poorly informed recipients (asymmetric information), often non-verifiable information, limited consumer sovereignty and provider market power and the many roles of providers.

3 Several means of influencing the behavior of a provider of health care: –Education: Medical ethics and culture –Formal regulations: Laws, orders, prohibitions –Economic incentives: Influencing behavior by influencing the revenue and costs of providers decisions and actions. The various means may be considered as complements In this course: The focus is on economic incentives

4 Is the treatment a patient gets likely to be influenced by how a physician or a health care organization is paid? –Surgery or wait and see –The number and types of diagnostic tests –Type and brand of medication –A referral from a general practitioner to a specialist The importance of gray zones in medical practice – the physicians discretion

5 From the reading list: McGuire, T. G., Physician agency. In A. J. Culyer and J. P. Newhouse: Handbook of Health Economics, Volume 1 (Elsevier Science, Amsterdam) Iversen, T., The effects of a patient shortage on general practitioners future income and list of patients. Journal of Health Economics 23,

6 Plan: First, some basic points from McGuire Then some modifications and in particular, considering the choice of number of patients and number of services for GPs Empirical studies Incentives to refer patients to specialist care under various payment systems

7 Dimensions of a payment system 1.Who is paying the physician Insurer Patient 2.What is paid for i.The factors of production Inputs and employed personnel The physicians own time Cost reimbursement ii.The number and type of services provided Consultation, laboratory test, Fee for service iii.The number of treatment episodes iv.The number of listed patients Per capita payment v.A fixed amount per period Practice allowance Salary

8 An illustration: Types of payment in private physician practice in Norway General Practice Before the capitation reform (1 June 2001): 1.Salaried community physicians (About 35%) 2.Private practice with contract (60%) –Practice allowance (1/3 of practice income) –Patient co-payment (1/3) –Fee for service from NIS (1/3) 3.Private practice without contract –Patient co-payment –Fee for service

9 After the capitation reform: 1.Salaried with personal list (10%) 2.Private practice with contract and personal list (88%) Capitation fee (1/3 of practice income) Fee for service (1/3) Patient copayments (1/3) 3.Private practice without contract (2%) Patient payments (100%) Specialists: 1.Employed by public hospitals 2.Employed by private hospitals 3.Private practice with contract Practice allowance Fee for service Patient copayment 4.Private practice without contracts Patient payments (100%)

10 The model from McGuire Monopolistic competition

11 x quantity Marginal benefits, cost b(x) NB * c xmxm x*

12 Physician sets price and quantity x quantity Marginal benefits, price, cost b(x) NB 0 c x* p

13 Few payers would let the physician fix the price nowadays Price fixed by the insurer From the net benefit constraint we then have that x is a function of x(p). We further have: Hence, a price decline initiates the provision of more services. Since the patient initially experiences an increase in NB, the physician can increase the profit by increasing the volume of services until NB again is equal til NB 0

14 Administered price θpθp x quantity Marginal benefits, price, cost x b(x) NB 0 c x* p

15 The conclusion so far is that the physician, because of his market power, provides the patient with more services than the patient would have preferred, given the co-payment. Remark: There is not assumed any asymmetry of information so far. Question: To what extent does this conclusion depend upon the payment system for physicians and their interest in attracting patients? Illustrate this by assuming that a capitation fee R>0 is introduced, such that the total payment per patient is now R + p s x where p s is the fee per unit of service and p s cx Assume first that the number of patient is independent of the level of NB offered Assume then that the number of patients depends on the level of NB offered: n(NB) with n>0 McGuire: Supply-side cost sharing

16 Assume n=n(NB) is the number of patients with n(NB)>0

17 According to McGuire Physician-induced demand (PID) exists when the physician influences a patients demand for care against the physicians interpretation of the best interest of the patient. McGuire distinguishes between PID and rationing of services. While under PID the physician influences the patients preferences, under rationing he fixes the quantity of services so that a discrepancy between the patients demand for services and his actual use of services occurs. Hence, under rationing the patient is dissatisfied with the services he receives, while under PID he is satisfied because his preferences are manipulated. According to McGuire, the distinction between preference shift and direct quantity setting is irrelevant for the planner if a physician increases quantity beyond a desired point. However, from the standpoint of running a market the distinction is important, since informed consumers are crucial to the virtues of the market. So far we have considered rationing since B(x) is considered to be the true benefit curve

18 The importance of distinguishing between PID and rationing for planning (normative) purposes: the planners considerations of services that could be left to the market Can we in practice distinguish between PID and rationing?